en The Utter Craziness Of Monetarism Is On Full Display <p><a href=""><em>Submitted by Jeffrey P. Snider via Alhambra Investment Partners,</em></a></p> <p><u><strong>Why Can&#39;t Oil Be Oil?</strong></u></p> <p>For most commentary on the recent and sharp decline in oil prices, there is a serious <em>ceteris paribus</em> to it especially from those that don&rsquo;t recognize that there are much deeper financial forces. The following is excerpted as an example of the closed system approach, as if there is a world of difference that <a href="" target="_blank">can allow &ldquo;decoupling.&rdquo;</a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>What matters is what&rsquo;s causing prices to decline: an increase in productivity or a decline in economic activity. Only in the second case is there a serious danger that the Federal Reserve should try to respond to. Similarly, rising prices can be a sign that monetary policy is too loose, but can also reflect declines in productivity.</p> </blockquote> <p>This is a tangential explanation to the <a href="" target="_blank">second stage of oil price excusing</a>. Some will &ldquo;predict&rdquo; that though demand has fallen, &ldquo;unexpectedly&rdquo; of course, it will not remain so weak for so long. This alternate but associated justification is that foreign demand, and only in discrete locales that are unrelated, is to blame as the US surges forward unobstructed (5% GDP and all that).</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>There are, however, two wrinkles worth noting. One is that although the fall in the price of oil doesn&rsquo;t appear to reflect any weakness in the U.S. economy, weakness abroad may be a factor. But that&rsquo;s a reason to loosen money elsewhere, not in the U.S. A second is that there is a reasonable argument that monetary policy in the U.S. has been a little too tight even leaving aside this price decline. If that&rsquo;s correct, then some added pressure for loosening, even if that pressure is based on a mistaken worry, might not be such a bad thing.</p> </blockquote> <p><strong>And thus the utter craziness of monetarism is on full display, in that after arguing that declining oil prices are good for American consumers, they are also suggesting that monetary policy is &ldquo;too tight&rdquo;, and thus oil prices are contradictorily &ldquo;too low.&rdquo;</strong> That betrays the central aspect of this orthodox embracing of lower energy prices as nothing more than a shaky rationalization &ndash; they still are not comfortable with low prices but accept them lest anyone get worried about what they really suggest. <strong>Orthodox monetary theory is, when stripped of its academic trappings, dedicated to high oil prices and low wages.</strong></p> <p><strong>Ultimately, oil prices do not operate in a vacuum, nor even a financial one</strong>. If oil prices were on their own declining as they have, this argument <em>might</em> have more merit (stress and overstress &ldquo;might&rdquo;). However, these closed-system masters, as they fancy, never address financial reality. Oil prices signal economic weakness and bond markets second that. <strong>The US bond market is not purely dedicated to Russian economic foundering or Brazilian inflation, but rather growing quite concerned in historical context of US economic cycles.</strong></p> <p><a href=""><img alt="ABOOK Dec 2014 UST 5s10s IR Targeting" class="aligncenter size-full wp-image-27625" height="361" src="" width="587" /></a></p> <p><strong>The yield curve itself has been shifted upward by the late 1980&rsquo;s intrusion of interest rate targeting &ndash; where the Federal Reserve has obliterated the meaningful restrictions on private &ldquo;money supply&rdquo;</strong> <em>(NOTE: we still do not know specifically when the FOMC switched to a pure interest rate target of the federal funds rate, but it certainly was evident before and heading into the 1990-91 recession). </em>That is the problem with these closed system adherents because saying something like, &ldquo;that&rsquo;s a reason to loosen money elsewhere, not in the U.S.&rdquo; is wholly unlike financial reality.</p> <p><strong>The credit markets are in tandem with oil prices, not on some distant shore but these United States.</strong> Despite the artificial and upward shift in the yield curve, the <em>relative</em> <a href="" target="_blank">relationship of its shape</a> has been a near-universal signal of contractionary tendencies. In that altered respect, the current flattening approaches what might fairly be called equivalency with past episodes.</p> <p><a href=""><img alt="ABOOK Dec 2014 UST 5s10s Recessions" class="aligncenter size-full wp-image-27624" height="361" src="" width="587" /></a></p> <p>The commonality is, of course, the modern &ldquo;dollar&rdquo; and its eurodollar aspects. The global exchange standard altered in the late 1960&rsquo;s and then again in the 1980&rsquo;s. <strong>There is no coincidence that bubbles, global credit bubbles, started under the latter as eurodollars began to &ldquo;finance&rdquo; not just trade but speculation.</strong> That is the nature of this artificially steepened yield curve &ndash; and its opposite position is that undoing.</p> <p><a href=""><img alt="ABOOK Dec 2014 UST 5s10s Terminal Point" class="aligncenter size-full wp-image-27623" height="361" src="" width="587" /></a></p> <p>Ambrose Evans-Pritchard, <a href="" target="_blank">writing in <em>The Telegraph</em></a> in the UK, at least recognizes that the world is united under a &ldquo;dollar&rdquo; system, but then dismisses that very linkage.</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>The world&rsquo;s financial system is on a dollar standard, not a euro standard. Global loans are in dollars. The US Treasury bond is the benchmarks for global credit markets, not the German Bund. Contracts and derivatives are priced off dollar instruments.</p> <p>&nbsp;</p> <p>Bank of America says the combined monetary stimulus from Europe and Japan can offset only 30pc of the lost stimulus from the US. If you think that the sheer force of the US recovery will lift the whole global economy regardless of fading monetary stimulus, none of this may matter.</p> <p>&nbsp;</p> <p>My own view is that a world awash with excess capacity cannot withstand a fully-fledged dollar tightening shock. The effects will ricochet back into the US eventually, but that could be a long time hence, and this in a sense is the problem for asset markets.</p> </blockquote> <p>That&rsquo;s precisely the point, as &ldquo;long time hence&rdquo; has never been such with the yield curve drawing as it is now. <strong>Oil and credit are not pricing in some far distant reverberation backward into the US, but one that is far more local than anyone would like to admit (GDP is 5%!!!). This was reinforced, strongly, just today <a href="" target="_blank">by more</a> &ldquo;unexpected&rdquo; &ldquo;supply gluts&rdquo;</strong>:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Global oil markets sold off again on Wednesday after a one-day pause as large build in U.S. crude stockpiles surprised investors who had expected a draw, adding to worries about a supply glut that has battered prices for six months.</p> </blockquote> <p><strong>That would seem to suggest that energy usage in the US is actually more consistent with credit market indications than GDP. &ldquo;Tight dollars&rdquo; is a bank balance sheet reflection of global risk that is not sliced by location, but rather a universal expression. <u>We are one economy and it <a href="" target="_blank">is feeling Japanese</a>.</u></strong></p> <p>*&nbsp; *&nbsp; *</p> <p><strong>Everything is else is WRONG, and stocks are right?