This weekend's reading list is a collection of articles discussing the good, the bad and the ugly of the dive in crude oil prices.
Bob Farrell's rule #9 says: "When all the experts and forecasts agree, something else is going to happen." Why should you care? Because hardly anyone expects US Treasuries to outperform in 2015… and that’s exactly why they might. In the following analysis, we’ll look at 5 reasons why the long bond might be the best trade of next year.
“Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.”
While we fully understand that when selling institutionally-priced newsletters to institutions (not retail for one simple reason: lack of "other people's money" to spend) one will have a far more lucrative career as a bull than as a bear simply because insecure (that would be most of them) institutional "strategists" prefer to surround themselves in cognitive bias-reinforcing groupthink just to convince themselves they are right, as the rating-agency era confirmed, one thing we are very confused by is whether David Rosenberg, who famously flipped from bear to bull a little over a year ago (recall David Rosenberg: Here’s why I’m bullish on the US economy), preaching a "wage-inflation" driven bout of economic growth which has not only not materialized, but the 10 Year recently hit 2014 lows, is now back to being a bear.
David Rosenberg, in one of his recent missives, wrote: "...based on the current trend in the LEI and the level of the diffusion index, history suggests that the next recession is at least four years away." While anything is certainly possible, it is highly unlikely that the current economic environment is supportive of another four years of a "struggle along" economy. Given the artificial supports during recent years, the extreme extension in assets prices, record levels of margin debt and the chase for yield in "junk credits," it is highly possible that the next recessionary decline could be much larger than the historical average.
This weekend’s “Things To Ponder” is comprised of a variety of readings that cover a fairly broad spectrum from educational to informative and even a little bit sarcastic.
The days of Bernanke's "non-Giffen good" speech circuit may come to an end far sooner than the ex-Chairsatan wishes: "UBS and Goldman Sachs considered his fees too high." Others were quick to point out the obvious:"You can spend $250,000 for Bernanke’s time at a private dinner, or you could just sit down and read what people like Janet Yellen and Mark Carney have to say," David Rosenberg said"... Indeed, this is one deflation which we are confident the Fed Chairman wishes he was 100% certain he could stop in 15 minutes. Sadly, like in the case of everything else relating to Bernanke, when paying for smoke and mirrors it is only a matter of time before everyone, even the uber-richer poseurs, realize that the product they are buying is nothing but a cheap commodity.
One Wall Street strategist who appears to have thrown in the towel on the entire rising wages debate is none other than BofA's chief economist, Ethan Harris, who in a note released on Friday fires the proverbial shot across the David Rosenberg bow regarding rising wage pressures: "Don't hold your breath."
Since 2012, almost every economist has predicted that the housing recovery would continue into each coming year and would be a key driver of economic growth. That was again the plan for 2014, but with the housing recovery now on the ropes those same economists are perplexed as to why. Yet, "hope" remains that the recent slowdown is just a "weather related" casualty. The slowdown in housing is not due to the "weather." It began prior to the onset of the recent winter blasts. Nor will reduced distressed sales, delinquencies, negative equity or rising inventories salvage the predictions. These are all indicators "OF" the housing market, but not what "DRIVES" the housing market. The real answer to the slowdown in housing is not so difficult to comprehend...
Market consensus is that deflation remains the greatest threat to the global economy. But that's ignoring signs of impending inflation, particularly in the US.
If the current pace of reductions continues it is reasonable to assume that the Fed will terminate the current QE program by the October meeting. If we assume the current correlation remains intact, it projects an advance of the S&P 500 to roughly 2000 by the end of the year. But... the question is, can the US economy can stand on its own when QE completely winds down, not to mention when the Fed actually hikes rates? Amid such weak levels of economic growth does not leave much wiggle room to absorb an exogenous event, or even just a normal downturn, in an economic cycle. If the Fed is indeed caught in a liquidity trap, then the current withdrawal of support will quickly show the cracks in the economy pushing the Fed back into action. It is at the point of "monetary impotence" where the word "risk" takes on a whole new meaning.
While the Fed's interventions have certainly bolstered asset prices by driving a "carry trade," these programs do not address the central issue necessary in a consumer driven economy which is "employment." In an economy that is nearly 70% driven by consumption, production comes first in the economic order. Without a job, through which an individual produces a good or service in exchange for payment, there is no income to consume with. With the Federal Reserve now effectively removing the "patient" from life support, we will see if the economy can sustain itself. If this recent Bloomberg poll is correct, then we are likely to get an answer very shortly, and it may very well be disappointment.
Less than a year ago, David Rosenberg fundamentally shifted his thesis from deflationary to stagflationary at first, and then to outright inflationary, aka from bearish to bullish, based on one simple thesis: labor costs, and thus wage inflation - that all important harbinger of broad economic inflation - have nowhere to go but up. Unfortunately, they also have another direction they can go: down.
This morning we showed several charts that "Market Bulls Should Consider", as the mainstream media, analysts and economists continue to become more ebullient as we enter the new year. This weekend's "Things To Ponder" follows along with this contrarian thought process particularly as it appears that virtually all "bears" have now been forced into hibernation.
We have been reading quite a few articles, as of late, regarding the resurgence of corporate fixed investment in 2014 that will provide a much needed boost to the economy. However, is that really the case? Given the data, it is far more likely that we are closer to the next recession versus the middle of an economic cycle. The fact that productivity growth is approaching zero is likely due to the reality that businesses have already extracted the majority of the benefits from their ongoing cost cutting and productivity measures. A resurgence of capital investment would certainly help stabilize the economy and potentially lift it to a level that would stimulate stronger employment and consumer demand. However, when it comes to managing investment risk, "hope" is not an investment strategy that works long term.