New Normal

The summer driving season is upon us. For many, that means vacations, barbeques, and of course, higher gas prices. For 23 out of the last 35 years, gas prices have risen an average of 14.7% from one summer to the next, while 12 decline years have only averaged -8.1%. Prices tend to be highest in June for any given year, with some years’ prices spiking in late May or early July. Retail gasoline prices are at their highest levels since 1980, in real dollars. But as we have uncomfortably noted previously, Americans have not returned to pre-crisis consumption patterns yet, despite all the chatter of recovery. So far in 2013, in fact, we have consumed 14 million fewer gallons of motor gasoline than in 2012, and nearly 55 million less than we did at the peak in 2007. But, as ConvergEx's Nick Colas notes, we aren’t necessarily "cutting back", as this data suggests: the Consumer Expenditure Survey shows that Americans spent nearly $700 more on gas in 2011 as compared to 2010, the two latest data sets available. What does appear to happening, though, is that Americans are restructuring their spending as healthcare, lodging, and overall taxes take a larger chunk out of every paycheck. Another explanation is fewer commuters to buy gasoline based on a still-high unemployment rate. Basically, we’re not necessarily consuming less 'on purpose': we’re just adjusting to a "New Normal" way of spending. What the data shows is a disconnect between the life of the average worker and the energy market: we assume that strength in the latter goes hand-in-hand with strength in the former. Unfortunately, the average American is being left behind: they’re still struggling.

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.

It used to be called the "New Paradigm", it is now the "New Normal" - aside from that everything else is still the same, Ben Bernanke's aspirations to overturn math, economics and the business cycle notwithstanding. The only question is where on the red valuation line is the global market currently located, and how much longer can the central bankers reject the inevitable arrival of the first denial, then fear , then all other increasingly more unpleasant phases.

It is immeasurably easier to digitally create claims on real-world assets than it is to create real-world assets. The Fed can digitally print a trillion dollars at no cost, but that doesn't mean the money flows into the real economy. Once again we are compelled to ask: cui bono, to whose benefit?

While Wall Street is implicitly conflicted in its actions, there is also another group of individuals who are also just as conflicted - corporate executives. Today, more than ever, corporate executives are compensated by stock options, and other stock based compensation, which are tied to rising stock prices. There are billions at stake in many cases and the game of "beat the Wall Street estimate" is critical in keeping corporate stock prices elevated. Unfortunately, this leads to a wide variety of gimmicks to boost bottom line profitability which is not necessarily in the best interest of long term profitability or shareholders. Today we will discuss four tools that have been at the heart of the surge in profitability since 2009 and why such profitability has failed to boost the economy. While the Fed's ongoing interventions since 2009 have provided the necessary support to the current economic cycle it will not "repeal" the business cycle completely.  The Fed's actions work to pull forward future consumption to support the current economy.  This is turn has boosted corporate profitability as the effectiveness of corporate profitability tools were most effective. However, such actions leave a void in the future that must be filled by organic economic growth.  The problem comes when such growth doesn't appear.

The problem is central banks have created a vast pool of credit-money that is far larger than the pool of sound investment opportunities.  Why are asset bubbles constantly popping up around the globe? The answer is actually quite simple. Asset bubbles are now so ubiquitous that we've habituated to extraordinary excesses as the New Normal; the stock market of the world's third largest economy (Japan) can rise by 60% in a matter of months and this is met with enthusiasm rather than horror: oh goody, another bubblicious rise to catch on the way up and  then dump before it pops. Have you seen the futures for 'roo bellies and bat guano? To the moon, Baby! The key feature of the New Normal bubbles is that they are finance-driven: the secular market demand for housing (new homes and rental housing) in post-bubble markets such as Phoenix has not skyrocketed; the huge leaps in housing valuations are driven by finance, i.e. huge pools of cheap credit seeking a yield somewhere, anywhere:

Blink and you have likely missed Obama's latest Watergate moment, this time following the disclosure that the White House has instructed the NSA to collect millions of daily phone records from Verizon (and likely all other carriers). What is surprising to us is that this is even news. We reported on just this in March of 2012 with “We Are This Far From A Turnkey Totalitarian State" - Big Brother Goes Live September 2013" and then again in April 2012 "NSA Whistleblower Speaks Live: "The Government Is Lying To You" using an NSA whistleblower as a source. Still, no matter the distribution platform, it is a welcome development for the majority of the population to know that the same Stazi tactics so loathed for decades in the fringes of the "evil empire" are now a daily occurrence under the "most transparent administration in history." This is especially true in the aftermath of the recent media scandals involving the soon to be former Attorney General.