</strong></p> <p><a href=""><img alt="" src="" style="width: 600px; height: 309px;" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="980" height="504" alt="" src="" /> </div> </div> </div> Bank of America Bank of America Bond Crude EuroDollar Evans-Pritchard Federal Reserve Global Economy Japan Monetary Policy Money Supply None Reality Recession recovery Yield Curve Mon, 29 Dec 2014 02:30:42 +0000 Tyler Durden 499632 at How To Stay Warm In Philadelphia - Burn Dollar Bills <p><a href="">Apparently taking a page out of China's book</a>, <a href=";utm_source=gizmodo_twitter&amp;utm_medium=socialflow">Factually reports</a> the Philadelphia Federal Reserve office (apparently aware of the worthlessness of their fiat currency) sends old <strong>currency to local power plants, where it's burned for electricity</strong>. <a href="">As WSJ reports,</a> The Fed destroys more than 5,000 tons of U.S. currency a year - most of it once went to landfills, but the central bank has pushed for years to go green with all that green. It appears we have come a long way from the<a href=";filepath=/docs/historical/frbrich/1953_frb_richmond.pdf"> Federal Reserve Bank of Richmond’s 1953 annual report</a> when it <strong>boasted it had "money to burn."</strong></p> <p>&nbsp;</p> <p>From 1953...</p> <p><a href=""><img src="" width="600" height="788" /></a></p> <p>&nbsp;</p> <p><a href=";utm_source=gizmodo_twitter&amp;utm_medium=socialflow">As Gizmodo reports</a>,</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Philadelphia is literally burning money to keep the lights on. </strong>And that's a good thing! They used to just shred it and send it to landfills, letting all that energy go to waste.</p> <p>&nbsp;</p> <p>...</p> <p>&nbsp;</p> <p><strong>"Rather than just sitting in a landfill, it's producing electricity for residents in the Delaware Valley, here in our district,"</strong> an official at the Federal Reserve Bank of Philadelphia proudly told the Wall Street Journal.</p> <p>&nbsp;</p> <p>Other municipalities around the country have similar currency incineration programs, including Los Angeles County, where they <strong>burn as much as 500 tons of money per year.</strong> I suppose the image of burning money is a good reminder to turn the lights off when you leave a room. <strong>Your dollar bills are literally going up in smoke.</strong></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="267" height="268" alt="" src="" /> </div> </div> </div> Federal Reserve Federal Reserve Bank Wall Street Journal Mon, 29 Dec 2014 01:45:08 +0000 Tyler Durden 499627 at From Land Of Opportunity To A Fool’s Paradise <p><a href=""><em>Via Mark St.Cyr</em></a>,</p> <p><strong>I am amazed daily to see just how many adults (never mind the teenagers) seem absolutely oblivious to their surroundings. </strong>Seemingly intelligent people walking with their heads down flailing away on a keyboard built for ants either trying to find out &ldquo;what&rsquo;s happening&rdquo; in the world or, to let the world know on some social networking platform what they ate for dinner, if they just showered, or posted their 2,375 picture of themselves in a compromising pose or situation.</p> <p>They tweet, post, paste, share, spread, etc.,etc.,etc. But ask them a question about a relevant subject such as the economy, state of global affairs, or more that might impact their future? You&rsquo;ll just get a <strong>blank soulless expression of bewilderment.</strong></p> <p>You know that look, it&rsquo;s the same look you get when one of these clueless figures walks right into you in some store or mall. Do they say sorry? Or, excuse me?&nbsp; No: you just get the animatronic look that says &rdquo; Weren&rsquo;t <em>you</em> watching where <em>I</em> was going?&rdquo;</p> <p>Sorry to say, that&rsquo;s what you&rsquo;ll hear people saying who put more into exercising their texting dexterity than their educating or informing themselves with useful information. Information which they need to know and understand so they can apply it to their personal well-being. Not their personal &ldquo;page.&rdquo;</p> <p><strong>Social media along with near instantaneous news feeds have given the allusion to a great many that they are &ldquo;informed.&rdquo;</strong> Nothing could be further from the truth. And in many ways it&rsquo;s becoming not only dangerous, but could turn catastrophic for these same &ldquo;informed&rdquo; individuals.</p> <p>Most truly informed people today (which you are) know that what is being reported, how it&rsquo;s reported, how it&rsquo;s manufactured, and all the other ways data of today is being manipulated that one can not rely on the once deemed &ldquo;reliable sources of information.&rdquo;</p> <p><strong>Today far too many are only taking in the &ldquo;headlines&rdquo; along with what&rsquo;s known as &ldquo;headline numbers.&rdquo; This is an abject lesson in Tom Foolery.</strong></p> <p>Be it as it may that the markets are at lifetime highs along with unemployment prints of under 6%. If you believe as Janet Yellen stated in her latest FOMC conference that we&rsquo;ll be at &ldquo;full employment&rdquo; in a little over a year from now without questioning or understanding how, along with looking at these markets without wondering how and why &ndash; then maybe this is &ldquo;paradise.&rdquo; However, I doubt that is what it will be in the not too distant future.</p> <p><strong>As I have stated many times over the years one of the most important reasons that needs to be understood above all with the Federal Reserve&rsquo;s intervention into the capital markets is the very fact &ndash; they enable both the political class, as well as other policy makers from attending to making sure intrusive, job killing, business stifling, or other entrepreneurial based impediments are either not made law &ndash; or repealed out of law. Whether that be taxes, regulations, et al.</strong></p> <p>This point for a long time seemed to have been falling on deaf ears. However, now with so many once &ldquo;touchstones&rdquo; as to gauge the health of the economy so utterly &ldquo;off the charts&rdquo; such as the indexes, others are now beginning to call out this glaring danger. One such person is Stephen Roach. In a <a href="" title="Link to article">recent article</a> he also opined the following:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;Moreover, the longer central banks promote financial-market froth, the more dependent their economies become on these precarious markets and the weaker the incentives for politicians and fiscal authorities to address the need for balance-sheet repair and structural reform.&rdquo;</p> </blockquote> <p>Again to make my point: what is happening away from the adulterated headlines and at the root of business is there are changes about to imposed on businesses as well as others that are going to have dramatic impacts on business creation, expansion, hiring, and a lot, lot more.</p> <p><strong>A few examples of what is possibly coming down the literal &ldquo;pipeline&rdquo; is just how fast all the good news in the employment front just might turn around near overnight and go from good straight to; how can this be happening?</strong></p> <p><strong>Oil as of today is in free-fall.</strong> &ldquo;Great news to consumers&rdquo; you&rsquo;ll read in the main stream media (MSM). Yes, it is. Yet, that decline in fuel savings will not turn into a windfall for spending on new trinkets or electronics that this same MSM will laud over. For a great many it will barely cover the increases in their newest round of healthcare premium increases. But not too worry &ndash; the MSM loves that new consumer spending report, and that factors in your new bill to their new-found narrative: Everything is just wonderful!</p> <p><strong>Then there&rsquo;s that unemployment number.</strong> Forget all the &ldquo;not counted&rdquo; souls any longer. How about the ones that they do count? You know where they all work? In the oil business in one form or another.</p> <p>As I stated in an earlier article <a href="" title="link to article">We Forget All Too Fast&hellip;</a> once you see the beginning signs, things can move very quickly. And we are beginning to see those very signs.