YOUR SERVE

There's an article in Barron's this week: "So Much, for So Long, for So Little."

It's a cute play on Winston Churchill's famous quote, but nonetheless it's appropriate.

Back in the 1970s then President Nixon declared war on cancer. Since then, though many in the industry will deny it, we've made some but really relatively few advances. In the interim we've tossed enough money down that black hole with very little bang for the bucks.

In fact, if one were a money manager with those feeble results he would've been fired long ago. That in essence is the crux of the Barron's piece.

America has received little bang for trillions of bucks put toward economic recovery. With so much time passed and money spent, we must recognize that the problem is more fundamental than a crisis.

The third quarter’s gross-domestic-product data show another lackluster annualized increase of 2.1%, giving 2015 an annualized average growth of 2.2% over three quarters. That indicates the U.S. economy remains mired in mediocrity. The economy has been limping along in low gear for years now.

 As the author rightly notes, there's been a few quarter outliers, but that's exactly what they were, exceptions not the rule. This next part is what we agree with the most.

Eight years’ worth of subpar performance has lulled the U.S. into deeming it normal. What was acceptable immediately after the crisis has evolved into nonrecovery. Now, years later, the U.S. has a new normal.

An October poll conducted by the Associated Press and the German research institute GfK showed just how deeply Americans have come to accept the current economy, and how little they expect it to change.

The economy was rated “extremely or very important by 83% of respondents—the highest by at least 18 percentage points of the six issues polled. When asked to describe today’s economy, its total “poor” rating was 54%. When asked whether the economy had improved over the past month, 21% said it had worsened and 60% said it remained the same. Twenty-five percent also expected their family’s financial situation to worsen over the next year, with 44% thinking it would stay the same.

We have lost sight of the obvious. First, the U.S. spent an enormous, unprecedented amount, using both fiscal and monetary policy in pursuit of recovery. Second, and more importantly, it has not worked.

On the monetary-policy front, the Federal Reserve’s balance sheet was roughly $900 billion in 2008, as the financial crisis hit the economy. When the Fed’s purchasing operations ended in October 2015, the balance sheet was about five times greater—approximately $4.5 trillion—the result of several rounds of quantitative easing, which injected unprecedented monetary stimulus into the economy and brought interest rates to roughly 0%, where they still stand.

On the fiscal-policy side, the effort also has been extreme. Federal debt held by the public measured $5.8 trillion in 2008. In 2014, according to the Office of Management and Budget, it was $12.8 trillion. That is a 121% increase, and it’s 74.1% of GDP, the highest level since 1950.

There's more here, but we'll conclude with this quote from the author:

The past seven years of stimulus from the public sector have been unable to compensate for what is lacking in the economy's more productive private sector. The private sector now is siphoned, shackled and stunted. When what is needed is for it to do more, it can no longer do as much.

With 2016 being a presidential election year, what we have is a two-party system full of bureaucratic clowns who seek to shackle it even more. Come next November at the polls, to steal a line from tennis, it will be your serve. Don't miss hit the ball.

http://www.barrons.com/articles/u-s-s-stimulus-of-the-economy-has-failed

LET THE GOOD TIMES ROLL OR A MINSKY MOMENT

Covenant-lite debt. Now there's term for you. With a little imagination you can guess it's origin.

But we'll give you a tiny hint anyway starting with two initials--Wall Street. To put it in man-on-the-street terms, covenant-lite debt is like a trapeze artist flying high up in the big top with only half a net beneath him. It's not so much that he falls but where he lands.

And in times like these you don't want covenant-lite debt lurking in your portfolio. Like the line in that old Kenny Rodgers' song: "You gotta know when to hold 'em and when to fold 'em."  One such place these Wall Street gems might be lurking around is in your seemingly friendly bond or ETF fund.

You might want to think the energy sector here. Recall yield has been the lost Mecca for nearly seven years.

Know what your holding is fundamental advice worth its weight in Super Bowel 50 tickets. Back in the day, the early 1980s, there was something called PIK, payment in kind bonds. Some are still around, getting offered. They were all the rage. Bonds pay interest, usually every six months, so the theory goes the lender, Mr. Bondholder, is getting some of his cash back while waiting for the maturity date.

With PIK, instead of getting some cash in Mr. Bondholder's fat little hands every six months, what he gets is more fiat paper. In this case, backed by whatever covenants that might exist. So you might say, though some may disagree, covenant-lite and PIK debt share much of the same DNA.

And here's another point: both of them usually make their appearance, however long it might last, during good times, reminiscent of an old Rock 'd Roll song, "Let The Good Times Roll."  Now we're not much into sailing, so we will leave it up to your imagination again to figure out what happens when the seas of Wall Street get really rough.

