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The Escape Velocity Delusion: Running Out Of "Next Year"
Submitted by Alhambra Partners' Jeffrey Snider via Contra Corner blog,
Reflections upon the past few years bring out valid criticisms about “being wrong.” I have made no secret that I favor the bearish interpretation of eventually the stock market, but immediately the economy. The erosion and attrition I describe does not look like anything seen before, except the months and years immediately preceding the Great Recession. But that inevitably brings back the rejoinder that there is no such immediate danger right now, as bad as the economy may be there is nothing financially equivalent to the conditions that existed prior to August 9, 2007; with the further inference that a floor exists, economically speaking, today where a trap-door was present then.
What we are really describing, as investors, are the risks to the asset case as it exists now. The optimistic view, which is represented by almost every mainstream economist and policymaker, is really the basis for what they would like to believe is a monetary panacea and thus bull market. The economy is promised to be as a full recovery each and every year, to no ultimate avail. As Stanley Fischer put it recently:
Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back. Indeed, research done by my colleagues at the Federal Reserve comparing previous cases of severe recessions suggests that, even conditional on the depth and duration of the Great Recession and its association with a banking and financial crisis, the recoveries in the advanced economies have been well below average.
Even reading that acknowledgement you realize what the bull case actually is – it is not the recovery or the economy as it exists, it is the promise of one and the plausibility for that promise. Under that paradigm, the market doesn’t care whether orthodox economists are “right” as much as I may be “wrong”, only that there is always next year.
Other places in the world, however, are running out of “next year.” The same assumptions have fueled the trajectory of asset prices in Europe, with much the same vigorous results. Those that have expressed doubts about Europe’s positive numbers and the durability of any recovery were met with the same howls of being “wrong” as stocks rose exponentially (it seemed) alongside the sovereign debt prices of every nation that appeared desperately or even fatally broke only two years ago.
Given what has taken place recently with regard to economic projections and confidence in Europe, does “next year” still hold the same regard as far as stock and bond prices? Again, as in the US, the description and analysis of European economics as it may be outside of the overly optimistic recovery narrative is the difference between seeing a bull market take shape and a monetary-driven asset bubble.
The same can be said of Japan, though the unraveling there has been far quicker than anyone thought (except everyone who was “wrong” doubting Abenomics and the Nikkei).
That is the context into which we provide this analysis. The economy and the market are not the same, as Joe Calhoun regularly points out, but they do bear resemblance over the longer-term. At some point, given any large disparity, there has to be convergence and reckoning. Identifying these divergences not only colors the interpretations of market prices, it allows investors to identify risk.
The greatest risk in investing under these conditions is the Greater Fool problem. Anyone using mainstream economic projections and thus expecting a bull market will, if I and those like me are eventually proven correct, be that Fool. That was what transpired in 2008 as the entire industry moved toward overdrive to convince anyone even thinking about mitigation or risk adjustments that it was “no big deal.” Read through the 2008 FOMC transcripts, as I have done, and get a feel for what was taking place then and how it related to identifying the divergence of the economy with various markets (just as housing had done almost two years earlier, and where the same actors proclaimed the same “don’t worry” nothingness to the imbalance as it imploded in slow motion).
For the mainstream, there was not to be recession in 2008 until it became too obvious to ignore.
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.
Federal Reserve Chairman Ben Bernanke, June 9, 2008.
Bernanke was not alone in that “confidence” as it filtered throughout economic projections and even what brokers and investment advisors recommended and said to their clients. For the most part, retail investors sat out 2008, passively watching as their 401(k)s became 201(k)s as the joke went. They did so because optimism ruled where it did not belong, because the cracks in the dollar system were not apparent outside of the technical complexity upon which the whole mess relied, a condition wholly different from those same faults never being presented.
But 2008 was 2008, and 2014 is a different circumstance. Or is it? We see the same types of cracks appear and widen, dysfunction continues on a global scale and the economy even here never lives up to those promises. So even evaluating on the individual circumstances here leads to the same framework – identifying the possibility that the economy may not be providing the support markets are expecting. Further, the potential trajectory of that may be such that “next year” never actually comes, and at some point “markets” become too aware.
