Purchasing Power

Ever since the advent of QE2, few if any, sellside analysts employed by Too Big To Fail banks have dared to voice a negative opinion of the Chairman's third mandate, that of raising stock prices (for obvious reasons: nobody will bite the hand that feeds them trillion in taxpayer bailout money). Which is why we continue to believe the BofA credit strategist Jeffrey Rosenberg is one of the few men standing who dares to call it how it is. In his latest piece, Rosenberg lays out what is the most harshly (yet diplomatically) worded criticism of QE we have read to date. "In our view, the longer term problem with such a strategy is that in delaying the adjustment to the root causes of the credit crisis, namely excessive leverage in the economy and financial markets, the essential vulnerabilities from that excessive leverage remain. What triggers their realization again is the inflationary shock leading to an interest rate shock that undermines the cheap cost of that debt that currently enables its maintenance." As for the implicit assumption that savings and wealth are inversely correlated, Rosenberg points out the glaringly obvious: "Inflation erodes the value of those savings and decreases their standard of living." The only option left: "Lowering the value of savings creates a powerful incentive to take on investment risk to maintain the real purchasing power of those savings." And while everyone getting aboard the investment ship at the same time is a horrible idea when it happens in one country, it is a guaranteed disaster waiting to happen when it occurs at the global level. Which is precisely what has happened: "Today, we see that same pattern again at play. But this time, it’s not limited to just the US Fed policy. Globally, central banks are pursuing coincident easy money policies. And even in Emerging Markets where the inflation fears stand most acute, the policy rate increases are just keeping  up with inflation increases. The result: global negative or zero real policy rates." The entire global "economy", which really means stock market, is now one timebomb, just waiting for the first central banker error-induced 'crack' to appear in the windshield, following which the destruction will be unprecedented.

Bernanke is kidding himself, the House Budget Committee and the entire 60 Minutes audience when he says that he can raise interest rates in 15 minutes. He can raise rates but it would be the INSTANT end of the economy. I’ve read the book: “Temple of Secrets: How the Federal Reserve Runs the Country”, and a large portion of the book was dedicated to Paul Volcker’s 21.5% rate hike. The adverse effects on the economy were disastrous. Businesses stopped borrowing, or went broke borrowing, unemployment went through the roof, housing was crushed, large purchases of automobiles crumbled.

The general public had stocks foisted on them in the 80s with the introduction of stock-based retirement plans (401ks and IRAs). They became further enamored by this asset class with the creation of online discount brokerages, which seduced the DIY spirit. Stocks have become so popular that there are entire peripheral industries have been built surrounding them: investing books, investing seminars, investing TV shows, etc. And yet no one has ever asked whether investing in stocks is actually a good thing.

We've known for a LONG time that too much inequality leads to crashes ...

Remember, Wall Street is nothing more than an exchange: a place where deals of hundreds of varieties are made. In this sense it’s nothing more than a corporate-scale version of Facebook or some other social network platform. That’s it. Wall Street doesn’t generate any real goods. It doesn’t produce drugs that cure illnesses. It doesn’t design cars or vehicles needed to get around. It hasn’t invented ANYTHING of real value in decades (unless you count make believe crap like derivatives and CDOs as goods).

Recently, some have started to ask a very pertinent question when it comes to the global Current Account: with every developed and developing country supposedly seeing a surge in exports, just who is it that is doing all the importing? Sean Corrigan from Diapason takes this question, and flips it on its head, as regards the printing of money and the "trade balance" of inflation: if every central bank continues to excuse itself from taking responsibility from what is now a global money printing pandemic, claiming it is merely importing inflation... then who is doing all the inflation exporting? Read on for some brilliant observations...

To those who look for confirmation of the wealth effect in every nook and cranny, better keep looking away from housing. The 30 Year Fixed Rate mortgage, that indicator of just how much "piggy bank" value US housing has, just jumped by a whopping 24 basis points in the last week to 5.05%, the highest since April 2010. And as the observant ones will point out, it was in April of last year, when the market topped out after hopes and dreams of a self-sustaining economic recovery collapsed (with Europe lending a helping hand in the process), leading to QE Lite and QE 2 several months later. In other words, in the last 2 months, housing, at least that part that has a mortgage associated with it, has lost roughly 10% of its value as incremental purchasing power has just declined by the same amount courtesy of the spike in rates. In spiking the market, Ben has once again planted the seeds of his own monetary policy destruction.

While nothing new to Zero Hedge readers, the realization that everyone's purchasing power is about to be yanked from underneath them has gone mainstream. Omaha.com has just come out with a headline that leaves little to the imagination: "Get ready for higher food prices." The issue is that no matter how Chairsatan Rudolf Vissarionovich von Bernankestein spins this to whatever congressional minions he is supposed to be lying to at any given moment, the undisputed truth is that consumers have just gotten that much poorer, as prices of staples surge, and as a result capital available for discretionary trinkets plunges (here's looking at you Guitar Hero which has just been discontinued due to lack of interest... Coming to an Apple store near you in 3-5 years). Because no matter what economic voodoo Bernanke, concocts there is little he can do to change the laws of mathematics. So for those who wish to stock up on staples in advance of a price surge (thereby bringing the price jump forward), and still haven't done so, here is the "mainstream" explanation for why now is a very good time to start doing so.

