In setting the price of money, we have given central bankers the power to effectively set the price of... everything. Make no mistake, this is a form of price controls; and one day (probably soon), future historians are going to look back and wonder how so many people could be bamboozled. We have somehow been conned into believing that the path to prosperity is for the grand wizards of the financial system to conjure paper currency out of thin air. Yet this notion of 'money backed by nothing' is an absurd fantasy that has failed every single time it has ever been tried before in history. We bring this up because the following chart highlights the Fed's margin of safety before confidence wanes...
Let's be clear about one thing (to quote the president): the Fed's policies have been an unqualified success for financiers and an abject failure for everyone who has to work for a living. The Fed has not just failed to rectify the nation's obscene inequality in wealth and income; it has actively widened it by handing guaranteed returns to the banks and financiers while strip-mining what's left of the middle and working classes' non-labor income, i.e. interest on savings.
"The more information we get, the more we're inclined to conclude that it was not a terrorist incident," says the Interpol Secretary General Ronald Noble according to CNN, as details of the 2 Iranians at the center of the "stolen passport" uncertainty are identified. As CNN reports, Noble gave their names and ages as Pouri Nourmohammadi, 18, and Delavar Syed Mohammad Reza, 29 and added "they are not likely to be members of a terrorist group." Of course, the more dismal unknown is that of the entire plane and its passengers and crew which remain missing without a trace.
The chart below shows that while there has traditionally been near 100% correlation between the 1 year cumulative change in payrolls, and the monthly amount of job hires, in the New Normal this is anything but true. The simple explanation: the only reason why it "seems" things have gotten back to normal, is not because there is hiring, but because companies have put a freeze on terminations, and with quality jobs few and far between, workers still refuse to leave existing jobs voluntarily, further confirmed by the Quits print which just dropped to 2.375MM, the lowest since October as confidence in finding a better paying job has rapidly evaporated. Perhaps the snow is to blame for that too?
Stocks in Europe failed to hold onto early gains and gradually moved into negative territory, albeit minor, as concerns over money markets in China gathered attention yet again after benchmark rates fell to lowest since May 2012. Nevertheless, basic materials outperformed on the sector breakdown, as energy and metal prices rebounded following yesterday’s weaker than expected Chinese data inspired sell off. At the same time, Bunds remained supported by the cautious sentiment, while EUR/USD came under pressure following comments by ECB's Constancio who said that financial markets misinterpreted us a little, can still cut rates and implement QE or buy assets. Going forward, market participants will get to digest the release of the weekly API report after the closing bell on Wall Street and the US Treasury will kick off this week’s issuance with a sale of USD 30bln in 3y notes.
If the U.S. economy is getting better, then why are major retail chains closing thousands of stores? If we truly are in an "economic recovery", then why do sales figures continue to go down for large retailers all over the country? Without a doubt, the rise of Internet retailing giants such as Amazon.com have had a huge impact. Today, there are millions of Americans that actually prefer to shop online. But Internet shopping alone does not account for the great retail apocalypse that we are witnessing. In fact, some retail experts estimate that the Internet has accounted for only about 20 percent of the decline that we are seeing. Most of the rest of it can be accounted for by the slow, steady death of the middle class U.S. consumer. Median household income has declined for five years in a row, but all of our bills just keep going up. That means that the amount of disposable income that average Americans have continues to shrink, and that is really bad news for retailers.
While central bankers and politicians alike celebrate the great recorvery in the UK, the nation is increasingly divided between the haves and have-nots (or Londoners and non-Londoners). In no way is that more clearly evident that a dreadful new trend that, as The Sunday Post reports, desperate Brits are turning to Facebook to advertise their organs for sale at up to $50,000 despite the medical and legal risks involved.
China's biggest blue-chip stock index - the CSI-300 - dropped over 3% overnight and fell to its lowest level since Feb 2009. Corporate bond and trust defaults (crushing confidence in credit markets), shadow-banking collateral unwinds (crushing commodity prices), and exports collapsing (crushing dreams of a global economic recovery) are all weighing on Chinese stocks. This comes, ironically as the US equity "market" celebrates the 5 year anniversary of the Mar 2009 lows and soars to new highs in the face of turmoil. There is, of course, another outlet for China's massive money-printing - that dwarfs the Fed's - its real estate market.. and that is the bubble that the PBOC is trying to tamp down.
The Whole World Has Gone Into Debt
People apparently don't eat pizza when it is snowing... Or during an economic recovery... And certainly not when celebrating the market's all time high 5 year bull "market" anniversary. That is the conclusion one can derive from the just filed Sbarro Chapter 11 bankruptcy filing, which just happens to be the company's second in three years after it did the same in April 2011. The filing itself, which lists assets and liabilities between $100 and $500 million, is not surprising following on the heels of the announcement last month, when Sbarro said it would close 155 of 400 North American restaurants to cut costs. The reason for the Chapter 22 as it is known in restructuring circles: too much debt (so... debt isn't wealth?) and declining customer traffic, which like in the McDonalds' case has nothing to do with a cash strapped US consumer, but the nagging fear, which came true in January, that it would snow during the winter. Oh, and there is also no inflation, even though as Moody's warned in January, Sbarros was striggling with "high food, labor and occupancy costs."
Moments ago McDonalds reported its latest monthly comp store sales numbers. Printing at -1.4% for the US, this was a nearly double miss to expectations of a 0.6% decline, and was the 4th consecutive monthly drop in annual sales - the longest such stretch in the past decade and likely longer. Looking at this data, there are two observations: i) Americans, courtesy of record obesity rates, are finally getting serious about their health, and have shunned the infamous 99 cent deep fried meals or ii) courtesy of the Fed's "Fed's recovery", the average American can no longer even afford sub-$1 deep fast food.
"It's the weather" That's all Abe has left to pretend that 'recovery' is right around the corner. Japan just printed its worst current account deficit on record and its worst GDP growth since Abenomics was unveiled - both missing by the proverbial garden mile and both confirming that all is not well in Asia. As for the perpetual hope of a J-curve (or miracle hockey-stick reversal)? There won't be one! As Patrick Barron noted, "monetary debasement does not result in an economic recovery, because no nation can force another to pay for its recovery."And the latest joke from Asian trading floors: "when asked what he thought of the recovery, Shinzo Abe responded "Depends!""
South Korea stands out as a buying opportunity amid the indiscriminate emerging markets sell-off.
President Barack Obama has recently released his budget in which he calls for an “end of austerity.” This is an amazing statement from a president whose government has spent the highest percentage of GDP in history and added more to the national debt than all past presidents combined. What must he mean by austerity? The president’s rejection of austerity represents the Keynesian view which completely rejects austerity in favor of the “borrow and spend” — increase aggregate demand — approach to recession. What he really is rejecting is the infinitesimal cutbacks in the rate of spending increases and the political roadblocks to new spending programs. President Obama and Congress should get busy doing what is best for the economy and the American public instead of enriching themselves and those who feed at the public trough.
With 40% of the portfolio in cash and having returned $4 billion to clients at year-end, Seth Klarman's Baupost Group has "drawn the line in the sand" as they reflect on the diminished opportunities in the so-called "Truman Show" market we see today. In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, Klarman notes, the stock market, heading into 2014, resembles a Rorschach test - "what investors see in the inkblots says considerably more about them than it does about the market." From "born bulls" to "worry genes" and from Bitcoin to flash-mob-speculation, "there is a growing gap between the financial markets and the real economy...and the overall picture is one of growing risk and inadequate potential return almost everywhere one looks... as every 'Truman' under Bernanke’s dome knows the environment is phony."