It’s not as if mainstream orthodoxy has proven itself in that regard, regardless of anyone’s feelings about the current case. They have even invented a highly academic cover story to try to explain why we have yet to see “next year”; secular stagnation is both an implicit admission that economists have been wrong of their own accord, but yet, curiously, markets never adjust to that or how that might shade these same projections year after year.
I have serious doubts that the running theme of secular stagnation penetrates the rationalizations that currently anesthetize stock investors, for if they actually understood what it was about there would be very likely be far, far different results.
“I think we do need to try to identify asset bubbles in real time,” Dudley said today at the Bloomberg Markets Most Influential Summit in New York. “You can’t have an effective monetary policy if you have financial instability.”
…
Chair Janet Yellen acknowledged the risk in July, telling Congress that financial-market valuations appeared stretched in some sectors, including lower-rate corporate debt, and that policy makers were monitoring developments closely.
The Fed’s semi-annual Monetary Policy Report to Congress also discussed “substantially stretched” valuations for smaller firms in the social media and biotechnology industries.
The combined account of what was reported above with the idea of secular stagnation is bubbles as far as they eye can see. It also means exactly this kind of disconnect between markets and the economy, one that is opened up on a regular basis as a matter of policy. At Jackson Hole this year, Janet Yellen’s speech was devoted, in part, to the basic idea I paraphrased at the time as:
We had to blow bubbles because that’s the only way to get the economy to grow, and now we have to start thinking about the inevitable consequences of that.
Investments are about two facets, as Doug Terry is fond of reminding: returns which are all very apparent right now, and risk. Risk is defined as keeping those positive returns for more than just numbers on a long ago discarded custodial statement. You can generate all the positive return you want on the upside, but you better have a solid handle on risk of a downside that buries the returns wherever and whenever it may show up. An economy that never lives up to the hype set against rapidly rising prices is simply a highly increased probability of that.
The Fed is practically begging in that direction because they do not want to be Bernanke/Greenspan’s deer in the headlights for a third time. However, that doesn’t mean there won’t be a third time, only that they are on record now trying to “do something” about it. Will markets listen, or is the cloak of rationalizations about “next year” too densely packed?
How you handle the interim period before that time is determined by your own comfort with various analyses of divergences, and whether you feel you can accurately gauge the Greater Fool problem. No matter the desire for return, you better understand the context.
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Trying to reduce QE at this point is as stupid as England trying to go back on the gold standard after the printfest of WW1 at the same exchange rate with gold that it had before WW1. You can't do it without causing a depression because the math is now wrong. The Fed has always had to increase its balance sheet roughly 3-5% a year. That means about 1 trillion a year is what is needed. The hard limit is the interest we have to pay on the national debt minus the interest the Fed pays back to the Government. They just cannot go under that. It has to be forked over to the government in some fashion. The Fed and the government debt explosion kicked us 40 years into the future. That is just the way it is now.
And my respnse to this article is; YES. As I have been repeating for years; there will be no growth. that was then. this is now. No Growth. None. Zero. never mind "the dis-inflationary indicators of the national GDPS"; they are what we scientistis refer to as "Bullshit'.
There will not be any growth until the debt is repudiated.
It is sad to think that all of the powers that "they" have over us are generated from one thing, "money"... which in and of itself is a figment of imagination... agreed upon by conspiracy.
Even their ability to keep us in constant fear is dependent on their use of money to create and maintain a dialectic and hire thugs, military and media.
It is not so much a question of why we allow them to do it to us ... we accepted the shackles willingly. It is more of a question of why they would do it. What makes them so sociopathic that they feel a need to enslave others. Are they so dependent, needy and fearful and they cannot let others have their own life? The evidence suggests that the answer is "yes".
Stanley Fisher is just another one of them to be ignored and ridiculed with the rest, if possible. We need to be not afraid of losing the chains that bind us... and stop betraying each other for their benefit.
These psychopaths have been at this for centuries and if anything their grip is even tighter. The problem this time is the blowup will be massive and less predictable. Never underestimate a psychopath. They will never alter their behavior.
