While the world and their cat believes that Mario Draghi saved the world last year - and continues to do so with his open-ended promise to do "whatever it takes" whatever that means (and the market's "positive contagion"). However, the reality, away from a sovereign-bond implied view of the world - with short-dated Spanish bonds now at 26-month low yields (whereby these bonds are sucked up wholesale by an ever more concentrated and self-satisfying group of European banks) is far different. As these two charts show, not only does Draghi's decision not to lower rates (when inflation and unemployment - both more 'real-world economy'-impacting items) indicate Taylor-Rule-esque that rates need cutting; but while banks get all they want (and more) from his over-flowing cup or collateralization and repo, credit extension in Europe continues to slide ever more negatively. Yes, Draghi saved the banks (for now) but, just as the scariest chart shows, Europe is very far from saved; and for those looking at TARGET-2 imbalances, the risk remains, it has merely shifted to the core.
Holding a PhD does not automatically walk you into even a decent paying job any more.
A zero sum game. That's where the central planning has taken us. Rate decisions tomorrow at the BOE and ECB could rattle the markets as traders look for direction in a directionless world.
Think the Fed (with its balance sheet amounting to over 20% of US GDP), or the ECB (at 30% of GDP) is bad? Then take a look at the balance sheet of the Swiss National Bank, whose assets now amount to some 75% of Swiss GDP and which has now "literally bet the bank" in the words of the WSJ not once, not twice, but three times in a bid to keep the Swiss Franc - that default flight to safety haven - low, and engaging in what is semi-stealth currency warfare by buying other sovereigns' currencies for over two years now, although he hardly expect the US Treasury to even consider it for inclusion on its list of currency manipulators - after all, "everyone is doing it".
Rather than attempt to predict the unpredictable – that is, specific events and price levels – let’s look instead for key dynamics that will play out over the next two to three years. Though the specific timelines of crises are inherently unpredictable, it is still useful to understand the eventual consequences of influential trends. In other words: policies that appear to have been successful for the past four years may continue to appear successful for a year or two longer. But that very success comes at a steep, and as yet unpaid, price in suppressed systemic risk, cost, and consequence.
As loathed as we are to say "we told you so," but we did and sure enough eKathimerini is reporting this evening that: thanks to the 'voluntary' haircuts the Greek banks were force-fed via the latest buyback scheme and the political uncertainty causing non-performing loans (NPLs) to rise (in a magically unknowable way), they will need significantly more 'capital' to plug their increasingly leaky boats. The original Blackrock report from a year did not foresee a rise in NPLs (which Ernst & Young now estimates stands at 24% of all loans) and the buyback dramatically reduces the expected profitability of the banks as it removes critical interest payments that would have been due. Whocouldanode? Well, plenty of people who did not just buy-in blindly to the promise of future hockey-stick returns to growth. Expectations are now for the Greek bank recap to be over EUR30bn.
More than half a decade has passed since the recession that triggered the financial panic and the Great Recession, but the condition of the world continues to be summed up by what The Spectator's Michael Lind calls ‘turboparalysis’ - a prolonged condition of furious motion without movement in any particular direction, a situation in which the engine roars and the wheels spin but the vehicle refuses to move. By now one might have expected the emergence of innovative and taboo-breaking schools of thought seeking to account for and respond to the global crisis. But to date there is no insurgent political and intellectual left, nor a new right, for that matter. Why has a global calamity produced so little political change and, at the same time, so little rethinking? Part of the answer, has to do with the collapse of the two-way transmission belt that linked the public to the political elite. But there is a deeper, structural reason for the persistence of turboparalysis. And that has to do with the power and wealth that incumbent elites accumulated during the decades of the global bubble economy. But it is coming...
Listening to talking heads and certainly to various retail associations, US consumer spending in December was lackluster driven by such traditional scapegoats as "lack of confidence ahead of the Fiscal Cliff", lack of clarity on taxation, fears about what the market may do, etc. And while retailers certainly did report a very mixed sales report for both November and December, it certainly was not due to lack of spending, at least not according to Gallup. Curiously, and rather inexplicably, the polling organization found that in December the average self-reported daily spending in stores, online, and in restaurants rose by a whopping $10 to $83. This was the highest monthly figure Gallup has reported since December 2008. It is also the first reading above the $80 mark since the 2008-2009 recession. But how is that possible? Wasn't the strawman that nobody would spend due to fiscal and tax uncertainty? Apparently not, and this unleashes merely the latest episode of baffle with BS, where data from one source contradicts directly what has been reported from other aggregators of spending data.
The main events of this week, monetary policy meetings at the BoE and the ECB on Thursday, are not expected to bring any meaningful changes. In both cases, banks are expected to keep rates on hold and to hold off on further unconventional policy measures. While significant economic slack still exists in the Euro area, and although the inflation picture has remained relatively benign, targeted non-standard policy measures are more likely than an interest rate cut. As financial conditions are already quite easy in the core countries, where the monetary transmission mechanism remains effective, the ECB’s first objective is to reverse the segmentation of the Euro area’s financial markets to ensure the pass-through of lower rates to the countries with the most need for further stimulus.
