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3 Things Worth Thinking About

Tyler Durden's picture




 

Submitted by Lance Roberts of STA Wealth Management,

Data And Surveys Continue To Part Company

Last Friday, I discussed the growing gap between economic reports particularly when they measure the same basic areas of the overall economy. For example, how can the Markit Manufacturing PMI Index be negative for three months while the ISM PMI has surged higher during the same period. Both cannot be right.

Well, the same thing happened yesterday with the release of the Chicago Fed National Activity Index (CFNAI) which is arguably one of the most important economic indicators available. While the recent release of the Philidelphia Fed manufacturing survey surged to its highest level in years, the CFNAI fell to .14 from .29 last month.

(Note: The Chicago Fed National Activity Index (CFNAI) is a monthly index comprised of 85 subcomponents that provide a broad measure of economic activity nationwide.)

More importantly, while the Federal Reserve and ISM surveys have been showing strong increases in recent months; the production, income and consumption and housing components of the CFNAI have declined.  The chart below shows the CFNAI index broken down into the 3-month average of supply (production, income, employment) and demand (consumption, housing, sales).

CFNAI-Supply-Demand-112514

There are TWO very important things to take away from the chart above. First, supply and demand have had an extremely tight correlation prior to the financial crisis. However, since the last recession demand has underperformed supply to a significant extent which confirms the weak economic underpinnings for the majority of the country. 

Secondly, while government related survey's are showing a vast improvement in economic activity, there has been little marginal improvement in the CFNAI. In fact, as shown in the chart below, the 3-month average has turned significantly lower in the second and third quarters of this year which suggests that real economic activity is slowing.

CFNAI-3month-Growth-112514

With the economic recovery now more than six years into recovery it has become a "footrace" to the finish line. With asset prices at elevated levels in anticipation of an economic revival, the failure of such a resurgence could lead to a significant disappointment for investors. With extremely cold weather threatening a large chunk of the population, there are risks to both corporate earnings expectations as well as to economic growth.

While there are indeed some very encouraging economic reports, it is important to remember that many are "sentiment surveys" that are subject to quick reversals.

Lastly, how is it the sentiment survey's are rising so strongly when CEO confidence is plunging. As Markit reports:

“This survey is a timely reminder that the U.S. economy has not been immune from weakening global business conditions, with euro area woes and heightened geopolitical risk weighing on firms’ business outlook and job hiring intentions for 2015."

Markit-US-Expectations-112514

“U.S. companies reported the lowest degree of confidence since the survey began in late 2009, reflecting domestic concerns and a subdued external demand environment."

Like I said in the beginning, most of the hard data suggests a much weaker economic environment than the current sentiment does. Both sets of data cannot be right.

 

 The Charge Of The Large Caps

One of the early warning signs of late stage bull market cycles is a narrowing of leadership in the markets. As the bull ages money tends to chase fewer and fewer stock into the peak. The chart below shows the S&P 600 small-cap, Russell 2000, S&P 400 mid-cap, S&P 100, Nasdaq 100 and S&P 500 large-cap indicies.

 Market-Capitalization-Performance-YTD-112514

As you can see, since the beginning of the year money has continued to chase fewer and fewer stocks with the large cap technology-heavy Nasdaq 100 leading the charge.

Of course, the last time that the Nasdaq 100 took a rather stellar lead in performance over the vast majority of other stocks was heading into 2000. While I am certainly not suggesting that the recent narrowing of performance is a sign that a market crash is imminent, it is important to understand that a narrowing of leadership has historically been attributed to an "aging bull market."

As Keith Jurow recently penned:

"Advisors must consider the possibility that what is assumed may not be true. This means challenging common perceptions. While not an easy task, it is absolutely essential for any investment advisor whose clients have large asset portfolios at risk."

 

Are We Taking Liquidity For Granted

Tracy Alloway recently penned:

"To be clear, the lack of liquidity just exacerbates market moves. The underlying problem is that complacent investors have been in the same (long) positions for the past five years, selling volatility and levering up to boost returns."

