For 727 editions, and nearly 30 years, Bill Buckler, the "captain" of the free market-praising Privateer newsletter provided a welcome escape from a world overrun with "free-lunch" economists, "for-hire" politicians, "crony-capitalist" oligarchs, "heroin-addict" bankers, "the-solution-to-record-debt-is-more-record-debt" Keynesians, and all those other subclasses of that species which Einstein, or whoever, described so aptly in saying that they all expect a different, and happy, outcome when applying the same flawed methods over and over. And for 30 years, Buckler's steadfast determination and adherence to his arguments, beliefs, reasoning and ironclad logic brought him countless followers, all of whom are now able to see past the bread and circus facade of a world every day on the edge of political and social collapse. Sadly, all good things come to an end, and so does The Privateer. We are delighted to celebrate its illustrious memory by presenting to our readers the final, must read, issue of the newsletter which encapsulates the philosophy and ideology of its author - a man much respected and admired in the free market circles - and thirty years of objective, unbiased market and economic commentary, best of all.
The world is awash in contradiction with stocks rising to new highs as interest rates reflect a slowing economy. It is an upside down world according to PIMCO's Mohamed El-Erian. As Lance Roberts annotates, the moustaced maestro explains individuals are both excited and anxious. They are excited by the rally in the markets as they see their portfolios increase in values but at the same timed overwhelmingly concerned about the economic future. It is a world with an enormous contrast between the markets and the real economy. That is the world we are navigating and it is incredibly unusual. This is why it is an unloved rally. His discussion at the recent Strategic Investment Conference is about a simple framework to reconcile these issues. The long term view matters greatly - but the short term matters also.
While Harvard historian Niall Ferguson's off-the-cuff remarks during the Q&A were in his words "as stupid as they were insensitive", the core message of his presentation was clear: the party of the last 20 years is now over and the longer we fail to address the real issues the bigger the hangover will be in the future. The central question Ferguson asks is whether our institutions, corporations and governments, are degenerating. As Lance Roberts of Street Talk Live notes Ferguson believes that without addressing the structural problems that plague the economy from production to employment – stimulus will fail. The reality is that the 'punch bowl' won't fix employment growth, economic growth or the rule of law.
“Labor market conditions are affected by a variety of factors outside a central bank’s control,” admitted the Fed's Jeffrey Lacker after the employment report bounced around the world.
Across the five valuation methodologies that Goldman's David Kostin uses to consider the S&P 500's richness, the current price (around 1600) represents the average. While the Fed Model (bond vs stock value) is the one significant 'framework' suggesting upside potential but as Kostin notes, it is bonds that are more mispriced than stocks and the gap could close from bond side (significantly reducing the upside potential of this model). His macro-valuation framework, as well as the ROE vs P/B relationship and the Discounted Dividend Model all suggest year-end 2013 fair value at around the current price (i.e. 0% upside). And remember, as we noted recently, this 'expectation' still relies on the H2 2013 rebound in GDP and implicitly EPS (+28% in Q4 2013!) that is so hoped for.
A look at the price action in the foreign exchange market and the technical forces in the week ahead.
A. Gary Shilling's discussion of how to invest during a deleveraging cycle is a very necessary antidote to the ecstacy and euphoria that surrounds the nominal surges in risk-assets around the world sponsored by central banking largesse. Shilling ties six fundamental realities together: Private Sector Deleveraging And Government Policy Responses, Rising Protectionism, the Grand Disconnect Between Markets And Economy, a Zeal For Yield, the End Of Export Driven Economies, and why Equities Are Vulnerable. The risk on trade is alive and well - but will not last forever. We are still within a secular bear market that begin in 2000 with P/E ratios still contained within a declining trend. Despite media commentary to the contrary - this time is likely not different.
Europe has already entered a Japanese sort of existence and America will be coming next in our opinion. We are caught in a trap of our own making and this will be the price for the printing of all of this money. As China has reached its apex and begun a gradual grinding down in their economy, as Japan wrestles with insolvency, as Europe falls further into its sinkhole; America will follow. Make hay while you can but you may also wish to notice that the fields are shrinking and that less hay may be forthcoming. Borrowers have reaped the benefits. Those with money have paid the price. Wealth that can be redeployed is evaporating. Buying power is in decline. There is always a price. The reason is simple enough; it is the consequence of what the central banks are doing.