</p> <p>Here are just a few: <a href="" title="link to article">US Oil Well Permits Collapse</a> 40% in Nov., <a href="" title="link to article">US Oil Rig Count Tumbles</a>, <a href="" title="link to article">Drilling Cutback&hellip;Forced to Scrap Rigs</a>. These few are not just for the sake of a headline, but have actual empirical data. I&rsquo;ll also bet dollars to doughnuts those are headlines that won&rsquo;t be shared or seen on a government supplied phone.</p> <p>With as abstinent or what some might say &ldquo;out right hostile&rdquo; view of the fossil fuel industry as this administration has both proclaimed, as well as demonstrated itself to be: How does one think the view will be when these once job creating states or areas suddenly find themselves in dire straights if this perfect storm of low oil prices, along with low demand, and high yield financing collide?</p> <p>Will they leave the heavy lifting (if there&rsquo;s anything left to lift at all) to the Federal Reserve? Because if jobs in these states begin to accelerate to the down side, so to will the narrative of &ldquo;patient.&rdquo; I&rsquo;ll garner it will turn right into outright panic. But there&rsquo;s a problem.</p> <p><strong>Interest rate cutting and more money printing won&rsquo;t help next time.</strong> You&rsquo;ll need far more tools than just a printing press, for the rest of the world is not going to bear that burden any further. The currency markets won&rsquo;t allow it.</p> <p><strong>Does one think Russia along with China are going to let the U.S. solve its monetary and economic crises once again by putting their currencies at risk? Along with the political unrest it fosters? </strong>You can see these tensions manifesting within the Forex markets everywhere. And as I&rsquo;ve stated many times before &ndash; it&rsquo;s the Forex markets where you have to keep a keen eye peeled. For this is where the real action happens that everything else follows.</p> <p><strong>The current new pledges of friendly trade and even friendlier currency swaps excluding the Dollar are happening with far more frequency and in more prominent markets today than probably the last two generations.</strong></p> <p>Whether they work out over time with signing parties is irrelevant. Just the mere fact that others are not only thinking but actually engaged in the process is a monumental shift. <strong>And should literally scare U.S. policy makers to their core.</strong> But alas &ndash; it seems they either have no understanding, or worse &ndash; don&rsquo;t want to know and don&rsquo;t care.</p> <p>And if you think about it why should they? Just look at what the all those people who bump into you are reading. <strong>You know, the one&rsquo;s only concerning themselves with what a &ldquo;headline&rdquo; says, or what a tightly dressed, impeccably coiffed headline reader would tell them &ndash; like&hellip; <a href="" title="link to article">&ldquo;Everything Is Awesome!&rdquo; </a></strong></p> <p>A Fool&rsquo;s paradise is what the once great &ldquo;land of opportunity&rdquo; is in real danger of becoming if the adults don&rsquo;t <strong>stop acting like children and actually care about what&rsquo;s beneath the headlines or between the book covers.</strong> Rather than the headlines of who&rsquo;s between the covers with who.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="384" height="309" alt="" src="" /> </div> </div> </div> Capital Markets Central Banks China ETC Federal Reserve headlines High Yield Janet Yellen Stephen Roach Unemployment Mon, 29 Dec 2014 01:00:53 +0000 Tyler Durden 499628 at Only War, Inflation And Financial Collapse Can End The Global "Plutonomy", According To Citi <p>The last time the market was as euphoric and as complacent as it is now, was in the <em>happy go lucky </em>days of 2006 when every day stocks surged without a care in the world, when Lehman bankers were looking to a comfortable retirement after cashing out their stock (then trading north of $70), when the only question was which mega M&amp;A and supermega LBO will hit next, and when the <em>then-brand new </em>Fed chairman Ben Bernanke said there is nothing to worry about because subprime was contained and because home prices in the US just can not possibly drop. Not surprisingly, late 2006 was also when Citigroup held its first and only Plutonomy symposium: <em><strong>a joyous celebration of the 0.001%, or as Citi called them, "The Uber-rich, the plutonomists who are likely to see net worth-income ratios surge, driving luxury consumption"</strong></em>, adding "<em>Time to re-commit to plutonomy stocks – Binge on Bling</em>. Equity multiples appear too low, the profit share of GDP is high and likely going higher, stocks look likely to beat housing, and we are bullish on equities."</p> <p>Wait what? Was there really a time 8 years before the French economist Piketty bashed (and made millions in the process) class and wealth inequality, when one of the world's soon to be most insolvent banks had a symposium in which the bank pulled a page right out of pre-revolutionary France and celebrated the world's mega rich?</p> <p>Yes, and that's not all. </p> <p>In a trilogy of reports authored by Citi's then head of global srategy, Ajay Kapur (who subsequently quit Citi, tried his hand at <a href=";sid=aU7rVOxeQoRI">running a hedge fund</a>, failed, <a href="">went to Deutsche Bank</a> to head the bank's Asian equity strategy, failed, and has for the past year <a href="">been working at Bank of America </a>in that pluotcracy mecca, Hong Kong), couldn't find enough words of praise to explain just how great the brave new world is, one in which the 0.1% control about half of the world's financial assets, and said, on September 29, 2006, that "we think the balance sheets of the rich are in great shape, and are likely to continue to improve." </p> <p><a href=""><img src="" width="600" height="692" /></a></p> <p>In retrospect we now know he couldn't be more wrong, and as events just two years later proved, it required a coordinated, global multi-trilion bailout of the entire financial system (which is still ongoing), to avoid the total collapse of the balance sheets of the rich. </p> <p>However, the flip side of this ongoing intervention by central banks has meant that the (merely) uber rich in 2006 have since become uber<em>est</em> rich, and the nascent Plutonomy of the mid 2000s has morphed into a giant monster unseen at any time before in history.</p> <p>And since the class divide of society has only gotten worse, here are some of Citi's observations on Plutonomy back then, which are even more applicable now. </p> <p><em>From Citi's September 29, 2006 report</em>: </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Plutonomy – the story so far...</strong> </p> <p>&nbsp;</p> <p>Over the last 20 years or so, in certain countries, the rich have been getting substantially richer. The share of the top 1% of the population of income has grown substantially in countries such as the US, UK and Canada. The countries, which apparently tolerate income inequality, are what we call plutonomy countries – economies powered by a relatively small number of rich people. </p> <p>&nbsp;</p> <p>... </p> <p>&nbsp;</p> <p>What has driven this? We see three drivers. Firstly, the bull market in financial assets – particularly equities – as inflation has fallen, has benefited those whose assets have been invested, particularly in equities as the disinflation was also accompanied by strong earnings growth as margins rose. </p> </blockquote> <p>The current analog: the Fed-induces record breaking rally since the 666 lows hit in early 2009</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Secondly, the rise of managerial capitalism, <strong>with CEO remuneration increasingly tied into EPS growth and equity performance</strong>. </p> </blockquote> <p>Which should explain the record surge in corporate stock buyabcks. After all, yield-squeezed bondholders have to pay to make management (and activist shareholders) wealthier than ever before. </p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>Finally, as with previous waves of plutonomy – such as sixteenth century Spain, seventeenth century Holland, Industrial Revolution Britain, the Gilded Age and the Roaring Twenties in the US – the ongoing technological revolution has generated a new wave of ultra-high net worth individuals.