In the meantime, here's a Minksy Moment worth reading.

reuters.com/breakingviews/2015/11/27/review-another-minsky-moment-may-be-on-the-way/

BUCKLE UP

Where did the two percent number for acceptable inflation come from that central banks around the globe are so fixated on? It's a fair question. But a fair answer is who knows and who cares. Yet the significance of it goes beyond that.

Take a look at Japan's recent numbers. Unemployment is at record lows, the BOJ has tossed enough QE at the problem to make every economist dyed in the dismal science of Keynesianism smile and still no whiff of inflation. Besides that consumers are still mostly a no show.

In truth, it just a lab number. One of the first things one learns in medicine--or should've learned--is never base your diagnosis solely on a lab number. All the data central banks around the globe collect are just lab numbers.

By the time that stuff get crunched, masticated and digested, the patient could be either thriving or DOA. In medicine there a term spontaneous remission. It's code for we don't know what the hell happened and we can't explain it.

In economics it's called data revision. The spontaneous remission is unexpected; that's the difference between the two. Anybody who doubts there will be data revisions that birth more data revisions forgot to take their medicine this morning.

In medicine there's a Hippocratic oath about not harming the patient. If you can't help him, for God's sake, don't harm him.

It reminds of the story about the preacher walking out in the woods one day, contemplating his next sermon, when he's confronted by a huge, angry, grunting bear. After a brief chase the bear trees him as both struggle to climb higher and higher, the bear right behind him, finally getting as far as they can go.

The bear's weight prevents it from quite reaching the preacher, so the bear stretches out one of his huge paws, trying to get just a little bit higher, his giant talons barely scraping the bottom of the preacher's breeches, but not enough to get a firm grip.

At this point, casting his eyes toward the heavens, the preachers does the only thing he can, the only thing he knows: "Lord, if you can't help me, please don't you help that bear!"

And that, fair readers, pretty much explains where we are with the Fed and its cohorts at other central banks. They can't help us.They know not what they're doing. But they can sure as hell hurt us. And like that preacher, you're on your own.

So get in, buckle up and get use to to it.

DATA DE AND DATA DUM

We are not alone in this.

Questioning the accuracy of the Federal Reserve Bank's data has become almost a national pastime. And it should be.

The Fed’s ability to construct and maintain financial and economic models is much more than a subject of intellectual curiosity. Given that Fed-approved models at the heart of the so-called Basel capital standards proved to be spectacularly wrong in the run-up to the last financial crisis, the new report is more reason to wonder why anyone should expect them to be more accurate the next time.

"The Fed Is Stressed Out," is the story line in today's WSJ Opinion piece.

According to the inspector general, “The governance review findings include, among other items, a shortcoming in policies and procedures, insufficient model testing” and “incomplete structures and information flows to ensure proper oversight of model risk management.” These Fed models are essentially a black box to the public, so there’s no way to tell from the outside how large a problem this is.

This is all about those stress tests the Fed has conjured up to test what would happen to each bank in an economic downturn. In short, it's a solvency standard of sorts. And it's precisely that prepositional phrase of sorts that should trouble you.

Much of the Fed's data, it turns out, is of sorts.

As the Journal notes, the Fed is enormously powerful with little to none accountability. But the Fed's mandate has changed. Broadened is a better term, into vast regulatory powers, leaving an age old question: Who's watching the watchers?

ONCE UPON A BIAS

Once upon a time there was a semi-popular television news show called "The Week That Was."

For the past several weeks much of the attention has focused on the Fed's upcoming December meeting and the first interest rate hike in seven years. So, right or wrong, there's been no shortage of opinions about the Fed's much anticipated actions. Here's another one.

Peter Schiff, the CEO of Euro Pacific Capital, is a controversial financial figure, not so much because his views are always wrong but because he says things MSM and the Fed apologists don't want you to hear.

Schiff recently told CNBC " that the Federal Reserve is playing a 'dangerous game' with benchmark interest rates that is likely to end in tears for stock-market investors.

“I think it is a very dangerous game the Fed is playing because I think the economy is already decelerating…and the Fed still has rates at zero,” Schiff said during the interview.

Long a critic of the Fed, Schiff made comments just after the Fed’s October policy-setting meeting hit the wires, giving "the clearest signals yet that Janet Yellen’s central bank is close to ending a nearly decade long period of ultra loose monetary policy."

He  added that "he isn’t convinced that the Fed is prepared to lift rates in December, though Wall Street has priced in a 68% probability of a rate increase next month. He described the Fed’s talk about raising rates as a pretense to mollify investors."

That the Fed is data-paralyzed shouldn't surprise anyone. Fed Chair Janet "Don't-Rock-the-Boat" Yellen is the first female to head up the big outfit lodged in the Eccles Building down on Constitution Avenue. Unless her performance improves drastically in the near future, her term will become a throw-away one, notwithstanding it's historical significance.