They say "be careful what you wish for", and they are right. Because, in the neverending story of the American "recovery" which, sadly, never comes (although in its place we keep getting now semiannual iterations of Quantitative Easing), the one recurring theme we hear over and over and over is to wait for the great rotation out of bonds and into stocks. Well, fine. Let it come. The question is what then and what happens to the US economy when rates do, finally and so overdue (for all those sellside analysts and media who have been a broken record on the topic for the past 3 years), go up. To answer just that question, which in a country that is currently at 103% debt/GDP and which will be at 109% by the end of 2013, we have decided to ignore the CBO's farcical models and come up with our own... To answer just that question, which in a country that is currently at 103% debt/GDP and which will be at 109% by the end of 2013, we have decided to ignore the CBO's farcical models and come up with our own. The bottom line: going from just 2% to 3% interest, will result in total 2022 debt rising from $31.4 trillion to $34.1 trillion; while jumping from 2% to just the long term historical average of 5%, would push total 2022 debt to increase by a whopping $9 trillion over the 2% interest rate base case to over $40 trillion in total debt!
2012 is the year the student loan bubble finally popped. While on one hand the relentlessly rising total Federal student debt crossed $956 billion as of September 30, and was growing at a pace that will have put it over $1 trillion by the end of 2012, the one data point confirming the size, severity and ultimately bursting of this latest debt bubble was the disclosure in late November by the Fed that the percentage of 90+ day delinquent loans soared from under 9% to 11% in one quarter. Which is why we were not surprised to learn that the Federal government has now delivered yet another bailout program: this time focusing not on banks, or homeowners who bought McMansions and decided to not pay their mortgage, but on those millions of Americans, aged 18 to 80, that are drowning in student debt - debt, incidentally, which has been used to pay for drugs, motorcycles, games, tattoos, not to mention countless iProducts. Which also means that since there is no free lunch, all that will happen is that even more Federal Debt will be tacked on to replace discharged student debt loans, up to the total $1 trillion which will promptly soar far higher as more Americans take advantage of this latest government handout. But when the US will already have $22 trillion in debt this time in four years, who really is counting? After all, "it is only fair" that the taxpayer funded "free for all" bonanza must go on.
First it was a German, then an Italian, and now, two months, later, the European self-immolation wave has spread to the country that many expect will be the next one to follow Greece into effective debt default. El Pais reports that an impoverished 57-year-old man who set himself on fire in Málaga Thursday, and subsequently died of his injuries at Carlos Haya hospital. He had third-degree burns on 80 percent of his body and suffered a multi-organ failure. The victim, thought to be of Moroccan origin, had worked in construction for years but was out of a job now, said people who knew him. In the last few months he had been scraping a living with the small change he made guiding cars into parking spaces near the hospital, an illegal practice that is usually overlooked by authorities. The police, who have not yet located his relatives, are not ruling out the possibility of an accident just as the man was lighting up a cigarette. Just two minutes before the event, he bought a pack of cigarettes from a local newsstand whose owner asked him how he was doing.
Wondering where the somewhat out-of-character economic improvements of Q4 2012 data came from - given Sandy and the fiscal cliff uncertainty? Wonder no longer. Charles Biderman, CEO of TrimTabs, has done the data-mining and explains, quite succinctly in this clarifying clip, just what happened in Q4 2012. To wit, after-tax income saw a somewhat impressive (but "don't get too excited" he adds) post-election spike as individuals (and small businesses) front-ran expectations of tax-rises in 2013 by pulling forward income and bonuses etc. into 2012. Q4 income rose by over 6% YoY, which , he believes means Q1 2013 income will be correspondingly lower. Following an epic rant/exposition of the higher taxes US citizens will be paying, Biderman batters GDP (and the government's infinite idiocy) instead focusing on the real recession of lower after-tax take-home-pay and expects Q1 to see the US plunge with the "US economy starting out the new year on its butt!" Then, as a bonus, he destroys the nonsense myth that the US housing recovery is leading us forward.
In money management long term success lies not in garnering short term returns but avoiding the pitfalls that lead to large losses of invested capital. While it is not popular in the media to point out the headwinds that face investors in the months ahead - it is also naive to only focus on the positives. While it is true that markets rise more often than not, unfortunately, it is when markets don't that investors are critically set back from their long term goals. It is not just the loss of capital that is devastating to the compounding effect of returns but, more importantly, it is the loss of "time" which is truly limited and never recoverable. Therefore, as we look forward into 2013, we want to review three reasons to be bullish about investing in the months to come but also review three risks that could derail the markets along the way. The reality is that no one knows for sure where the markets will end this year; and while it is true that "bull markets are more fun than bear markets" the damage to investment portfolios by not managing the risks can be catastrophic.
- After the worst post-Christmas market performance since 1937, we had the largest surge to kick off any year in recorded history
- The myth is that we are now seeing the clouds part to the extent that cash will be put to work. Not so fast It is very likely that much of the market advance has been short-covering and some abatement in selling activity
- As equities now retest the cycle highs, it would be folly to believe that we will not experience recurring setbacks and heightened volatility along the way
- The reality is that the tough choices and the tough bargaining have been left to the next Congress and are about to be sworn in
- The myth is that the economy escaped a bullet here. The reality is that even with the proverbial "cliff" having been avoided, the impact of the legislation is going to extract at least a 11/2 percentage point bite out of GDP growth