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Fri. October 4th, 2013 |
THE MACRO ANALYTICS - A Technical Update What Are Tipping Poinits? |
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TODAY'S TIPPING POINTS"BEST OF THE WEEK " |
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RISK - 3 Rising Risks To The Markets The 3 Rising Risks To The Markets 10-03-13 Lance Roberts of STA Wealth Management via ZH I have written about in the past the detachment between underlying fundamentals and the artificially elevated markets. (See here, here and here) However, as I specifically stated in the article entitled "The Fed Taper And Market Direction:"
However, it is critically important to understand that market reversions do not occur without a catalyst. Whether it is the onset of an economic recession, a natural disaster or a financial crisis - there is always something that sparks the initial selloff that leads to a full blown market panic. With this idea in mind here are 3 rising risks that investors should be paying attention to. 1) Government Shutdown/Debt Ceiling Debate The markets were well aware that a Government shutdown was likely to occur. However, the markets believed that it would be a short term event. Unfortunately, that may not be the case. As reported by Bloomberg:
The risk that this poses for the markets are twofold. First, with the economy already growing very weakly the government shutdown acts as a fiscal drag on the economy. The longer the government shutdown lasts the more negative impact there will be to economic growth. Secondly, the markets were prepared, and expected, a short term event with the Republicans quickly "rolling over" and resolving the fiscal crisis. However, the prolonged debate could roil the markets in coming weeks. 2) Revenue Growth Is Non-Existent As I discussed recently, earnings, as well as valuations, are becoming extremely stretched. Specifically, I wrote that:
The 2-Panel chart below shows the S&P 500 versus topline revenue per share. As you can see in the top chart revenue per share has flatlined in recent quarters even as prices rise due to the artificial interventions from the Federal Reserve. The second chart is the most important of the two. Historically, when the annual change in revenue per share declines the market is generally correcting with it. Currently, the price of the markets have detached from the underlying revenue growth. This is unlikely to be sustained for an extended period of time. 3) "Herding" Into Popular Assets One of the phenomenon’s that has occurred over the last several years is the proliferation of hedge funds, high frequency trading firms and program trading. The problem with this explosion is that they are more and more dollars chasing a finite set of assets. This "asset chase" leads to price dislocations and increased risk. As reported by Bloomberg (via Zero Hedge)
Of course, as we have shown many times in the past much of the rise in the market can be attributed to the Federal Reserve's monetary interventions. The risk is going to be what happens when they actually begin to reduce that support? Complacency Not An Option While the recent Federal Reserve inaction is bullish for stocks in the short term there are plenty of reasons to remain somewhat cautious. Stocks are overvalued, rates are rising, earnings are deteriorating and despite signs of short term economic improvements the data trends remain within negative downtrends. Investors, however, have disregarded fundamentals as irrelevant as long as the Federal Reserve remains committed to its accommodative policies. The problem is that no one really knows how this will turn out and the current assumptions are based upon past performance. Of course, as anyone who has ever invested should already know, past performance is no guarantee of future results.
Bill Gross' Advice On Why You Should "Run For The Hills" 10-03-13 Twitter via ZH
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10-04-13 | RISK |
1 - Risk Reversal |
PATTERNS - Treasury Warns Current "Herding" Threatens US Financial System Treasury Warns Asset Manager "Herding" Threatens US Financial System 10-02-13 Bloomberg via ZH Just two weeks ago we explained how when there is only one driving factor for market performance and "too-many coat-tail clinging asset managers chasing too few real alpha opportunities" then problems can arise. Critically, we showed the correlation between the S&P 500 and hedge fund returns has never been higher and is approaching 1. So it is refreshing that the Treasury Department agrees in a recent report that this "herding into popular assets" by asset managers could pose a threat to the US financial system.