This is an important point. Investors have come to take a flood of liquidity by Central Banks as a given. However, what investors have come to take as a "given" may, in fact, be a mirage. The Federal Reserve has recently stopped its most recent innovation of direct liquidity injections. Furthermore, the BoE's Mark Carney recently gave a speech suggesting:

"It is particularly notable how the search for yield has compressed liquidity premia across markets. This is unlikely to be sustainable over the medium term because it exists against a backdrop of much-reduced market-making activity. Fundamentally, liquidity has become more scarce in secondary fixed income markets. It just appears that it hasn’t."

However, as investors continue to chase yield in a low interest rate environment, the push has primarily been focused in the riskiest of bond issuances. For example, Spanish bonds recently traded with a yield of below 2%. Since interest rates are a function of the "risk" that is undertaken by the lender, is this a suggestion that Spain is a more credit worthy borrower than the U.S. Hardly. It is, however, a sign that investors believe that whatever happens a central bank will gladly bail them out.

Bonds-UST-Spain-112514

Carney comments suggests that the belief of infinite liquidity may be flawed.

"New prudential requirements have reduced incentives for banks to warehouse risk positions. Dealer inventories in fixed income have declined by 70% since the pre-crisis period, while the stock of fixed income assets outstanding has doubled. And the Value-at-Risk in banks’ trading books has retreated to 2002 levels.

 

The time to liquidate a given position is now seven times as long as in 2008, reflecting much smaller trade sizes in fixed income markets. In part the current liquidity illusion is a product of the risk asymmetries implied by the zero lower bound on interest rates, excess reserves in the system, and perceived central bank reaction functions. However, interest rates in advanced economies won’t remain this low forever. Once the process of normalization begins, or perhaps if market perceptions shift, and it is expected to begin, a re-pricing can be expected.

 

The orderliness of that transition is an open question."

This is a hugely important statement. While Central Banks globally have gone "all in" on keeping the current environment stable in the face of global deflationary pressures, they cannot control the "psychology" of the market if, or when, something breaks.

The rise of illiquidity in the fixed income markets is a byproduct of the bond buying schemes run by Central Banks globally. The problem comes when someone, somewhere, decides to sell.

 

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Wed, 11/26/2014 - 14:49 | 5491697 svayambhu108
svayambhu108's picture

Petrodollar vortex

 

Wed, 11/26/2014 - 14:50 | 5491700 svayambhu108
svayambhu108's picture

I think the Saudi realised the thing about the paper and they thought they might as well get less paper it doesn't matter

 

Wed, 11/26/2014 - 15:25 | 5491814 Bloppy
Bloppy's picture

Some economic surveys are faked, others are not. That explains the difference.

 

Time Magazine DEFENDS rioters AND LOOTING, compares it with Boston Tea Party:

http://tinyurl.com/lvdk99v

Wed, 11/26/2014 - 15:44 | 5491865 Neverstopprintingme
Neverstopprintingme's picture

the logic is flawed...we are 6 years from the "crisis" (assuming it ever ended), but i'm not sure we ever see nomalization again.  el erian was spot on with the "new normal" monicker.

Wed, 11/26/2014 - 14:53 | 5491712 no more banksters
no more banksters's picture

"From this point up today, there is an unprecedented rise of the US debt held by the FED. Specifically: In the first quarter of 2014, this figure is skyrocketing at 15,34% of GDP, which means a rise of 377,88% in six years!"

http://failedevolution.blogspot.gr/2014/11/us-debt-held-by-fed-further-i...

Wed, 11/26/2014 - 14:59 | 5491726 KnuckleDragger-X
KnuckleDragger-X's picture

Lie as much as you can,as big as you can, for as long as you can and when it all falls apart, act surprised.

Wed, 11/26/2014 - 15:03 | 5491739 ebworthen
ebworthen's picture

The transition will be just as orderly as 2008-2009; as orderly as a bubble popping can be.

Wed, 11/26/2014 - 15:09 | 5491748 Notsobadwlad
Notsobadwlad's picture

As long as there is always a buyer of last resort for every equity there will be infinite liquidity ... and hence infinite money printing.

Banks now both price equities (and commodities) and ensure liquidity by being the buyer of last resort for every trade. They cannot price without being the buyer of last resort. However, they CAN be the buyer of last resort without controlling price (as they have for at least the past 6 years).

