STALL SPEED : Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall
As we reported last month, Global Economic Risks have taken a noticeable and abrupt turn downward over the last 60 days. Deterioration in Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggested the global economic condition is at a Tipping Point. Though we stated "Urgent and significant actions must be taken by global leaders and central banks to reduce growing credit stresses" nothing has occurred even after the 19th disappointing EU Summit to address the EU Crisis. Some event is soon going to push the global economy over the present Tipping Point unless major globally coordianted policy initiatives are undertaken. The IMF recently warned and reduced Global growth to 3.5%. This is just marginally above the 3% threshold that marks a Global recession. This would be the first global recession ever recorded. The World Bank is "unpolitically'projecting 2.5%. The situation is now deteriorating so rapidly, as to be impossible to hide anylonger.
MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
MONETARY MALPRACTICE : Moral Hazard, Unintended Consequences & Dysfunctional Markets - Monetary Malpractice has had the desired result of driving Investors into becoming Speculators and are now nothing more than low-odds Gamblers. There is a difference between investing, speculating and gambling. At one time these lines were easy to comprehend and these distinctive groups separated into camps with different risk profiles in which to seek their fortunes. Today investing has become at best nothing more than speculating and realistically closer to outright gambling.
The reason is that vital information is either opaque, hidden or manipulated. Blatant examples such as: the world of off balance sheet debt, Contingent Liabilities, Derivative SWAPS, Special Purpose Vehicles (SPV), Special Purpose Entities (SPE), Structured Investment Vehicles (SIV) and obscene levels of hidden leverage make a mockery out of public Financial Statements. Surely if we get our ego out of this for a moment we can see that stockholders are now nothing more than gamblers? What is worse is that the casino is rigged. With Monetary Policy now targeting negative real interest rates, it is forcing the public out of interest bearing savings and investing, and into higher risk vehicles they would have shunned historically. They have no choice as the Monetary Malpractice game is played against them.
There is an old poker player adage: "when you look around the table and can't determine who the patsy with the money is, it is because it is you." MORE>>
The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern. - The "Peek Inside" shows the detailed coverage available this month.
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
It appears that the Central Banks have finally reached Peak Efficacy, after shooting themselves in the head with Bernanke's asinine QEternity which leaves nothing else to be priced in. Last night's JPY10 trillion fact (no longer rumor, whisper, or promise) of more LSAP from the BoJ had its typical knee-jerk reaction but within 5 hours it was 50% retraced and now at 9 hours the entire move (and its accompanying S&P 500 future's correlated risk-on surge) have been fully retraced.
In other news, there is a rumor that the Bank of Zambia is contemplated proceeding with open-ended easing to infinity and beyond. Sadly, none of this matters at all any more as monetary policy is no longer a factor in a world in which all the future CTRL-Ping is already accounted for. Just as we said last night, minutes after the 'event':
It seems like only yesterday that we were lamenting "Einstein rolling over in his grave" as a result of the BOJ's latest increase in its asset purchase program from Y65 to Y70 trillion, although technically it was 5 months ago on April 27. We would excuse Einstein if he were doing cartwheels in his grave right about now, following the BOJ's latest attempt to keep doing what has definitvely failed for 30 years, hoping this time it will be different, as a result of the just announced latest expansion in the asset purchase program's size by yet another Y10 trillion, this time to a total of Y80 trillion.
The expansion impacts only JGBs and T-Bills, both of which will be monetized by a further Y5 trillion. Putting this in perspective, Japan's total public debt is Y1 quadrillion, and counting very fast.
All other components of the Japanese LSAP program, including CP, Corporate Bonds, ETFs and REITs (yes, unlike the Fed, the BOJ is quite open about its equity and corporate bond purchases) remain the same.
Bottom line, just as we predicted back in July 2009, the global race to debase continues unabated, and as a result of QEternity will merely accelerate until the only true currency is gold tungsten.
Earlier today, FedEx reported weak guidance on slowing global growth. Its stock ended down about 3%, and the transport stocks were generally big laggards.
Because FedEx is considered to be such a bellweather for economic activity, its earnings are closely watched by a broad range of folks, not just FedEx investors.
First is his comment about the global economic situation: global trade is in a very rare position of growing slower than GDP:
...fundamentally, what's happening is that exports around the world have contracted, and the policy choices in Europe and the United States and China are having an effect on global trade. Global trade has grown faster than GDP, except for the 2000, 2001 meltdown and 2008 and 2009, for 25 years. And over the last few months, that has not been the case. So that's what's really going on, is that exports and trade have gone down at a faster rate than GDP has.
Smith also takes a shot at the Fed:
Well, let me elaborate on what I said just a moment ago. I mean, systemically, the policy choices that have been made in Europe and the United States and China are having effect on world trade. The episodial product launches that you refer to, we've been talking about for 2 years. And we are carrying a huge amount of that traffic, but it is episodial. At the same time that you have that going on, you have a declining value per pound. In a lot of electronic equipment, you have fuel going up, partially in response to the quantitative easing. I mean, as the Fed puts more money out there, people put more money into commodities and drive the price up. So you have products that are getting lower in value per pound, which is the key correlation for goods being moved by air. And so they're going on the water to an improved container liner system that's been developed over the last few years. So you've got a lot of things that are going on there, and the product launch of Apple's and Microsoft is not going to provide the type of sustained growth in the international trade that the world has seen historically. So when that turns back around I think is directly related to the economic macro system in Europe, North America and particularly in China.
Then later he hits on a very specific point about China:
…I can tell you this on China. The locomotive that has driven China’s growth is its export industries. And with the situation in Europe and, to a lesser degree, in North America, that is a significant issue for the Chinese economy. Now the consumer consumption in China is not increasing at a significant rate contrary to everybody’s hopes. While exports from, say, the United States into China have grown, they are dwarfed by the exports from China into the United States. And as the big economies in Europe and the U.S. have grown or contracted — grown at a far lesser rate or, in the case of certain European countries, have contracted, that’s reflected in the numbers in China. And you can’t escape that. I’ve been somewhat amused watching some of the China observers, I think, completely underestimate the effects of the slower exports on the overall China economy.”