Well given the charts below... we'd say the systemic threat has never been higher... Hedge fund managers have become high cost version of their index-tracking ETF brethren... And performance advantages have dwindled... as Stan Druckenmiller previously noted: On why Hedge Fund managers are less successful:
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10-03-13 | RISK PATTERNS |
1 - Risk Reversal |
FINANCIAL REPRESSION - The U.S. (and global economy) may have to get used to financially repressive – and therefore low policy rates – for decades to come. Bill Gross' Monthly Thoughts: Expect The "Beautiful Deleveraging" To Conclude... Some Time In 2035 10-02-13 PIMCO A week ago, we first reported that Bridgewater's Ray Dalio had finally thrown in the towel on his latest iteration of hope in the "Beautiful deleveraging", and realizing that a 3% yield is enough to grind the US economy to a halt, moved from the pro-inflation camp (someone tell David Rosenberg) back to buying bonds (i.e., deflation). This was music to Bill Gross' ears who in his latest letter, in which he notes in addition to everything else that while the Fed has to taper eventually, it doesn't actually ever have to raise rates, and writes: "The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time." How long one may ask? "the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!... A highly levered U.S. and global economy cannot deleverage “beautifully” without repressive future policy rate." In the early 1940s there was also a world war, but PIMCO's bottom line is clear: lots and lots of central planning for a long time. From PIMCO: Survival of the Fittest?William H. Gross I hate crows and my wife Sue hates bugs, but like most married couples we have learned to live with our differences. Crows eat bugs though, and bugs eat bugs, and that scientific observation sets the context for the next few paragraphs of this month’s Investment Outlook.
About those crows: They screech, they jabber, they complain from the treetops and then once on the ground they hop, hop, hop all over the street looking for garbage. Flying seems beyond them – too much effort to flap those ebony wings. They prefer to play chicken with my car rolling into the driveway at 5 mph. “Get out of my way,” they seem to be saying. “We’re probably on the endangered species list and if you hit us, you’re the one that’ll be sorry.” Probably true – damn crows. About those bugs: Sue hates any kind of bug, but especially those with lots of legs. Creepy crawly legs. Centipedes, Millipedes, even Octapedes and there are no eight-legged bugs. And of course there’s the world’s perennial favorite – the cockroach. Who could love “La Cucaracha?” Not Sue, that’s for sure. Our hatred of bugs and crows though is perhaps too strong of a word. “Dislike” or “not like” might be better. Nature itself is rather neutral when it comes to any living thing – including us humans – so perhaps we Grosses should take a lesson from the grand Mother. And to think of it, perhaps it is nature and its rather incomprehensible neutrality that “bugs” me the most – not crows. Why, I wonder, is it that nature seems so indifferent to life, that it promotes, even encourages the Grim Reaper as a necessary condition for living and evolving? Why must it create multiple examples of a living species and then rather innocently step aside as they voraciously consume one another? Must Darwin and his survival of the fittest be God’s philosophical guidepost? Why couldn’t a loving and theoretically omniscient creator just make it simple as opposed to infinitely complex? Why couldn’t the Mother, for instance, pattern an outcome that produced a pride of one or two perfectly healthy lion cubs as opposed to three or four with flaws – the latter two becoming hyena food because they were too slow or insufficiently hyena-aware. So the hyenas could live, you say? Then why create hyenas in the first place – leave them out of the plan and prevent the needless suffering. Of course we would then probably all become grazing cows, chewing our cuds in a more pastoral but less painful setting. Perhaps – but better a cow, I think, than millions of crows eating billions of bugs. Hindus would agree. If I were the creator I’d do it better, but then I’m not. As for this life – count me in by necessity. I’ll play the game but reluctantly. My rage and incomprehension at the pain and death of living things – especially two-legged ones – is as old as Mother time herself, but forever fresh and completely unanswerable. Speaking of questions with no answers:
