Fear, like greed, makes people, and that would include investors, behave irrationally. Two major equity bear markets in the last 13 years have traumatized investors. The belief in Modern Portfolio Theory in general and the Efficient Markets Hypothesis (EMH) in particular has been shaken and finance theory will have to be re-written. So, Absolute Return Partners' Niels Jensen asks, what is it specifically that has changed? Human behavior certainly hasn’t. Greed and fear have been factors to be reckoned with since day nought. When faced with the unknown, people (in this case, fund managers) will use whatever information they can get hold of. Hence we shouldn’t really be surprised that fund managers extrapolate current earnings trends when forecasting future earnings, despite the evidence that it is a futile exercise. Occasionally, the Wisdom of Crowds turns into the Madness of Mobs and all rational behavior goes out the window. History provides many examples of that. EMH is entirely unsuited to deal with froth. What made economists love the EMH is that the maths behind it is so neat whereas the alternative truth is a little messy.
Each and every day we are told by asset-gatherers everywhere that stocks are cheap, money-on-the-sidelines will 'greatly rotate', and now that any 'Taper' is good news as it signals the Fed 'believes'. However, it would appear that the market is either a 'hope-discounting mechanism' or a serial non-linear extrapolator; as, just for clarity, this is the 'hope' that equity bulls are buying currently about the next three years' earnings... what could possibly go wrong?
Confirming that the administration is in very hot water over this week's revelations of widespread domestic and global surveillance, moments ago this Saturday afternoon the head of National Intelligence James Clapper released "Facts on the Collection of Intelligence Pursuant to Section 702 of the Foreign Intelligence Surveillance Act" in which he says that PRISM is not an undisclosed collection or data mining program. It is an internal government computer system used to facilitate the government’s... collection of foreign intelligence information." In fact, the program is so legit, it doesn't even work to collect foreign data: "We cannot target even foreign persons overseas without a valid foreign intelligence purpose." Finally, any rumors that Google Glass will be reverting to its original codename "NSA SpyCam" are greatly exaggerated: "Service providers supply information to the Government when they are lawfully required to do so." In short - please believe him. He is from the government, he is telling the truth, and the government is here to help. As for all those Verizon (and other carrier) all too domestic phone intercepts: don't you worry about that.
We’ll admit it. We just don’t understand Prime Minister Shinzo Abe’s much vaunted economic policy known as Abenomics. Spend public funds that Japan doesn’t have, increase inflation, but not raise minimum wages? How is this supposed to improve the economy? We know we’re missing something. Secretly, we feel like it only works because people believe it works. Sort of like fairies. If you believe in fairies, gnomes, and Abegnomics – than clap your hands! Follow the rainbow, kids! A pot of platinum yen coins is waiting for you.
As important as when the Fed might taper its asset purchases is why it might do so. Uncertainty about the Fed’s QE reaction function, BofAML argues, is a significant contributor to recent market volatility. There are several scenarios that could explain why a number of Fed officials have started talking about tapering: they have become more optimistic on the outlook; they are more worried about potential QE costs; they have decided to taper earlier for largely technical reasons. The first of these likely would be the least disruptive for markets, and the last the most. Clear Fed communication could mitigate some of the volatility, but, as BofAML notes, the current lack of consensus on the FOMC likely means uncertainty will likely persist.
One thing is for certain -- the job market is very tight as layoffs and discharges have reached the lowest levels since the turn of the century. While this is leading to lower initial jobless claims it is not translating into higher levels of full-time employment relative to the population. It is not surprising that with an economy that is mired at a near 2% economic growth rate that employment is "muddling" right along with it. While the economy is indeed creating jobs, it is a function of population growth rather than a sign that the economy is on the road to recovery. What is clear is that current detachment between the financial markets and the real economy continues.
Yesterday, briefly, we were confused by the eruption in the stock market following a not too bad sub-200K nonfarm payrolls number. Because we know that in the New Normal bad is always good, no matter what the well-coifed TV pundit du jour tells you. Then we remembered that yesterday is when the USDA releases its monthly Supplemental Nutrition Assistance Program data, i.e. Americans on Foodstamps. It was here that the ramp was perfectly explained, because while the bad (for stocks of course) data was that individual foodstamps recipients rose by 170K in March - if just a whisker below all time highs - it was the number of American households on foodstamps, which rose to a new all time high of 23,116,441 (each collecting an average of $274.30 per month) that perfectly explained the Dow Jones' 200 point surge higher: the transfer of wealth from the poor and middle-classes to the 1% continues without a hiccup.
That things in Greece are hopeless and getting worse is an understatement. With unemployment levels off the charts, the pension and retirement systems effectively gone and every able-bodied individual (what little remains of them) moving to the shadow economy which now accounts for 24% of GDP, there are few incentives for people to remain on payrolls, pay taxes and otherwise grow the economy via conventional channels. As a result, instead of an improvement in the economy despite all Greek foreign debt now having been forgiven courtesy of its recent conversion to perpetual Zero Coupons, not even during the depths of the recent economic collapse in late 2011 and early 2012 has the economic collapse been as bad. Kathimerini reports that figures released by ELSTAT on Friday showed GDP at 37.7 billion euros in the period from January to March 2013 – the lowest quarterly GDP since 2000.
