Having recently cut its estimate of US trend productivity growth to 1.5%, in a shocking move earlier today, Goldman admitted US trend growth is far less than previously speculated and lowered its long-term potential GDP. The bank says: "after adjusting for a drag from government sector productivity and incorporating an updated assessment of trend labor force growth, we now see long-run potential GDP growth at 1¾%, half a percentage point below our prior estimate." This is a huge deal as Goldman just recalibrated every single economic (i.e., inflation, employment) and financial (i.e., bond rates, leverage) equation by more than 20%, not to mention the amount of implied residual slack in the economy. In short, an absolutely massive amount!
"...with each passing session the casino is getting more dangerous, but the lemmings have no clue and the narrative gets ever more specious."
It is unknowable how much more pronounced these excesses can become, especially in light of extremely loose monetary policy around the world. Things could easily become quite dicey as soon as tomorrow, but it is just as easily possible that valuations will continue to expand for some time yet. However, these data do indicate one thing: risk has increased enormously, and it will keep increasing the longer the bubble persists. Frankly, the situation also scares us a bit, because we expect that governments and their agencies (such as central banks) will find it extremely difficult to deal with the next crisis. They have become quite overstretched as a result of the last one. After having gone “all in” last time around, what are they supposed to do for an encore? The only options that come to mind are repressive measures such as capital controls, confiscation of private wealth, and a host of other unpleasantries.
As it stands now, U.S. healthcare will bankrupt the nation and doom it to permanent stagnation and recession. It's our choice: live with a bankrupt system built almost entirely of perverse incentives, or begin an adult discussion about a system that delivers responsible care to the elderly in line with other advanced nations, but at a fraction of the current cost.
"Today, six and a half years after the collapse of Lehman, there is a Bigger Short cooking. That Bigger Short is long-term claims on paper money, i.e., bonds."
What do we really know?
Markets are not cheap by any measure. If earnings growth continues to wane or interest rates rise, the bull market thesis will collapse as "expectations" collide with "reality." This is not a dire prediction of doom and gloom, nor is it a "bearish" forecast. It is just a function of how markets work over time. This time is "not different." The only difference will be what triggers the next valuation reversion when it occurs.
“Things always become obvious after the fact” – Nassim Nicholas Taleb
“Facts do not cease to exist because they are ignored.” – Aldous Huxley
We got a glimpse of just what Yellen has in mind for the next 'monetary transmission mechanism' yesterday, when a mystery drone appeared above the Rosa Parks Circle in Grand Rapids, Michigan and literally rained down money on the people below, leading to what the Mail describes as a "cash-grabbing frenzy."
There’s only one question that matters today in markets: why is the government bond market going up and down like a yo-yo? How is it possible that the deepest and most important securities in the world are currently displaying all the trading stability of a biotech stock?
"Right now, we’re living in a make believe world. Debt can’t be the main source of growth. Without a pick-up in final demand a lot of bad debts are out there. As long as you have excess capacity in the commodity production you have bad loans throughout the system. That means you have governments who can’t repay their debt without selling new loans and all their bad loans are funded by the central banks.... I think a global recession is inevitable...You just can’t devalue your way to prosperity. As long as the number of shares keeps declining, stock prices are going to go up and nobody cares [but] in the long term there has to be a major correction."
American consumers may have pocketed most of their gas savings thus far, but there are two discretionary items where they aren’t holding back spending: bourbon and Tennessee whiskey.
"...it is imperative that the data does turnaround during 2015h2 for the recent rise in yields to be sustained. It is quite surprising to us that there is so much focus on US employment data and Fed Funds normalization to the exclusion of global trade data or US demand let alone productivity. A case perhaps of the lunatics trying to run the asylum."
Having missed for a record 5 months in a row, Dallas Fed Manufacturing Outlook collapsed further in May to -20.8 (against expectations of -12.4). Thisis the 5th drop in a row (only ever seen in a recession) and 6th monthly miss in a row (never seen before) as it appears Former Dallas Fed Fisher was talking crap once again when he said "net, low oil prices were good for Texas." Despite Consumer Confidence indicating, somehow, that Texans are the most confident in a year (up from 121 to 130 in May), business survey continues to point to notable weakness with employment collapsing, hours worked crashing, and production plunged. However, on a bright note, expectations for the future jumped from -5.9 to +4.9 - hope springs etermal eh?
In an important interview with Reuters in 2012, John Butler suggested that if one country - he cited Russia - were to back its currency with gold it could cause a 20% collapse in the dollar in just 24 hours. In order to stabilise the currency and in an attempt to preserve the reserve currency status of the dollar, the U.S. would be forced against its will to back its currency with gold.