</p> </blockquote> <p>... Such as a ludicrous $40 billion valuation of a taxi-alternative service or a several hundred billion market cap for yet another "cool, hip du jour" social network, all perfectly rational and which clearly have nothing to do with the endless pool of zero-cost money that VCs can recycle into perpetually unprofitable projects</p> <p>To be sure, being uber-wealthy is not without its drawback. As Citi explained back in 2005, there is inflation, and then there is "inflation for the uber rich":</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>It's Never Been More Expensive To Be Rich... </strong></p> <p>&nbsp;</p> <p>Another new data point we have is the CLEW (Cost of Living ExtremelyWell) Index from Forbes Magazine for 2005 (in our original Plutonomy note back in October, we didn’t have the latest data point for the year 2005). </p> <p>&nbsp;</p> <p>CLEWI is an inflation index of the cost of luxury goods. It measures such things as the cost of suite at the Four Seasons in New York (up 15% year on year) and a kilo of Imperial Beluga caviar (at US$6840, up 40% year on year). In 2005, the CLEWIndex rose 4%, while US CPI rose at 3.6%. Luxury goods still have relative pricing power. The 0.4% gap might not sound all that impressive, but bear in mind that a stronger US dollar, probably helped check this inflation rate (many luxury goods come from Europe, but the CLEWI is a measure in dollars). At any rate, the year to year fortunes of the CLEWI versus the CPI are less relevant. The long-term chart says it all (Figure 4). The most recent data point just confirms that in the search for pricing power, we’d rather be in luxury goods, than low end consumer businesses.</p> <p><a href=""><img src="" width="600" height="332" /></a></p> </blockquote> <p>&nbsp;</p> <p>Surely everyone feels the pain resulting from the rising costs of living for the uber wealthy.</p> <p>Sarcasm aside, the biggest question on everyone's mind is how does the current episode of peak-Plutocracy end. Back in 2005/2006 Citi saw nothing but bright skies ahead for the world's mega rich, and yet there already were ripples forming...</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>The risks to plutonomy </strong></p> <p>&nbsp;</p> <p>Our thesis is that the plutonomists are likely to get even richer over the coming years. This could mean global imbalances get even larger, without the planet getting knocked of its axis and sucked into the cosmos. </p> <p>&nbsp;</p> <p>But this thesis is not without its risks. Plutonomies have existed before and they have come to an end. To this end we see four primary risks. </p> <ul> <li>The first, war and/or inflation. </li> <li>Secondly, financial collapse. </li> <li>Three, the end of the technological revolution. </li> <li>Finally, political pressure to end the increase in income and wealth inequality. </li> </ul> <p>Looking back over time, wars have been pretty bad times for wealth. Both because of the destruction of physical assets, and/or confiscation of wealth... <strong>Global conflict/revolution on a scale that could destroy the wealth of the plutonomy countries looks to us unlikely in the short term.</strong> </p> <p>&nbsp;</p> <p>Secondly, financial collapse. As much of the wealth of the plutonomists is held in one shape or other in financial wealth (as opposed to land or property), the state of the financial system is important. Financial collapse, as in the Great Depression in the US, would be a serious challenge to the plutonomists. <strong>While we have worried periodically about systemic financial risk, say in the aftermath of the LTCM debacle, it is beyond us to speculate about financial collapse. This would however be a serious issue for the rich.</strong> </p> <p>&nbsp;</p> <p>A third challenge would be the end of the wave of technological revolution. <strong>The great plutonomy waves of previous centuries, such as the Gilded Age, the Industrial Revolution in Britain, the era of Dutch supremacy, were often associated with technological and financial progress. </strong>Economies advanced through progress, with the gains in the first instance disproportionately going to the innovator and risk takers. Were the technology revolution to dissipate, it is likely that the income gains would channel less to the top. Furthermore, technology waves are usually associated with productivity gains, which in turn tend to help keep inflation low and profit growth high. This in turn being a major source of financial wealth creation. So an end of this positive spur would be unhelpful to plutonomy. We see the current internet and communications revolution as being far from dead. </p> <p>&nbsp;</p> <p>Perhaps the most immediate challenge to Plutonomy comes from the political process. Ultimately, the rise in income and wealth inequality to some extent is an economic disenfranchisement of the masses to the benefit of the few. However in democracies this is rarely tolerated forever. </p> <p>&nbsp;</p> <p>One of the key forces helping plutonomists over the last 20 years has been the rise in the profit share – the flip side of the fall in the wage share in GDP. <strong>As plutonomists or capitalists tend to be long the profit share, they have benefited from trends like globalization and the productivity revolution, disproportionately. However, labor has, relatively speaking, lost out. </strong></p> <p>&nbsp;</p> <p>We see the biggest threat to plutonomy as coming from a rise in political demands to reduce income inequality, spread the wealth more evenly, and challenge forces such as globalization which have benefited profit and wealth growth. </p> <p>&nbsp;</p> <p>Globalization has come in for its fair share of attack of late. And political attention on immigration and protectionism is never far from the surface. As we suggested in our note in October last year, reactionary political forces are likely to rise as globalization persists and the losers in developed economies gain in numbers. To an extent we see this happening in Europe, for example, where the rise in the profit share (fall in the wage share) has come at the same time as the rise of right-wing, generally anti-immigration parties. </p> <p>&nbsp;</p> <p>On the other hand, ageing populations in countries where there are developed and well-financed pension schemes, and a big equity component in these, are probably more tolerant of a rising profit share. As individuals move from being workers to retirees, their incomes shift from being earned as wages, to dividends and savings, which are more linked to profits. This would suggest that in the UK and US for example, demographics might support – politically – a higher profit share, though this might not hold true, for example, in a country like France. </p> <p>&nbsp;</p> <p>So, is plutonomy under threat politically? We are keeping an eye on this one. At the moment, it is too early to make this call. Calls for protectionism and an end to immigration grow louder by the day, but they are difficult to measure. But a substantial percentage of Americans are in favor of repealing the estate tax (though only 2%, roughly, will ever pay it), which does not resonate as a population determined to destroy wealth inequality. The political process is the greatest threat to plutonomy. We don’t see it as a threat today in most countries. But we are alert to changes here.</p> </blockquote> <p>Back in 2006 Citi ultimately ended up being very, very wrong, however in a way that ultimately made the rich whose financial paper wealth was about to disappear even richer, courtesy of the biggest taxpayer-funded wealth transfer in history. As a result those who were merely uber rich a decade ago have been wealthier (if only on paper).