New Normal

With everyone chanting the praises of the "better than abysmal" economy, we decided to post a time lapse video (since cartoons are all that stand an even remote chance of attracting some attention)prepared by John Lohman, of just how the New Normal has been progressing, both since the starts of the great depression in December 2007, and more importantly, since the beginning of the "end" of the recession. The result may surprise you. As John points out: food stamps - the only thing keeping 43 million Americans from going postal." Hopefully the end of extended unemployment benefits coming December 1 won't be that first one additional straw on the camel's back that leads to a full blown fracture.

New York City may reduce the assumed return on its $100.5 billion of pension investments from the current 8%, Comptroller John Liu said. Welcome to the new normal...

Paul Farrell knocks it out of the ballpark today: "Yes, it's going to get worse, a whole lot worse ... Bill Gross warns this is the "New Normal. Forget 10% returns. Think 5%". ... Economist Larry Kotlikoff, author of The Coming Generational Storm, warns: "Let's get real. The U.S. is bankrupt. Neither spending nor taxing will help the country pay its bills" ... Economist Peter Morici warns: "Unemployment is stuck near 10%. Deflation coming. Stock market threatens collapse. The Federal Reserve and Barack Obama are out of bullets. Near zero federal funds rates, central bank purchases, a $1.6 trillion deficit have failed to revive the economy." ... Simon Johnson, co-author of 13 Bankers, warns: "We came close to another Great Depression, next time we may not be so lucky." Why? Because Wall Street's already well into the next bubble/bust cycle -- the "doom cycle."

We are getting a sense why traditionally optimistic and hopeful Americans tend to broadly despise realists...

In the current environment, where the market's Advance/Decline line is swinging with greater daily amplitude than ever before, the only thing glaringly obvious is that nobody has any clue how to trade pretty much any asset class. Which is why the following presentation by Morgan Stanley's Jim Caron does a great job at summarizing at least some of the core fundamentals in this new, "new normal" where corporate risk no longer exists, only to be replaced with unprecedented sovereign risk and pervasive moral hazard. It is a must read for anyone who dabbles in any market even remotely connected to credit (which implies everyone): 112 pages of no-nonsense (if somewhat biased) goodiness.

Was this it for the bear market rally? The new new normal, same as the old normal: Risk and Carry off, Gold on...Meanwhile, the panic over at the Eccles building can be felt all the way in Europe.

The boom and bust cycles of the new normal (as it wishes to be called) can be characterized.  This characterization provides clues about the nature of its endgame and progress toward that end. 

• Economic growth fueled by easy monetary policy leads to excessive investment in specific assets (bubbles), resulting in more extreme boom and bust cycles. 
• Government policies to regulate the cycles lead to further crises that impact higher levels of capital structure.
• In particular, very steep yield curves result in a generalized carry trade. 
• Equity valuations always get smashed in a crash.  However, in the new normal the top of the corporate capital structure is not as immunized as it has been. 
• The next to get smashed?  Sovereign credit.
• The Endgame?  The United States lives within their means, or U.S. t-bills get hammered.

ECB President Jean-Claude Trichet on Wednesday urged European insurers and pension funds to have sufficient capital on hand, stressing they are "systemically important" to the financial system. I have long argued that insurers and pension funds need to be monitored by regulatory agencies that respond to systemic risks. Unfortunately, the New Normal for retirement benefits looks a lot like the old normal based on chicanery and deceit.