EFFECTS OF FED RATE HIKE

In a related piece to the one about the fund manager survey is this from: www.marketwatch.com/storywatch-these-3-charts-as-investors-prepare-for-fed-rate-hikes-2015-11-30.

With the Fed looking to start the tightening cycle, the dollar has increased sharply and credit spreads have widened. This has led to a deteriorating of financial conditions in the U.S., as illustrated by the chart above, which could penalize companies by making borrowing more expensive and hitting exports.

“The divergence between wider credit spreads and still-high equity valuations suggests that a further worsening of financial conditions is not fully priced in by the stock market,” they said.If this continues, the stock market could be in for a downturn, according to the SocGen analysts.


Potential slump ahead in EM bonds.

How will a Fed rate increase affect emerging markets? Many developing economies issue debt in dollars, and with a rising greenback, that debt becomes harder to service.

On top of that, emerging markets have suffered from the rout in commodity markets, China’s slowdown and a weaker global growth outlook. This has led to a sharp drop by several emerging-market currencies, but as SocGen points out, corporate credit spreads have not widened as much as the foreign-exchange markets have depreciated.

“Our EM strategists believe this may change, as redemptions should force reissuance next year,” they said.

WHATEVER

Since ECB President Mario Draghi first sprung his "whatever it takes" meme on investors, it's become a household term and it's certainly not lost of other central bankers.

NAGOYA, Japan--Bank of Japan Gov. Haruhiko Kuroda said Monday that he won't simply sit and watch until domestic wage growth accelerates, reaffirming his stance to do "whatever it takes" to achieve 2% inflation as quickly as possible.

In his latest public appearance Mr. Kuroda tried to dispel perceptions that the BOJ may have relaxed its initial commitment to meet the price target at the "earliest possible time" because of stubbornly slow wage increases.

"Pushing up prices alone will be meaningless, so let's wait until wages increase--this is not the way I am thinking," Mr. Kuroda said at a news conference in Nagoya, central Japan. "If it is judged as difficult to achieve the 2% price stability target at the earliest possible time, we will do whatever it takes, including additional monetary easing." More:

marketwatch.com/story/bojs-kuroda-will-do-whatever-it-takes-2015-11-30? 

FUND MANAGER SURVEY

Global investors raised allocation in U.S. and UK equities in November and in select emerging markets as some managers see a rebound there.

The survey of 50 fund managers and chief investment officers in the United States, Europe, Britain, Japan and China was conducted between Nov. 17 and 26.

http://in.reuters.com/article/2015/11/30/us-funds-poll-global

ORGAN OF THE STATE

Recently, while surfing the Internet we came across a story about the refugee crisis going on practically around the globe.

The author wrote the following, pointing out something we've been talking about for some time, the absolute denial and blatant front running of MSM on the refugee problems: Front running for the administration and denying the real causes.

But don’t count on the mainstream media to figure this out. They effectively operate as an organ of the State. I bet they’ll keep prescribing more of the same bad medicine that caused this crisis to begin with.

This will help to cover the tracks of the real perpetrators, and it will obscure other real problems. I expect the media to ramp up the “blame the foreigner” sentiment, as it helps the US and EU governments distract the anger of their citizens from the sputtering economy and the shrinking of their civil liberties. From the politicians’ perspective, it’s a win-win. But it’s a lose-lose for citizens hoping for accountable government.

And this brings up another uncomfortable truth for Americans and Europeans. The way the political and economic winds are blowing, things could get much worse. More:

http://www.zerohedge.com/print/514596

Here's more on immigration, this time in Germany.

http://http://globaleconomicanalysis.blogspot.com/2015/11/german-economist-concludes-refugees.

THE MADNESS OF PC

We've pointed out many times just how dangerous the environmental freaks are to your liberty and freedom of speech. Now here's some indication of just how dangerous they might turn out to be to your health and your life.

It's just one indication of the madness of political correctness and the incompetence of the current Washington crowd.

zerohedge.com/news/2015-11-29/former-cia-deputy-director-gives-stunning-reason-why-obama-has-not-attacked-isis-oil

MUTUAL ADMIRATION

If you don't know who Andrew Huszer is, read the following:

Andrew Huszar is a Fed veteran who served as the "quarterback" for the world's largest stimulus program by managing the purchase of more than $1 trillion worth of mortgage-backed bonds — only to renounce his support for the entire effort in a 2013 public apology. In a recent interview with CNBC, Huszar insisted the excess liquidity created by the Fed has done more to enrich Wall Street than the average citizen. 

Here's two more quotes from Huszar from a Time interview he gave in late 2013.

TIME: You argue that QE helps Wall Street banks but not the real economy. How does QE help Wall Street banks?
Huszar: QE had two goals, but one of them was originally highlighted as the primary goal by Fed Chairman Ben Bernanke: to make credit more accessible to more Americans. QE aimed to achieve this through lowering the wholesale cost for banks to make loans, and we were actually successful at doing this. For example, my program – which was buying mortgage backed securities – drove down the cost for banks to make mortgage loans. But the banks weren’t fully passing on the benefits to their customers — they were pocketing a lot of the extra profit.

In addition, though we lowered the cost for banks to make mortgages, the banks didn’t actually start making more mortgages. If you look at the first day of trading in my program which was in January of 2009, and you look at the last day of trading fifteen months later, the overall amount of U.S. mortgage lending had actually decreased despite the fact that the Fed had spent $1.25 trillion trying to stimulate mortgage lending. In fact, if you look as late as 2012, U.S. mortgage lending was at a fifteen year low. The banks weren’t making more loans. Instead, they were often investing their extra money into securities to take advantage of the rising tide of asset prices in the market.

The third point to make is that the Fed was actually buying and continues to buy all of these mortgage bonds through the network of primary dealers – banks. The commissions that the banks were generating off these purchases were also significant.

If this smacks of a blatant bailout of big banks, institutions that contributed mightily to the meltdown in the first place, under the phony twin banners of Fed transparency and independence, you realize what this really is--a mutual admiration society.

cnbc.com/2015/11/28/qe-quarterback-fed-sees-through-wall-streets-eyes

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?