In the early 1970s, there were about 200,000 new US businesses created each year (net of closures). Now, the number is negative. Why are Americans getting poorer? Look no further. No new businesses (net). No new jobs (again net). No new wealth. Under Obama and Draghi, crony capitalism flourishes. Real capitalism dies.
It’s not entirely clear what will happen in the near term, but the financial markets are already pushed to extremes by central-bank induced speculation. With speculators massively short the now steeply-depressed euro and yen, with equity margin debt still near record levels in a market valued at more than double its pre-bubble norms on historically reliable measures, and with several major European banks running at gross leverage ratios comparable to those of Bear Stearns and Lehman before the 2008 crisis, we're seeing an abundance of what we call "leveraged mismatches" - a preponderance one-way bets, using borrowed money, that permeates the entire financial system. With market internals and credit spreads behaving badly, while Treasury yields, oil and industrial commodity prices slide in a manner consistent with abrupt weakening in global economic activity, we can hardly bear to watch...
Well the day has finally arrived that after two years of promises, jawboning and hope - the European Central Bank finally announced they will take the plunge into the Quantitative Easing (QE) pool. Whether or not the ECB's QE program has the desired effect or not will not be realized for a while. However, this week's reading list is a variety of opinions and initial takes on the "ABC's of the ECB's QE."
There is virtually nothing which is on the level in today’s financial markets. According to the Fed’s PR firm, Hilsenramp & Blackstone, one quarter of the $7 trillion in bonds issued by euro zone government are trading at negative yields. And this drastic financial repression prevails across the yield curve, not just on the short end. Yes, the juxtaposition is entirely reasonable that a state drifting toward insolvency and/or ruinous taxation should be able to borrow 10-year money at 0.70%. That is, when the fix is in, the central bank printing press is open to buy, the apparatchiks are terrified and one of history’s greatest monetary charlatans is in charge - the speculators have nothing to do but harvest their haul. So now begins the greatest heist since Bernanke bailed out Wall Street in September 2008.
Government has NEVER accepted the economy or free markets. They assume they have the ability and the right to manipulate society. They have failed each and every time. They cannot just recognize the natural order of things driven by human nature (character). They constantly work against the business cycle and attempt to change what cannot be changed. Therein, they are engaging in a perpetual war they can never win.
With less than two hours until the ECB unveils its first official quantitative easing program, the markets appear to be in a unchanged daze. Well, not all markets: the Japanese bond market overnight suffered its worst sell off in months on a jump in volume, although for context this means the 10Year dropping from 0.25% to 0.32%. Whether this is a hint of the "sell the news" that may follow Draghi's announcement is unclear, although Europe has seen comparable weakness across its bond space as well and the US 10 Year has sold off all the way to 1.91%, which is impressive considering it was trading under 1.80% just a few days ago. Stocks for now are largely unchanged with futures barely budging and tracking the USDJPY which after rising above 118 again overnight, has seen active selling ever since the close of the Japanese session.
On the heels of last week's downgrades by Fitch and Moody's to just above junk status, The Central Bank of Russia (CBR) has issued a statement that it will no longer use credit ratings from Standard & Poor’s, Fitch, or Moody’s that were assigned after March 1, 2014. All credit ratings will now be at the discretion of the Board of Directors of the Bank as regulators assess whether or not the ratings made after March are accurate. Sounds like Spain, Greece, and USA's previous derision over ratings agencies proclamations is heading east.
The fact that Central banks are now openly cutting interest rates to NEGATIVE should tell you how far along we are in terms of funding problems (at these rates, bond holders are PAYING the Government for the right to own bonds). From a baseball analogy we’re in the late 8th, possibly early 9th inning.
There are more important factors than merely looking at the total size of the QE program that is apparently coming next week from the ECB. the greatest probability in my opinion, and the only way we believe Draghi can retain enough votes, is for the Council to reject risk sharing (as suggested in the Der Spiegel article). This means QE will be implemented by the National Central Banks who would be responsible for the purchasing of their own debt. We believe this structure is of critical importance, because unlike other ‘bail-out’ structures, such an action is anti-integration. It would be a step back-ward; a step away from being a union.
Top ten things that investors will likely be watching in the week ahead.
Next week will be crucial for Super Mario...
Chaos was seen in financial markets today as participants were thrown a curveball with the SNB 'reset'. In just 13 minutes, from 0930 to 0952 BST, the franc collapsed by 30%. Swiss shares fell more than 12% - their largest crash since 1987. Stock markets around Europe fell with investors buying "safe haven" assets such as German bunds and gold bullion ...
In December I proclaimed that we'll likely see multiple crashes for 2015. I don't say this lightly & I have a track record on this topic that's foolish to ignore!
The major unintended consequence of government and central bank intervention since Volcker's stand against inflation has been to generate its nemesis; deflation. With interest rates near zero in the major economies, there is nowhere for rates intervention to go to provide a stimulus. Strangely the answer must be higher interest rates. We will then see some "creative destruction" which is what the financial system needs to reset and start a proper economic cycle, but with the investment banks, who stand to lose the most, controlling the strings (just how do you think the US Budget bill got changed to allow banks’ derivative positions to be included in subsidiaries covered by FDIC insurance? ie the taxpayer covers their losses) we need stronger hands at the tiller than a coalition of "politicians" or a lame duck president. We need somebody with balls... any volunteers?
We are observing the emergence of a new phase in The Golden Age of the Central Banker – the cult phase – to use the sociological lingo. Joseph Heller’s brilliant book provides the starting point, not only by calling attention to the prevalence and power of Catch-22’s in the investment world today, but also in the creation of a self-regulated, faith-based system of social behavior. A Catch-22 world is not a happy world, but it is a very stable world, at least on its own terms. Change is very unlikely to come from within, and internal market risk indicators are all quite benign. But external market risk indicators are all screaming red, as the global environment has rarely been this worrisome for political shocks, trade/forex shocks, and supply shocks with the scope and power to challenge the Central Banking gods.