A few days before the September meeting, I tweeted that the Fed would “tinker rather than taper,” which was close to the end result, but still not totally accurate. They refused to budge, with an uncertain economy being the explanation. Ben Bernanke sort of sat back and did nothing, just like Mother Nature with her crows and bugs. The debate though is actually only so much noise in the scheme of things. The Fed will have to taper, cease and then desist someday. They can’t just keep adding one trillion dollars to their balance sheet every year without something negative happening – either accelerating inflation, a tanking dollar or a continued unwillingness on the part of corporations to invest because of the resultant low and unacceptable returns on investment. QE (quantitative easing) has to die sometime. Just like Mother Nature, death and creative destruction seem to be part of the Grand Economic Scheme. What matters most for bond and other investors though is not timing of the taper nor the endpoint of QE, but the policy rate:
It’s the policy rate, both spot and forward, that prices markets and drives economies and investment decisions. QEs were simply a necessary medicine for rather uncertain and illiquid times. Now that more certainty and more liquidity have been restored, it’s time for the policy rate and forward guidance to assume control. Janet Yellen, future Fed Chairperson, would agree, as would oft-quoted Michael Woodford, Columbia University professor and 2012 Jackson Hole speaker, who seems to have become the private sector’s philosophical guru for guidance and benchmarks, that will now attempt to convince an investment public that what you hear is what you get. But if QE is soon to be out, and guidance soon to be what remains, I think investors should listen and invest accordingly. Not with total innocence, but sort of like a totally hyena-aware lion cub – knowing there’s bad things that can happen out there in the jungle, but for now enjoying the all clear silence of the African plain. In bond parlance, the all clear sign would mean that the Fed believes what it says, and if their guideposts have any credibility, they won’t be raising policy rates until 2016 or even beyond. The critical question to ask in terms of the level and eventual upward guide path of the policy rate is how high a rate can a levered economy stand? How much wood can a woodchuck chuck? How high a rate can a homebuyer handle? No one really knows, but we’re beginning to find out. The increase of over 125 basis points in a 30-year mortgage over the past 6–12 months seems to have stopped housing starts and importantly mortgage refinancings in its tracks. It was the primary “financial condition” that Chairman Bernanke cited in his September press conference that shifted the “taper to a tinker to a chance” that maybe they might do something next time. The 30-year mortgage rate of course is connected to the policy rate and its pricing in forward space. All yields in composite are what an economy has to hurdle in order to grow at historically hoped-for rates at 2–3% real and 4–5% nominal: Treasury yields, mortgage yields, corporate yields and credit card yields, all in composite. Ray Dalio and company at Bridgewater have the concept down pat. The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time. It is PIMCO’s belief that Yellen, Woodford and Dalio are right. If you want to trust one thing and one thing only, trust that once QE is gone and the policy rate becomes the focus, that fed funds will then stay lower than expected for a long, long time. Right now the market (and the Fed forecasts) expects fed funds to be 1% higher by late 2015 and 1% higher still by December 2016. Bet against that. The reason to place your bet on the “don’t come” 2016 line is what we have just experienced over the past few months. We have seen a 3% Treasury yield and a 4½% 30-year mortgage rate and the economy peeked its head out its hole like a groundhog on its special day and decided to go back inside for another metaphorical six weeks. No spring or summer in sight at those yields. The U.S. (and global economy) may have to get used to financially repressive – and therefore low policy rates – for decades to come. As the accompanying chart shows, the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035! I’m not gonna stick my neck out for that – April, May and June of 2013 have taught me a lesson that low yields can become high yields almost overnight. But they should stay abnormally low. A highly levered U.S. and global economy cannot deleverage “beautifully” without repressive future policy rates, which in turn help to contain 5s and 10s although with much less confidence and more volatility as investors have seen recently.