Ongoing grand plans to flood the economy market with money have reminded Bundesbank's Jens Weidmann of the scene in the play Faust - when the devil (Mephistopheles) 'disguised as a fool', convinces an emperor to issue large amounts of paper money - which solves the kingdom's financial problems in the short-term but ends rather badly in rampant inflation.
As The Telegraph notes, without specifically mentioning Mario Draghi’s bond-buying programme, he said: “If a central bank can potentially create unlimited money from nothing, how can it ensure that money is sufficiently scarce to retain its value?” He added: “Yes, this temptation certainly exists, and many in monetary history have succumbed to it,” Mr Weidmann warned.
Although the remarks were in context - Frankfurt is currently marking the 180th anniversary of the death of Goethe - they defy calls by leaders for Mr Weidmann to tone down his criticism of the ECB, particularly at a febrile moment in the crisis.
09-20-12
ECB
CENTRAL BANKS
CONSUMPTION - Hides the Real Busines to Business Consumption Issue
rather than being fooled by the mantra that ‘(personal) consumption is two-thirds of the economy’, one should be clear about the distinction that its (imputation-boosted) count is actually only two-thirds of the highly-subjective statistical shorthand which is GDP – and that this is not the same thing at all!
Blackhawk Ben seemed to hew to a particularly crude version of the Phillips curve largely disavowed by even the most unreconstructed mainstreamers (one which imagines that extra jobs can be bought if only prices can be made to rise fast enough), after five years of ever more desperate flailing to restore false, Boom-time levels of activity, he appeared to have staked his all on bursting the piñata of the labour market by smacking it with the rough-hewn pole of the so-called ‘wealth effect.’
As he told the journalist in Thursdays’ post-FOMC Q&A:
”The tools we have involve affecting financial asset prices… Those are the tools of monetary policy. There are a number of different channels. Mortgage rates, other interest rates, corporate bond rates. Also the prices of various assets….”
“For example, the prices of homes. To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend. If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase. So house prices is [sic] one vehicle…”
“Stock prices – many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend…”
“One of the main concerns that firms have is that there is not enough demand… if people feel their financial position is better… they’ll be more likely to spend, and that’s going to provide the demand firms need in order to be willing to hire and to invest…”
These few, brief sentences contain such a miasma of error that it is hard to know where to begin if we are to restore a fresh breeze of economic rationale to this swamp of non sequiturs and wilful misunderstandings. It is not enough that crude, Krugmanite Keynesianism clings to the cheap parlour trick of using money illusion to fool unemployed wage-earners into lowering the reservation price of their labour, but now we must battle against banal, Bernankite Bubble-blowing – the hope that money illusion will fool cash-constrained asset owners instead.
To show what we mean, indulge us while we parse the Chairman’s words:
“If we can artificially suppress interest rates to a low enough level, lots of people will forget that they got themselves into the current mess by borrowing too much the last time we did this and so they will begin to do so again – especially the would-be home-owners and condo-flippers.”
“If the price of homes begins to rise, those who have already borrowed to buy one will feel better off even though: (a) they will earn not one red cent in extra income because of that appreciation and (b) if they do manage to register a one-off capital gain, it can only come at the expense of the purchaser, whose acquisition of a durable store of shelter services will therefore involve a much greater, zero-sum call on his resources than otherwise would have been the case”
“The stock market should also rise just because there’s more easy money chasing after a parking place. Naturally, we at the Fed could care less about the quaint notion that equities should represent a sensibly valued claim on a company’s estimated stream of residual earnings, or that capital markets need genuine prices if they are to serve any useful social function by allocating scarce savings to the prospectively best investment projects.”
“To the contrary, from our perspective, if Joe Soap wants to splash out to celebrate the entirely notional, potentially only nominal, and probably ephemeral gains on his 401k which we can bring about – without wondering whether the increase represents any lasting contribution to the aimed-for security of his retirement – well, in the long run, we’re all dead, aren’t we?”
“Companies don’t have enough ‘demand’, don’t you know, so if we can only get people to wave their cheque books at them, they will be so sure of being able to profit from this that they will offer every one of their new customers a job, on the spot!”
“Incidentally, we Keynesians are big on portraying consumer demand as being the driver of the economy, even though we’ve never quite been able to explain why it is that the ‘demand’ inherent in the existence of millions of hungry people in the world – all pathetically eager for an extra morsel of food – has not automatically brought about the necessary increase in agricultural output, investment, and employment in precisely the same manner that we are now presuming will be the case for, say, WalMart once we start buying in its customers’ mortgages.”
FALLICY OF CONSUMPTION
Thus, rather than being fooled by the mantra that ‘(personal) consumption is two-thirds of the economy’, one should be clear about the distinction that its (imputation-boosted) count is actually only two-thirds of the highly-subjective statistical shorthand which is GDP – and that this is not the same thing at all! Gloves may well comprise 100% of the clothing I put on my hands in winter, but if they are all I don when I go out snow-shoeing, I’m not likely to get very far before some Good Samaritan of the Alps finds my half-frozen form and has to send forthwith for the nearest brandy-carrying St. Bernard so as to revive me.
Take, for example, the four years from 2006-9 inclusive which saw US GDP average just under $14 trillion while cash PCE came in at a mean $8.5 trillion (ergo, validating the shibboleth that the latter number equates to 60% or so of the first). Mainstream thinking may stop short here, smugly satisfied with this trivial – and circular - QED, but this is not even half the story.