The powers that "they" have over us are because of government.
That, and the fact that most people are innately incapable of understanding the evil that government is.
Won't just be the global economy running cooler next year...
Global emmissions of SO2 have just increased by 60,000 tons per day thanks to all the volcanic activity occuring in Iceland
http://icelandreview.com/news/2014/09/25/holuhraun-emitting-more-so2-pol...
Some day someone will have to explain to me why C02 makes it warmer and SO2 makes it cooler... and according to the "so called" experts, for exactly the same reason.
Seems anti-intuitive, eh?
Are we that dumb that we accept total bullshit as the prevailing paradigm?
The SO2 reflects light (and thus heat) back into space. Emit enough SO2 and global temperatures will crash.
“It’s clear that no eruption [in Iceland] in the 20th century comes close to this one. We have to go far back to the 19th century, to find eruption as voluminous in gas emissions,” Þorsteinn Jóhannsson, a specialist at the Environmental Agency of Iceland, told visir.is.
Definitely something to keep an eye on...
"Escape Velocity", you say? Interesting choice of words, because...
India's Mars Orbiter finally reached the Red Planet a couple of days ago, and they did it at a fraction of the cost that NASA does it. They did it for $72M, as opposed to the >$600M that NASA spent. A big part was to look at the problem differently. Instead of shooting it out with the "required Escape Velocity" in one giant blast-off, they did it in two steps: First they launched it into Earth Orbit, and then to Mars. Changes the rocket design, mass and fuel.
Sometimes, HOW you see the problem, IS the problem.
p.s. India's Mangalyaan interplanetary project was launched at an estimated cost of $72 million while the Hollywood flick Gravity, starring Sandra Bullock and George Clooney is estimated to have cost $100 million. / That's because these two over-rated and over-paid actors ate half of that budget. But they are NY/Fed Dollars, so not to worry. / sarc
Sometimes, HOW you see the problem, IS the problem.
Our motion pictures and 2 days of war are more expensive than India's Mars orbiter.
In a word we're a pathetic slob. A pathetic deeply deranged and psychotic slob -that is....
Fixed it!
"They did it for $72M, as opposed to the >$600M that NASA spent"...
The additional M$500 went to the CRONY Capitalists (read PINKO COMMIE FASCISTS) that the good 'ole USSA has become accustomed to paying---it is not only part of the culture (since late 1960's, maybe earlier) but the very fabric of our Fascist political system. Off with their heads!
"Other places in the world, however, are running out of “next year.”...
What's even more amazing is how long "the players" have allowed themselves to be involved in this game and have stuck by it knowing full well for more than 6 years that they will never get their money back and that incrementally their losses will only increase the longer they stay in it!
Two things that are undeniable fact(s) that are no longer being hidden by those player(s) in the Casino:
All the Au that Uncle Sam once had ain't in a vault anymore on Liberty Street... and the only "gold" that is left is in the shape of a gun pointed at every head that refuses to play!!!
Are you saying Bernanke was spot on starting in 2008?
And Greenspan did the right thing in picking Bernanke, DDR -- (Doctor of Depressions and Recessions) -- as his successor in 2002, when he had Bush put him on the Board of Governors of the Fed?
That stuffing the banks with QE money to send the stock market soaring without rhyme nor reason and screwing everybody at the low end of the economy was also the right thing?
And exaggerating good statistics and burying as much as possible the bad news?
Because all of the above provided the hope that is giving us the opportunity today to really and truly believe "There is always next year."
Barefoot , ignorant and poor .
The preferred state of the masses for the elite .
We are in the end-game .
See http://andreswhy.blogspot.com/2014/09/drowning-in-gold.html
I feel like we're just killing some time for the 1% to get (even more) ready before the next major event.
Agreed. They mostly missed the gold rally, so the current dump is for them to be able and load up. They will never talk about that, but I'm 100% sure they do. Insiders are selling shares, end of QE in sight, bonds and stocks near all-time highs, ZIRP in place, economy and middle class crumbling. The writing is on the wall. After the 7 "good" (bad) years (2009-15) of the so-called "recovery" will come 7 bad (abysmal) years.