</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Our own view is that the rich are likely to keep getting even richer, and enjoy an even greater share of the wealth pie over the coming years. </strong>We think rising profit margins will keep profit growth strong, and equities are at any rate undervalued. And the rich tend to be disproportionately exposed to the equity markets. While there are challenges to this, not least through populations/the political process demanding a more “equitable” share of the wealth, <strong>in the short term we think the trend of the rich&nbsp; getting richer is likely to persist. Plutonomy related stocks should, we think, continue to see strong demand and inflation-beating pricing power</strong>.</p> </blockquote> <p>Here, Citi was absolutely spot-on accurate. However, the question now stands: since there is a finite amount of wealth that can be transferred from the expiring global middle class, and since everything above that is merely dilution from excess printing of fiat money, inquiring minds want to know: is the world financial system due for another massive collapse, one which will even further accelerate the wealth redistribution, or is the world's population so zombified that nothing can ever possibly tips the scales ever again, and the lesson from the French revolution, when an unprecedented amount of wealth and power was held by a precious few, have been forever lost on the world and its citizens? </p> Bank of America Bank of America Ben Bernanke Ben Bernanke Central Banks Citigroup CPI Demographics Deutsche Bank Equity Markets Four Seasons France Great Depression Hong Kong LBO Lehman Mon, 29 Dec 2014 00:30:17 +0000 Tyler Durden 499631 at China Bans Christmas And This Happens To Google Traffic <p>Very quietly and under the radar, <strong>authorities in China have cracked down on Christmas celebrations in China, deeming them "Western spiritual pollution."</strong> <a href="">As CNMNews reports,</a> for several years, a virtual rush to convert to Christianity has been underway in China, both in its Protestant and Catholic versions. <strong>The Department of Education this year issued a directive to limit Christianity’s appeal to young people, banning Christmas events and celebrations in schools and kindergartens, deemed “kitsch” and “un-Chinese”</strong>. The crackdown has also been spreading to universities and colleges nationwide. The result is nowhere more evident than in Google's traffic in China...</p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="543" /></a></p> <p>&nbsp;</p> <p><a href=",-Wenzhou-bans-Christmas-celebrations-in-schools-and-universities-33055.html"><em>As Asia News reports,</em></a></p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>For several years, a virtual rush to convert to Christianity has been underway in China, both in its Protestant and Catholic versions.</strong></p> <p>&nbsp;</p> <p>According to some reports, some 3,000 people, mostly young people, were baptised on Christmas night, in Beijing alone.</p> <p>&nbsp;</p> <p><strong>In Wenzhou, the local Department of Education has issued a directive to limit Christianity's appeal to young people, banning Christmas events and celebrations in schools and kindergartens, deemed "kitsch" and "un-Chinese".</strong> The crackdown has also been spreading to universities and colleges nationwide.</p> <p>&nbsp;</p> <p>Since China opened up to foreign trade, Christmas trees, Santa Clauses, greeting cards and even crèches have spread widely. Although 25 December is a working day, thousands of young non-Christians attend church services in order to understand what Christmas is about. Eventually, many of them eventually sign up for the catechumenate and being baptised.</p> <p>&nbsp;</p> <p>According to a survey conducted a few years ago at universities in Beijing and Shanghai, at least <strong>60 per cent of young people are interested in learning about Christianity.</strong></p> <p>&nbsp;</p> <p>The directive issued by Wenzhou authorities is part of a wider pattern, which includes a <span style="text-decoration: underline;"><strong>campaign to tear down crosses and religious buildings launched in Zhejiang by the local party secretary whose primary purpose is to reduce the influence of Christianity in society, deemed "Western spiritual pollution."</strong></span></p> <p>&nbsp;</p> <p>Ironically, Zhejiang - in particular the city of Yiwu - lives off Christmas.<strong> About 60 per cent of all Christmas decorations sold in the world are manufactured in the province.</strong></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="614" height="556" alt="" src="" /> </div> </div> </div> China Google Sun, 28 Dec 2014 23:30:08 +0000 Tyler Durden 499626 at ISIS Claims 2nd Fighter Jet Downed Near Baghdad, Pilot Captured <p><a href="">While the US-led coalition claims that the first fighter jet was "not downed" by ISIS</a>, the fact that <strong>ISIS is now claiming to have downed a 2nd fighter jet in Balad (north of Baghdad) and captured the pilot</strong>, suggests the west may not be being entirely honest (two 'crashes' in a week is perhaps more worrisome than 2 'shot down' in a week). What is even more disturbing is the fact that <strong>ISIS has taken to social media to ask how the first captured Jordanian pilot should die</strong>...</p> <p>&nbsp;</p> <p>&nbsp;</p> <blockquote class="twitter-tweet" lang="en"><p>Loos like <a href="">#ISIS</a> is confirming the news now. <a href="">#Aljazeera</a>: Jet downed in <a href="">#Balad</a>. The pilot is reportedly captured. <a href="">#Iraq</a> <a href=""></a></p> <p>— Rami (@RamiAlLolah) <a href="">December 28, 2014</a></p></blockquote> <script src="//"></script><p>&nbsp;</p> <p>&nbsp;</p> <p>As Bloomberg reports,</p> <ul> <li><strong>*ISLAMIC STATE SAYS IT DOWNED WAR JET NORTH OF BAGHDAD</strong></li> <li><strong>*ISLAMIC STATE POSTS AUDIO STATEMENT ON DOWNED JET ONLINE</strong></li> <li><strong>*ISLAMIC STATE SAYS IT TO RELEASE MORE INFORMATION SOON</strong></li> </ul> <p>And this is the depravity ISIS is willing to stoop to... (<a href="">as IJReview reports</a>)</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>Following the capture of Jordanian pilot Moaz al-Kasasba by ISIS terrorists, the Islamic State and its followers have taken to Twitter to show the world that depravity is just a game to them.</strong></p> <p>&nbsp;</p> <p>While ISIS is infamous for beheading its captives, some of their suggestions on what to do with al-Kasaba are even more barbaric than beheading. According to Voactiv:</p> <p>&nbsp;</p> <p> <strong>ISIS supporters are having the morbid debate predominantly on Twitter, using the hashtag “Suggest a Way to Kill the Jordanian Pilot Pig” ( #?????_?????_????_??????_???????_???????). With over a thousand retweets, the hashtag is gaining popularity. </strong></p> <p>&nbsp;</p> <p>One terrorist recommends to use a bulldozer to run over al-Kasaba.</p> <p>&nbsp;</p> <p><a href=""><img src="" width="577" height="585" /></a></p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="693" height="515" alt="" src="" /> </div> </div> </div> Iraq Twitter Twitter Sun, 28 Dec 2014 23:04:06 +0000 Tyler Durden 499630 at The Line Between Rational Speculation and Market Collapse <p><a href=""><em>Via John Hussman&#39;s Weekly Market Comment</em></a>,</p> <p class="largeText">The Shiller P/E (S&amp;P 500 divided by the 10-year average of inflation-adjusted earnings) is now 27, versus a long-term historical norm of 15 prior to the late-1990&rsquo;s bubble. Importantly, the profit margin currently embedded into the Shiller P/E is currently 6.7% versus a historical norm of just 5.4%. The implied margin is simply the denominator of the Shiller P/E divided by current S&amp;P 500 revenues (the ratio of trailing 12-month earnings to revenues is even higher at 8.9%). As I showed in <a href="">Margins, Multiples and the Iron Law of Valuation</a>, taking this embedded margin into account significantly improves the usefulness and correlation of the Shiller P/E in explaining actual subsequent market returns.