We say this because, over the period in question, aggregate business revenues – i.e., the best representation of the overall circulation of goods and services throughout the economy - amounted to no less than $33 trillion a year (the vast bulk of which receipts were subsequently disbursed again, whether as above-the-line costs, below-the-line outlays, interest, dividends, or taxes).
Thus, not only was the ‘economy’ almost 2 ½ times as large as the GDP count, but every $1 of that supposedly crucial personal outlay was matched by $3 of business-to-business spending.
It should also be recognised that the vast bulk of that $25 trillion in B2B expenditures is every bit as discretionary as the outlays of the most finicky of shoppers: no businessman can be compelled to keep his store open, or his factory running, if he finds the game not worth the candle, even though mundane economic analysis tends to assume without question that, far from being an adaptive, calculating, he is an unthinking automaton who can very much be relied upon to do just that, irrespective of his estimated remuneration.
More fundamentally still, it is the relationship (strictly, the ratio) between his receipts and his disbursements wherein the lies the difference between our hero’s commercial success – and so, his role in hiring, commissioning and the onward generation of orders for his suppliers – and his failure – hence, his sad duty to undertake lay-offs, cut-backs, and cancellations. Even absent net, new investment to improve and deepen the capital stocks and so raise real incomes, the overwhelming preponderance of that $25 trillion (in fact, all of it less an average $1.5 trillion before – and only $250 billion after – depreciation) represents a voluntary sacrifice of the enjoyment of present goods, undertaken merely to keep things running as they are.
The idea that such a delicate network of relative prices and differential cash-flows can be not only maintained, but enhanced, by the clumsy process of artificially forcing arbitrary quantities of money and credit into the system is at best naïve and at worst astrological in its pseudo-rationality.
Though we must always exercise caution regarding any use of aggregates, a reasonable proxy is therefore what we need if we are to monitor developments, albeit using the broadest of brushes. For us the widely-ignored business sales data fits the bill for overall activity, while the ratio of its sub-components—retail sales versus those made in the manufacturing and wholesale sectors gives us an idea of gross saving/investment v end-consumption. Another way of showing this is to plot the monthly personal consumption estimates against those for business revenues. As the plot shows, this latter is highly variable and has been in decline ever since the financialization of the economy began in earnest in the early-1980s.
A falling ratio implies, to an Austrian, that a greater degree of time preference appears to be developing and hence, a higher natural rate of interest (the ratio of intertemporal prices) has come to prevail.
In contrast, an examination of the path of BAA bond yields shows that market rates (after subtracting consumer price changes) have been steadily falling over time, due to a toxic mix of loose money and abundant speculative leverage. The gap between what should be and what is, is therefore a widening one, suggesting that a mix of overconsumption and malinvestment, fuelled by increased non-productive indebtedness, is to be expected.
Chronic and often highly elevated current account deficits (not to mention the dire fiscal situation) testify to the overconsumption element, while the series of ever-more violent booms and busts, coupled with lacklustre real net investment and stagnant real wages, are symptomatic of the second, while the level of debt itself should itself need no further comment.
09-20-12
MONETARY
CENTRAL BANK
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Sept 16th- Sept. 22nd, 2012
The recent position of the Fed was spelled out and will be enacted. You may be happy, unhappy or camped in between but they will do exactly what they have said they are going to do. This is a Continent apart for the recent announcement of the ECB and should be noted. The European Central Bank waved the banner of “unlimited” and “without cap” subject to the CONDITION of the EU’s acceptance and audits and the approval of any nation applying for aid. It may not have dawned upon you or most of the world but the ECB may never do anything as a result of the yoke that it placed upon itself; nothing at all may ever happen. If the Austrians and the Dutch are to be taken at their word and no more of their money is going to be used to bailout other nations then all of the fluff raised upon giant banners may be no more than flags waving in the wind. The strategy has worked to date and driven down interest rates but when people figure out that the condition is actually an impediment; the winds may begin blowing in the other direction. If “A” depends on “B” and “B” is not forthcoming then “A” is a worthless proposition.
Tell no one that I told you though. It could cause indigestion in Brussels and their food is rich enough now and costly enough for the other nations in Europe. It is a funny thing you know; when a promise made is not a promise kept then Pandora jumps about with her little box of miseries.
“Let the key guns be mounted, make a brave show of waging war, and pry off the lid of Pandora's Box once more.”
As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we’ve observed in a century of data. There is no way to view this as something other than a warning, but it’s also a warning that I don’t want to overstate. This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5% of the data for months. This is just the most negative return/risk estimate we've seen. It is what it is.
Hussman's general approach is to look at an "ensemble" of datapoints, and then compare them to previous market periods to see how stocks generally performed after this signals emerged.
He notes that "single lowest point" does not necessarily mean most overvalued (which was in 2000), but merely that the complete ensemble gave the most negative reading.
So what makes this moment so fraught with risk?
Hussman gives a taste of his secret recipe for measuring the market:
Despite the uniformity of negative signals we presently observe, I can’t say with certainty that this particular instance will produce negative market outcomes, or that we won’t find ourselves at odds with a speculative, richly valued, overbought, overbullish but still-advancing market. But even setting aside our particular methods, we have a very mature market advance, at a high Shiller P/E, atop nearly every upper Bollinger band (two standard deviations above the 20-period average at daily, weekly, and monthly resolutions), in an environment of lopsided bullishness. All of this should make bells go off for anyone familiar with market history. Of all the investment adages that are being embraced as reasons to accept market risk, somehow the phrase “buy low, sell high” is conspicuously absent. I expect that this will prove to be a crucial error for investors. In all of the present ebullience about quantitative easing with no ex-ante amount (which I’ll again point out is far different than “unlimited” QE), the market conditions we observe at present have been consistently associated with negative outcomes throughout history.
