It is hard to believe that the end of the year is fast approaching. This weekend's list of things to ponder covers a range of issues that caught our attention this week. Will the economy continue to grow, are stocks under owned, what about Fed - rising credit risk (and collapsing credit risk premia) and the question of "when or if to taper?" These are all important questions that all investors must answer as the new year rapidly approaches.
Reading between the lines of recent Fed communications, it’s becoming increasingly clear to me that the Fed wants to exit its quantitative easing policies as soon as possible. Though they’re loath to admit it, the architects of quantitative easing now recognize that their efforts are achieving diminishing marginal returns while at the same time building up massive imbalances, distortions, and speculative excesses in the capital markets. Moreover, they’re realizing that the eventual exit costs are also likely much higher than they had previously thought, and continue to rise with each new asset purchase. Implications for the markets, which may not yet be fully prepared for this outcome, are likely to be significant. In short, we would expect yield curves to steepen, the dollar to strengthen, equities to fall, credit spreads to widen, commodities to weaken (the metals in particular), and volatility to rise. How the Fed will then respond to these developments will be very telling indeed. Their hand will be forced, and we may all soon learn how strong the QE trap has become.
When the multiple bubbles burst and the financial house of cards comes crumbling down, Ben Bernanke will be comfortably secure, far from the consequences of his policies. It is worth recalling, on today of all days, that only two U.S. presidents in the past 50 years had any experience of combat: John F. Kennedy and George H.W. Bush. Both men acted with care and restraint in matters of war and both sought a peaceful resolution to the Cold War. Was this merely a coincidence, or did experiencing combat inform their humility and sense of responsibility for the consequences of their choices? The more power devolves to those who actually face the consequences of their actions and authority, the less pathological it becomes. This is the power structure of liberty: each person carries the responsibility and consequence of their actions, choices and words.
The last twenty years have seen an acceleration of real wealth transfer from the west to the east. Nowhere is that more evident than the change in gold stock piles since 1993 with Russia and China gorging and Holland, Belgium, and most notably Switzerland selling it all...
With all eyes glued to the anniversary of the assassination of JFK 50 years ago, we thought it worth noting that the death of another important American figure - the USDollar - began exactly 100 years ago. Today in 1910 Sen. Aldrich, 1 yr after introducing an amendment to establish an income tax, convened the first secret meeting at Jekyll Island.
Analysts are forecasting the highest fraction of companies to post year-over-year margin expansion in our data history, despite the already near-record profit levels today. The only thing one can say when looking at this chart of expectations (apart from - imagine the job losses needed to achieve this) is WTF?!
The S&P 500 has now managed the longest weekly winning streak (7 weeks) since May 2007 (when it managed a 9% gain). Off the recent lows, the current run is an impressive 9.6% (for the S&P) with Trannies up 12.5% in the same period. (we hesitate to mention that May 2007's run-up was halted by the first of the structured credit funds imploding) On the week, Trannies and NASDAQ ended back practically unch, Russell 2000 outperformed but the afternoon melt-up in stocks (on the back of more shorts being squeezed) held the S&P above 1,800 close for the first time ever. Bonds rallied (recovering a lot of their mid-week losses), the USD was offered in general (led by EUR strength) but AUD's 2% loss was notable. VIX was manhandled to 12.25% into the close to maintain the headline-grabbing 1,800 as gold and silver clung to their lows.
The assessment on the attached chart is very simple: as Stone McCarrthy puts it "this is an indication of an increase in structural unemployment." That statement is quite obvious to the millions of Americans who have been out of a job for years since the Lehman collapse, and have been unable to find a new job despite the plethora of "job openings." However, that's not all. What the implied unemployment rate based on the current level of Job Openings is, is even worse - because it is precisely at the 5.5% level where the Fed would not only taper, not only end QE but begin tightening!
Encapsulating all that is wrong with the raise-your-stock-price-by-hyperbole-alone strategy of most new 'tech' firms, Tesla's recent claim of a "5.4 Stars - out of 5" safety rating from the National Highway Traffic Safety Administration (NHTSA) perhaps takes the biscuit. But as Jalopnik reports, the NHTSA is not standing for the lies anymore and has issues a statement explaining to car-makers that NHTSA does not award higher than a 5-star rating - advertisers should avoid "double" 5-star rating, numbers greater than 5, and using the terms "perfect," "safest," "flawless" or "best in class" are misleading. What will Elon Musk do now?
Out of curiosity, we searched for the term “gold” in English language books starting in 1776. As one would expect back in the 18th and 19th centuries when gold was actually considered money, the instances of the word ‘gold’ favored prevalently in English language books at the time. The trend continued into the early part of the 20th century. But then something interesting happened in the mid-1930s. The use of the word ‘gold’ in English language books reached its peak… and began a steep, multi-decade decline. The last 10 years though, have seen that trend begin to shift...
Yesterday, Ukraine was faced with a historic choice: "go West" by signing a new trade pact with the European Union and align against its former master the USSR... or "East", and go back, at least symbolically, to mother Russia. To Europe's shocked amazement, the Ukraine picked "East" in yet another very visible win for Vladimir Putin in what has just been the former KGB spy's year. Sure enough, Putin spokesman's welcomed "the desire to improve and develop trade and economic cooperation" with a "close partner". Europe on the other hand, was shocked and appalled at this unprecedented snub: "This is a disappointment not just for the EU but, we believe, for the people of Ukraine," EU foreign policy chief Catherine Ashton said in a statement. Ah yes, because Europe's unelected dictators are so concerned with the popular choices of wayward "democracies."
Expenditure on social benefits in the EU fell to 29.1% of GDP in 2011 from 29.7% in 2009, Eurostat said yesterday. However, do not feel too bad for the broad European social state. While France (as one might expect) nears the top of the list with over 33% of GDP spent on "social benefits", Bloomberg's Niraj Shah notes that it is Denmark that spends the most on welfare at 34.3% of GDP, and Latvia spent the least, 15.1%. Of course, in the new normal, as in the US, retirees accounted for the majority of the trasnfer payments with an average of 46% of total expenditure while unemployment benefit accounted for 6%. Interestingly, Greece nears the top of the list with almost 31% of GDP spent on welfare.
We earlier discussed Bill Ackman's lengthy interview on Bloomberg TV during which he faced up to the $500 million losses (more now) from his Herbalife position, and that it is "not a trade" for him but "will take it to the ends of the earth." However, it seems his comments that "Herbalife longs are all 80-year-old billionaires" pissed off Carl Icahn enough to warrant his wrath. Icahn called in to Trish Regan and exclaimed, "I fail to understand how Bill Ackman, whom I haven’t spoken to for years, nor do I intend to speak to, would know what I am or am not committed to. I continue to believe Herbalife has a great future, and in my opinion many of the things Ackman says about it are simply the rantings of a sore loser." The stock remains +5% and back near recent record highs.