China continues to be stuck between an external hot money flows rock and a contracting economy and unstable banking sector hard place... Thanks to the G-0 central planners, the PBOC's hands are now tied: if it injects more hot money or lowers the interest rate the inflation on the margins, which it has so far been able to mask will spill over into the streets in a repeat of 2011, and force an even more epic scramble for inflation protection than the one seen two years ago, and which led to gold rising to just shy of $2000. Naturally, at a time when the central planners have gone all in on precipitating the Great Rotation out of bonds and into stocks at all costs, a re-exodus into gold might just end the Keynesian experiment. So the China central bank has that to contend with as well.Which means one thing: in reality Chinese credit and liquidity is in far worse shape than reported. And sure enough, over the past 24 hours we got news courtesy of Bloomberg that the "China Liquidity Squeeze Risks Companies’ Debt Rollover" leading to what may be the first harbinger of a Chinese bank failure which may subsequently lead to a whole lot of dominoes falling.
Demand for Warren Buffett, the investor, peaked in 2012 when an anonymous donor bid $3,456,789 for the annual Glide Foundation's eBay lunch with the Octogenarian of Omaha. Demand for Warren Buffett, 82, the Obama tax and fairness advisor, however, is a mere fraction as the stunned Glide Foundation found out last night when the final bid for the "Power Lunch for 8 with Warren Buffett to Benefit GLIDE Foundation" auction closed at the lowest possible 6 digit increment, or an embarrassing $1,000,100. This was the lowest demand to have lunch with Buffett since 2007. This is a stunning result considering that with every passing year, for obvious reasons, the likelihood of many more such "power lunches" drops exponentially. We hope Buffett-demand is not a proxy leading indicator for the stock market or else a 71% plunge is coming.
As of this moment, Obama is making the case that the US government is not eavesdropping on phone calls. Specifically, he said "nobody is listening to your phone calls - they are just looking at phone numbers and duration of calls" and concluded that the NSA was only engaged in "modest encroachments." It was unclear if that clarification was meant to put to rest fears that Big Brother has made personal privacy a thing of the past. He further went on to add that the telephone surveillance program is fully vetted by Congress and supervised by the Federal Intelligence Surveillance Court (FISA). In other words: Obama is making the case that the NSA's Big Brother supervision is perfectly legal and not only that, there are checks and balances and neither the telephonic snooping nor the internet supervision is anything to be concerned about. There is one problem: Obama is lying.
Would you like to know what America's young people are actually learning while they are away at college? It isn't pretty. Yes, there are some very highly technical fields where students are being taught some very important skills, but for the most part U.S. college students are learning very little that they will actually use out in the real world when they graduate. Some of the college courses listed below are funny, others are truly bizarre, others are just plain outrageous, but all of them are a waste of money. If we are going to continue to have a system where we insist that our young people invest several years of their lives and tens of thousands of dollars getting a "college education", they might as well be learning some useful skills in the process. This is especially true considering how much student loan debt many of our young people are piling up. Sadly, the truth is that right now college education in the United States is a total joke... and still a generation of jobless youths borrow from a feckless Fed to indenture themselves...
Suddenly embroiled in too many scandals to even list, and humiliated by a publicly-exposed (because everyone knew about the NSA superspy ambitions before, but with one major difference: it was a conspiracy theory.... now it is a conspiracy fact) surveillance scandal that makes Tricky Dick look like an amateur, earlier today, as expected, Obama came out and publicly declared "I am not a hacker" and mumbled something about "security", "privacy" and "inconvenience." He went on to explain how the government "welcomes the debate" of all three in the aftermath of the public disclosure that every form of electronic communication is intercepted and stored by the US government (now that said interception is no longer secret, of course) but more importantly how it is only the government, which is naturally here to help, that should be the ultimate arbiter in deciding what is best for all. Yet the PRISM-gate scandal which is sure to only get worse with time as Americans slowly realize they are living in a Orwellian police state, meant Obama would have to do more to appease a public so furious even the NYT issued a scathing editorial lamenting the obliteration of Obama's credibility. Sure enough, the president did. Reuters reports that the first course of action by the US government will be to... shoot the messenger.
The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. The West has been following Japan each step on the way – usually with a lag of about ten years or so, although it seems to be catching up of late. Now Japan is the first developed nation to go ‘all-in’, to implement a no-holds-barred money-printing regime to (supposedly) ‘stimulate’ the economy. We expect the West to follow soon. In fact, the UK is my prime candidate. Wait for Mr. Carney to start his new job and embrace ‘monetary activism’. Carnenomics anybody? But here is what is so interesting about recent events in Japan. At first, markets did exactly what the central bankers wanted them to do. They went up. But in May things took a remarkable and abrupt turn for the worse. In just eight trading days the Nikkei stock market index collapsed by 15%. And, importantly, all of this started with bonds selling off. Are markets beginning to realize that all these bubbles have to pop sometime and that sometime may as well be now? Are markets beginning to refuse to dance to the tune of the central bankers and their printing presses? Are central bankers losing control?
The Fed’s zero lower bound policies have dislodged credit risk as the primary concern for investors, only to replace it with a major technical headache: interest rate risk. If rates remain too low for too long, financial stability suffers as investors reach for yield, companies lever up, and lending standards decline. The greatest of financial stability risks is probably the least discussed among those that matter at the Fed: the deterioration in trading volumes. As such, we suspect that the longer low rates persist, the worse the unwind of QE may be. And it may, in fact, already be too late. As events in the past two weeks have shown, credit markets also appear vulnerable to a rise in rates that occurs too quickly or in a chaotic fashion. Moreover, to the extent that issuers sense demand may be waning for bonds, there’s a distinct possibility the pace of supply increases precisely at the same time that demand decreases. Invariably, it’s this sort of dynamic that ends in tears.