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Breaking Bad News From The Fed’s Z1: Expansions Tend To Explode Near Current Leverage Multiples





breaking bad 2

While bubbling assets are a major part of the history of the Greenspan/Bernanke economy, so too is unsustainable borrowing. It seems wise to keep an eye out for another borrowing binge, especially as policymakers are encouraging all forms of financial risk-taking.  And one place to check is the Fed’s quarterly “Flow of Funds” report, which recently took the fancy new title, “Financial Accounts of the United States,” but still goes by the nickname “Z1.” There’s a cautionary note in comparisons of today’s leverage ratio to the last three expansions. The last three times the ratio jumped above the current reading of 7.2 were Q1 1990, Q1 1999 and Q2 2007. And from these points in time, the economy fell into recession about a year later, or less, in each case. (The respective times to recession were two, four and two quarters.)

 
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Berlusconi Has Last Laugh As Italy Scrambles To Contain Fallout From Government Collapse





Following yesterday's unexpected (if not shocking) news that ministers from Berlusconi's PDL have resigned en masse in order to push for new elections, leading to the latest Italian government crisis (in a long and distinguished series), Italy's premier Letta and president Napolitano are scrambling to preserve some stability, and not only they but moments ago Ansa reported that the management and supervisory boards of Italian megabank Intesa are set to meet at 6 pm, as not even the most optimistic see an easy way out of the political dead end Italy has found itself in now.

 
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The JCPenney Lawsuits Begin





Last Thursday when we reported the surreal sequence of investor disinformation events facilitated by both JCP's management team, CNBC and a conflicted "source", we said that "it was only a matter of time before lawyers started making phone calls, and before someone got implicated in what in retrospect can be construed as very serious, and costly, 10(b)-5 securities fraud." Sure enough, it took a little under 48 hours before the first (of many) lawyers smelled blood, and resulted in Shareholder Rights Law Firm Johnson & Weaver, LLP starting an investigation " if a securities violation was committed by J.C. Penney Company, Inc., when it made specific representations about the company's liquidity and the need to raise cash." The answer: yes. The only question is who is guilty, and how much the settlement will be for all those who lost cash on the second most active trading day of JCP stock in history (followed only by the next trading day in which the stock tumbled another 6% from the Goldman follow on offering price to a fresh 13 year low).

 
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House Votes To Delay Obamacare By One Year; Checks To Senate Democrats - Shutdown 'Inevitable'?





On a rare Saturday session (now Sunday); in a not-too-surprising vote down party lines, the House has voted in favor of the continued-military-funding, medical-device-tax-repealing, Obamacare-delaying continuing resolution that keeps the government paid until December 15th...

*HOUSE PASSES 231-192 OBAMACARE DELAY IN U.S. SPENDING BILL

*HOUSE VOTES 423-0 TO FUND TROOPS IF GOVERNMENT SHUTS DOWN

Now it's off to the Senate and Harry Reid's 'over-my-dead-body' as the White House prepares for Government Shutdown.. (and/or veto) with little (or no) time to cobble together a last-minute deal.

 
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The FBI Has Been Using Drones Domestically Since 2006





So about that whole drone debate in the USA... It seems the feds decided to simply skip over such a quaint notion and deploy them without telling anyone. Back in December of last year, the Electronic Frontier Foundation (EFF) detailed current drone flights in the U.S. That story was big news at the time, and it was particularly disturbing in light of the fact that Congress has cleared the way for the Federal Aviation Administration to allow 30,000 drones in the nation’s skies by 2020. Well it appears that the whole drone debate was over before it even began, with the FBI having used drones domestically for at least seven years.

 
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Boehner: "House Votes To Keep Govt' Running"; US Troops Will Be Paid During Government Shutdown





Just like that, we are back to square minus one, with the House again punting to the senate:

  • HOUSE VOTES 231 TO 192 TO DELAY OBAMACARE FOR ONE YEAR, AVERT GOVERNMENT SHUTDOWN
  • 2 DEMOCRATS VOTE YES, 2 REPUBLICANS VOTE NO
  • HOUSE UNANIMOUSLY VOTES 423-0 ON "PAY OUR MILITARY ACT" ENSURING TROOPS ARE PAID DURING GOVERNMENT SHUTDOWN

As repeatedly reported earlier, the Senate will promptly squash said bill once again as it did with the defunding CR, in effect leaving essentially no time to cobble a deal together ahead of the the October 1 government shutdown.

 
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Government Shutdown Imminent; "Obamacare-Delay" Continuing Resolution Vote - Live Webcast





UPDATE: The Bill is currently under debate on the floor - live webcast (Final votes are expected after 11pm ET.)

It appears investors (CDS markets, VIX, T-Bills anxiety) were on to something as each side in the  looming government shutdown debate seems mired in their own belief that the other has more to lose. House Republicans are aiming to hold a vote today on a bill to extend government funding through December 15th and ensuring the military gets paid on any shutdown, but...

