In the latest month of data, April, the Fed just disclosed that of the $11.1 billion in crease in total consumer credit, only 6% was in revolving credit. The balance, or $10.4 billion, was non-revolving, and thus was used to pay for that new Chevy Impala and/or "Keynesian Shamanomics 101 for Dummies." And of course, all was funded by the US government.
While Wall Street is implicitly conflicted in its actions, there is also another group of individuals who are also just as conflicted - corporate executives. Today, more than ever, corporate executives are compensated by stock options, and other stock based compensation, which are tied to rising stock prices. There are billions at stake in many cases and the game of "beat the Wall Street estimate" is critical in keeping corporate stock prices elevated. Unfortunately, this leads to a wide variety of gimmicks to boost bottom line profitability which is not necessarily in the best interest of long term profitability or shareholders. Today we will discuss four tools that have been at the heart of the surge in profitability since 2009 and why such profitability has failed to boost the economy. While the Fed's ongoing interventions since 2009 have provided the necessary support to the current economic cycle it will not "repeal" the business cycle completely. The Fed's actions work to pull forward future consumption to support the current economy. This is turn has boosted corporate profitability as the effectiveness of corporate profitability tools were most effective. However, such actions leave a void in the future that must be filled by organic economic growth. The problem comes when such growth doesn't appear.
Not exactly a ringing endorsement of his hodgepodge of old ideas and new contradictions.
The problem is central banks have created a vast pool of credit-money that is far larger than the pool of sound investment opportunities. Why are asset bubbles constantly popping up around the globe? The answer is actually quite simple. Asset bubbles are now so ubiquitous that we've habituated to extraordinary excesses as the New Normal; the stock market of the world's third largest economy (Japan) can rise by 60% in a matter of months and this is met with enthusiasm rather than horror: oh goody, another bubblicious rise to catch on the way up and then dump before it pops. Have you seen the futures for 'roo bellies and bat guano? To the moon, Baby! The key feature of the New Normal bubbles is that they are finance-driven: the secular market demand for housing (new homes and rental housing) in post-bubble markets such as Phoenix has not skyrocketed; the huge leaps in housing valuations are driven by finance, i.e. huge pools of cheap credit seeking a yield somewhere, anywhere:
If you look at the history of financial crises in Argentina, you will see there is almost no 10-year period when there isn't a financial crisis. Argentines have become masters at dealing with things like inflation and ridiculous government policies. How can the actions of the Argentine government give us insight into what a desperate government is capable of and what might be in store for the United States? The current Argentine government is dominated by true believers – young people who have that idealistic notion of equality for all, and who believe that government mandates can fix anything that ails. They are hardcore socialists, leaning towards communism. But, as is the case in the United States, they really don't know what they are doing and so pursue policies that are incredibly shortsighted. They are uninformed as far as history and economics are concerned and blunder from one harebrained policy to another. There is literally nothing that they will not try. It is like a textbook case in government gone mad. There is a lesson to be learned from all of this, and I think it is a very important one. When it comes right down to it, any government – not just the Argentine government, but the US government as well – will simply do whatever it thinks it needs to do to keep the status quo intact, with no moral or ethical considerations.
And the beat goes on! More studies, more surveys, more statistics, more data to feed the ongoing fires in present day American cultural wars. Last week, the Pew Research Center released a study stating that women are now the primary breadwinners in 40 percent of households with children in the US. A figure which more than doubled that of a generation ago. Economic circumstances usually determine the need for multiple breadwinners in a household, and the household today in no way resembles the nuclear family of yesteryear. Perhaps we would not be in these dire economic straits if instead of Erickson’s dominant males governing the US during the past 32 years… we had been ruled by brainy dominant females - not the Amazon-cliché type. They couldn’t have fared any worse - as simply put: Americans - well, the bottom 80 percent - have lost control of their economic destiny…
Today, there is almost zero truth in mainstream media. The fascist corporate-banking-government machine has ensured that mainstream media has now become the official department of propaganda, not only in political news, but also regarding nearly all financial news as well.