- U.S. Bulks Up to Combat Iran (WSJ)
- Taking sides in Syria is hard choice for Israel (Reuters)
- Gold Traders Most Bearish in Three Years After Drop (BBG)
- It's a Hard Job Predicting Payrolls Number (WSJ)
- EU economies to breach deficit limits as economic picture darkens (FT)
- IBM Says U.S. Justice Investigating Bribery Allegations (BBG)
- At Texas fertilizer plant, a history of theft, tampering (Reuters)
- SAC Sets Plan to Dock Pay in Cases of Wrongdoing (WSJ) - "in case of"?
- EU to propose duties on Chinese solar panels (Reuters)
- Billionaire Kaiser Exploiting Charity Loophole With Boats (BBG)
- SEC Zeroing In on 'Prime' Funds (WSJ)
- Apple Avoids $9.2 Billion in Taxes With Debt Deal (BBG)
- China April official services PMI at 54.5 vs 55.6 in March (Reuters)
While everyone's attention this morning will be focused on the sheer, seasonally-adjusted noise that is the monthly NFP report (keep in mind that any number +/- 200,000 of the actual, is entirely in the seasonal adjustments and is thus entirely in the eye of the Arima X 13 beholder), which is expected to print at 140,000, resulting in an unemployment rate of 7.6%, there were some events overnight worth noting. First, the China non-manufacturing PMI printed at 54.5 in April, down from 55.6, and tied with the lowest such print in two years. The biggest red flag was that New Orders dropped below 50, with the price index also declining sharply, indicating that either the Chinese slowdown is for real, and the national bank will have no choice but to ease unleashing inflation, or that the politburo wishes to telegraph to the world that China is slowing, because what goes on in China, and what data is released out of China are never the same thing. Elsewhere, in Europe Mario Draghi's henchmen were stuck in damage control mode, and Ewald Nowotny said markets over-interpreted a signal yesterday that the ECB would consider a deposit rate below zero. Policy makers have “no plan in this direction,” Nowotny said in an interview with CNBC today. This helped boost the EUR from its languishing levels in the mid 1.30s higher by some 50 pips following his statement.
If there was ever a clear sign that the leadership of Japan is fully aware that the country is about enter a terminal economic catastrophe this is it. Using the cover of currency devaluation and a rising stock market, Japan’s Prime Minister, Shinzo Abe, is attempting to make it easier to change the country’s constitution so that they can eliminate freedom of speech and set the stage for a military dictatorship.
Here is why for the 2013 edition of "attempt to decouple reality from stocks (and fail every time)", the global central banks realized that just the Fed (2011), and/or just the Fed and the ECB (2012) would not be enough. Thus, welcome Japan and your unsterilized $75 billion per month, and lots and lots of prayer that third time will be the charm to enable the "market" finally to break free from the tyrrany of evil fundamentals, macro factors and, generally, reality.
Nomura's Richard Koo destroys the backbone of the modern central bankers only tool in the tool-box in his latest paper. "As more and more people began to realize that increases in monetary base via QE during balance sheet recessions do not mean equivalent increases in money supply, the hype over QEs in the FX market is likely to calm down ...The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limitmed impact... In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging them to consume more."
With any and every asset-gatherer capable of forming a sentence being trotted out on business media to proclaim victory and elucidate on why "there is no where else to invest but stocks" and "the US is the cleanest dirty shirt," we thought it might be useful to reflect on just how clean that shirt can remain as the rest of the world's growth slows down significantly. In the last decade, there has been particular growth in inter-regional trade, with a dramatic expansion in trade vis-à-vis Asia, reflecting globalization. At the same time, the deepening in global trade relationships means that the potential for a sudden shift in demand in one region can have a more significant impact on the rest of the world. This has been seen particularly in recent years, with the sharp retrenchment in domestic demand in southern Europe affecting the economy of Asia, particularly Japan. Looking at the rate of increase in regional imports (which we assume is what the 'heads' believe will power the US 'clean' shirt) and the picture is ugly. And while copper is enough of a tell for most, even the IMF (usually extraordinarily optimistic) sees World Trade slowing dramatically - and given these interconnections, perhaps being the cleanest shirt merely shows the stains even more clearly when they finally hit.
There is not one single example in history in which QE has successfully created jobs. The UK has engaged in QE equal to over 20% of its GDP and hasn’t seen a real recovery in employment. Similarly, Japan has employed QE equal to nearly 25% of its GDP and GDP growth continues to slow while unemployment stays elevated.