The chart below shows the S&P 500 since 1928, with blue bars identifying points where 1) the Shiller P/E exceeded 18; 2) the S&P 500 was above its upper Bollinger bands on daily, weekly and monthly resolutions; 3) the percentage of advisory bulls exceeded 45%, with bears less than 27% (sentiment data prior to 1960 is imputed based on the strong post-war relationship between sentiment and measures of price momentum), and; 4) the 10-year Treasury yield exceeded its average over the prior 6-month period. This set of criteria is one of many observationally equivalent ways to define an “overvalued, overbought, overbullish, rising-yields” environment.
It's worth noting that Hussman's fund, due to the fact that it's been so cautious and hedge, has had a very rough run, and is close to post-crisis lows.
That being said, Hussman's general predicament is not that different from many investors who can't abide by this huge rally, but don't want to get creamed by the bull run.
09-18-12
ANALYTICS
Risk-On-Off
CANARIES
GLOBAL
RISK
3
3 - Risk Reversal
VOLATILITY STAGE - The Bridge from RISK On to RISK Off.
Much has been written over the course of the last few days/weeks about what Bernanke could do, has done, and the efficacy of said actions. Inflation, unintended 'energy' consequences, debasement, financial repression, scarcity transmission mechanisms all come to mind but realistically they are all just symptoms of what is really going on. As the following chart from Barclays shows, the real effect of LSAPs is to suppress the signaling effect of macro data from the real economy. During periods of extreme monetary policy, the stock market's beta to macro-economic data surprises is dampened massively - and hence the forced mal-investment and mis-allocation of funds occurs. However, given the now open-ended nature of QE3, this may change with the 'good news/bad news' logic leading to a stronger market (higher beta) response (since all bad news is automatically attenuated by QEternity and thus all the good news is out there).
Via Barclays:
An important driver of this attenuated market response to economic news was the sense that important elements of the monetary policy framework were ‘in play’, and that policy was likely to respond if the economy weakened sufficiently, but not otherwise. In this context, bad economic news may not seem so horrible, if it is perceived to raise the probability of a market-friendly monetary policy response. In the run-up to June 2011, the question facing investors was whether the Fed would allow QE2 to end in June, in accord with the Fed’s stated intention. More recently, the question has been whether the Fed would put a more aggressive policy in place. But the ‘good news/bad news’ logic was much the same.
It seems to us that this logic will not, however, remain operative in the months to come, since the policy frameworks recently announced by both the Fed and the ECB have no stated end date on which markets can focus (as did QE2), and are not likely to be materially adjusted in response to economic data for some months to come. Economic news may have been a ‘good news/bad news’ story in the recent past. But now that the monetary policy responses to economic weakness are in place, markets have had the good news.
In the future, bad economic data will be, well, just bad, and good news will be unambiguously positive. This should lead to a stronger market response to economic data in the weeks and months to come.
Up until now, the LHD 7 Iwo Jima Big-Deck Amphibious Warfare ship was all alone in the Arabian Sea, patiently awaiting orders to liberate this or that middle east country of their oil reserves. This is no longer the case: launching today in general direction - Middle East - for a brand new 7 month engagement, is the LHA 1 Peleliu Amphibious Ready Group, consisting of the amphibious assault ship, the USS Peleliu which consists of 4000 marines. LHA 1 also comprises of the amphibious transport dock USS Green Bay and the dock landing ship USS Rushmore. Also deploying Monday is the Marine Corps' 15th Marine Expeditionary Unit and elements of Fleet Surgical Team 1, Helicopter Sea Combat Squadron 23, Assault Craft Units 1 and 5, and Beach Master Unit 1. And as we reported previously, the middle east veteran - the CVN 74 Stennis aircraft carrier - was providently already on its way. In other words, in about 2 weeks, the Middle east will be the focal point of 3 aircraft carriers, 2 amphibious assault forces, and who knows how many "developed" world armadas, all hell bent on securing that one extra bit of Middle East oil, under the guise of spreading democracy and liberating the local people who "hate America's for its freedom."
This is how US naval assets stand as of last week via Stratfor:
Also deploying Monday is the Marine Corps' 15th Marine Expeditionary Unit and elements of Fleet Surgical Team 1, Helicopter Sea Combat Squadron 23, Assault Craft Units 1 and 5, and Beach Master Unit 1.
Their departure comes against the background of ongoing tensions with Iran over its nuclear program and amid anti-American unrest throughout the Muslim world triggered by an anti-Muslim film trailer posted on the Internet.
U.S. Ambassador to Libya Chris Stevens and three other Americans working for the State Department -- including two local former Navy SEALS, Encinitas resident Glen Doherty and Tyrone Woods of Imperial Beach -- were killed by an armed force in the Libyan city of Benghazi on Sept. 11 amid demonstrations over the film.
The sailors and Marines in the Peleliu Ready Group recently completed nine months of training scheduled long before the current anti-American unrest flared. Rescue training is a common part of pre-deployment training for Marine expeditionary units.
The final pre-deployment training was on the evacuation of noncombatants from hot-spots, according to U.S military authorities. The exercise included role-players on San Nicholas Island and Victorville in San Bernardino County who were "rescued" by Marines and taken by helicopter to Camp Pendleton, the Los Angeles Times reported.
The 15th MEU was on a deployment similar to the one starting Monday when the Sept. 11 terrorist attacks occurred. Summoned back to their ships from a port-call in Australia, the Marines were among the first U.S. combat forces into Afghanistan just weeks later, The Times reported.
Bullish Brent calendar spreads may be cheap to quite cheap once all this firepower finally arrives at its soon to be liberated, pre-election destination.
Having trouble keeping track of how many countries have now officially rebelled against Pax Americana in the past week? Here is your handy one-stop resource to keep you abreast of all the latest in the embassy storming fad.
