A zombie government armed with accounting tricks has bailed out a zombie banking industry using even more financial phoniness. A few numbers pushed here and there, and the industry is earning record profits. But out in the real world where people live and work, things aren't so rosy. Zombies make negligent landlords and dangerous neighbors.
The mainstream media staple 'common wisdom' within the financial markets is that when the Federal Reserve "tapers," or eventually ceases, its current bond buying program that interest rates will begin to rise. However, there are three primary issues which should be considered that fail to support this widely held belief. The Federal Reserve has gotten itself trapped into creating an asset bubble in the equity markets because any reversal of policy leads to severely negative economic consequences. With the current economic recovery cycle already very extended in historical terms, along with the financial markets, it is unlikely that we have just begun a growth cycle that will allow the Federal Reserve to extract its support. The reality is quite the opposite, and the next asset rotation will not be from bonds to stocks; but just the opposite.
The first thing to understand about China is there is always a front door and a back door to everything. The front door is what's presented to the outside world; the back door is for everything that doesn't fit the PR image created by the front door. The front door presents positive "face," the back door is for everything that would "lose face," so it's hidden and never discussed, except in private, and only with trusted family or friends. The front door is covered with official pronouncements of "the China Dream" and blustery demands of hegemony, but the back door is choked with members of the financial/political Elite fleeing China and taking their wealth with them.
Economics should not not try to effect human behavior, but to explain it. It does, however understand how incentives and disincentives affect behavior. All political visions involve the improvement of man and/or society by changing the nature of man. Social planners want to “improve” and “perfect” matters according to their ideas of what these terms imply. Little commonality exists regarding utopian visions. One commonality between these utopian ideas does exist — the universal failure of all such schemes. There is no better way to understand the wisdom “the perfect is the enemy of the good” than to study the historical wreckage that has resulted from trying to “perfect” society.
A great many long refuted Keynesian shibboleths keep being resurrected in Krugman's fantasy-land, where economic laws are magically suspended, virtue becomes vice and bubbles and the expropriation of savers the best ways to grow the economy. According to Paul Krugman, saving is evil and savers should therefore be forcibly deprived of positive interest returns. This echoes the 'euthanasia of the rentier' demanded by Keynes, who is the most prominent source of the erroneous underconsumption theory Krugman is propagating. Similar to John Law and scores of inflationists since then, he believes that economic growth is driven by 'spending' and consumption. This is putting the cart before the horse. We don't deny that inflation and deficit spending can create a temporary illusory sense of prosperity by diverting scarce resources from wealth-generating toward wealth-consuming activities. It should however be obvious that this can only lead to severe long term economic problems. Finally it should be pointed out that the idea that economic laws are somehow 'different' in periods of economic contraction is a cop-out mainly designed to prevent people from asking an obvious question: if deficit spending and inflation are so great, why not always pursue them?
Valuations still matter. Assuming that one is 'investing' as opposed to 'speculating', initial valuation (i.e. the price you pay for the investment) remains the single most important characteristic of whatever one elects to buy. And at the risk of sounding like a broken record, “initial valuation” in the US stock market is at a level consistent with very disappointing subsequent returns, if the history of the last 130 years is any guide. Without fail, every time the US market has traded on a cyclically-adjusted P/E (CAPE) ratio of 24 or higher over the past 130 years, it has been followed by a roughly 20 year bear market... but there are plenty of other fish to fry...
Most people – certainly most governments and economists – define inflation as a general rise in prices. But this is wrong. Inflation is an increase in the money supply, of which a rising general price level is just one possible result – and not the most common one. More often, excessive money creation shows up as asset bubbles, where the new money, instead of flowing equally to all the products that are for sale at a given time, flow disproportionately into the ‘hottest’ asset classes. In each case, mainstream economists and government officials pointed to modest consumer price inflation as a sign that things were fine. And in each case they were simply looking in the wrong place and completely missing the destabilizing effects of an inflating money supply. Now we’re at it again, with economists, legislators and central bankers using low consumer price inflation as a rationale for even easier money, while ignoring epic bubbles in sovereign bonds, equities, high-end real estate and collectibles around the world. A chart tracking the tangible asset classes of the super-rich would show all lines going parabolic - except one, gold - for now.
When the multiple bubbles burst and the financial house of cards comes crumbling down, Ben Bernanke will be comfortably secure, far from the consequences of his policies. It is worth recalling, on today of all days, that only two U.S. presidents in the past 50 years had any experience of combat: John F. Kennedy and George H.W. Bush. Both men acted with care and restraint in matters of war and both sought a peaceful resolution to the Cold War. Was this merely a coincidence, or did experiencing combat inform their humility and sense of responsibility for the consequences of their choices? The more power devolves to those who actually face the consequences of their actions and authority, the less pathological it becomes. This is the power structure of liberty: each person carries the responsibility and consequence of their actions, choices and words.
