This system works as long as debt continues to stay cheap. However, in the last 12 months the Fed has definitively crossed the point of no return with its policies. It is not just a matter of timing before this debt bubble bursts.
"Rich Will Keep Getting Richer In 2014" - In 2013, Top 300 Billionaires Added Half A Trillion In Net WorthSubmitted by Tyler Durden on 01/02/2014 12:22 -0500
All the pundits who preach an economic recovery in the US always fall strangely silent when asked to share their thoughts on the following chart (taken from the St. Louis Fed), showing the annual change in real disposable income per capita in the US. What seems to stump them most is that aside from the 2012 year end aberration (due to accelerated distribution of dividends ahead of the 2013 tax hikes) is that in November the series finally posted its first Y/Y decline (-0.1%) since the Lehman collapse. But as the chart notes, the data is "per capita" and as everyone knows, under the New Normal, some "per capitas" are more equal than other "per capitas." Enter the billionaires. As Bloomberg summarizes, "The richest people on the planet got even richer in 2013, adding $524 billion to their collective net worth, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 300 wealthiest individuals. The aggregate net worth of the world’s top billionaires stood at $3.7 trillion at the market close on Dec. 31, according to the ranking. "The rich will keep getting richer in 2014," John Catsimatidis, the billionaire founder of real estate and energy conglomerate Red Apple Group Inc., said in a telephone interview from his New York office.
Gross: HoHoHo! Who cant like a ~25% gain in 2013? Only a Grinch who worries abt record profit margins, corp buybacks &Fed checkwriting. Moi?
— PIMCO (@PIMCO) December 25, 2013
Gross:Part 1of 2: We live not in a new gilded age but a bitcoin age where artificial money (from central banks) creates temporary prosperity
— PIMCO (@PIMCO) December 23, 2013
Gross: The worm turns. Market expects Fed Funds tightening by March 2015. They must not listen – or trust. Buy frontends you paranoids!
— PIMCO (@PIMCO) December 19, 2013
Today is the big day. Investors are on the edges of their seats, waiting to find out what the Fed will do. Taper? No taper? Or maybe it will taper on the tapering off? Investors don't seem worried... Most of the reports we read tell us the economy is improving. Unemployment is going down. Meanwhile, manufacturing levels are rising. Compared to Europe, the US is a powerhouse of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence. But wait... What if all these things were delusions... statistical folderol... or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along? As Rick Santelli so uncomfortably asked, "What is Bernanke afraid of?"
- Wall Street Exhales as Volcker Rule Seen Sparing Market-Making (Bloomberg)
- GM to End Manufacturing Down Under, Citing Costs (WSJ)
- U.S. budget deal could usher in new era of cooperation (Reuters)
- Ukraine Police Back Off After Failing to Stop Protest (WSJ)
- First Walmart, now Costco misses (AP)
- Dan Fuss Joins Bill Gross Shunning Long-Term Debt Before Taper (BBG)
- China New Yuan Loans Higher Than Expected (WSJ)
- China bitcoin arbitrage ends as traders work around capital controls (Reuters)
- Blackstone’s Hilton Joins Ranks of Biggest Deal Paydays (BBG)
Japan is likely to launch even more QE in early 2014 and a much lower yen may result. That'll have dramatic consequences, perhaps greater than US tapering.
With just a tad more than three weeks left in the year it is time to start focusing on what 2014 will likely bring. Of course, what really happens over the next twelve months is likely to be far different than what is currently expected but issuing prognostications, making conjectures and telling fortunes has always kept business brisk on Wall Street.
Faith in the current system is as high as it has ever been, and folks don't want to hear otherwise. If you're one of those people who thinks it prudent to have intelligent discussion on some of these risks -- that maybe the future may turn out to be less than 100% awesome in every dimension -- you're probably finding yourself standing alone at cocktail parties these days. A helpful question to ask yourself is: if I could talk to my 2009 self, what would s/he advise me to do? Don't put yourself in a position to relearn that lesson so soon after the last bubble. Exercise the wisdom to look like an idiot today.
"What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a” T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world. ... investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate.... Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE." - Bill Gross
Gross: We should call this “Green Friday” – Be careful, though, of red numbers in 2014. All markets are bubbly.
— PIMCO (@PIMCO) November 29, 2013
— PIMCO (@PIMCO) November 28, 2013
In short: from January to September (we exclude the October 204K print as there is no matching JOLTS number yet) the average monthly jobs gain per the Non-farm Payrolls report is 184K. However, when looking at the implied job gains per the JOLTS Net Turnover, this number is a far more disturbing 150K, some 20% lower.
Economics is all about making rational decisions given some set of likes and dislikes. It doesn’t presume to tell you what you should like or dislike, and it assumes that you do in fact know what you like or dislike. Or at least that’s what economic theory used to proclaim. Today economic theory is used as the intellectual foundation for a political stratagem that goes something like this: you do not know what you truly like, and in particular you do not know your economic self-interest, but luckily for you we are here to fix that. This is the common strand between QE and Obamacare. The former says that you are wrong to prefer safety to risk in your investments, and so we will fix that misconception of yours by making it extremely painful for you not to take greater investment risks than you would otherwise prefer. The latter says that you are wrong to prefer no health insurance or a certain type of health insurance to another type of health insurance, and so we will make it illegal for you to do anything but purchase a policy that we are certain you would prefer if only you were thinking more clearly about all this.