Just as there's no shortage of Fed apologists, there is likewise reams of critics. The accuracy of the Fed, let alone the national economic picture, should be obvious based on the number of revisions they undergo quarter after quarter, year after year. The old joke economists have correctly predicted nine of the last two recessions applies to the Fed.

The same holds true for other so-called prognosticating organizations like the IMF and the World Bank. People either forget or overlook the fact that forecasts are just forecasts, nothing more and nothing less. Take the case of biases.

Research has identified numerous instances of persistent bias in the track records of professional forecasters. These findings apply not only to forecasts of growth, but also of inflation and unemployment (Coibion and Gorodnichencko 2012). Overall, the evidence raises doubts about the theory of “rational expectations.” This theory, which is the dominant paradigm in macroeconomics, assumes that peoples’ forecasts exhibit no systematic bias towards optimism or pessimism. Allowing for departures from rational expectations in economic models would be a way to more accurately capture features of real-world behavior.

So as we said: There is no shortage of opinions or biases. And as a colleague used to say after he made a presentation at another one of those stodgy corporate meetings many of us suffered through over the years, "That's my bias. I hope you know yours."

If only all those television talking heads, bureaucrats and members of MSM would stoop to being as candid, we'd all be better off.

And here's one more aside. Both Yellen and Obama are precedent setters. Yellen is the first woman to head up the Fed and he is the first African-American to occupy the White House. Now we know first hand that precedence has nothing to do with competence.

PRECIOUS HOLD?

For those who wonder what's going on with gold here's an interesting read from The Daily Bell.

Some will think it's just hype over an asset that's about as out of favor as an asset can get. Some might even question whether it's even an asset anymore. Much of what you think should be based on your trust in monetary authorities.

Will the precious metal become so precious again only the monetary authorities are allowed to hold it?

Reuters claims, "Financial market transparency has been a major focus for regulators after evidence of price manipulation in lending rates between banks with the LIBOR scandal in 2012." But we would suggest that the real reason for the sudden interest in transparency has to do with the gravity of the gold market migrating to Asia. 

To counteract this trend, the LBMA is proposing an electronic gold-trading platform that will make trading more efficient and "transparent." As there are some "$5 trillion of gold trades estimated to be made over the counter in London," an electronic facility would certainly be significant. Our take remains a cynical one, however. In the money profession, an institutional bias against precious metals is not likely to be reduced by an electronic facility. The forces arrayed against precious metals are enormous and involve the fabric of Western society itself. If London is moving to address some of the issues around gold trading, you can probably bet it is in order to reassert control over world markets. 

The sociopolitical and economic bias against gold remains a fundamental and stubborn fact. Elite institutions, in our view, are ultimately going to make it a good deal more difficult to purchase gold and silver, especially the physical stuff, as the world's economy inevitably unwinds. Prudent investors and savers who understand the reality of precious metals will continue to find holding precious metals to be an important part of a well-balanced portfolio. Even if acquiring and holding precious metals ultimately becomes more difficult – and it probably will sooner or later – the acquisition of yellow and silver metals should not be abandoned. 

Paul Rosenberg carried an interesting article on the subject this week in his Free-man's Perspective entitled "Golden Disobedience." Author Sandy Sandfort relates in this article how his parents practiced determined civil disobedience when it came to FDR's decision to put people in jail for buying and holding gold. A snippet: Back on April 5, 1933, His Majesty, Franklin Delano Roosevelt (FDR), had a pen and a telephone. So he issued Executive Order 6102, which made it a federal crime for Americans to own or trade gold anywhere in the world. There were some minor exceptions for some jewelry, industrial uses, collectors' coins, and dental gold, but the vast majority of the gold had to be turned in. My father instantly understood what was going on and he didn't like it. "They're going to devalue the dollar!" he predicted. ... My parents made the conscious decision to become outlaws. At every possible opportunity for the next three weeks (and substantially longer), my parents followed Gresham's law ("Bad money drives out good."), not federal law. They spent paper and collected gold ....thedailybell.com/news-analysis/36660/Sandy-Sandfort-Michael-Pento-Buy-and-Hold-Gold/

INDISPUTABLE THANKS

Thanksgiving is more than a traditional day for giving thanks

A lot of eyeballs today will watch some sports before that big Thanksgiving meal and, if they're still awake, most likely after it. Blame it on the tryptophan. 

This might not apply to all ball sports, but it's an interesting read especially for football fans given all the increasingly controversial decisions that continue to crop up in the game by the review crews and that ever so abstract term indisputable evidence.