The question is will they being willing to surrender complete price control of equities and commodities and still be the buyer of last resort that ensure liquidity?!? My assumption is "no" and they will only give up price control only if they can no longer infinitely print money. If they can no longer infinitely print then they can no longer ensure liquidity.

Wed, 11/26/2014 - 15:17 | 5491783 Hohum
Hohum's picture

Now, why won't interest rates remain this low forever?  Because of wage inflation? Because the economy will never collapse?  We'll see.

Wed, 11/26/2014 - 15:16 | 5491791 Clesthenes
Clesthenes's picture

“Challenging common perceptions… is absolutely essential for any investment advisor whose clients have large asset portfolios at risk.”

An understatement if there ever was one.

When I was in the Navy, I was the lead electronic technician (ET) for a task force of 8 ships; when ET’s on other ships couldn’t fix gear, they’d call me.  Most of the problems were too simple for them to see.  For example, who would think to check the AC plug.  It would usually take me about 15 minutes to find this problem (more than once); and I never told them what I did; didn’t want to embarrass them.

We have the same problem today.

What is the most basic factor regarding an investment?  Are your counterparties sound… will they, or can they, perform in a crisis?

If, for example, your assets involve counter-parties who are complicit in world-class crimes/treasons (NYSE, Federal Reserve, munitions makers, foreign banks et cetera), you’ve got a major problem.  All such counter-parties are liable for major restitution if they should ever be made accountable for their crimes; and if they suspect you have been critical of them… good bye assets.

It’s a system of mass bribery: if you go along with their crimes – and keep your mouth shut, you can sort of depend on them; otherwise, forget it.  Why do you think banks freeze assets of those who die?  Regardless of your stance, banks’ lawyers will slice off 25%-50% of your accounts before releasing them to heirs; if you have asked too many questions… or described too many crimes (actually, it only take one), they take all.

You also have to focus your attention on how to protect yourself when government-protected fictions evaporate.  That’s when the proscription begins: a time when dissidents are openly eliminated along with many thousands of useless eaters.

What happens during such a proscription?  During the French slaughter (1792-4), Judeo-Bolshevik money-lenders withheld food from the market; they blamed shopkeepers, peasants (farmers) and hoarders for such shortages, seized their supplies and paraded them before a Revolutionary Tribunal before carting them off to the guillotine.

During the Russian mass slaughter, they did the same thing, only with a wider net: hooligans, speculators, anti-socialists, and saboteurs were added to their lists.  Their property was seized, they were paraded before a Revolutionary Tribunal before receiving the shot in the nape of the neck.

You think it’s not likely here?  Then, why is the Department of Homeland Security modeled after the French committees of terror, the Judeo-Bolshevik Cheka and the Nazi Schutzstaffel?

What does the DHS plan to do with 2-3 billion rounds of ammo… an amount sufficient to wage an Iraqi War, at its highest rate, for 25 years?

And why did several agencies of the federal government aid Chinese communists as they cobbled together an ALLIANCE among Mexican and Columbian drug cartels, Chinese Triads, the Red Army and Chinese communist party, among other world-class crime syndicates?

And by “federal agencies” I mean the FBI, Justice Department (e. g., Fast and Furious), Congress, DEA, White House, CIA, and possibly others.  I collected this info from testimony before a congressional subcommittee.

And, who will staff DHS offices when it is time to use those 2-3 billion rounds of ammo… native cutthroats and thieves… or members of the Chinese ALLIANCE?

How do we protect ourselves from these consequences?  I’ve suggested it so many times: we have to duplicate what American Founders did, minus their mistakes.  We have the same power they had; the power to make criminal and useful-idiot classes accountable for their crimes; and we REFUSE to use that power.

There are three main reasons for this failure: one is that Americans have no knowledge of such power; the second, they’ve been herded into a kind of impotent stupor by medication and indoctrination; the third, that they aid, benefit or are/were complicit in such evil.

There’s a remedy for all three of these failures: 1) learn, and use, the law and procedures of redress (full article); 2) follow a health regimen that has REDUCED – not slowed – my biological age 50 years (it also un-does the damage done by medication and indoctrination); and, 3) see number one.