Click to Enlarge
Since the map above is as of September 13, don't forget to add Afghanistan and now Pakistan. And further details courtesy of AP:
PAKISTAN
Hundreds of protesters demonstrating against the film torched a press club and a government building in the northwestern town of Wari, setting of clashes with police that killed one demonstrator and wounded several others.
Hundreds also clashed with police for a second day in the southern city of Karachi as they tried to reach the U.S. Consulate there. Police lobbed tear gas and fired in the air to disperse the protesters who were from the student wing of the Jamaat-e-Islami party. Police arrested 40 students, but no injuries were reported.
AFGHANISTAN
Demonstrations turned violent outside a U.S. military base in Kabul, where about 800 protesters burned cars and threw rocks at Camp Phoenix. Many in the crowd shouted "Death to America!" and "Death to those people who have made a film and insulted our Prophet."
Police fired into the air to hold back about crowd and to prevent it from pushing toward government buildings downtown. More than 20 police officers were slightly injured, most of them hit by rocks. Protests also broke out along the main thoroughfare into Kabul, where demonstrators burned shipping containers and tires. The crowd torched at least one police vehicle before finally dispersing.
INDONESIA
Hundreds clashed with police outside the U.S. Embassy in Jakarta, hurling rocks and firebombs and setting tires alight. It was the first violence seen in the world's most populous Muslim country since international outrage over the film exploded last week. Eleven policemen were rushed to the hospital after being pelted with rocks and attacked with bamboo sticks, while four protesters were arrested and one was hospitalized.
Demonstrators burned a picture of President Barack Obama and tried to ignite a fire truck parked outside the embassy after ripping a water hose off the vehicle and torching it, sending black smoke billowing into the sky. Police used water cannons and tear gas to try to disperse the crowd as the protesters shouted "Allahu Akbar," or God is great, and burned a U.S. flag. Demonstrations were also held in the cities of Medan and Bandung.
IRAN
Iran's top leader urged the West to show it respects Muslims by blocking the film. Ayatollah Ali Khamenei said Western leaders must prove they are not "accomplices" in a "big crime." Khamenei was quoted on state TV as noting that some nations place restrictions on expression, such as banning Nazi-related sites.
EGYPT
An al-Qaida-linked Egyptian jihadist, Ahmed Ashoush, issued a religious edict, or fatwa, saying it is justified to kill anyone who took part in the making of the prophet film.
Ashoush, who was believed close to Osama bin Laden and al-Qaida's current No. 1, Ayman al-Zawahri, heads the relatively obscure "Jihad Group." His edict, posted on a militant website, says the blood of the participants in the movie "should be shed, including the producer, the director and the actors" and that "their killing is a duty of every capable Muslim."
WEST BANK
Several hundred Palestinians held a peaceful protest in the city of Ramallah against the film. Men stood on one side, chanting, "We will sacrifice for you, oh Muhammad." Women wearing headscarves stood on the other side, holding up large posters in Arabic, including one that read: "The Prophet is more important than my family."
UNITED ARAB EMIRATES
The country's telecommunication regulator said it has blocked access to the video and urged users to report any existing links to the country's Internet providers. Internet users in the Emirates searching by name for the film on YouTube, for example, now get a standard page used for other censored sites in the country saying "this website is not accessible in the UAE." There are loopholes, though, since YouTube itself is not blocked and it is still possible to view the film by clicking recently posted links found within the site.
Unable to reach a compromise over the weekend, South Africa is now in an all out labor strike, with the police again firing rubber bullets at miners with lethal escalation guaranteed
Back from vacation, the once again penniless citizens of Spain, Greece, and Portugal have resumed protesting austerity
Netanyahu telling Meet the Press Iran will have a nuke in six-seven months and must be stopped beforehand
Warships from more than 25 countries, including the United States, Britain, France, Saudi Arabia and the UAE, launching a military exercise in the Straits of Hormuz
A third US aircraft - the CVN-74 Stennis - carrier is en route to Iran with an ETA of about 10 days
And finally, a potential catalyst to light this whole mess on fire, Iran's Revolutionary Guard announcing that its troops are now on the ground in Syria.
Far more important to most Americans than the interest rate on their mortgages is how much they have to pay to fill up their cars. This is true, I think, for the group affected by both costs but the amount of people in the United States that have no mortgages and still have to pay for gas to go to work and the grocery store is a far larger amount of people than those that own houses. Further, the amount of time necessary to lower mortgage rates is a much longer proposition than the time it takes to raise prices at the gas stations. With oil hovering around $100.00 and likely to go higher as a consequence of the Fed’s recent actions; trouble may be brewing.
Even without Bernanke’s recent move the price of gas has escalated dramatically. Regular gas, since July 1, has risen 54 cents to $3.87 which is a 14% move up in just two and one-half months. It is now highly likely, in my view, that regular gas will reach $4.00/gallon and move higher from there. This will cause a hue and a cry from the streets and the Press will turn its attention to this and the Fed and Mr. Obama may well get blamed for this outcome and hence the “unintended consequence” swings fully into view.
09-17-12-
GLOBAL RISKS
INFLATION
22
22 - Oil Price Pressures
TO TOP
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
Curious why the mere prospect of a gold, or gold-linked "standard" (or any other hard-asset backing for that matter) - a monetary system in which the creation of money units, i.e., literally the creation of money out of thin air, is constrained by some real-world limitation is the scariest thing to the status quo, the following chart courtesy of Grant Williams should explain it all. It shows the expansion of the world's monetary bases coupled with the expansion in the world's gold supply over a comparable period. Needless to say, expanding the money supply at 8% in several years will hardly lead to the massive inflation needed to "inflate away" the roughly $35 trillion in debt overhang by now (vs $21 billion through 2009) that is crushing the entire developed world.