Investment Implications In betting on a lower policy rate than now priced into markets, a bond investor should expect a certain pastoral quietude in future years, much like that grazing cow, I suppose. Not that exciting, but what the hay, it’s an existence! Portfolios should emphasize front end maturity positions that are stabilized by the Fed’s forward guidance as well as volatility sales explicitly priced in 30-year agency mortgages. Because of the inflationary intention of low policy rates, TIPS (Treasury Inflation-Protected Securities) and the avoidance of anything compositely longer than say 7–10 years of maturity should be favored (long liability structures such as pension funds excepted). PIMCO believes that such a modeled portfolio could likely return 4% in future years. A bond investor’s focus must simplistically be this: In this new age where short-term yields cannot go lower, let the yield curve, volatility and acceptably priced credit spreads be your North Star. Duration and its empowering carry are fading from the nighttime sky, especially for 10- and 30-year maturities. Mother Nature nor Mother Market cares not a whit for your losses nor your hoped for double-digit return from an equity/bond portfolio that is priced for much less. Be a contented cow, not a voracious crow, and graze wisely with increasing certainty that the Fed and its forward guidance is your best bet for survival. "Survival Speed Read"
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10-03-13 | US MONETARY
RISK
PATTERNS
STUDY BONDS |
3- Bond Bubble |
PATTERNS - Spotting Potential TRIGGER$
Now see where we are to determine a potential TRIGGER$: Broker Parlance: BTFD = Buy The F... Dip!
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10-04-13 | PATTERNS | ANALYTICS |
PATTERNS - Cognitive Dissonance Cognitive Dissonance Chart Of The Day (Year) 10-03-13 Zero Hedge Faith, hope, and central bank charity... that's all there is left in the new normal. (h/t @Not_Jim_Cramer) Source: Gallup and Bloomberg |
10-03-13 | PATTERNS | ANALYTCS |
DERIVATIVES & HEDGING - Markets being Manipulated Through the VIX
CLEARLY THE VIX IS BEING USED AS AN INSTRUMENT TO MANIPULATE THE MARKET. REMEMBER: VIX is an OPTIONS pricing metrics and therefore is directly related to Derivatives of almost all forms and additionally most Hedging Algos.
VOLATILITY INCREASING IN PRECIOUS METALS
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10-03-13 | PATTERNS | ANALYTICS |
YOUTH UNEMPLOYMENT - Millennials Devastated As American Dream Becomes Nightmare For Most Millennials Devastated As American Dream Becomes Nightmare For Most 10-01-13 The Generations Initiative, Georgetown University "It seems to me that if you went to college and took on student debt, there used to be greater assurance that you could pay it off with a good job," sums up one 'millennial', adding - sadly - "but now, for people living in this economy and in our age group, it's a rough deal." As WSJ reports, only about a third of adults in their early 20s works full-time - the lowest rate in 40 years - as the combination of structural changes and this recession "is devastating for millennial." Despite think-tanks demanding more of employers in terms of workplace rules and minimum wages, the reality is workers are expected to do more for less and be grateful - "this is a huge problem when think of where demand is going." The young are earnings less and less relative to the average earnings in the US...
as the younger generation's participation in the labor force fell more than 3 times as fast in the "lost decade" as in the previous two decades... Summing it all up - where the priority is:
And the full report is below: |
10-02-13 | US CATALYST EMPLOY- MENT |
7 - Chronic Unemployment |
CRISIS OF TRUST - Continues to Worsen Trade Of The Decade: Short 'Trust' 10-01-13 Zero Hedge The sad truth is that, based on Gallup survey data, Americans have never trusted other Americans less. Is this the "short" that catalyzed the real trade of the decade - "long gold" - as a hedge for the lies and liars that run the nation...
