In the aftermath of the recent Wall Street Journal profile piece that, rather meaninglessly, shifted attention to Bill Gross as quirky manager (who isn't) to justify El-Erian's departure and ignoring Bill Gross as the man who built up the largest bond fund in the world, the sole head of Pimco was eager to return to what he does best - thinking about the future and sharing his thoughts with one of his trademark monthly letters without an estranged El-Erian by his side. He did that moments ago with "The Second Coming" in which the 69-year-old Ohian appears to have pulled a Hugh Hendry, and in a letter shrouded in caveats and skepticism, goes on to essentially plug "risk" assets. To wit: "As long as artificially low policy rates persist, then artificially high-priced risk assets are not necessarily mispriced. Low returning, yes, but mispriced? Not necessarily.... In plain English – stocks, bonds and other “carry”-sensitive assets would outperform cash."
With Trader Monthly magazine having, ironically, gone out business long ago, all those traders whose egos demanded that their insider trading connections put them at least in one of the iconic "Top X under X" league tables, pardon, rankings, had to bide their time in expectation of one day when their prowess to frontrun others or move markets with repeated calls to 555-7617 (with or without references to Anacott Steel) would be appreciated by such sterling Wall Street "experts" as Anthony Scaramucci. Well, for this year's crop of some 30 traders under 30, the day has arrived. And while Forbes may not be Trader Monthly, the amusement, the hubris and the behind the scenes dealing to appear in such a list, sure are still the same...
A mere two months after the last widespread blackout to hit Venezuela, major parts of the nation are once again dark tonight as a power outage hit during President Maduro's evening address laying out his new economic philosophy (the inverse of Bernanke's):
*MADURO SAYS VENEZUELANS MUST SAVE MORE, CONSUME LESS
The blackoutt has affected some of the nation's oil refineries (even though they are often powered by separate generator plants). Maduro himself said this evening's blackout cause was "strange," hinting at "sabotage" and not caused by excess demand (since the same substation that was sabotaged in September has failed). Perhaps it is time to spend what little discretionary reserves the nation has left on infrastructure instead of Samsung trinkets and military bonuses to keep the people at bay.
Now that the All Time High (ATH) in the S&P is a distant memory (at least until the Syrian war becomes a widespread conflict involving all global powers and the US suddenly has to issue, and monetize, a few extra trillion) there are those momentum chasers who have an itch to BTFATH. To all of them we have a message: don't despair, and merely set your sights a little lower, on the globe that is, to Venezuela where the local stock market keeps crushing every upside resistance level and hitting new all time highs day after day after day, resulting in a YTD return of nearly 200%!
- Washington Post Company Chairman and CEO Donald Graham talks about the sale, what it means for the future of The Post (WaPo)
- Private-equity firms are adding debt to companies they own to fund payouts to themselves at a record pace (WSJ)
- U.S., U.K. Urge Citizens to Leave Yemen (WSJ)
- India Names Rajan Central Bank Governor as Rupee Plunges (BBG)
- Family Offices Chasing Wealthy’s $46 Trillion in Assets (BBG)
- UK 'bad bank' repays $2.9 billion to taxpayers in first half (Reuters)
- Sony rebuffs Daniel Loeb’s push for entertainment spin-off (FT)
- Public Pensions Up 12% Get Most in 2 Years as Stocks Soar (BBG)
- Hidden Billionaire Found With Food Fortune in California (BBG)
- Fonterra under fire over milk scare; more product recalls (Reuters)
- Crédit Agricole Profit Rises After Greek (WSJ)
It appears that all it took for Spain to finally grant Bolivian president Evo Morales a green light to fly in its airspace was a thorough Austrian check of its cargo hold, a la Millennium Falcon, to make sure it does not hide Barack Obama's public enemy number 1. Sure enough, the plane has left Vienna and at last check was about to fly over Madrid in a few short minutes.
As already reported, the Dassault Falcon 900EX that is the Bolivian Air Force 1 was prohibited from flying over Italy, Portugal, Spain and France, due to suspicions it was harboring the "democratic world's enemy #1" Edward Snowden, trapping FAB1 above Austria, and forcing to land in Vienna. Watch the animation of the flight path below how effective the "democratic world" is in making a mockery of due process, diplomatic immunity and all those other highly valued qualities that make living in the "democratic world" such a joy. As for Europe: what can we say - the continent that over the weekend was furious at the NSA for spying on it, expressed its anger by blocking Snowden's airpace.
Events are rapidly unfolding in Europe which may bring something more than the “blink, wink and nod” of the famous children’s poem to the forefront of everyone’s thinking. There is great wisdom in Pinocchio actually beyond what is generally known. At one point the puppet heads into the “Field of Miracles” where he plants his gold and waits for it to grow. Pinocchio then heads off to “Catch-fools” which is a place where everyone has done something exceedingly foolish and suffers as a result. The world presently believes that there is no “event risk” and upon this foothold and the money poured into the streets by the central banks the markets rest in peace. Roads do not go on forever, the day eventually fades into the night and the peace of the morning is often shattered by the shrill cry of the dove being attacked by the falcon. The Great Game is not “Toyland” and great care is now called for before we awaken to find that we have turned into donkeys, or worse, ourselves.