09-19-12
MONETARY
CENTRAL BANKS
CENTRAL BANKS - Liquidity Everywhere and Yet No Solution
The world is awash in it. If you listen closely you can hear the giant slurping sound of it rushing the shores at home and continents away. The Fed is providing it and the ECB is providing it while China doesn’t need it but it is sloshing around anyway. The world’s problems, the financial mess in Europe, the global slowdown that is resplendent from sea to not-so-shining sea is all being addressed with liquidity.
There is nothing of substance to deal with the structural issues that is forthcoming from the American Congress and there will not be until after the elections are completed. Then it will be right or left, more social programs or a rather serious cut-back in governmental spending but for now; the spacious sound of nothing.
In Europe it is even worse. The ECB may well be the only functioning institution on the Continent and they promise and they bray and they talk of an unlimited response that is firmly tied to the political part of the equation, the European Union, making up its mind and deciding and approving and blessing the enterprise but with the lack of this divination; the spacious sound of nothing.
China, the growth engine of the world for so many years and the bringer of manna and other bread leavened and unleavened, faces the shutting down of its almost mystical ovens. The end was due to come, the manufacture of cities and the cheap labor that built them would inevitably halt. It was always when and how and by how much and I believe we are witnessing the drawing of the curtain on a fabled age. Perhaps it was complicated by the change of guard in China or perhaps it is as simple as nothing else left to do; but steel and raw materials and an almost 20% decline in exports to Europe also echo with the spacious sound of nothing.
A very macro view of the world leads me to suggest that it is not one nation or another or even one continent or another but the totality of them all together that is leading the globe into what may be quite a serious slowdown. It is nice to think that the Central Banks will solve all of the world problems just as it is nice to think that ever increasing debt paying off old debt will right the ship before it falters in the storm but the very acts of the Central Banks are part of the problem if not the cause of the problem as the accompanying structural reforms that should be taking place do not and so liquidity is provided but it is not the solution for the problem and hence we find an answer but it is not the correct response to the question.
Liquidity, it must be said, has casual effects such as inflation, ratings downgrades, decreasing valuations and, ultimately, a lesser value of goods and services as ever more capital is necessary to purchase what is desired to be bought. This Central Bank liquidity also produces ever higher and higher levels of debt and, aside from the interest rate, the principal must be paid back by economies such as America that are flat-lining or by economies in Europe that are in distinct decline. You may applaud at the opening act but the second act may produce quite different results. The $2.2 trillion balance sheet now at the Fed is going higher and there is not even a cap or a limit in place. Perhaps it is the “it worked for the ECB and maybe it will work for us” play but it is rife with danger. The ECB pledge of ad infinitum funds is clearly bound by the conditions of the pledge and those that must approve may never approve given the political infighting between the haves and have-nots that is currently taking place in Europe.
Europe and America face fiscal cliffs of their own making and what anyone can afford is generally the needle that breaks both a camel’s and a union’s back. The firewall in Europe, heralded by the IMF and every institution in Europe, has been revealed to be a wall of translucence as Spain is settling into the frying pan and dredging itself with oil for the fire. The firewall notion was ill conceived and poorly orchestrated and as demonstrated by reality, a firewall does nothing for those that live inside it except defend it from outside enemies when the enemies were always within.
Finally, liquidity does accomplish one other major factor; it provides a tremendous amount of leverage. Liquidity provided must be paid back and if the banks and nations that receive it do not provide structural changes, reduce their deficits, decrease their borrowings then, ultimately, the gods of chaos are unleashed. At this point it is no longer the interest that is paid but the return of capital that must be paid that becomes the number one issue. Liquidity has its price and I submit to you today that the time is fast approaching when a world awash in liquidity overwhelms the barriers and the dike is breached. The applause of today may become the tears of tomorrow if the current course continues.
"when things are this senseless, a reversion to sensibility will occur again at some point."
His view is to be long vol and as the disconnect between the economic cycle and stocks continues to grow, we present three mind-numbing charts of the exuberant hopefulness that is now priced in (oh yeah, aside from AAPL actually selling some iPhones in pre-order). Whether it is earnings hockey-sticks, global growth ramps, or fiscal cliff resolutions, it seems the market can only see the silver-lining. We temper that extreme bullish view with the fact that all the monetary policy good news has to be out now - for Ben hath made it so with QEternity.
These three factors - weak economic growth, powerful monetary policy and elevated public policy uncertainty - remain the critical drivers of performance and with weakening data, the market is all the more dependent on central bank life support - and following the rally through the Fed signalling period to 1460, much of the monetary policy related rally seems to be priced in, with the market already discounting considerable data improvement. With already high oil, gasoline and food prices, the Fed’s balance sheet expansion risks driving down the dollar, boosting commodities and dampening consumption and thus growth.
As this chart comparing P/E multiples to the ISM New Orders index, we need to see some serious unicorn-conjuring for these valuations to be sustained...
One tool often utilized to assess the attractiveness of equities relative to other assets is the equity risk premium (ERP), also known as the Fed model or the difference between the forward earnings yield and the yield on the 10 year U.S. Treasury. We have argued, based in part on the prior period of extreme financial repression in the U.S. following WWII, that a sustained contraction in the ERP and expansion of the PE multiple was unlikely until the Fed began the policy normalization process. Integrating inflation and a ratio of stock to bond market volatility paints a far less compelling picture for equity market valuation. We are at least 3 years from any normalization of Fed policy (according to them) and thus...
the following chart (or real rates vs P/E multiples) suggests current valuations are unsustainable at best, or down-right crash-worthy as you simply can't fight the cash-flow forever...
The reach for yield and safety has led investors to push into mega caps - defensive ingredients including lower betas, lower earnings volatility, and lower P/E multiples as well as higher dividend yields. This has pushed the relative median P/E of the mega caps notably above smaller (and higher beta) stocks - as the somewhat odd beta-defying rally of the last few weeks took hold...