It was Otto von Bismarck who explained that “politics is the art of the possible.” We can thank him for that much, but he didn’t tell the whole story. I’ll give you the rest of it. Politics is the art of the possible fictions you can get away with. Politics is mostly dissembling, and the dissembling is mostly about dodging personal responsibility for the messes governments make. It works out that way because making messes is most of what governments do. So when we ponder how the U.S. government will go about defaulting on its debts, a good way to approach the question is to consider how a default might be presented. At this point there is no room for doubting that the government will renege on the commitments it has made to give people money. The $9.2 trillion in Treasury securities held by the public is just the tip of the iceberg. Estimates differ, but if you add in the unfunded obligations for Social Security and Medicare, it’s hard to avoid getting a total that exceeds $80 trillion. That works out to $260,000 for every man, woman, and child in the country, including the two-year olds. It can’t be paid, so it won’t be paid.

The erosion of the American middle class is of little concern for one simple reason: it no longer matters much on the global stage. All that Global Corporate America needs from America is a stable foundation that won't offer up any surprises or spots of bother. As the discretionary purchasing power of the American middle class erodes, four times as many new potential customers appear elsewhere, hungry to taste the Oreos, become consumed by the iPhone, etc., and ten times as many are potential buyers of toothpaste and other basics. U.S. corporations are pulling $500 billion in profits from non-U.S. sales, and they hold $1 trillion in stashed overseas profits in various tax havens. All the growth in their revenues and profits are coming from non-U.S. sources. Spending $3-$5 billion on lobbying and campaign contributions is an "investment" with extremely high returns: for that small sum, U.S.-based global corporations make sure the U.S. government and citizenry don't become overly burdensome or obstructive.

I have tried hard to not have strong views in market recently given what seems to be possible tectonic shifts. Despite this, I feel as though there was alot of pent up energy at recent range lows and is now being released, to say the least. We had weeks of very defined range that broke and the damn broke. After a tepid 3yr auction, I think players extrapolate the increased level of difficulty of having to increase the DV01 of a 10yr and 30yr to follow, particularly in light of trying to repair wounds from December rinsing, November rinsing.......Adult swim.

Some thoughts on why the Fed's monetary policy is, paradoxically, doing everything in its power to prevent the organic growth of the economy, and to hinder employment growth.

One chart as usual does more to convey a simple message than all the Fed speeches equating the economy with the Russell 2000 ever could. Below we demonstrate the performance of three key market data points since the August Woods Hole speech: the performance of the S&P (via the ES), the price change in the 10 Year bond (TY1 inverse scale), and of course the change in non-farm payrolls (remember that old-school Fed mandate about full employment something something). Bottom line: the S&P is up over 30%, the 10 Year has plunged from over 126 to 118, while NFPs have added 392k, or 78.4 per month, nowhere near enough to even keep up with the natural growth of the labor force. So has QE been a success? We leave it up to you.

Some time ago, SocGen's Dylan Grice wrote an extended essay which could be synthesized in the following line: "to be 'long commodities is to be short human ingenuity'." Many took this statement as a sign of capitulation from the otherwise highly skeptical Grice, who not once has criticized the current financial and economic status quo.  Last week, as Zero Hedge pointed out, Grice made the effort to clear up any confusion about why gold is not and was never meant to be included under this broad umbrella defintion: "although I've said I'm not a fan of plain commodities as investment vehicles because buying commodities was equivalent to selling human ingenuity, I exclude gold from that logic. I prefer to see buying gold as buying into the stupidity of governments, policy-makers and economists, and I'm comfortable doing that." Then over the last few days, Diapason Securities' Sean Corrigan, took a turn at also deconstruction the corollary to the Grice "pair trade" adding the key qualifier: "while Mr. Grice is right in so far as he goes, he has only stated half the case. The true dictum is that 'to be long commodities is to be short human ingenuity but also to be long political stupidity and avarice.'" What has gotten Corrigan so riled up? Why the same underlying premise that makes all those who once had a fascination with the stock market, deride and ridicule it: namely the fact that in doing all he can to flip reality by 180 degrees, Ben Bernanke has completely destroyed the core principle of capital markets: price formation by way of proper information content, i.e. "the free market [must] be allowed to work its magic and that price formation not be deprived of much of its crucial informational content by our dysfunctional monetary and, hence, corrupted financial systems." Sadly, free markets are now only a topic best left to the history books, and as such any idealistic perspective on commodities and the like must take this key persistent variation from the mean into account.

Well, the US Dollar has staged a small bounce at $77 or so. The question now is whether this becomes anything substantial, or is merely a result of the Euro/USD pair becoming so stretched that a brief pullback had to happen. We should know the deal within a few days. However, the greenback is now only 2% away from breaking its multi-year support line. If the Dollar turns down again now then the inflationary collapse will intensify rapidly.