Submitted by Lance Roberts of STA Wealth Management,
With the "inmates in charge of the asylum" during this holiday shortened trading week it seemed to be an apropriate opportunity to share a virtual cornucopia of topics to consider while enjoying the delicious delicacies, and subsequent tryptophan induced comas, of a traditional Thanksgiving.
As I discussed earlier this week in "30% Up Years: The Case For Cashing In:"
"If the markets rise to 1850 by the end of 2013, which I believe is entirely possible as managers chase performance, it will mark the 11th time in history the markets have attained that goal. I have also notated that each 30% return year was also the beginning of a period of both declining rates of annualized returns and typically sideways markets. It is also important to notice that some of the biggest negative annual returns eventually followed 30% up years."
1) Margin Debt Soars To New Record via Zerohedge
"The correlation between stock prices and margin debt continues to rise (to new records of exuberant "Fed's got our backs" hope) as NYSE member margin balances surge to new record highs. Relative to the NYSE Composite, this is the most "leveraged' investors have been since the absolute peak in Feb 2000. What is more worrisome, or perhaps not, is the ongoing collapse in investor net worth - defined as total free credit in margin accounts less total margin debt - which has hit what appears to be all-time lows (i.e. there's less left than ever before) which as we noted previously raised a "red flag" with Deutsche Bank. Relative to the 'economy' margin debt has only been higher at the very peak in 2000 and 2007 and was never sustained at this level for more than 2 months."
2) Thanking The Fed For Investors' Bounty via Bloomberg Businessweek
"Thanks to outgoing Fed Chairmen Ben Bernanke and the nominee to replace him, Janet Yellen, and their colleagues taking down interest rates to near-zero five years ago and keeping them there—on top of the Fed's nearly $4 trillion of creative asset purchases—investors have enjoyed the restoration of more than $13 trillion in U.S. equity market value. That's called the multiplier effect. And it's also called remorse, if you were one of the record numbers who bolted stocks altogether and are scrambling to get back in now, after indexes have more than doubled. It's also called financial repression if you're a saver having to eat negative real rates on your hard-earned cash.
Any wonder why capital markets threw a summer temper tantrum merely on signaling (arguably) from the Fed that it could soon reduce the size of its asset purchases (not end them, mind you—much less hike interest rates). Either way, the lame-duck Bernanke Fed opted to hold off."
"If it shows what it appears to show," says University of Texas economics and government professor James Galbraith, "then it's not difficult to grasp why the Fed's tapering has acquired the habit of ever-receding into the future."
3) Need To Laugh, Read "Getting Back To Full Employment" via Forbes
"They say that laughter is the best medicine. If so, "Getting Back to Full Employment", a revised and updated book by economists Dean Baker and Jared Bernstein, might just be able to save Obamacare. Read it, and see if it doesn't make you laugh out loud.
Of course, Bernstein, at least, has experience in economics comedy writing. Along with Christina Romer, he wrote "The Job Impact of the American Recovery and Reinvestment Plan," which was the blueprint for President Obama's 2009 "stimulus" program.
In their "Recovery" study, Romer and Bernstein confidently predicted that shoveling $862 billion of borrowed money into the gaping maws of various Democratic interest groups would prevent the unemployment rate from going above 8%, and would push joblessness down to 5% by, well, now.
As they say in text message land, ROTFLMAO! Adjusted to the labor force participation rate that Bernstein and Romer assumed in their study (that of December 2008), the unemployment rate peaked at 11.5% in mid-2011, and it was still at 11.4% last month.
Baker and Bernstein begin by waxing nostalgic over the year 2000, when America reached effective full employment. The official "U-3" unemployment rate bottomed out at 3.84% during April of that year, while a record-high 64.74% of working-age Americans had jobs.
If that was full employment, we are 15.8 million jobs distant from it now. On a full-time equivalent (FTE) jobs basis, the shortfall is even worse: 16.6 million FTE jobs.
Unemployment and underemployment are not laughing matters. The humor is contained in Baker and Bernstein's bizarre ideas for getting America back to full employment. After extolling the glories of Bill Clinton's second term, they go on to recommend policies that are the exact opposites of the ones that worked so well during that period."
4) Goldman's Global Leading Indicator Collapses Into Slowdown via Advisor Analyst
"The best silver lining Goldman Sachs found when faced with the total and utter collapse in their global leading indicator swirlogram was – (probably) stabilizing. The only improving factor across all their global economic components was the US initial jobless claims (and that has been a farce wrapped in a debacle for 2 months of 'glitches'). Having led global industrial production for a few months, it seems the indicator is crashing back to reality as the summer's hopefulness is exsanguinated from hard and soft data around the world."
5) In Fed Policy, Exits May Be Harder To Hear via New York Times
"Is it time for the Federal Reserve to start its exit from the extraordinary set of policies it has pursued over the past few years? That crucial question is on the minds of the nation's central bankers, as well as the stock and bond traders who follow the Fed's every move.
In her recent testimony before the Senate Banking Committee, Janet L. Yellen, the eminently qualified nominee to lead the Fed, made clear she didn't think the time for an exit had come. With inflation running below the Fed target of 2 percent and continued weakness in the labor market, she argued, the economy needs all the help the central bank can provide.
Many of the numbers back up that diagnosis. The unemployment rate is about three percentage points higher than it was seven years ago, before we got the first whiffs of the economy's financial problems. The employment-to-population ratio is about five percentage points lower, and it has not recovered much at all since the trough of the recession.
But that is only a small part of the story. A relevant measure is the employment-to-population ratio for those in the prime working age group —25 to 54. This statistic also shows the recession's lingering effects: the ratio declined to about 75 percent from 80 percent over the course of the recession, and has recovered to only about 76 percent today. So we have recovered only about a fifth of what we lost during the downturn.
These numbers indicate that there is still much slack, or unused potential, in the economy. In turn, this suggests that inflation is unlikely to become a problem anytime soon, so the Fed can delay its exit. But the labor market data are hard to interpret, because this recession has been so different from those before it.
How these conflicting signals are resolved will eventually determine the course of monetary policy. Because Ms. Yellen says the economy has a lot of slack, she isn't especially worried about inflation and isn't eager for the Fed to quit its stimulative policies. Many measures confirm her judgment, but this recession has been extraordinary, making historical norms hard to apply, and other statistics point to a different conclusion. Ms. Yellen may well turn out to be right, but as new data arrive, she had also better be prepared to change her mind."
Have a great Thanksgiving holiday, be safe and enjoy your family.