It may come as a surprise to some that the total level of commercial bank loans outstanding as of the most recent week, May 22, was "only" $7.303 trillion. We say only because this number is $20 billion less than the total commercial loans outstanding as of the weeks following the Lehman failure, just before the most epic deleveraging episode in recent US history began. It is also just $600 billion higher than the cyclical lows of $6.7 trillion (net of the February 2010 readjustment of the commercial loan terminology). So does this mean that deposits in the US financial system have been unchanged in the past nearly 5 years? Not at all. As the chart below shows, while commercial loans have flatlined, deposits, which previously used to track loans on a dollar for dollar basis, took off, and are now at $9.4 trillion (as per the latest H.8), or $2.2 trillion more than the $7.2 trillion when commercial banks loan hits a record in October 2008, just after Lehman filed. What's more notable, is that as of the latest week, the excess of deposits over loans just hit an all time record of $2.079 trillion
Neil Macdonald of the CBC recently did an investigative piece on central bankers and what they’re doing to the world’s economies. Mark Carney was featured heavily. He told Macdonald, “there is no secret cabal orchestrating things,” despite CBC’s own findings earlier in the program. Central bankers around the world meet in Basel, Switzerland for secretive meetings. Of course, central banks have – and have always had – enormous power that remained more-or-less hidden until 2008. A paradigm shift is occurring where a large number of people (particularly young people) are questioning their assumptions. Some of them are even beginning to read economists like Ludwig von Mises and Murray Rothbard. The “economics” of central bankers can now be revealed for what it truly is: statistical propaganda. Not only is the “Keynesian school” of economics unsound – the entire social science is bunk. Only the Austrian tradition can explain economic phenomena in such a way that makes common sense, scientific. Carney is asking us to trust him. This cannot be done. He is not speaking truth; he is speaking nonsense.
We are rapidly approaching the end of cheap resources. The wealth of most Americans could get wiped out during the next decade due to commodity inflation. Focusing on your real purchasing power is critical. As this brief documentary discusses, what is it that makes gold so special? Merely a "tradition" as Bernanke would have us believe, or sound 'money'?
As Barron's notes in this recent interview, Marc Faber view the world with a skeptical eye, and never hesitates to speak his mind when things don't look quite right. In other words, he would be the first in a crowd to tell you the emperor has no clothes, and has done so early, often, and aptly in the case of numerous investment bubbles. With even the world's bankers now concerned at 'unsustainable bubbles', it is therefore unsurprising that in the discussion below, Faber explains, among other things, the fallacy of the Fed's help "the problem is the money doesn't flow into the system evenly, how with money-printing "the majority loses, and the minority wins," and how, thanks to the further misallocation of capital, "people with assets are all doomed, because prices are grossly inflated globally for stocks and bonds." Faber says he buys gold every month, adding that "I want to have some assets that aren't in the banking system. When the asset bubble bursts, financial assets will be particularly vulnerable."
The conventional wisdom is that oil should decline in nominal price as global demand weakens along with the global economy. In the hot-money-seeks-a-new-home scenario outlined above, demand could decline on the margins but speculative inflows - demand for oil contracts by speculators - push prices higher, potentially a lot higher in a geopolitical crisis. The central banks that are creating all the "free money" that is available to large speculators fulminate against oil speculators, as if all the free money is only supposed to go to "approved" speculations in equities and bonds. Unfortunately for the central bankers, they only create the money, they don't control what the financiers who get the free money do with it. Gasoline is expensive at the pump, but by one measure oil is cheap and poised to go higher and despite the endless MSM hype about U.S. energy independence and U.S. exporting energy abroad, the U.S. still imports over 3 billion barrels of crude oil every year and when oil becomes expensive: the economy sinks into recession.
"We continue to maintain a long equity risk exposure through companies least exposed to the business cycle, whilst favouring receiving rates in developed countries most prone to a loss of economic momentum as other countries, notably Japan, weaken their currencies through the pursuit of QE. We also retain a structural long position in the US dollar and remain long yen assets [currency hedged] via the Japanese stock market.... One of our core investment themes remains the fight against deflation launched by Japanese authorities through QE of historic proportions. We believe that such radical QE creates the perfect recipe for a weaker yen and booming Japanese equities. The Nikkei rallied by 11.8% in yen terms in April 2013, the best monthly return since December 2009, and has now gained 61% from the November 2012 low. Against this background, the Fund recorded a gain of 30 bps from Japanese equities."
We must have discovered a new bug in excel, because when we took median new home prices (which a week ago hit an all time high) which we then divided by the average American's purchasing power expressed through real disposable income per capita, we got this chart...
A week later and everyone is a bit more nervous, with the speculation that US sovereign debt purchases by the Federal Reserve will wind down and with the Bank of Japan completely cornered. In anticipation to the debate on the Fed’s bond purchase tapering, on April 28th (see here) we wrote why the Federal Reserve cannot exit Quantitative Easing: Any tightening must be preceded by a change in policy that addresses fiscal deficits. It has absolutely nothing to do with unemployment or activity levels. Furthermore, it will require international coordination. This is also not possible. In light of this, we are now beginning to see research that incorporates the problem of future higher inflation to the valuation of different asset classes. Why is this relevant? The gap between current valuations in the capital markets (both debt and credit) and the weak activity data releases could mistakenly be interpreted as a reflection of the collective expectation of an imminent recovery. The question therefore is: Can inflation bring a recovery? Can inflation positively affect valuations? The answer, as explained below, is that the inflationary policies carried out globally today, if successful will have a considerably negative impact on economic growth.