(h/t @Not_Jim_Cramer) |
10-02-13 | SENTIMENT | 22 - Public Sentiment & Confidence | MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - September 29th - October 5th |
| RISK REVERSAL | 1 | ||
| JAPAN - DEBT DEFLATION | 2 | ||
| BOND BUBBLE | 3 | ||
EU BANKING CRISIS |
4 |
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| SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] | 5 | ||
| CHINA BUBBLE | 6 | ||
| TO TOP | |||
| MACRO News Items of Importance - This Week | |||
GLOBAL MACRO REPORTS & ANALYSIS |
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US ECONOMIC REPORTS & ANALYSIS |
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GOVERNMENT SHUTDOWN - Key Dates The Debt-Ceiling Fight "Could Get Ugly" - Key Dates And Implications 09-30-13 Zero Hedge Even though there is no technical link between the two main fiscal issues – the continuing resolution (CR) and the debt ceiling bill - there is a link in the minds of market participants because prompt resolution of the CR could spell a favorable outcome for the debt limit. On the other hand, a government shutdown tonight could lead the market to be more pessimistic on the chances of a debt default. As BofAML notes, the link between the two issues is fairly complex but the shutdown battle is just the beginning - and, as they suspect "the fight could get ugly." As BofAML notes, In Washington, the link is viewed differently, with the House Republican leadership seeing an immediate deal on the CR leaving more negotiating room on the debt limit, but a shutdown having an immediate negative political impact and increasing the chances of a political capitulation on the debt limit. The link between the two issues is fairly complex. Debt ceiling – paying the bills The shutdown battle is just the beginning. At the time of this writing, the House decided to delay any action on an initial version of the debt limit extension, with numerous extraneous provisions attached, including a one-year delay in implementing the ACA, the Keystone pipeline, energy policy, financial regulation, and others. These extra provisions could be a basis for giving the Republicans some political cover in passing a debt limit extension. However, disagreements among House Republicans have delayed this initial vote on the debt limit for at least several days. The president continues to insist there will be no negotiations over the debt limit. The divisions among House Republicans, as well as the relative political weakness of the president, who has seen his approval ratings decline, increase the difficulty of finding a path that would lead to a solution. We expect a solution will be reached before the deadline because the political costs of a debt default would be significant. Important dates, mechanism of debt ceiling raise The deadline dates pertinent to the debt limit have been narrowed considerably. The Treasury released an estimate that extraordinary accounting maneuvers allowing public debt issuance at the debt limit would be exhausted by October 17, at the latest. The CBO also estimated that the cash balance would be run down sometime between October 22 and the end of the month. In our view, there are three relevant dates, using our estimates of the path of the debt outstanding subject to the limit and the Treasury cash balance. October 15 We estimate that the Treasury exhausts its accounting maneuvers on October 15. This date is the settlement of the mid-month coupon auctions, in the 3y, 10y, and 30y maturities. Any uncertainty in the ability to settle the entire auction without breaching the debt limit would require one of three choices:
with the last alternative being the most likely in our view. According to our estimates, this date would be a fairly close call, but maneuvers are certain to be exhausted in the next day or so, with a mid-October payment into the Highway Trust Fund. After this date, the Treasury would be in rollover mode, issuing just enough at each auction to roll over maturing debt, while paying for outlays using withholding tax revenues and steadily draining the outstanding cash balance. In our view the Treasury may have enough cash balance to make it to the end of the month and make the month-end interest payment, although there is substantial uncertainty. November 1 Treasury will fail on its scheduled spending obligations on November 1, having almost certainly exhausted its cash balance. A total of $67bn in payments for social security, Medicare, Medicaid, military pay, and veterans programs will be due on this date. After this, the Treasury could only spend money as it comes in via tax revenues, with scheduled payments being delayed or only paid partially. It is uncertain how the Treasury will prioritize spending programs. November 15 The first large coupon interest payment of $31bn is paid on November 15. If the debt limit is not raised by then, the Treasury is likely to fail to pay bond interest and will be in technical default. Key Factors There are four key factors while analyzing possible market implications of the upcoming fiscal debates, in our view.