It is often said there only two kinds of people in this world: those who know, and those who don’t. We would expand on this and say that there are actually three kinds of people: those who know, those who don’t know, and those who don’t care to know. Members of the last group are the kind of people we would characterize as “sheeple.” Sheeple are members of a culture or society who are not necessarily oblivious to the reality of their surroundings; they may have been exposed to valuable truths on numerous occasions. However, when confronted with facts contrary to their conditioned viewpoint, they become aggressive and antagonistic in their behavior, seeking to dismiss and attack the truth by attacking the messenger and denying reason. Sheeple exist on both sides of America's false political paradigm, and they exist in all social "classes". We cannot imagine an existence more deserving of pity and remorse than that of the sheeple.
In every country we can think of, the sovereignty and wealth of the Nation, which was once the embodiment of the power and will of the people, is being butchered and sold to the highest bidder. Everywhere, the Nation and the people within it, are under attack. Not from without by terrorists but from within. Because in every country the people who run the State have largely decided they no longer wish to serve the people but prefer instead to serve the interests of a Global Over-Class. Of course we are not encouraged to see this clearly or if we do, certainly not to speak of it to others. And many of those we might try to talk to, do not want to hear.
Barring any exogenous shock, and assuming that current reported earnings estimates actually occur, the S&P 500 will be sporting a P/E ratio of 21.17x in 2015 if fed balance sheet correlations hold. However, if earnings growth stagnates then valuation multiples will rise dramatically from current levels. The further that multiples deviate from the long term mean the greater the eventual reversion will be. Should we have an expectation that the same monetary policies employed by Japan will have a different outcome in the U.S? Anything is certainly possible. However, history suggests that artificial, liquidity driven, market inflations always end poorly.
When neither the private nor public sector is willing to invest in the future, it seems appropriate to ask, what happened to the future? Have corporations along with governments figured out that a return to slow growth does not necessary equal a return to normal growth? Why invest in new infrastructure, new workforces, new office space, equipment, highways, or even rail, when the demand necessary to provide a return on this investment may never materialize? Many sectors in Western economies remain in oversupply or overcapacity. There is a surplus of labor and a surplus of office and industrial real estate, as well as airports, highways, and suburbs that are succumbing to a permanent decrease in throughput and traffic. Perhaps the private sector is not so unwise. Collectively, through its failure to invest, it is making a de facto forecast: No normal recovery is coming
Late in the life of every financial bubble, when things have gotten so out of hand that the old ways of judging value or ethics or whatever can no longer be honestly applied, a new idea emerges that, if true, would let the bubble keep inflating forever. During the tech bubble of the late 1990s it was the “infinite Internet.” During the housing bubble the rationalization for the soaring value of inert lumps of wood and Formica was a model of circular logic: Home prices would keep going up because “home prices always go up.” Now the current bubble – call it the Money Bubble or the sovereign debt bubble or the fiat currency bubble, they all fit – has finally reached the point where no one operating within a historical or commonsensical framework can accept its validity, and so for it to continue a new lens is needed. And right on schedule, here it comes: Governments with printing presses can create as much currency as they want and use it to hold down interest rates for as long as they want. So financial crises are now voluntary. The illusion of government omnipotence is no crazier than the infinite Internet or home prices always going up, but it is crazy.
Sickcare is unsustainable for a number of interlocking reasons: defensive medicine in response to a broken malpractice system; opaque pricing; quasi-monopolies/cartels; systemic disconnect of health from food, diet and fitness; fraud and paperwork consume at least 40% of all sickcare funds; fee-for-service in a cartel system; employers being responsible for healthcare, and a fundamental absence of competition and transparency. Obamacare simply speeds up the coming collapse. The neutron bomb has gone off, unseen by politicos and the Elites who wrote the bill. It is already undercutting fulltime employment, and it will soon add momentum to the free-fall erosion of small business growth and employment.
At this point it is incredible that there are any Americans that still trust anything that comes out of the administration's collective mouth. And of course it is not just Obama that has been lying to us. Corruption and deception are rampant throughout the entire federal government, and this has been the case for years. Now that some light is being shed on this, hopefully the American people will respond with overwhelming outrage and disgust. Aside from the now "fake" employment data, the following are five massive economic lies that the government has been telling you... Our financial system is far more vulnerable than we are being told. We are in the terminal phase of the greatest debt bubble in the history of the planet, and when this bubble bursts it is going to be an absolutely spectacular disaster. Please don't believe the mainstream media or the politicians when they promise you that everything is going to be okay.