In the long term, it will ultimately be the fundamentals that drive the markets. Currently, the deterioration in the growth rate of earnings and economic strength are not supportive of the speculative rise in asset prices or leverage. The idea of whether, or not, the Federal Reserve, along with virtually every other central bank in the world, are inflating the next asset bubble is of significant importance to investors who can ill afford to lose a large chunk of their net worth. It is all reminiscent of the market peak of 1929 when Dr. Irving Fisher uttered his now famous words: "Stocks have now reached a permanently high plateau." Does an asset bubble currently exist? Ask anyone and they will adamantly say 'NO.' However, maybe it is precisely that tacit denial which might be an indication of its existence
These men are masters of the capital markets. They are voting with their feet and pulling their capital out of them.
One of these lines represents the return due to the wisdom of the Oracle of Omaha, the unquestionable "what he says is law" asset manager who adds so much value to everything he does.. and the other is the S&P 500...
- Headline of the day: U.S. Risks Joining 1933 Germany in Pantheon of Deadbeat Defaults (BBG)
- As Senate wrestles over debt ceiling, Obama stays out of sight (Reuters)
- The "Truckers Ride for the Constitution" that threatened to gum up traffic in the capital was a dud as of Friday afternoon (WSJ)
- China New Yuan Loans Top Estimates as Money-Supply Growth Slows (BBG)
- Vegetable prices fuel Chinese inflation (FT)
- China Slowing Power Use Growth Points To Weaker Output Data (MNI)
- London Wealthy Leave for Country Life as Prices Rise (BBG)
- Gulf oil production hits record (FT)
- Every year like clockwork, analysts start out bizarrely optimistic about future results, then “walk down” their forecasts (WSJ)
- Weak Exports Show Limits of China’s Growth Model (WSJ)
For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well: "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." Fortunately, there is an institution that exercises control over the academics at the Fed; it is called the 'real' market economy... and it has badly humbled the professors at the Fed.
As we have discussed previously, the "partial government shutdown" that we are experiencing right now is pretty much a non-event - especially with the un-furloughing of The Pentagon. Yeah, some national parks are shut down and some federal workers will have their checks delayed, but it is not the end of the world. In fact, only about 17% of the federal government is actually shut down at the moment. This "shutdown" could continue for many more weeks and it would not affect the global economy too much. On the other hand, if the debt ceiling deadline (approximately October 17th) passes without an agreement that would be extremely dangerous. A U.S. debt default that lasts for more than a couple of days could potentially cause a financial crash that would make 2008 look like a Sunday picnic. If a debt default were to happen before the end of this year, that would bring a tremendous amount of future economic pain into the here and now, and the consequences would likely be far greater than any of us could possibly imagine.
The appalling fiscal and monetary situation in the U.S. will lead to further dollar weakness in the coming months. This weakness will be most manifest versus gold as other fiat currencies have their own risks.
In the past we have tried to show the growing divide between the haves and the have-nots in the US. Whether through this morning's "aggregate" Main Street vs Wall Street chart or various anecdotal indicators of diverging confidence. However, no one signifies the beneficiaries of the status-quo-sustaining government bailouts and stimulus better than Warren Buffett (who now, like Obama, sees stocks are full valued). The following chart shows just how well one can do with a few billion in your pocket and an ear for what the Government will do.
- A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall (BBG)
- Software, Design Defects Cripple Health-Care Website (WSJ)
- Gunmen kill 5 Egyptian soldiers near Suez Canal, 2 people die in blast (Reuters); Egypt death toll rises to 53, streets now calm (Reuters)
- Three retailers sell Apple iPhone 5C for $50 or less (Sun Sentinel)
- New American Economy Leaves Behind World Consumer (BBG)
- Dow's Exiles Often Have Last Laugh (WSJ)
- Macy's Puts China Online-Expansion Effort on Hold Amid Economic Slowdown (WSJ)
- Gold Befuddles Bernanke as Central Banks’ Losses at $545 Billion (BBG) - just ask the BIS gold selling team: they are unbefuffdled
- Markit Group Said to Avoid U.S. Antitrust Claims as EU Proceeds (BBG) - being owned by the banks has benefits
- Paulson leads charge into Greek banks (FT) - and scene for the Greek banking sector
- Government Shuts Down as Congress Misses Deadline (WSJ); Shutdown starts, 1 million workers on unpaid leave (Reuters); Government Shutdown Begins as Deadlocked Congress Flails (BBG)
- This is not The Onion: Stocks Rise on U.S. Government Shutdown (BBG)
- Pentagon chief says shutdown hurts U.S. credibility with allies (Reuters)
- In historic step, Japan PM hikes tax; will cushion blow to economy (Reuters)
- Obama Says He Won’t Give Into ‘Ideological’ Budget Demand (BBG)
- More part-time warehouse workers: Amazon to Hire 70,000 Workers for the Holidays (WSJ)
- Less full-time legitimate workers: Merck to fire 8,500 workers (BBG)
- Education cuts hit America’s poor (FT)
- Euro-Zone Factory Growth Slows (WSJ)
- Watchdog Warns EU Not to Water Down Insurance Rules (Reuters)
Another signal for investors around the world to buckle their seatbelts.
It’s often argued that they don’t a bell at the top. I would argue that we numerous bells ringing in the financial markets today.
There is a reason why every fiat currency in the history of the world has eventually failed. At some point, those issuing fiat currencies always find themselves giving in to the temptation to wildly print more money. Today, the Fed finds itself faced with a scenario that is very similar to what the Weimar Republic was facing nearly 100 years ago. Like then, the U.S. economy is struggling and like the Weimar Republic, the U.S. government is absolutely drowning in debt. Unfortunately, the Fed has decided to adopt the same solution that the Weimar Republic chose. The Fed is recklessly printing money out of thin air, and in the short-term some 'positive things' have come out of it. But quantitative easing worked for the Weimar Republic for a little while too.
While the commemoration of the 5 year anniversary of the start of the Great Financial Crisis is slowing but surely fading, another just as important anniversary is revealed when one goes back not 5 but 15 years into the past, specifically to September 23, 1998. On that day, the policy that came to define the New Normal more than any other, namely the bailout of those deemed Too Big To Fail, a/k/a throwing good (private or taxpayer) money after bad was enshrined by Wall Street as the official canon when faced with a situation where capitalism, namely failure, is seen as Too Dangerous To Succeed. This was first known as the Greenspan Put, subsequently the Bernanke Put, and its current iteration is best known as the Global Central Banker All-In Systemic Put. We sow the seeds of bailing out insolvent financial corporations to this day, when instead of making them smaller and breaking them up, they are rewarded by becoming even bigger, even more systemics, and even Too Bigger To Fail, and their employees are paid ever greater record bonuses.
In a world in which all the matters is "scale", the ability to Martingale down on losing bets as close to infinity as possible (something which JPMorgan learned with the London Whale may not be the best strategy especially when one can't print money out of thin air), and being as close to the Fed's Heidelberg rotary printer as possible, it was expected that that "expert" of government backstops and bailouts, the Octogenarian of Omaha, Warren Buffett, would have only kind words for Ben Bernanke. But not even we predicted that Buffett would explicitly admit what we have only tongue-in-cheek joked about in the past, namely that the Fed is the world's greatest (and most profitable) hedge fund. Which is precisely what he did: "Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion. "The Fed is the greatest hedge fund in history,” Buffett told students yesterday at Georgetown University in Washington. It’s generating “$80 billion or $90 billion a year probably” in revenue for the U.S. government, he said.