As stocks hit new records and small investors—finally—return to the market, some analysts are getting worried. Risk assets have rallied to previous bubble conditions. Powered by unprecedented refinancing and recap activity, 2013 is now the most productive year ever for new-issue leveraged loans, for example. This has been great for corporations as financing and refinancing has put them on a stronger footing. Where M&A activity still lags the highs of the last boom, issuers have jumped into the opportunistic pool with both feet. And why not? Secondary prices are high and new-issue clearing yields remain low. Yet very inadequate movement has been evidenced on the hiring front. And after all the improvement in ebitda, where do we go from here? Forward guidance will clearly be harder. One might argue that we are back in a Goldilocks fantasy world, where the economy is not so strong (as to cause inflation and trigger serious monetary tightening) or so weak (as to cause recession and a collapse in profits) but "just right". Yet, it seems unlikely that issuers with weaker credit quality could find it so easy to sell debt without the excess liquidity created by the Fed and other central banks.
To paraphrase Mark Twain, "It isn't the stuff you don’t know that will kill you – it's the stuff you're sure about but is totally wrong that will do you real harm." As a corollary to this fateful phrase, Convergx's Nick Colas has collected a list of market "knowledge" that is questionable at best and harmful at worst.
Having exposed the "biggest scam in history" is Part 4 (following Part 1, Part 2, and Part 3), Mike Maloney's fifth episode serves as an ideal primer for those waking up to the monetary matrix around them, as it clearly shows the history of true money and why it so important to our freedom. The quality of a society is directly proportional to the quality of its money. Debase a currency for long enough, and you end up with dangerous deficits, debt driven disasters, and eventually...delusional dictators. History proves this to be true.
"The reality is,"Kevin Warsh exclaims, "QE policy favors those with big balance sheets, those with risk appetites, and access to free money," while real people "are still looking around and saying what is fed policy doing for me." The problem, he explains, is a disconnect between what markets are discounting about the future and the Fed's credibility with regard their apparently divergent forecasts for unemployment, growth, and interest rates. In a little under 90 seconds, Warsh explains the dilemma and sums up the Fed perfectly, "they're just talking, rather than acting."
The mainstream media staple 'common wisdom' within the financial markets is that when the Federal Reserve "tapers," or eventually ceases, its current bond buying program that interest rates will begin to rise. However, there are three primary issues which should be considered that fail to support this widely held belief. The Federal Reserve has gotten itself trapped into creating an asset bubble in the equity markets because any reversal of policy leads to severely negative economic consequences. With the current economic recovery cycle already very extended in historical terms, along with the financial markets, it is unlikely that we have just begun a growth cycle that will allow the Federal Reserve to extract its support. The reality is quite the opposite, and the next asset rotation will not be from bonds to stocks; but just the opposite.
"I just don't see evidence that people believe we are launching into a great new era" of home price appreciation,"that's what we had in the early 2000s." Simply put, he chides Faber and Cramer, "people are not so excited about the future," in spite of record high stock prices (and surging home prices) as it seems the Fed's plan was foiled again. In a fascinating to-and-fro, they note "we don't want to go back to 2005," even though "it would lift the economy" since "we know how that story ends." The hedge funds and 'investors' proclaim themselves long-term investors, but Shiller notes "they are not, what they have learned there is short-run momentum in the housing market," and will bail at the first sign of that ebbing, "it's different now, we can't trust momentum."
In order to offset the lack of loan creation by commercial banks, the "Big 4" central banks - Fed, ECB, BOJ and BOE - have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world "Big 4" central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse. How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has expaneded its financial balance sheet by 50% more than the assets of all global central banks combined!
The first thing to understand about China is there is always a front door and a back door to everything. The front door is what's presented to the outside world; the back door is for everything that doesn't fit the PR image created by the front door. The front door presents positive "face," the back door is for everything that would "lose face," so it's hidden and never discussed, except in private, and only with trusted family or friends. The front door is covered with official pronouncements of "the China Dream" and blustery demands of hegemony, but the back door is choked with members of the financial/political Elite fleeing China and taking their wealth with them.
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. Sounds like a perfect time to BTFATH...
Another (like yesterday) late-day collapse in stocks was not enough to entirely ruin CNBC's headlines as the NASDAQ closed above 4,000 for the first time in 13 years. The only thing that could have made today better for the central planners was a red close for gold but despite rolling over from late-yesterday's spike, the precious metal closed marginally higher and unch on the week. The NASDAQ just rolls on - up over 100 points in the last 4 days and now +10.3% off debt-ceiling lows (outpacing the S&P and Dow). Today's 'apparently' good news on housing sent homebuilder buyers into a frenzy (+2.4% on the day as the squeeze continues wherever it can). The total lack of volume and liquidty was evident when sellers appeared in the last 15 minutes and instantly smashed the S&P back to VWAP and below echoing yesterday afternoon. Treasuries rallied on the day (with a little selloff as stocks sold off into the close) ending -3bp on the week. The USD slid from the US open but notably stocks disconnected from any JPY carry for most of the day until the closing collapse...
What is an aspiring market manipulator to do on those cold winter mornings in the 9th floor trading hub of Liberty 33, when the heat emitted by the money printer is not enough to keep one warm, and when repeatedly punching the "buy" button has lost its heat-generating, full body workout bliss? Wear this of course.
If indeed the topic of Obama's speech today from Glendale, CA is "the state of the economy", then it should be a short speech.
One of the notable developments in the neverending China-Japan territorial sovereignty dispute over various rock formations (and potential massive natural resources located beneath them) in the East China Sea, has been China's launch of an "air defense zone" over said disputed islands. As AP reported previously, Beijing on Saturday issued a map of the zone — which includes a cluster of islands controlled by Japan but also claimed by China — and a set of rules that say all aircraft entering the area must notify Chinese authorities and are subject to emergency military measures if they do not identify themselves or obey Beijing's orders. Various Japanese airlines responded in a confused manner overnight, with neither JAL nor ANA sure whether or not to comply with China's new demand which is merely the latest territorial escalation.
As we noted previously (here and here), the exuberance over 'lower' gas prices is a little overdone. Perhaps more worrying though, as Bloomberg's Jo Brusuelas notes, wholesale gasoline futures are pointing to about a 5% rise in gasoline prices during the next few weeks. This would essentially erase the entire decline in gas prices seen since Sept. 1. As Brusuelas warns, because recent gains in inflation-adjusted personal disposable income on a per capita basis can be directly tied to falling gasoline prices, rising prices may come at an inopportune time for many larger retailers.