This health regimen has given me the coordination, health and physical condition of a professional athlete around the age of 20; I’m 70 years of age (for validation, video and webpage – each leads to the other).

Wed, 11/26/2014 - 15:40 | 5491838 Jonathan Equine...
Jonathan Equine Phallus's picture

+1

 

This essay>  http://redressone.wordpress.com/exodus-pt1/

is particularly interesting.

Wed, 11/26/2014 - 19:21 | 5492447 Clesthenes
Clesthenes's picture

Johathan Equine,

Thanks, C/A

Wed, 11/26/2014 - 15:37 | 5491850 QQQBall
QQQBall's picture

Way too much info. Get your own website

Wed, 11/26/2014 - 19:32 | 5492488 Clesthenes
Clesthenes's picture

QQQBall,

The Federal Reserve, Congress, big banks, munitions makers, IRS, DoJ plus many more are driving this country to utter destruction; its measure and means is governmental debt. We stand, in other words, on the cusp of another Dark Age, during which the memory of America, and its experiment in liberty, will be erased from human memory.

I am trying to convey to Americans, and the world, knowledge of the only historically-proven method to save ideals and people who are worth saving... and you declare, "Way too much info"?

Please reconsider.

Wed, 11/26/2014 - 16:16 | 5491965 Nico Bellik
Nico Bellik's picture

bi-polar?

Wed, 11/26/2014 - 19:52 | 5492556 Clesthenes
Clesthenes's picture

Late addition:

The biggest instrument of bribery is the US currency.  Formerly, US bank notes and bank reserves were issued into existence in exchange for gold.  Today, they come into existence in exchange for US Treasuries (either directly or indirectly).  Government debt is the process by which a generation of tax consumers imposes taxes on following generations of tax payers.  The problem here is that it is practically and constitutionally impossible for the US Treasury to collect such debt – but this won’t stop them from trying.  There is currently enough such debt on the books to financially cannibalize following generations of Americans to the end of time (based on data, assumptions and formulas provided by Financial Reports of the US government).

I mean, how would you describe a situation where, if the government imposed a tax of 200% on the income of every American taxpayer, it would not be enough to pay the interest on such liabilities?

I suppose the original idea of mandating (by the FR Act and debt authorizations) the imposition of this currency of cannibalization, was to create a system whereby the populace either accepted cutthroats and bandits as slave masters, or they would utterly destroy such society.

As it turns out, such currency will destroy America whether we accept rule by thieves or not.

Of course, before the government, munitions makers, big banks and media concede defeat, I am sure they will try to impose such a tax.  After all, who would presume to set a boundary for stupidity?

[and] So, the most basic consideration for any portfolio, regardless of size, is, "By what currency shall it be measured... Zimbabwe dollars.... US dollars.... gold?  If you choose the last alternative, you don't have much time.

Wed, 11/26/2014 - 15:31 | 5491794 Jonathan Equine...
Jonathan Equine Phallus's picture

Seriously, though - disinflation... would be a good thing for the real economy.

 

But World War 3 is better.

 

All-Out War in Ukraine: NATO’s ‘Final Offensive’

 

Wed, 11/26/2014 - 15:24 | 5491805 Bell's 2 hearted
Bell's 2 hearted's picture

Lance on his call a few weeks ago usd will weaken

 

FAIL

 

Lance on his call a few months ago 10yr @ 4% in 2015

 

will be monumental

FAIL 

Wed, 11/26/2014 - 17:32 | 5492014 RaceToTheBottom
RaceToTheBottom's picture

Liquidity is overated as long as the seller and the buyer are the same entity.....

Wed, 11/26/2014 - 19:50 | 5492553 AdvancingTime
AdvancingTime's picture

Getting out of an illiquid market can be a problem. I believe ugliness lies ahead. I love the way it is always being kicked out a year or two and never going to happen tomorrow. It is as if we can't handle what is coming at us and need more time.

For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below is an article looking at how it could happen sooner rather than later.

http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html

Do NOT follow this link or you will be banned from the site!