Even though there is no technical link between the two issues, there is still a link in the minds of market participants because a government shutdown next week may lead the market to be more pessimistic on the chances of a debt default. While comparing the market reactions from 2011, we caution investors to be aware of certain key differences. There was a novelty to dealing with the ceiling in 2011. The US in recent history had not experienced such a bitter showdown on whether to pay the nation’s bills, and markets likely had greater uncertainty premiums. |
10-01-13 | US FISCAL | US ECONOMY |
GOVERNMENT SHUTDOWN - The Next Step In The Collapse Of The Dollar Government Shutdown: The Next Step In The Collapse Of The Dollar? 09-30-13 Brandon Smith of Alt-Market blog, via ZH There is a considerable amount of debate in alternative economic circles as to whether a federal government shutdown would be a “good thing” or a “bad thing”. Frankly, even I am partially conflicted. I love to read mainstream news stories about how a shutdown in the capital would be “horrible” because Barack Obama might have to reduce the White House cleaning staff and wash his own laundry: It's about time that sellout bastard did something to clean up his own act. I also love the idea of the federal government out of the picture and removed from the U.S. dynamic. Americans need to learn again how to live without the nanny state, even if only for a few weeks, and what better way than to go cold turkey. I can hear the tortured sobs of the socialists now, crying for their SNAP cards and low grade government healthcare. It's like...beautiful music... That said, as much as centralized government needs to be erased from the face of the planet, there are, indeed, consequences that must be dealt with. It is foolish to believe otherwise. No social system, and I mean NO SOCIAL SYSTEM, changes without pain to the population. I am not among those that cheer a federal shutdown, because I understand that the only people to ultimately feel suffering will be average citizens, not the establishment itself. The sheeple may be ignorant and blind, but no one deserves the kind of unmitigated hellfire that could rain down upon our country if a shutdown continues for an extended period of time. Call me a humanitarian... As I write this, mainstream media projections estimate a 90% chance of government shutdown by midnight on September 30th. Though technically, government funds will not run out until October 17th: http://www.usatoday.com/story/news/politics/2013/09/25/treasury-debt-limit-october-17/2867471/ We have dealt with this kind of talk before over the past few years, and it's interesting to see the kind of cynicism that has developed over the idea of a shutdown event. After all, the last time a government shutdown occurred was at the end of 1995, lasting only a couple of weeks into 1996. The GOP has folded so many times over the U.S. budget and debt ceiling that most of the public expects they will obviously do it again. It is certainly possible that the Republicans will roll over, however, I am not so sure of that this time around. Why? Not because Obamacare is on the table. Obamacare is just a distraction. No, I'm far more interested in the circumstances surrounding the U.S. dollar. Obamacare is designed to fail. Anyone with any financial or mathematical sense could look at the real national debt and deficit projections of the U.S. and understand that there is no money and never will be enough money to fund universal healthcare. The GOP could simply let the program take effect, sit back, and watch it crash and burn over the next three to five years. This would entail, though, watching the whole of our economy crash and burn with it. What we have developing in front of us is the recipe for a new false paradigm. Already, the MSM is discussing the possibility of debt default and who will be responsible under such circumstances. Not surprisingly “Tea Party” conservatives have been named the primary culprits if a shutdown goes south; even former Democratic president Bill Clinton is getting in on the blame game: All the bickering over Obamacare is fascinating, I'm sure, but lets set the Affordable Care Act aside for a moment and look at the bigger and more important picture. The private Federal Reserve Bank has just announced to much surprise a complete reversal on its suggested QE “taper” measures, resulting in a shocked and confused marketplace. If the U.S. fiscal system is stable and sound, as the Fed has been suggesting for the past year, then why continue stimulus measures at all? Could it be that most if not all positive economic numbers released by the Fed and the Labor Department are actually fake, and that investors have been duped into assuming overall growth when America is actually in an accelerated decline? Wouldn't that be a high speed excrement storm straight out of left field! The first day rally over the Fed