<strong> With this adjustment, the margin-adjusted Shiller P/E is now nearly 34, easily more than double its historical norm. &nbsp;</strong></p> <p class="largeText">This fact is important, because the Shiller P/E averaged 40 during the first 9 months of 2000 as the tech bubble was peaking. But that Shiller P/E was associated with an embedded profit margin of only 5.0%. <strong>Adjusting for that embedded margin brings the <em>margin-adjusted</em> Shiller P/E at the 2000 peak to 37.</strong></p> <p class="largeText"><strong>Quite simply, stocks are a claim not on one or two years of earnings, but on a very long-term stream of cash flows that will actually be delivered into the hands of investors over time. For the S&amp;P 500, that stream has an effective <a href="">duration</a> of about 50 years.</strong> At normal valuations, stocks have a duration of about half that because a larger proportion of the cash flows is delivered up-front.</p> <p class="largeText"><strong>The point is that our concerns about valuation aren&rsquo;t based on what profit margins might do over the next several years. </strong>To take earnings-based valuation measures at face-value here is essentially a statement that current record-high profit margins, despite being highly cyclical across history, will remain at a permanently high plateau for the next 5 decades. That&rsquo;s the only way that one can use current earnings as <em>representative</em> of the long-term stream of cash flows that stocks will deliver over time. In order to use a simple P/E multiple to value stocks, this <em>representativeness assumption</em> is an absolute requirement.</p> <p class="largeText">On other measures that have an even stronger historical correlation with actual subsequent market returns than either the Shiller P/E or the S&amp;P 500 price/operating earnings ratio, the ratio of stock market capitalization to GDP is now about 1.33, compared to a pre-bubble norm of 0.55. <strong>The S&amp;P 500 price/revenue multiple is now about 1.80, versus a historical norm of 0.80.</strong> On the measures we find most reliably associated with <em>actual subsequent</em> 10-year market returns (with a correlation of about 90%), the S&amp;P 500 is not just double, but about 120-140% above historical norms. On a broader set of reliable but more varied measures, the elevation averages about 116%.</p> <p class="largeText"><strong>Current equity valuations provide no margin of safety for long-term investors. One might as well be investing on a dare.</strong> It may seem preposterous to suggest that equities are literally more than double the level that would provide a historically adequate long-term return, but the same was true in 2000, which is why the S&amp;P 500 experienced <em>negative</em> total returns over the following decade, even by 2010 after it had rebounded nearly 80% from the 2009 lows. Compared with <a href="">2000</a> when we estimated negative 10-year total returns for the S&amp;P 500 even on the most optimistic assumptions, we presently estimate S&amp;P 500 10-year nominal total returns averaging about <em>1.3% annually</em> over the coming decade. Low interest rates don&rsquo;t change this expectation &ndash; they just make the outlook for a standard investment mix even more dismal &ndash; and the case for alternative investments stronger than at any point since 2000. I&rsquo;ll repeat that if one associates historically &ldquo;normal&rdquo; equity returns with Treasury bill yields of about 4%, the promise to hold short-term interest rates at zero for 3-4 years only &ldquo;justifies&rdquo; equity valuations 12-16% above historical norms. Again, at more than double those historical norms, <strong>current equity valuations provide no margin of safety for long-term investors.</strong></p> <p class="largeText">To put some full-cycle perspective around present valuations, understand that 1929 and 2000 are the only historical references to similar extremes. Moreover, aside from the 2000-2002 bear market (which ended at still-elevated valuations but still allowed us to remove most of our hedges in early 2003), no bear market in history &ndash; including 2009 &ndash; ended with prospective 10-year returns less than 8% (See <a href="">Ockham&rsquo;s Razor and the Market Cycle</a> to review the arithmetic of these estimates). <em>This was true even in historical periods when short and long-term interest rates were similar to current levels.</em> Currently, such an improvement in prospective equity returns would require a move to about 1200 on the S&amp;P 500, which we would view as a fairly pedestrian completion of the current market cycle &ndash; certainly not an outlier from the standpoint of historical experience.</p> <p class="largeText">Major <em>secular</em> valuation lows like 1949, 1974 and 1982 pushed stocks to valuations consistent with prospective 10-year returns over 18% annually, and dragged the S&amp;P 500 price/revenue ratio to about 0.40, and the ratio of market capitalization/GDP to about 0.33. At present, a <em>secular</em> valuation low would require &quot;S&amp;P 500&quot; to be not only an index but a price target - though one that would also make a rather satisfying megaphone pattern out of the past 15 years of market action. Such an outcome only seems preposterous if one ignores the cyclicality of profit margins and assumes they have established a permanently high plateau. In any event, with the current price/revenue ratio at 1.80, and market cap/GDP at 1.33, the notion that stocks are in the early phase of a secular bull market (as some Wall Street analysts have suggested) can only reflect a complete ignorance of the historical record.</p> <p class="blueArticleHeadline"><strong><u>The line between rational speculation and market collapse</u></strong></p> <p class="largeText"><em>However</em> &ndash; and this is really where the experience of the past few years and our research-based adaptations come into play &ndash; there are some conditions that historically appear capable of supporting what might be called &ldquo;rational speculation&rdquo; even in a severely overvalued market. Depending on the level of overvaluation, a safety net might be required in any event, and that would certainly be the case if those conditions were to re-emerge here. But following my 2009 insistence on stress-testing our methods against Depression-era data, and the terribly awkward transition that we experienced until we nailed down these distinctions in our present methods, the central lesson is worth repeating:</p> <p class="largeText"><strong>Neither our stress-testing against Depression-era data, nor the adaptations we&rsquo;ve made in response extreme yield-seeking speculation, do anything to diminish our conviction that historically reliable valuation measures are of immense importance to investors. Rather, the lessons to be drawn have to do with the <em>criteria that distinguish</em> periods where valuations have little near-term impact from periods where they suddenly matter with a vengeance.</strong></p> <p class="largeText">I detailed these lessons in my June 16, 2014 comment &ndash; <a href="">Formula for Market Extremes</a> (see the section entitled <em>Lessons from the Recent Half Cycle</em>). That&rsquo;s really the point at which we were finally able to put a box around this awkward transition and view it as fully addressed. See also <a href="">Air Pockets, Free Falls, and Crashes</a>, <a href="">A Most Important Distinction</a>, and <a href="">Hard-Won Lessons and the Bird in the Hand</a>.</p> <p class="largeText">Historically, the emergence of extremely overvalued, overbought, overbullish conditions has typically been followed by an &ldquo;unpleasant skew&rdquo; &ndash; a succession of small but persistent marginal new highs, followed by a vertical collapse in which weeks or months of gains are wiped out in a handful of sessions. In prior market cycles, more often than not, periods of extremely overextended conditions were also <em>already</em> accompanied by a subtle deterioration in market internals or widening credit spreads.