recovery

"It is ironic that we are perhaps best known for advising “that you panic”. However, if you are anxious at the wrong time it can prove very painful. Today, we would advise that you don’t panic!
... by withdrawing the “Greenspan put” and using their asset purchase schemes to eviscerate any notion of value, the authorities have paradoxically created a safer yet more paranoid market."

- Hugh Hendry

"zero interest rate policy actually reduces demand in the economy, prompting the Federal Reserve to prescribe even further doses of a medicine that, for a long time, has been impeding rather than promoting economic recovery."

- JPM's David Kelly

"But they won’t, you know. Yellen and Draghi believe in the Taylor model and the Phillips curve. Gresham’s law will be found in the history books, but his corollary has little chance of making it into future economic textbooks. The result will likely be a continued imbalance between savings and investment, a yield curve too flat to support historic business models, and an anemic 1-2% rate of real economic growth in even the most robust developed countries."

So far today's trading session has been a repeat of what happened overnight on Monday, when following a weak start on even more weak Chinese data, US equities soared on the first trading day of the month continuing their blistering surge since that dreadful September payrolls report, which as we showed was mostly catalyzed by a near record bout of short's being squeezed and covering, which accelerated just as the S&P broke the 2100 level.

While there are certainly reasons to be "hopeful" that stocks will continue to rise into the future, "hope" has rarely been a fruitful investment strategy longer term. Therefore, let's analyze each of the optimist's arguments from both perspectives to eliminate "confirmation bias." 

Amid the ever-expanding easing program in Europe (longer? more-er? different-er?), one of the gravest concerns was (amid a growing scarcity of collateral), finding willing sellers (at any price) to meet the needs of central bank asset purchasers could be a problem. However, as The FT reports, it appears the Chinese stepped up to the plate to 'help' The ECB (rather The Bundesbank) out from its dilemma. Just as we saw with Chinese selling US Treasuries (whether to diversify away from the major reserve currencies, deal with outflows, or to manage a liquidity crisis at home), The PBoC's reserve management wing, the State Administration of Foreign Exchange, has been selling some of its German government bonds since the ECB began buying them in March, say two sources close to central banks in China and Europe. This news has prompted further weakness in Bunds today, despite expectations of Draghi unleashing more buying in December.

Instability pervades the entire system, encompassing everything from financial markets to social safety nets. And while it is easy to ignore the seriousness of current events because stock markets remain at record highs and mainstream pundits continue to toe the recovery line, the fact is that an unexpected and seemingly minor event could well send the entire world into a tailspin.

It was 77 years ago this week that Orson Welles struck terror into the hearts of Americans with his live radio broadcast of the HG Wells classic War of the Worlds. What struck me while watching the PBS retrospective were the similarities between then and now. The gullibility of the masses, the power of fear, the overreaction by the media, busy bodies calling for the government to do something, and the effectiveness of propaganda are all commonalities between that Fourth Turning and today’s Fourth Turning.

China as the global Bubble’s focal point – the weak link yet, at the same time, the key marginal source of Bubble finance. China’s policy course appears to focus on two facets: to stabilize the yuan versus the dollar and to resuscitate Credit expansion. For better than two decades, similar policy courses were followed by myriad EM policymakers in hopes of sustaining financial and economic booms. Many cases ended in abject failure – often spectacularly. Why? Because when officials resort to such measures to sustain faltering Bubbles it generally works to only exacerbate systemic fragilities. For one, late-stage reflationary measures compound Credit system vulnerability while compounding structural impairment to the real economy. Secondly, central bank and banking system Credit-bolstering measures create liquidity that invariably feeds destabilizing “capital” and “hot money” outflows.

The talking heads were busy this week powdering the GDP pig. By averaging up the “disappointing” 1.5% gain for Q3 with the previous quarter they were able to pronounce that the economy is moving forward at an “encouraging” 2% clip. And once we get through this quarter’s big negative inventory adjustment, they insisted, we will be off to the ‘escape velocity’ races. Again. No we won’t! The global economy is in an epochal deflationary swoon and the US economy has already hit stall speed. It is only a matter of months before this long-in-the-tooth 75-month old business expansion will rollover into outright liquidation of excess inventories and hoarded labor. That is otherwise known as a recession.

Should the Fed actually hike in December (the statement explicitly mentioned the possibility), we think it’s highly likely to become a “one and done” that will be taken back shortly, similar to the BoJ’s handful of attempts to hike rates after the bursting of the 1980s bubble. We say this simply based on the economy’s actual performance. After all, it took only a minimal tightening of policy (the “tapering” of QE3) to induce a bust in the sector most exposed to capital malinvestment.

Shantytown, Stockton, California, USA

On January 6, 2004, Senator Charles Schumer and I challenged the erroneous idea that jobs offshoring was free trade in a New York Times op-ed. Our article so astounded economists that within a few days Schumer and I were summoned to a Brookings Institution conference in Washington, DC, to explain our heresy. In the nationally televised conference, I declared that the consequence of jobs offshoring would be that the US would be a Third World country in 20 years. That was 11 years ago, and the US is on course to descend to Third World status before the remaining 9 years of my prediction have expired. The evidence is everywhere.

At least parts of the Fed all the way back in 1979 appreciated how Greenspan and Bernanke’s “global savings glut” was a joke. Rather than follow that inquiry to a useful line of policy, monetary officials instead just let it all go into the ether of, from their view, trivial history. But the true disaster lies not just in that intentional ignorance but rather how orthodox economists and policymakers were acutely aware there was “something” amiss about money especially by the 1990’s. Because these dots to connect were so close together the only reasonable conclusion for this discrepancy is ideology alone. Economists were so bent upon creating monetary “rules” by which to control the economy that they refused recognition of something so immense because it would disqualify their very effort.