announcement faded quickly, resulting in a slow bleed of the Dow ever since. The magic of Fed stimulus is wearing off, and the investment world is not happy. If I were a member of the Federal Reserve Bank, I suppose I would appreciate a large scale distraction designed to take attention away from me and my elitist club-mates as the primary culprits behind the greatest currency implosion in the history of the world. Sadly, a government shutdown is sizable threat to the American financial system, and few people seem to get it. Perhaps because the expectation is that any shutdown would only be a short term concern. And, this assumption might be correct. But, if a shutdown takes place, and, if “gridlock” continues for an extended period of time, I have little doubt that the U.S economy will experience renewed crisis. Here's why: Exponential Debt Obamacare only tops a long list of already existing “unfunded liabilities” (otherwise known as entitlement programs). These programs are not counted in the government's official calculations of national debt or deficit spending, but they cost taxpayers money all the same. True deficit costs and national debt costs expand every year without fail. If the debt ceiling does not rise in accordance with this exponential debt, a default is inevitable. No amount of increased taxes could ever fill the black hole already created by negative government spending. A long term government shutdown will eventually require cuts in entitlements, if not a total overhaul of certain aid programs. Imagine an end to all disability payments, including veterans disability payments. Imagine federal employee pensions put on hold for an undesignated period of time. Imagine food stamps placed on hiatus for 50 million people. Imagine how many states now rely on federal funding just to keep municipalities from bankruptcy. Get the picture now? End Of Foreign Faith In U.S. Treasuries In a disgusting display of propaganda, media outlet Reuters has released an article claiming that, default or not, Asian investors and central banks are “hostage” to U.S. debt: http://www.reuters.com/article/2013/09/29/us-usa-debt-asia-analysis-idUSBRE98S0GY20130929 Their argument essentially revolves around the lie that Asian investors believe an American default to be “unthinkable”. Surely, the unnamed Japanese investment source they cite as an “insider” truly represents the whole of Asia. The reality is, the Asians (the Chinese in particular) have been preparing for a calamity in the U.S. Treasury market for years. Most foreign investors in U.S. Treasuries have converted their long term bond holdings to short term bond holdings; meaning, they are ready to liquidate their bonds at a moment's notice. Overall purchase levels of treasuries are either static, or falling depending on the nation involved. China has been internationalizing its currency, the Yuan, since 2005. China has opened Yuan “clearing houses in multiple countries to allow faster convertibility of the Yuan, quietly supplanting the dollar as the world reserve currency. These clearing houses now exist in London, Hong Kong, Singapore, Taiwan, and Kenya. The Federal Reserve and international banks like JP Morgan are heavily involved in the internationalization of the Yuan. The assertion that Asia is somehow hostage to U.S. debt is a lie beyond all proportions. In truth, the U.S. economy is actually hostage to Asian holdings of U.S. debt. A call for a dump of U.S. treasury bonds by China, for example, in the face of a U.S. default, would immediately result in a global chain reaction ending in the destruction of the dollar as the world reserve currency. This is not speculation, this is mathematical fact. China is not going to sit back and do nothing while their investment in U.S. debt quickly disintegrates. Why would they take the chance when they could could just sell, sell, sell! The very idea that Reuters is attempting to twist the fundamentals surrounding a default event leads me to believe a default event may be preordained. What Will Be Defunded? Non-essential personnel (which apparently includes Obama's maids), will be the first to receive a pink slip from the federal government. Extra Pentagon staff, EPA staff, FDA staff, IRS staff, etc will all be cut. Good riddance. But what will follow will not be so pleasant. If a shutdown stretches for months, expect cuts in all support programs and entitlements. Veterans disability checks, social security, Medicare, employee pensions, even the Postal Service is likely to undergo defunding. National Parks, and schools that receive federal aid will discover immediate cash-loss. In fact, any state or city that relies on federal funds should plan for the possibility that those funds will disappear. Military cuts would be at the bottom of the list, but I would not discount the chance of that either. It cannot be denied; an enormous subsection of the American public is dependent on federal money. If