Our point here is that 1) the spread between LTM and NTM PE is gaping (something that we saw in the run-up to the peak in 2008), and 2) that the mega-caps which dominate the indices (which everyone watches including Ben) are 'over-valued' rightly or wrongly relative to less-defensive stocks... leaving plenty of room for rotational risk-off as well as reality disconnects
On balance, Barclays are less bullish than they were at this time in either of the last 2 years. Investors seem to mis-remember history; monetary policy was not the only driver of the rallies following QE2 and Operation Twist. In the signalling period prior to QE2’s launch, and in the immediate aftermath of its commencement, both the economic and public policy outlooks were improving.
[They] remain relatively cautious given a weaker economic outlook and no clear trend in the polls to provide confidence that the U.S. can avoid the potential massive tax hike scheduled for January 1, 2022
Source: Barclays
09-18-12
PATTERNS
ANALYTICS
REAL VERSUS NOMINAL: Hyperinflationary Germany Tells the Story
A century apart and a continent apart. With Bernanke's fingers now glued on CTRL-C, perhaps the reality of these two charts suggests it's really not different this time at all...
Chart 1 - GERMAN REAL STOCK MARKET 1914-1927
Chart 1 is the real value of the German stock market from 1914 to 1927 (and the lower chart is the nominal price)
Chart 2 -The GERMAN Wealth Effect
Chart 2 is the real value of the Dow Jones Industrial Average from 1999 to Present (real = adjusted for the value of Gold)
Can you identify what is being charted in each of these images?
Doing so may help to lift the veil of Bernanke's (and Draghi's) Grand Plan.
The Grand Plan, as we have espoused for years, is to force all 'safe' assets to a point where they appear 'rich' to risk assets - and inflate another bubble to take our eyes off the debt being inflated away in the other hand. In the Fed's mind, they tried this before with QE1 and it worked magnificently - lifting stocks phoenix-like from the ashes of a credit-crunch reality. However, this time is different. The last time the Fed forced MBS CurCpn yields down to 'match' the S&P 500's dividend yield was March 2009 - and investors 'rotated' back to risk (to many people's surprise). Yields were at 4% then and the S&P's P/E multiple was 10x; this time yields are just above 2% and the S&P 500's P/E multiple is a staggering 14.9x. We suspect that rather than re-enacting the post-March 2009 eruption, valuations this time will force that liquidity to flood into non-equity asset classes (and with HY call-constrained, it leaves little but the energy and precious metals complex to soak up the Fed's exuberance).
The 8-Step Path to where we are...
1) Fed buys TSYs to fund deficit and keep government alive - under guise of maintaining rates low and performing extraordinary monetary policy out the curve (but there is a limit - see Japan)
2) Fed action pushes market to reach for yield - corporate credit sees huge technical demand, but valuations and call constraints will always limit gains...as well as leverage constraints holding new issuance back at some point.
3) QE1 impact remained the greatest - MBS-related repression to force the mortgage yield down to the S&P's dividend yield.
The lower pane shows the spread between the Current Coupon 30Y MBS yield and the dividend yield of the S&P 500 - notice the similarity to another period in time...
4) QEternity - try that again...but... yields were 4% then, now they are 2% and our balance-sheet-recession minds have changed behaviorally...
5) When it worked before S&P 500 P/E was 10x and was 'defensible' from a valuation perspective (to some) to rotate from MBS to stocks...
6) This time S&P 500 P/E is almost 15x!
7) The financial repression will continue until morale improves, but...
8) at these levels of valuation, we suspect non-equity asset classes will get the brunt of the liquidity flush (i.e. Gold/Commodities). HY remains call-constrained and while issuance is very high, there is a limit to just how much debt these firms will want to take on - no matter how cheap.
As we noted earlier, fundamentals will matter again at some point but the Fed expecting a pile in at 15x of the scale of the pile-in at 10x is insane - especially with the lower yields empirically setting average P/Es considerably lower (making the current P/E even more fantasy-like).
Just over a week ago, we wrote of the challenge to Obama's NDAA totalitarian bill. Hope remained that Chris Hedges' view of the indefinite detention as "unforgivable, unconstitutional, and exceedingly dangerous" would bolster judgment. However, as Russia Today reports, a lone appeals judge bowed down to the Obama administration late Monday and reauthorized the White House's ability to indefinitely detain American citizens without charge or due process. On Monday, the US Justice Department asked for an emergency stay on the previous Chris Hedges'-driven order, and hours later US Court of Appeals for the Second Circuit Judge Raymond Lohier agreed to intervene and place a hold on the injunction. The stay will remain in effect until at least September 28, when a three-judge appeals court panel is expected to begin addressing the issue. It would appear the total fascist takeover of Amerika is drawing nearer by the day.
Some background:
What is ironic, is that in the ongoing absolute farce that is the theatrical presidential debate, there hasn't been one word uttered discussing precisely the kind of creeping totalitarian control, and Orwellian loss of constitutional rights, that the biparty-supported NDAA would have demanded out of the US republic. Why? Chris Hedges said it best:
The oddest part of this legislation is that the FBI, the CIA, the director of national intelligence, the Pentagon and the attorney general didn’t support it. FBI Director Robert Mueller said he feared the bill would actually impede the bureau’s ability to investigate terrorism because it would be harder to win cooperation from suspects held by the military. “The possibility looms that we will lose opportunities to obtain cooperation from the persons in the past that we’ve been fairly successful in gaining,” he told Congress.
But it passed anyway. And I suspect it passed because the corporations, seeing the unrest in the streets, knowing that things are about to get much worse, worrying that the Occupy movement will expand, do not trust the police to protect them. They want to be able to call in the Army. And now they can.
Via RT, Obama wins right to indefinitely detain Americans under NDAA:
A lone appeals judge bowed down to the Obama administration late Monday and reauthorized the White House’s ability to indefinitely detain American citizens without charge or due process.
