Everyone has seen the 100-year US Dollar destruction chart; so here is the 200-year... a century without The Fed and a century with... which would you prefer?
In the 1st installment of this article – May the Odds Ever Be in Your Favor – The Reaping, we addressed how wealth inequality created by men rigging the system and utilizing media propaganda ultimately leads to rebellion. In Part 2, we will show how hope and defiance can ignite the flame of liberty in the minds of men. Edward Snowden has ignited that flame. A Lot of Hope is Dangerous... Linear thinking old timers are likely to scoff at the notion that some trilogy of novels for teenagers could capture the mood of the time in a way that explains how the people of this country will respond to the current worsening Crisis. History is cyclical and we’ve returned to a time where leaders will step forward to lead and brave heroes step forward to fight. The future of the country hangs in the balance.
We can only imagine the upward revisions to 'current' GDP that will occur due to the largest mal-investment-driven wholesale inventory build in over 2 years. The 1.4% MoM gain is over 4x the expectation and biggest beat since Q4 2011, when - just as now - a mid-year plunge was met by a rabid over-stocking only to see the crumble back into mid 2012. As we noted previously, 56% of economic "growth" this year was inventory accumulation (cough auto channel stuffing cough) and this print merely confirms "hollow growth" continues. The problem with inventory hoarding, however, is that at some point it will have to be "unhoarded." Which is why expect many downward revisions to 'future' GDP as this inventory overhang has to be destocked.
Inflating serial asset bubbles is no substitute for rising real incomes. Why are we stuck with an economy that only generates serial credit/asset bubbles that crash with catastrophic consequences? The answer is actually fairly straightforward.
The stock market. Source of unknown riches - but not necessarily for investors. So-called "professional" investors offer to manage your money. However, their fees are based on the level of assets managed, not performance. Hence their goal is to maximize assets, not performance, and prey for markets to behave. You will never hear a bad word about stocks from a professional money manager. the by-laws of many mutual funds do not allow the manager to have cash levels above 5% of assets. He has to be invested at least 95% at all times. On one hand, it is probably right to force money managers to concentrate on stock picking, not market timing. On the other hand, this puts the onus of market timing onto the inidiviual investors. Lighthouse's Alex Gloy's excellent presentation below proves finance doesn't have to be complex (people make it complex). Gloy goes on to discuss the link between GDP and Profits, performance, valuation, inflation, and war and their effect on all markets.
"There are going to be consequences to central bank balance sheet expansion all over the world," Kyle Bass tells Steven Drobny in his new book, The New House of Money, adding "It’s a beggar-thy-neighbor policy, but everyone is beggaring thy neighbor." The Texan remains concerned at QE's effects on wealth inequality and worries that "at some point this is going to ignite and set cost pressures off." While Gold-in-JPY is his recommended trade for non-clients, his hugely convex trades on Japan's eventual collapse remain as he explains the endgame for his thesis, "won't buy back until JPY is at 350," and fears "the logical conclusion is war."
By standards of previous generations, the middle class has been stripmined of income, assets and purchasing power. So what does it take to be middle class nowadays? A recent paper used Census data to discuss what sort of income it takes to qualify as middle class but income is not the only the metric - indeed, it can be argued that 12 other factors are more telling measures of middle class membership than income.
Where the scramble to accumulate inventory in hopes that it will be sold, profitably, sooner or later to buyers either domestic or foreign, is seen most vividly, is in the data from the past 4 quarters, or the trailing year starting in Q3 2012 and ending with the just released revised Q3 2013 number. The result is that of the $534 billion rise in nominal GDP in the past year, a whopping 56% of this is due to nothing else but inventory hoarding.
First things first. Losing 39% of your purchasing power over the course of 13 years is criminal. This was purposely created by Greenspan/Bernanke and the Federal Reserve. We're quite sure that most Americans have not seen their wages go up by 39% since 2000; therefore the average American has lost ground. No matter how you cut it, Federal Reserve created inflation slowly but surely destroys the middle class and benefits the ruling class. Ben isn’t working for you. His mandate of stable prices has been disregarded. He does not have it contained.
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.
Bitcoin is on fire. Mainstream media coverage is everywhere. No doubt, digital currency is a growing trend in Latin America… particularly in neighboring Argentina where the government has been nationalizing everything that isn’t nailed down. As a result, Bitcoins in Argentina frequently trade for more than 30% higher than in neighboring countries… presenting a rather interesting arbitrage opportunity. With all the mainstream attention, though, Bitcoin has been building its share of detractors. Most of these pieces roll out the same tired points– that nobody knows anything about the mysterious programmer who put it together… that it’s too volatile… etc. But, for the US investor, there is one big issue that remains entirely unclear...
One economic myth is that paper money is wealth. The proponents of big government oppose honest money for a very specific reason. Inflation, the creation of new money, is used to finance government programs not generally endorsed by the producing members of society. It is a deceptive tool whereby a “tax” is levied without the people as a whole being aware of it. Since the recipients of the newly created money, as well as the politicians, whose only concern is the next election, benefit from this practice, it’s in their interest to perpetuate it. For this reason, misconceptions are promulgated about the “merits” of paper money and the “demerits” of gold. Simply put, “Easy” money causes hard times.
The economic turmoil in Venezuela has received increasing international media attention over the past few months. Earlier this month, in another attempt to ensure “happiness for all people,” Maduro began to hand out Christmas bonuses, in preparation for the coming elections in December. Although not yet officially in hyperinflation, monetary expansion is pushing Venezuela toward the brink. In such an environment, paychecks need to be distributed quickly, before prices have time to rise; hence, early bonuses. This kind of policy is nothing new in economic history: Venezuela’s hyperinflationary episode is unfolding in much the same way Germany’s did nearly a century ago. Consequently, Venezuela’s economic policy is proving to be another example of Ludwig von Mises’s argument that economic intervention, if left unchecked, leads to complete socialism. As disturbing as the thought is, the difference between the U.S. and other Western economies and Venezuela is merely one of degree, not of kind.
Just as many expect that the #1 buyer of Treasuries (the Fed) will soon begin paring back its purchases, the top foreign holder (China) may cease buying, thereby opening a second front in the taper campaign. Little thought seems to be given to how the economy would react to 5% yields on 10 year Treasuries (a modest number in historical standards). The herd assumes that our stronger economy could handle such levels. That is why when it comes to tapering, the Fed is all bark and no bite. But the market understands none of this. This is not unusual in market history. When the spell is finally broken and markets wake up to reality, we will scratch our heads and wonder how we could ever have been so misguided.
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...