that money dries up, chaos will ensue. I don't like it, but it is a concern. Controlled Reaction A long term shutdown will be catastrophe no matter how you slice it. Foreign creditors will react harshly. The bond market will see a haircut not unlike that given to investors in Greek treasuries. Austerity will become an American way of life. The only mitigating factor will be the Federal Reserve, which I believe may institute “extraordinary measures” without congressional consent in order to continue feeding stimulus into government regardless of whether the debt ceiling is raised or not. Given enough desperation, the American public might even applaud such an action and praise the Fed as “heroic”. In this situation, the U.S. would be facing a Weimar-style currency collapse, rather than a debt default. But in either scenario, the dollar is the final target. Unfortunately, too many economic analysts presume that the only threat to the dollar's value is hyperinflation (these are the same people that quote the Fed's crooked CPI numbers). But the dollar is just as vulnerable to a debt default and loss of reserve status. Devaluation seems to be inevitable regardless of the outcome of the funding debate. The Republicans could still surrender, and even if they don't, real damages will not be felt until after October 17th. This is plenty of time to manipulate the public into demanding more spending even when more spending is not in our best interests in the long term. Our greatest concern, though, should be whether or not the establishment is ready to pull the plug on the dollar altogether, using the debt ceiling crisis as cover in order to distract away from the involvement of international banks in the overall problem. There is no doubt given the facts at hand that America is on the edge of a terrible pyre. Is this the event that will finally trigger collapse? We'll know more in a week...
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10-01-13 | US FISCAL | US ECONOMY |
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EARNINGS - Q3 Earnings Warnings Second-Worst Since 2001 Q3 Earnings Warnings Second-Worst Since 2001 09-30-13 Zero Hedge US companies are warning about Q3 earnings at the second highest level since 2001, with estimates well below what they were just three short months ago. Of course, the US equity markets don't care - having rallied aggressively in the face of this collapse; lubricated by multiple-expanding QE and rev. repo. As Reuters reports, companies issuing negative outlooks outnumber positive ones by 5.2-to-1, the most negative since the 6.3-to-1 ratio in the second quarter, when however the "second half recovery" (which has been once again indefinitely delayed, perhaps to the third half?) was said would take place momentarily and lead to another mythical rebound. Industrials, Materials, and Tech top the list for negative pre-announcements. Via Reuters,
Of course, the complete disconnect between corporate profitability and forward earnings, has been well-documented, but just in case some have forgotten here it is again.
(h/t @Not_Jim_Cramer)
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10-01-13 | STUDY EARNINGS |
ANALYTICS |
VALUATIONS - Largest 2 Year Multiple Expansion Since Late 90's Charting The Bubble In Multiple Expansion 09-30-13 Barclays via ZH The equity market has discounted a large portion of any improved outlook that the always-optimistic sell-side strategists believe is just around the corner. As Barclays notes, we have just witnessed the largest two-year expansion of P/E multiples since the late 90’s. This 'bubble' of optimism, sparked by a repressive Fed policy, combined with historical valuation metrics that are above their long-term averages, implies a correction and a period of consolidation is likely to plague the U.S. equity market during the first half of 2014. Via Barclays, The improved outlook is fully discounted in share prices... Given that historical valuation metrics are above their long-term averages it is difficult to make a case to the contrary. ...and the largest two-year expansion of PE multiples since the late 90’s implies a correction and a period of consolidation is likely to plague the U.S. equity market during the first half of 2014.
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09-30-13 | STUDY VALUATIONS
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ANALYTICS |
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PRECIOUS METALS - Winners in Q3 Gold and Silver handily outperformed US equities on the quarter |
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2013 - STATISM |
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2012 - FINANCIAL REPRESSION |
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2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS |
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2010 - EXTEN D & PRETEND |
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