Last week, a federal judge ruled that an temporary injunction on section 1021 of the National Defense Authorization Act for Fiscal Year 2012 must be made permanent, essentially barring the White House from ever enforcing a clause in the NDAA that can let them put any US citizen behind bars indefinitely over mere allegations of terrorist associations. On Monday, the US Justice Department asked for an emergency stay on that order, and hours later US Court of Appeals for the Second Circuit Judge Raymond Lohier agreed to intervene and place a hold on the injunction.
The stay will remain in effect until at least September 28, when a three-judge appeals court panel is expected to begin addressing the issue
On December 31, 2011, US President Barack Obama signed the NDAA into law, even though he insisted on accompanying that authorization with a statement explaining his hesitance to essentially eliminate habeas corpus for the American people.
“The fact that I support this bill as a whole does not mean I agree with everything in it,” President Obama wrote. “In particular, I have signed this bill despite having serious reservations with certain provisions that regulate the detention, interrogation, and prosecution of suspected terrorists.”
A lawsuit against the administration was filed shortly thereafter on behalf of Pulitzer Prize-winning journalist Chris Hedges and others, and Judge Forrest agreed with them in district court last week after months of debate. With the stay issued on Monday night, however, that justice’s decision has been destroyed.
With only Judge Lohier’s single ruling on Monday, the federal government has been once again granted the go ahead to imprison any person "who was part of or substantially supported al-Qaeda, the Taliban or associated forces that are engaged in hostilities against the United States or its coalition partners" until a poorly defined deadline described as merely “the end of the hostilities.” The ruling comes despite Judge Forrest's earlier decision that the NDAA fails to “pass constitutional muster” and that the legislation contained elements that had a "chilling impact on First Amendment rights”
Because alleged terrorists are so broadly defined as to include anyone with simple associations with enemy forces, some members of the press have feared that simply speaking with adversaries of the state can land them behind bars.
"First Amendment rights are guaranteed by the Constitution and cannot be legislated away," Judge Forrest wrote last week. "This Court rejects the Government's suggestion that American citizens can be placed in military detention indefinitely, for acts they could not predict might subject them to detention."
Bruce Afran, a co-counsel representing the plaintiffs in the case Hedges v Obama, said Monday that he suspects the White House has been relentless in this case because they are already employing the NDAA to imprison Americans, or plan to shortly.
“A Department of Homeland Security bulletin was issued Friday claiming that the riots [in the Middle East] are likely to come to the US and saying that DHS is looking for the Islamic leaders of these likely riots,” Afran told Hedges for a blogpost published this week. “It is my view that this is why the government wants to reopen the NDAA — so it has a tool to round up would-be Islamic protesters before they can launch any protest, violent or otherwise. Right now there are no legal tools to arrest would-be protesters. The NDAA would give the government such power. Since the request to vacate the injunction only comes about on the day of the riots, and following the DHS bulletin, it seems to me that the two are connected. The government wants to reopen the NDAA injunction so that they can use it to block protests.”
Within only hours of Afran’s statement being made public, demonstrators in New York City waged a day of protests in order to commemorate the one-year anniversary of the Occupy Wall Street movement. Although it is not believed that the NDAA was used to justify any arrests, more than 180 political protesters were detained by the NYPD over the course of the day’s actions. One week earlier, the results of a Freedom of Information Act request filed by the American Civil Liberties Union confirmed that the FBI has been monitoring Occupy protests in at least one instance, but the bureau would not give further details, citing that decision is "in the interest of national defense or foreign policy."
Josh Gerstein, a reporter with Politico, reported on the stay late Monday and acknowledged that both Forrest and Lohier were appointed to the court by President Obama.
As Chris Hedges said so well last week as he sued Barack Obama:
This demented “war on terror” is as undefined and vague as such a conflict is in any totalitarian state. Dissent is increasingly equated in this country with treason. Enemies supposedly lurk in every organization that does not chant the patriotic mantras provided to it by the state. And this bill feeds a mounting state paranoia. It expands our permanent war to every spot on the globe. It erases fundamental constitutional liberties. It means we can no longer use the word “democracy” to describe our political system.
The supine and gutless Democratic Party, which would have feigned outrage if George W. Bush had put this into law, appears willing, once again, to grant Obama a pass. But I won’t. What he has done is unforgivable, unconstitutional and exceedingly dangerous. The threat and reach of al-Qaida—which I spent a year covering for The New York Times in Europe and the Middle East—are marginal, despite the attacks of 9/11. The terrorist group poses no existential threat to the nation. It has been so disrupted and broken that it can barely function. Osama bin Laden was gunned down by commandos and his body dumped into the sea. Even the Pentagon says the organization is crippled. So why, a decade after the start of the so-called war on terror, do these draconian measures need to be implemented? Why do U.S. citizens now need to be specifically singled out for military detention and denial of due process when under the 2001 Authorization for Use of Military Force the president can apparently find the legal cover to serve as judge, jury and executioner to assassinate U.S. citizens, as he did in the killing of the cleric Anwar al-Awlaki in Yemen? Why is this bill necessary when the government routinely ignores our Fifth Amendment rights—“No person shall be deprived of life without due process of law”—as well as our First Amendment right of free speech? How much more power do they need to fight “terrorism”?
Fear is the psychological weapon of choice for totalitarian systems of power. Make the people afraid. Get them to surrender their rights in the name of national security. And then finish off the few who aren’t afraid enough. If this law is not revoked we will be no different from any sordid military dictatorship. Its implementation will be a huge leap forward for the corporate oligarchs who plan to continue to plunder the nation and use state and military security to cow the population into submission.
09-19-12
THEME
STATISM
CURRENCY WARS
STANDARD OF LIVING
GENERAL INTEREST
TO TOP
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TODAY'S TIPPING POINTS
The Fed May Be Pumped Up