</p> <p class="largeText"><strong>In recent years, the persistent yield-seeking speculation encouraged by quantitative easing has weakened the overlap between these two conditions.</strong> That is, we&rsquo;ve had repeated periods of severely overvalued, overbought, overbullish conditions, but they often have <em>not</em> been accompanied by internal deterioration or widening credit spreads. In those periods, stocks were generally resilient to significant losses. In contrast &ndash; <em>even since 2009</em> &ndash; periods that have <em>joined</em> 1) overvalued, overbought, overbullish conditions with 2) deteriorating internals or widening credit spreads have been responsible for nearly stair-step market losses.</p> <p class="largeText"><strong>During the tech bubble, we introduced considerations related to market internals (what I often called &quot;trend uniformity&quot;) as an overlay to our value-driven models.</strong> So our pre-2009 method of classifying market return/risk profiles had this distinction hard-wired into it. The ensemble methods that came out of our 2009-2010 stress-testing efforts were <em>more</em> effective in market cycles across history - including Depression-era data - but while they <em>included</em> trend-sensitive measures, they didn&#39;t <em>impose</em> them as an overlay. The basic narrative of the transition from those pre-2009 methods to our present ones boils down to 1) our self-inflicted stress testing miss, and 2) the need to re-introduce those overlays (albeit in a somewhat different form) to make our methods more tolerant of speculative bubbles. We certainly learned all of this the hard way, and my hope is that others will draw some benefit from that experience. Unfortunately, my sense is that many have learned entirely the wrong lesson, and are just as vulnerable to the next crash as they were to the other two collapses in recent memory.</p> <p class="largeText">You can see the effect of imposing those overlays in the narrowing of conditions under which we view a hard-negative outlook as appropriate. See last week&rsquo;s comment, <a href="">Iceberg at the Starboard Bow</a>, for a chart of the cumulative performance of the S&amp;P 500 across history in periods restricted to the conditions we presently observe.</p> <p class="largeText"><strong>Now, if we do observe an improvement in market internals and credit spreads, it would not make valuations any less obscene, but it would significantly ease our immediate concerns about market losses. A safety net would be required in any event, but there is a range of possible outlooks between hard-negative and constructive with a safety net.</strong> I suspect that the range of variation in our investment outlook is likely to be very confusing in the coming years to those who have swallowed the hook that I&rsquo;m a permabear, because our present methods would have encouraged an unhedged, <em>leveraged</em> investment stance through about 62% of history (including over 20% of recent cycle &ndash; though at no time in the past 3 years). Again, we completed the transition from our pre-2009 method to our present method of classifying market return/risk profiles in June. The resulting adaptations are robust to market cycles across history, <em>including the Depression, including recent bubbles and crashes, and including the current cycle</em>. With these adaptations in place, nothing in recent years leaves us concerned that we would be unable to navigate a long continuation of the recent bull market (unlikely as we might view that outcome). <strong>We don&rsquo;t need to hope for a market collapse, nor dread the possibility of a further advance. Our primary goal is simply to maintain a historically-informed discipline and align our outlook consistently as market conditions change.</strong></p> <p class="largeText">At present, the fact that we are highly concerned about market risk is a reflection of a market environment that <em>joins</em> extremely overvalued, overbought, overbullish conditions with still-troubling dispersion in market internals and a widening of credit spreads. That will change. In short, our concerns about market risk remain extreme at present, and will shift considerably as the evidence changes.</p> <p class="blueArticleHeadline"><strong><u>Unpleasant skew</u></strong></p> <p class="largeText"><strong>From a near-term perspective, my impression is that recent market action is very much in line with the &ldquo;unpleasant skew&rdquo; that one would expect from present conditions. </strong>On that basis, we should fully expect a tendency toward small but persistent marginal new highs &ndash; including points where the market retreats somewhat and then spikes back up to a marginally higher level. Absent a material improvement in market internals and credit spreads, however, that tendency is also likely to be accompanied by an abrupt vertical drop that wipes out weeks or months of market gains within a handful of sessions. It would be nice to be able to narrow down the window for that event, but that research question has always been difficult to answer. The best we can say is that going into every session here, the <em>probability of an advance</em> is greater than 50%, but the <em>expected return</em> is significantly negative. <strong>Numerous small gains, more than offset by a handful of wicked losses. That&rsquo;s what I mean by unpleasant skew.</strong></p> <p class="largeText"><u><strong>Valuations remain obscene from a historical perspective, bullish sentiment is lopsided (52.5% bulls to 15.8% bears according to <a href="">Investors Intelligence</a>), and we observe severely overbought conditions at record highs. Moreover, credit spreads have normalized only slightly, and internals have not improved enough to signal a shift from the risk-aversion that emerged a few months ago. </strong></u>Indeed, the day-to-day action of the broad market here looks quite a bit like the topping process that the market experienced in 2007. The chart below shows the peaking process of the New York Stock Exchange Composite Index during 2007. Note the initial selloff as market internals broke down in July of that year. See <a href="">Market Internals Go Negative</a> for my comments at the time. That initial selloff was followed by a full recovery and a persistent series of marginal new highs, a smaller selloff, and then another push higher before the market eventually rolled into a major collapse.</p> <p class="largeText"><img src="" style="border-width: 0px; border-style: solid; width: 601px; height: 470px;" /></p> <p class="largeText"><strong>In hindsight, we remember the endless second-guessing that accompanied that peaking process in the face of overvalued, overbought, overbullish conditions, widening credit spreads, and deteriorating market internals that had yet to fully assert themselves.</strong> Our concerns about cyclically-elevated profit margins understating valuations were dismissed, as they are today. The common theme at the time focused on the market&rsquo;s &ldquo;resilence,&rdquo; and the confidence that credit problems were &ldquo;contained&rdquo; &ndash; particularly as the FOMC had already shifted to aggressively cutting the fed funds rate.</p> <p class="largeText"><strong>The recent chart below shows a similar dynamic in the broad market as measured by the NYSE Composite, which has largely stagnated over the past two quarters, but with a similar profile of churning and unpleasant skew that we saw in 2007 after internals had deteriorated. </strong>Of course, any resemblance to prior outcomes doesn&rsquo;t ensure a similar outcome in the future. Still, it is challenging to find much but air-pockets, free-falls and crashes in the historical record once extremely overvalued, overbought, overbullish conditions are joined by deteriorating market internals or widening credit spreads.