The center cannot hold because it has failed the nation by defending the Status Quo kleptocracy. As a case study, let's look at Greece, a nation that is the leading-edge of Status Quo delegitimization and destabilization. As the Status Quo fails to protect the national interests and the citizenry from the neofeudal kleptocracy, faith in the political center fades. What happens when people lose faith in the financial institutions and their coercive "fixes"? They move their capital to less-risky, more productive climes. In other words, capital flight is another positive feedback: as people move their capital out of the country, then there is less available per capita for productive investment. The same holds true for every nation ruled by kleptocratic Elites that has attempted to "grow our way out of debt" by piling debt on debt. Doesn't that include Spain, Italy, China, the U.S. and a host of other nations?
Lately, it has become particularly fashionable to bash private equity, especially among those workers in the employ of the state. The argument, in as much as capitalism can be summarized in one sentence, is that PE firms issue excess leverage, making bankruptcy inevitable (apparently those who buy the debt are unaware they will never get their money back), all the while cutting headcount to maximize cash flow (apparently the same PE firms don't realize that their investment will have the greatest terminal value to buyer if it has the highest possible growth potential, which means revenue and cashflow, which means proper CapEx investment, which means streamlined income statement, which means more efficient workers generating more profits, not less). The narrative ultimately culminates with some variation on a the theme that PE firms are responsible for offshoring jobs. While any of the above may be debated, and usually is especially by those who have absolutely no understanding of finance, one thing is certain: when it comes to bashing PE, America's public workers should be the last to have anything negative to say about Private Equity, and the capital markets in general. Why? Because when it comes to fulfilling those promises of a comfortable retirement with pensions and benefits paying out in perpetuity, always indexed for inflation, and otherwise fulfilling impossible dreams, who do America's public pension fund administrators go to? The very same private equity firms that have suddenly become outcast number 1.
Six weeks ago we detailed how watching intra- and inter-asset-class correlations can tell investors a lot about what is behind market movements and as Nick Colas, of ConvergEx, highlights in his monthly review of asset price correlations - it reveals a key feature of the "Mystery Rally of Summer 2012." The move from the early June lows for U.S. stocks has come with increasing correlations across a wide array of asset types and industry sectors. That's unusual, because rising markets over the past three years more commonly bring lower correlations. For example, the rally from January to early April of this year saw industry correlations within the S&P 500 drop from +95% to 75-80% as the index went from 1270 to 1420 (a 12% return). Conversely, the move from 1278 to 1400 (early June to present day) has come with increasing industry correlations – 82% in May to 86% currently. To us, that's an important "Tell" about what's been taking us higher – hopes for further Federal Reserve liquidity at the next FOMC meeting in September and ECB liquidity to support the euro. The rest of August will likely feature the kind of light-volume tape that loves to drift higher, but increasing correlations represent a flashing yellow light signifying the need for caution in trading over the balance of the month.
A Guide for Those with Much Money and Very Little Patience Whom Want to Prepare for Zombie Apocalypse But Are Afraid to Google It For Fear of DHS Labeling Them A Terrorist.
And what rough beast, its hour come round at last, Slouches towards Maiden Lane to be reborn?
The 4th of July is a fitting day to ponder the reality that we are at Peak Government, and the Savior State is unsustainable. This is a matter of accounting: no nation can spend more than it generates in surplus real output forever. What goes unremarked is the intrinsically destructive nature of our rising dependence on a Savior State. In his book Collapse of Complex Societies, anthropologist Joseph Tainter identified two causes of economic collapse: investments in social complexity yield diminishing marginal returns, and energy subsidies, i.e. cheap, abundant energy, decline. In my terminology, the dynamic he describes is one in which the cost structure of a society continues rising due to “the ratchet effect” but the gains from the added expenses are increasingly marginal. At some point the additional costs, usually justified as the “solution” to the marginal returns problem, become counterproductive and actually drain the system of resilience as dissent and adaptability (“variation is information”) are suppressed. This feeds systemic instability: on the surface, all seems stable, but beneath the surface, the potential for a stick/slip destabilization grows unnoticed. Cheap, abundant energy offers a surplus of value that can be invested in social complexity and consumption. Once the cost and availability of energy declines, then that surplus shrinks and can no longer be used to support the high cost structure. The U.S. economy has clearly been driven to the cliff edge of instability by both dynamics: the cheap, abundant energy which enabled fast growth of consumption and high cost social complexity is vanishing, and the cost structure of the economy has ballooned far beyond sustainability.
There is no pleasure in "I told you so" when things fall apart. Many of us recognized the artifice and folly of the credit-housing bubble "Bull market" as early as 2004, but few cared to listen because they were deeply complicit in the Status Quo's legerdemaine: their home was rising in value, their pension fund was being fattened, their sales were rising on the onrushing tide of abundant, cheap credit, their tax revenues were soaring, and their benefits/perquisites were notching higher with every tick up of the stock and housing markets. Faith in a centrally planned economy operating under the flimsy guise of cartel-State "capitalism" was supreme, as were greed, self-absorption and an overweening sense of entitlement to consumerist "prosperity." Both corrupt political parties enthusiastically embraced the bubble-culture of fraud and speculative excess, for they too benefited from the illusory glow of "permanent economic growth" and the ever-richer contributions from the fiefdoms, cartels and Financial Elites who gained the most from the credit-based frenzy. The "prosperity," "growth" and "wealth" were all illusory, but the pain is real. Hardworking, dedicated, smart, experienced people are being laid off into an economy with few prospects. Young people are graduating from university into the same bleak atmosphere of a paper-thin facade of magical thinking and propaganda finally crumbling. Things are falling apart because the economy has been undermined by financialization and the extreme concentrations of capital and State power. I think these charts tell the story rather well...