So here is an indisputable thanks to all our readers as we look forward to 2016.

technologyreview.com/view/543986/why-ball-tracking-works-for-tennis-and-cricket-but-not-soccer-or-basketball

THE WEEK AHEAD

Christmas is not here yet, but it's beginning to look a lot like next week will be one of 2015's most important if the schedule on tap is any indication.

Even in a Thanksgiving holiday lull, financial markets are gearing up for a week of drama.

"Next week could be one of the most important weeks of the whole year," said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman. U.S markets are closed for the Thanksgiving holiday Thursday, and stocks trade in a shortened session Friday. So by Wednesday the market focus was already on the coming week, and for investors worldwide, it's a busy one.

First on Monday, the IMF is expected to grant China's yuan reserve currency status. The yuan would be included in the fund's Special Drawing Rights basket which, while largely symbolic, would elevate the currency and China's influence in the global economy. More:

cnbc.com/2015/11/25/why-markets-see-next-week-as-among-most-important-of-year.

STRAW CLUTCHING

There is an old saying about clutching for straws.

With the start of this year's final month closing in on us, December 16 is the could be magical date when the Fed ends its long drought of higher interest rates. Though the expected hike won't be much since most are predicting 25 basis points, the pros and cons of such a move continue to be debated.

Is the economy and by proxy the market ready for such a move however small it might seem? In short, given the global picture, is the economy too fragile for even such a small hike?

As the Federal Reserve contemplates lift-off in December from seven years of near-zero interest rates, policy makers should not ignore the global backdrop.

I’m not talking about equity markets, whose tremors were instrumental in encouraging the Fed to take a pass on a rate increase at the September meeting. I refer instead to the broad-based collapse in industrial commodity prices, including oil, copper and nickel. While the 60% decline in crude oil pricesCLF6, +0.35%  since June 2014 reflects both an increase in output — a result of hydraulic fracturing in the U.S. — and a decline in demand, the commodity-wide rout points to reduced global appetite for these essential industrial materials, especially from China.

With the ECB apparently set to dump more liquidity on the market and Japan's recent no-inflation-no-pick-up-in-demnd-no-cigar performance after its massive QE programs, the global picture looks indeed dismal. To suggest, then, as the author of this piece does that the Fed has done a better job than either the ECB or BOJ is indeed clutching at straws.

In some circles that would be called damning with faint praise.

marketwatch.com/story/this-economy-needs-ultra-low-interest-rates-just-to-stay-afloat-2015-11-25

PRE-HOLIDAY FOOD FOR THOUGHT

More easing ahead from ECB.

The ECB meets on December 3 and is widely expected to loosen policy via a further cut in the deposit rate or extending and expanding its bond-buying stimulus to stave off the threat of deflation.

reuters.com/article/2015/11/25/us-global-markets

Commodities news continues its bleak downturn and a stronger dollar won't help.
The gauge tracking the performance of 22 natural resources has plunged two-thirds from its peak, to the lowest level since 1999. That shows it’s back to square one for the so-called commodity super 
cycle, a hunger for coal, oil and metals from Chinese manufacturers that powered a bull market for about a decade until 2011. bloomberg.com/news/articles/2015-11-25/if-china-killed-commodities-super-cycle-fed-is-about-to-bury-it

Geopolitical events present risks to investing. It's not like the globe is getting any safer.
money.cnn.com/gallery/investing/2015/11/24/isis-russia-china-geopolitical-threats-2016

U.S. Consumer confidence drops. wsj.com/articles/consumers-outlook-on-u-s-economy-down-sharply-in-november

There's nothing like gratitude. It belongs among the most practical things in your life. Given the start of the holiday season, this post is more than a reminder. It's a must read.
cnbc.com/2015/11/24/what-am-i-thankful-for-the-next-5-minutes-joe-terranova-commentary

Before and after pictures are well known. So here's a before and after note about how stocks perform before and after the Big Meal every November.
marketwatch.com/story/how-stocks-perform-before-and-after-thanksgiving-2015-11-24

Some investment food for thought.

Everyone has grown accustomed to thinking about emerging markets as a monolith -- a collection of undifferentiated countries aspiring to the big leagues, with all of the heft and stability of more developed economies,” writes Kaissar.

He goes on to separate the five most expensive markets from the five least expensive (based on their normalized P/Es) and calculated an average P/E for each.

“The five most expensive trade at an average P/E of 16.8, whereas the five least expensive trade at an average P/E of 8.5 -- half the price,” he adds. “For example, Brazil and Russia are laughably low by any measure, even after accounting for the incremental emerging market risk and whatever idiosyncratic risks you wish to attribute to them (Vladimir Putin, anyone?). At the same time, the valuations in China and India are princely by any measure, particularly after accounting for the incremental emerging market risk, to say nothing of their own unique risks.” barrons.com/articles/can-stocks-rise-on-wave-of-global-liquidity-