A month ago we posted two sets of charts - WTFs and Divergences. It appears equity markets are beginning to catch down to this underlying reality as the Fed (afraid of its own shadow impact now) tries to gently talk the bulls off the leveraged ledge.

While it isn't news to regular readers, the fact that one of the key pillars of the "housing recovery" (the other three being foreign oligarchs parking cash in the US courtesy of an Anti Money Laundering regulation-exempt NAR, foreclosure stuffing and, of course, the Fed's $40 billion in monthly MBS purchases) have been the very biggest Wall Street firms (many of whom had to be bailed out the last time the housing bubble burst) who have also become the biggest institutional landlords "using other people's very cheap money" to buy up tens of thousands of properties, appears to still be lost on the larger population. Intuitively this is to be expected: in a world in which the restoration of confidence that a New Normal, in which everything is centrally-planned, is somehow comparable to life as it used to be before Bernanke, is critical to Ben's (and the administration's) reflationary succession planning. As such perpetuating the myth of a housing recovery has been absolutely essential. Which is why we were surprised to see an article in the very much mainstream, and pro-administration policies NYT, exposing just this facet of the new housing bubble, reflated by those with access to cheap credit, and which has seen the vast majority of the population completely locked out.

On practically every day of the past four years, we have said that it was the Fed's own policies that are causing the ever-deeper systemic weakness in the US (and now global with all central banks going "all in") economy, which in turn forces the Fed to intervene even more aggressively in an attempt to counteract, in turn generating ever more economic weakness, leading to even more intervention, which is why every incremental episode of QE is larger and longer, and why the economic baseline is ever lower in the most perverse feedback loop of the New Normal. Now, it is once again Bill Gross to catch up to Zero Hedge and conclude just this in his latest monthly letter: "It’s been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution. Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution." Which is why there simply is no way out as long as Bernanke stays in.

Why did the E-Mini just dump by 6 points on no news following the 6pm resumption of trading? Why not. Maybe someone hacked the vacuum tubes' calendar file and instead of Tuesday has pegged tomorrow as a Wednesday which takes away any "fundamental" reason to ramp futures and stocks (or perhaps someone leaked that after Tuesday we get a Wednesday when nothing levitationally magical happens, which however makes no sense: after all someone could just as easily refute that rumor with another rumor that yet another Tuesday will follow a week from tomorrow, offsetting the Wednesday rumor). That, or your run of the mill fat finger. Or, worst case, someone actually, gulp, selling with premeditated intent (which in the new normal is at least a 2nd degree felony, somewhere up there alongside marketslaughter).

While the new normal knee-jerk reaction to the dismal ISM print was the bad-is-good surge in buying, it seems reality is setting in...

As we are in the final stage of the global bubble, we realize that we often fail to ask the most obvious questions. In this case, as every central banker tells us that his policies are directed to obtain growth, the obvious question is... how do we define economic growth? What is economic growth? Yes, yes, we know that what they do is simply monetize deficits and enable the transfer of wealth between sectors and generations, but there is also an intellectual battlefield, which we should be aware of. What is the view of the central banking cartel on how to grow output? Surprisingly, not via an increase in the marginal productivity of capital, but via the so called wealth effect: As interest rates fall, asset prices increase (it doesn’t matter which assets see their prices rise) and the assets can be used as collateral to leverage a higher than previously possible consumption level. This consumption level will drive output growth, and this increase in output –they believe- will bring about full employment. The wealth effect is mistakenly attributed to Keynes, who actually argued against it. Thus, the central banking cartel has its own interpretation of economic growth and it does not fit any of the 'reality' perspectives presented below.