While the specter of the debt ceiling debate continues to haunt the halls of Washington D.C. it is the state of retail sales that investors should be potentially focusing on. While the latest retail sales figures from the Bureau of Economic Analysis are unavailable due to the government shutdown; we can look at other data sources to derive the trend and direction of consumer spending as we head into the beginning of the biggest shopping periods of the year - Halloween, Thanks Giving (Black Friday) and Christmas. The recent downturns in consumer confidence and spending are likely being exacerbated by the controversy in Washington; but it is clear that the consumer was already feeling the pressure of the surge in interest rates, higher energy and food costs and stagnant wages. As we have warned in the past - these divergences do not last forever and tend to end very badly.
Gold’s price falls are very counter intuitive and suggests that Wall Street banks, either independently or in unison with the U.S. authorities possibly through the Working Group On Financial Markets or the Plunge Protection Team, are suppressing gold lower.
The latest Q2 US Flow of Funds data revealed that the corporate financing surplus declined to zero, for the first time since the Lehman crisis. The financing surplus is a measure of corporate savings, and in principle the lower this financing surplus the more expansionary the corporate sector is. Typically the corporate sector is dis-saving, i.e. capex typically exceeds cash flows from operations. However, the sharp decline in the US corporate surplus is less positive than it appears at first glance because it was driven by a rise in dividend payments rather than a rise in capex. As we have pointed out time and again, with the Fed's ZIRP, the only thing that matters is the share price and with firms increasingly focused on dividends rather than capex, to the extent that it continues, points to lower productivity and potential growth going forward.
For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well: "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." Fortunately, there is an institution that exercises control over the academics at the Fed; it is called the 'real' market economy... and it has badly humbled the professors at the Fed.
A week ago, we first reported that Bridgewater's Ray Dalio had finally thrown in the towel on his latest iteration of hope in the "Beautiful deleveraging", and realizing that a 3% yield is enough to grind the US economy to a halt, moved from the pro-inflation camp (someone tell David Rosenberg) back to buying bonds (i.e., deflation). This was music to Bill Gross' ears who in his latest letter, in which he notes in addition to everything else that while the Fed has to taper eventually, it doesn't actually ever have to raise rates, and writes: "The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time." How long one may ask? "the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!" In the early 1940s there was also a world war, but the bottom line is clear: lots and lots of central planning for a long time.
Don't Blame Free Market Capitalism ... We Haven't Had It for a While
In case there was any concern that the umbilical cord between US corporations and government has never been thicker (especially in light of recent revelations that the NSA views the AAPL Borg Collective as useful "zombies", abusing their credit cards just so they can be spied upon in new and improved ways) the New York Police Department is here to remind everyone of just that.
Since 2002 the US government has presided over one of the most dramatic financial bubbles of all time: the bubble of the military-industrial complex. (A few will remember that Dwight Eisenhower warned Americans about this in 1961.) This bubble, like all others, will pop, and it looks to be deflating right now - as we have pointed out vociferously. The amounts of money that have been spent in the past decade can only be characterized as obscene. But the point that really matters is this: Military spending is just part of the bubble. The military-industrial-intelligence-law enforcement complex has only a few choices left in front of it. (Aside from rational things, like giving up their immoral and abusive game.)
The man who could barely recall anything at his various Congressional hearings, has no problem with remembering one key aspect of the MF Global bankruptcy: Jon Corzine is innocent! And, as a result, yesterday his lawyers filed a motion to dismiss a civil case brought against him by the CFTC in which the legal team shows that the best defense is a good offense and openly critiques the commodities regulator. DealBook excerpts from the filing: "There is no evidence demonstrating that Mr. Corzine knowingly directed unlawful conduct or acted without good faith," wrote the lawyers from Dechert, Andrew J. Levander and Benjamin E. Rosenberg. "Rather than acknowledge that reality and move on, the C.F.T.C. has clung to its baseless presumptions and manufactured charges of wrongdoing that are supposedly connected to Mr. Corzine." Right: the commingling just happened on its own. Twas but a glitch.
There is also consensus among the people inhabiting the real world -the one that is found outside the ivory towers of the economics departments of all US and global Tier 1, 2 and 3 universities - that the only reason the world is currently in its sad, deplorable and deteriorating economic state (which however keeps making the rich richer), is precisely due to these same economists, whose tinkering and experimentation with DSGE models, differential equations, curved lines, and all such things all of which have no real world equivalent, and specifically due to economists like Greenspan and Bernanke. These two men, both of whom barely have seen the real world for what it is or held a real job outside of their academic outposts, who surround themselves with brownnosing sycophants and who do the bidding of Wall Street, are the primary reason for the current centrally-planned quagmire. Which is why we wonder: is the fact that some 313 economists (and counting) have signed a petition pushing for Janet Yellen (aka Freudian slip "he" if you are the president), and against Larry Summers, sufficient grounds to actually like the outspoken former Harvard head?
The press that Google Glass has received already been stunning, particularly considering there's hardly a person on the planet sporting a pair of these things on the bridge of their nose yet, but I've got a feeling that, like Google Wave (remember that? anyone? I didn't think so..........) it will be a flop. Here's why:
While central planning has seemingly achieved its goal, they have merely created another bubble. A bubble in which fundamentals will have their day and a completely unsustainable societal situation has emerged. Rising rents and falling incomes. For example, in Minnesota we find that “since 2000, rents have risen about 6 percent statewide, but renter incomes have dropped about 17 percent.”
The new American Dream is to one day be able to move out of your parent's basement and rent from Blackstone.
— Michael Krieger (@LibertyBlitz) August 22, 2013
- Bernanke Seeks to Divorce QE Tapering From Interest Rates (BBG)
- China launches crackdown on pharmaceutical sector (Reuters)
- Barclays, Traders Fined $487.9 Million by U.S. Regulator (BBG) - or a few days profit
- Barclays to fight $453 million power fine in U.S. court (Reuters)
- When an IPO fails, raise money privately: Ally Said to Weigh Raising $1 Billion to Pass Fed Stress Tests (BBG)
- Bank of England signals retreat from quantitative easing (FT) ... Let's refresh on this headline in 6 months, shall we.
- Russia's Putin puts U.S. ties above Snowden (Reuters)
- Smartphone Upgrades Slow as 'Wow' Factor Fades (WSJ)
- Snowden could leave Moscow airport in next few days (FT)
- New Egypt government may promote welfare, not economic reform (Reuters)
Let us be blunt: Our capitalist system is approaching failure. Or, perhaps better said: Our marginally capitalist, partly-free market systems are approaching a massive collapse. Not because of what capitalism is, mind you, but because the powers that be have bastardized it. Capitalism can bear many distortions and abuses, but it is not indestructible. And, make no mistake, the ‘capitalist’ system we have today has been massively corrupted, so much so that it’s sagging under the load... and will continue to do so until the proverbial straw breaks its back.
- China, the single biggest contributor to global growth over the past decade, slowing markedly.
- World trade now flirting with recession.
- OECD industrial production in negative territory YoY.
- Southern Europe showing renewed signs of political tensions as unemployment continues its relentless march higher and tax receipts continue to collapse.
- Short-term interest rates almost everywhere around the world that are unable to go any lower, even as real rates start to creep higher.
- Valuations on most equity markets that are nowhere near distressed (except perhaps for the BRICS?).
- A World MSCI that has now just dipped below its six month moving average.
- A diffusion index of global equity markets that is flashing dark amber.
- Margins in the US at record highs and likely to come under pressure, if only because of the rising dollar.