  • HOUSE PLAN WOULD DELAY OBAMACARE ONE YEAR, LAWMAKER SAYS

And as the WSJ reports, Harry Reid has already stated that "we are going to accept nothing as it related to Obamacare," before adjourning the Senate until Monday afternoon (narrowing the gap for a shutdown-avoidance vote). The shutdown-blame-game has begun as it seems the ball is back in the Senate's court...

 
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Charting The Bubble In Multiple Expansion





The equity market has discounted a large portion of any improved outlook that the always-optimistic sell-side strategists believe is just around the corner. As Barclays notes, we have just witnessed the largest two-year expansion of P/E multiples since the late 90’s. This 'bubble' of optimism, sparked by a repressive Fed policy, combined with historical valuation metrics that are above their long-term averages, implies a correction and a period of consolidation is likely to plague the U.S. equity market during the first half of 2014.

 
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As A Result Of Obamacare, Employer-Based Health Insurance Is Becoming Extinct





Barack Obama promised to fundamentally transform America, and when it comes to health care he has definitely kept his promise. As a result of Obamacare, health care spending is up, health insurance premiums are up, the number of hours Americans are working is down and employer-based health insurance is becoming an endangered species. Of course employer-based health insurance will not disappear completely any time soon, but it has been steadily shrinking for over a decade, and Obamacare will greatly accelerate that decline. So Americans are going to pay more, get worse care, have more paperwork and a more complicated system, and they are likely to die younger too? Wow, that sounds like a great deal.

 
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Can Central Bankers Be Trusted?





Following the Fed’s surprise decision not to ‘taper’ its asset purchases this month, market participants feel misled. That’s hardly a surprise to UBS' Amit Kara who has long argued that central banks have limited ability to guide markets, given that their policies must adjust to hard-to-predict outcomes. Policy pre-commitment is an oxymoron, and central bankers who pledge ‘forward guidance’ do so at considerable risk to their credibility. In an inherently uncertain world, central bankers must adjust current policies to achieve those outcomes. That makes it impossible to pre-commit to a given policy, given that flexibility is required to respond to unforeseeable circumstances.

 
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Caption Contest: Golden Dusk





As we earlier noted, the leader of the third most popular Greek political party (pictured here) and a number of other Golden Dawn affiliates have been arrested. Whether guilty or not, the look of disgust on his face reflects well on the state of the world this weekend in general; as two of the three largest debtor nations in the world face massive political upheavals.

 
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The Great Tesla Rotation: From Institutions To Retail Bag-Holders





Two months ago we were the first to highlight the 'real' great rotation in US equity markets as so-called "professionals" were selling in size as "retail" was the big buyer. Since then, market breadth has been weaker and the new highs are made on the back of fewer and fewer supposed "cult" stocks (as Cramer so aptly put it before Lumber Liquidators started to crumble). Perhaps the most infamous of the "cult" stocks is TSLA. At twice the market cap of Fiat, needing to sell 537,815 cars to meet expectations, and the gap in GAAP, Tesla closed at all-time highs on Friday. So who is buying?

 

 
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House Rules Committee Meets On "Obamacare-Delay" Bill - Live Webcast





The sausage-making continues... "stop the madness" urge Dem. Nita Lowey, but once the committee has agreed, it's off to the floor for what the White House calls:

"A vote for the Republican bill is a vote for Shutdown"

Despite the House's bill claiming it is to keep the government funded... It seems do as we say or else is the new normal White House policy as the fear-mongery grows.

 

 
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The Next 3 Years





This is at a time when we have real economic growth barely above 2% and nominal growth of just over 3% (abysmal by any standards) after six years of monetary easing and 5 years of QE1; QE 2; Operation twist; QE “infinity” and huge fiscal deficits. After last week Citi notes it is not clear that this set of policies is going to end anytime soon. It seems far more likely that these policies will be continued as far as the eye can see and even if there are “anecdotal” signs of inflation this Fed (Or the next one) is not a Volcker fed. This Fed does not see inflation as the evil but rather the solution. Gold should also do well as it did from 1977-1980 (while the Fed stays deliberately behind the curve). Unfortunately Citi fears that the backdrop will more closely resemble the late 1970’s/early 1980’s than the “Golden period” of 1995-2000 and that we will have a quite difficult backdrop to manage over the next 2-3 years.

 
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"90% Odds of Government Shutdown" Democrats Warn





Following Nomura's estimate of a 40% chance of government shutdown yesterday, thanks to the pending vote for the Republican's "Obamacare-Delay" bill, Democrats note the odds of a shutdown of the government are now at 90%. A Democratic congressional aide added, "the only reason I’m not putting it at 100 percent is because nothing’s certain in American politics."  As we previously noted, this likely means the Fed will be flying blind at their next meeting with the BLS unable to "manufacture" jobs data for them to make their judgments.

 
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