</p> <p class="largeText"><img src="" style="border-width: 0px; border-style: solid; width: 601px; height: 470px;" /></p> <p class="largeText"><strong>In my view, we&#39;ve gone through an extended period of yield-seeking speculation that has encouraged the issuance of a mountain of low-quality securities to finance reckless malinvestment.</strong> We&#39;ve seen this story before. We know better how to navigate the bubble portion with adequate safety nets if it continues (which we doubt it will for long), but we also know that the cycle will ultimately end in tears for the average investor. Forget the lesson three times (1929, 2000, 2007), learn it four times.</p> <p class="largeText">A few final remarks as we look ahead to 2015. One of the things that should be clear from our experience of recent years is that I discuss and address challenges very openly, and I&#39;m my own harshest critic. So I&#39;ll say again that I believe we completed our difficult transition in June. What we&#39;ve seen then in market action is a deterioration in market internals consistent with a peaking process, but that in any case has made the market more vulnerable to air pockets recently.</p> <p class="largeText"><strong>It may be imperceptible that we are doing anything differently, or that we have addressed anything at all. It may take even more time for that to become clear. But again, I am convinced that the distinctions and hard-won lessons I&#39;ve repeatedly articulated in recent months matter, because we can demonstrate their effect across a century of market cycles. Equally important, we don&#39;t <em>rely</em> on a collapse or dread a continued bubble. I believe what we need most is patient discipline.</strong></p> <p class="largeText">Again, a firming in broad market internals and a return to narrow credit spreads would convey a signal that investors had at least temporarily shifted back to risk-seeking behavior. That wouldn&rsquo;t ease our concerns about the level of valuations or remove the need for a safety net, but it would defer our concerns about immediate consequences. We&rsquo;re going to take our evidence as it comes. My hope is that it is clear exactly how and when we addressed the challenges that made the recent half-cycle such a difficult transition. There are useful lessons here that I expect will help investors to avoid outcomes like the market experienced in 2000-2002 and 2007-2009, while still leaning to a constructive investment stance in the <em>majority</em> of market periods when extreme valuations, widening credit spreads, and breakdowns in market internals have typically not been joined as dangerously as they are today.</p> <p class="largeText">To look at the past 14 years and draw the lesson that rich valuations can be ignored (even when market internals and credit spreads are deteriorating), that hedging is a fool&rsquo;s game, and that Fed easing can be relied on to drive stock prices higher, is to forget the <em>principal</em> lessons from the most severe market losses that the equity market has endured throughout history. <strong>What repeatedly distinguishes bubbles from the crashes is the pairing of severely overvalued, overbought, overbullish conditions with a subtle but measurable deterioration in market internals or credit spreads that conveys a shift from risk-seeking to risk-aversion.</strong></p> <p class="largeText">As for monetary policy, remember that the Fed did not tighten in 1929, but instead began <em>cutting</em> interest rates on February 11, 1930 &ndash; nearly two and a half years before the market bottomed. The Fed <em>cut</em> rates on January 3, 2001 just as a two-year bear market collapse was <em>starting</em>, and kept cutting all the way down. The Fed <em>cut</em> the federal funds rate on September 18, 2007 &ndash; several weeks <em>before</em> the top of the market, and kept cutting all the way down. &nbsp;Many of the distinctions that investors believe are important are actually <em>useless</em>&nbsp; in avoiding devastating market losses, and many of the distinctions that investors are ignoring at present are absolutely critical.</p> <p class="largeText"><em>So for those who value and rely on our work, know that I do see the challenging transition of recent years as fully addressed, as the adaptations we&rsquo;ve made are robust to data from every market cycle we&rsquo;ve observed across a century of history. We&rsquo;ve got much to show for our efforts in recent years. I expect that it will be great fun, once again, to demonstrate it all in practice, as we did in the years prior to 2009 (and with any luck, even more clearly).</em></p> <p class="largeText">*&nbsp; *&nbsp; *</p> <p class="largeText">As we noted yesterday, there is only thing left to save us...</p> <p><a href=""><img height="427" src="" width="600" /></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="1234" height="879" alt="" src="" /> </div> </div> </div> Bear Market Cyclicality John Hussman Market Conditions Market Cycles Market Internals Monetary Policy New York Stock Exchange Quantitative Easing recovery Sun, 28 Dec 2014 22:45:08 +0000 Tyler Durden 499625 at "Orwellian" Orthodoxy Rules (For Now) <p>Presented with just a slight case of "sounds familiar"...</p> <p>&nbsp;</p> <p><a href=""><img src="" width="600" height="154" /></a></p> <p>&nbsp;</p> <p><em>h/t @RudyHavenstein</em></p> Sun, 28 Dec 2014 22:00:08 +0000 Tyler Durden 499624 at Caught On Tape: McDonalds Customer Goes Berserk Over A Fistful Of Cents <p>Half a century ago, Clint Eastwood killed a whole lot of people&nbsp; for "<em><a href="">a fistful of dollars</a>.</em>" This Christmas, a particularly agitated customer nearly killed the staff at a McDonalds over the matter of <em>a fistful of cents</em>, or some $0.40 to be precise. The best part: it was all caught on tape.</p> <p> <iframe src="" width="640" height="360" frameborder="0"></iframe></p> <p><em>h/t <a href="">LiveLeak</a></em><a href=""></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="262" height="265" alt="" src="" /> </div> </div> </div> McDonalds Sun, 28 Dec 2014 21:14:18 +0000 Tyler Durden 499629 at Spot The Odd One Out <p>Sometimes you just have to smile <em>(but mostly just scream)</em>. Volatilities across all asset classes have crashed back towards complacent levels in the last few days as, apparently driven by utter confusion by The Fed, stocks have soared, vol compressed, and risk vanquished. <strong>There is, however, one asset that is back at near-record-high vol</strong>...</p> <p>&nbsp;</p> <p>Spot the odd one out...</p> <p><a href=""><img src="" width="600" height="316" /></a></p> <p><em>(on a side note, we do see <strong>FX vol picking up -slowly but surely- </strong></em><strong>at its highest in 16 months</strong>)</p> <p><a href=""><img src="" width="600" height="312" /></a></p> <p>&nbsp;</p> <p>And even better... <strong>energy companies volatilty has cratered... even as the underlying raw material that drives their entire business model and business risk (no matter how well hedge they think they are) is seeing its volatility soar...</strong></p> <p><a href=""><img src="" width="600" height="617" /></a></p> <p>&nbsp;</p> <p>Smells to us like massively widespread hedging - explaining the cessation of selling- (perhaps even HY traders) have piled into Oil vol (instead of unwinding their energy-sector exposures) as they 'assume' - just as the fed promised - this price drop is transitory (rather than, as Pickens explains, structural and will lead to massive rig count reduction)...</p> <p><strong>We await the liquidity of thge new year and options maturities to see the decision-making process - roll the hedges (at far greater cost) or unwind energy-sector exposure?</strong></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="958" height="505" alt="" src="" /> </div> </div> </div> Volatility Sun, 28 Dec 2014 20:45:08 +0000 Tyler Durden 499623 at