Quantitative Easing

Having gazed ominously at the extreme monetary policy smoke-and-mirrors intervention in bond markets, and previously explained that "the stock market is to important to leave to the vagaries of an actual market." While the rest of the world's central banks' direct (BoJ) and indirect (Fed, ECB) manipulation of equity markets, nobody bats an eyelid; but when PBOC steps on market volatility's throat (like a bull in a China bear store), people start complaining... finally. There is no difference - none! And no lesser Asian expert than Stephen Roach warns that we should be afraid, very afraid as he states, the great irony of manipulation, he explains, is that "the more we depend on markets, the less we trust them."

Just as Japan thought they could go back to pre-Plaza Accord growth rates by holding on to the old ways in the 1990s, the Chinese will expect the growth miracle to return in 2016 with the “right” policies. It will not. It is all a mirage though. Just as in Japan, the Chinese will not allow the market process to do its magic to get the economy back on a stable footing. Draconian measures to stop the recent stock market rout are a clear testimony of that. In other words, the Chinese economy will resemble that of Japan, and it will do so very soon, if it is not already there.  China is heading straight into a zero growth environment, and will be mired there for years to come.

"Central bank quantitative easing drove traditional investors seeking mid-to-high single digit yields out of investment grade/ crossover credit into high yield, loan and emerging market debt to satisfy yield bogeys. The problem, however, is some of the tourists underappreciate the exponential loss and mark-to-market functions for low quality high yield assets."

Over the last five-plus years in regard to today’s financial markets, the most revered memes that are recited in unison whether it’s in the form of a silent prayer or, it’s done in a near backwoods revival fashion from the televised financial shows “pulpit” in a “Can I get an …. !!!” stylized homily are: “It’s different this time!” followed with “The Fed’s got you’re back.” However, what they mean today may find those that put all their “faith” into such dogma finding that faith severely tested. For as of today July, 26, 2015 It truly is – different this time. And what else is different is: the Fed. may indeed have one’s back. Only problem this time is – that back may no longer be “yours.”

Straight-forward discussion of next week's economic data and events, and why it is important for the dollar.  

"The modern financial animal is wont to assume that he or she lives in an age of science. The truth is we live in an age of pseudoscience. Far from dealing in science, central bankers, and, to a degree, investment bankers and security analysts, employ magical thinking... For an individual to fix Libor is a crime. For a central bank to suppress European bond yields is an act of financial statesmanship..."

"The important thing to recall is why those of us who own it, bought it. What is it about gold that ought to make it appealing – when it seems to be absolutely the thing you don’t want to have." As ValueWalk reports, Grant warned that gold thrives in the face of monetary turmoil, disorder and uncertainty, noting, "I think we have all three of these things."

"It wan't raining when Noah built the ark."

In almost all cases, including the most recent rise, the intermittent change in psychology that drove interest rates higher in the short run, occurred despite weakening inflation. There was, however, always a strong sentiment that the rise marked the end of the bull market, and a major trend reversal was taking place. This is also the case today. Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. While Treasury bond yields have repeatedly shown the ability to rise in response to a multitude of short-run concerns that fade in and out of the bond market on a regular basis, the secular low in Treasury bond yields is not likely to occur until inflation troughs and real yields are well below long-run mean values.

There could be trouble ahead....

Why are commodity prices, including oil prices, lagging? Ultimately, it comes back to the question, “Why isn’t the world economy making very many of the end products that use these commodities?” If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing. It looks to me as though we are heading into a deflationary depression, because prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening.

Greece’s lesson for Russia, and for China and Iran, is to avoid all financial relationships with the West. The West simply cannot be trusted. The “globalism” that is hyped in the West is inconsistent with Washington’s unilateralism. No country with assets inside the Western system can afford to have policy differences with Washington. It is testimony to the insouciance of our time that the stark inconsistency of globalism with American unilateralism has passed unnoticed.

The Euro Summit statement (or Terms of Greece’s Surrender – as it will go down in history) was just annotated by Yanis Varoufakis as it pertains to ordinary Greek citizens. As the former finance minister writes "The original text is untouched with my notes confined to square brackets (and in red). Read and weep…"

With so much attention rightly focused on China at the moment, people aren’t paying enough attention to the budding economic calamity unfolding in Japan. While “Abenomics” has succeeded in boosting the stock market and food prices, it has utterly failed to raise wages. In fact, wages adjusted for inflation have plunged to the lowest since 1990. As such, a record number of households now describe their living conditions as “somewhat hard” or “very hard.”