THEN AND NOW

 
The idea that the Fed is out of bullets has little or nothing to do with whether the U.S. is already in a recession. That's one of the controversies making the economic rounds today.

Being out of bullets has more to do with being wrong than recessions. In fact, whether the economy is in a recession isn't even the correct question, notwithstanding Fed Chair Janet Yellen's upcoming semi-annual two-day appearance this week before Congress.

Things aren't good. And haven't been good for a long, long time. This year's presidential election is frank testimony of that. For the first time in a long time socialism's become an acceptable political public term in the country. That doesn't happen in a vacuum. And the Fed's easy-money-asset-bubble-creating policies has widened the economic gap between Americans.

The big benefactors have been big bankers and Wall Street, the same groups that shower money on these political candidates, left and right. Those who continue to push the bright side of the story are mostly the same ones who argued the Fed had the magic potion to make all the pain and suffering disappear. But like the famous Wizard of Oz, the Fed has been exposed for what it is--a group of groping bureaucrats hiding behind a not-so-transparent-quasi-government curtain.

Lower energy prices at the pump was touted as the magic manna for consumers and rekindling the flames of consumption in an already deeply indebted, overwrought consumer. It isn't, as consumers opted to drive more miles and save more. One of the largest segments of the population, baby boomers, are rapidly approaching the age of cleaning out their garages not piling them up with more junk. A good part of consumption is just another name for junk collecting.

Zero interest rates were to loosen up the lending reins. They haven't. What they engendered is more restrictions and regulation. And despite the positive twist many put on the recent jobs report, big U.S. firms, according to the WSJ, are laying off workers. Cutting costs is the latest corporate meme in light of a strong dollar and anemic growth, another form of divergence not so welcome for businesses and emerging markets.

Fixation has it's own definition. Right now it's spelled consumer, not just here but in China, Japan and Europe. It's the antithesis of hedging, diversification and spreading your eggs around. It also shows how arrogant, cocksure the Fed has been. Sales and profits for many of the S&P 500 companies are expected to be down.The FANG lost their fangs. If you're of an economic ilk, according to reports, this equals two consecutive quarters of declining earnings. And it's not just manufacturing and energy.

There's another pall hanging over those celebrated jobs numbers that for the most part gets ignored.
Laid off employees who over time worked their way via loyalty and performance into higher pay brackets are having difficulty finding work at similar pay owing to their salary history. Employers have options. Hiring younger workers with less experience willing to work for lower pay is just one of them.

All the cost cutting will eventually work it's way into the economy becoming a good thing. But that is then and this is now. What's needed, too, despite all the phony Keynesian rhetoric, is a lot more actual cost cutting at the government levels, local, state and federal. Waiting for that to happen anytime soon, however, you might want to give the economy a consumer boost by purchasing a respirator.

OVERNIGHT

China's on holiday, this week Fed Chair Janet Yellen is set to give her semi-annual talk to Congress and last week's U.S. jobs report shed little light on the Fed's next interest rate moves, so it's little surprise that Japanese shares Monday faded to more than a two-week low.

The Nikkei fell 1.2% in mid-morning trading, coming off an earlier low of 16,552.30. It was the fifth straight down session and the lowest it's been since the third week of January. With China closed volume is expected to be lighter in many of the few remaining open area markets.

U.S. stocks, on the other hand, are down 8% since the end of 2015, causing an estimated $2 trillion in value of the S&P 500 to disappear. U.S. futures were higher overnight as was oil trading above $31 a barrel. Gold was down and in later trading the yen weakened allowing Japanese stocks to recover some of their earlier losses.

The Hong Kong HSI, +0.55%  stock market will also be closed from Monday to Wednesday. Respite from the Chinese market might just be what the financial doctor ordered to sooth investor nerves that  have been jangled by all the volatility since the beginning of the year. So far the Shanghai e Composite Index is off 22% despite all the easy money Chinese officials have injected into the market. That's bear market material.

Other markets closed are Indonesia, Malaysia, New Zealand, Philippines, Singapore, South Korea and Taiwan.

JOB NUMBERS GAME

Today was job numbers day and to use a kind term they're open to interpretation. No doubt some will paint a positive picture. This group includes the Fed cheerleaders and the MSM data twisters who people the airways. Then there are the pessimists, like this quote today from Citi strategists.

The global economy seems trapped in a "death spiral" that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned.

Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S.
"The world appears to be trapped in a circular reference death spiral," Citi strategists led by Jonathan Stubbs said in a report on Thursday. 

"Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)... and repeat. Ad infinitum, this would lead to Oilmageddon, a 'significant and synchronized' global recession and a proper modern-day equity bear market." 

 Here's another view, one we think is a bit more accurate.More:
mishtalk.com/2016/02/05/core-employment-age-25-54-still-below-january-2000-level-3-million-below-2007/ 

Core Employment (Age 25-54) Still Below January 2000 Level, 3 Million Below 2007

05 Friday Feb 2016

Posted by mishgea | February 5, 2016 11:15:47 | Economics

≈ 7 Comments

With the mainstream media going gaga over the headline unemployment rate of 4.9%, let’s put a spotlight on actual employment with a focus on those aged 25-54.
Age group 25-54 ought to be out of school, not retired, not on disability, and working somewhere. Here are some charts that show what has actually happened.

Core Employment 1950 to Present

BEWARE OF THE IMF

With the upcoming Riksbank of Sweden set to make an important policy decision next week, the global central banking community's hunt for a flicker of inflation continues. With all this searching at some point the question needs to be asked: Could this turn out to be one of this century's biggest bureaucratic ruses?

This is really about capital controls, money moving into and out of countries. Volatility is caused by so-called hot money. Chinese officials are upset with a couple of U.S. hedge fund managers who are betting the yuan has further south to go. During the Asian Tiger crisis hedge fund runners were the villains of choice, too. Politicians and central bankers never take the blame for their own incompetence. The idea that you can sanction ZIRP and negative-ZIRP in a good portion the the globe's economies without stimulating volatility is laughable.

Like pent up energy in the water stored behind a dam, when inflation returns--and it will--look for a scenario uglier than any of these pathetic government bureaucrats bargained for. And what they're bargaining with is your future. And if that doesn't scare you more than a spooky movie we hope the force is with you.

The massive money creation that's taking place behind the phony mask of saving economies will turn out to be your worst nightmare. Once again these lads and lassies are fighting the last war and have no clue what they're doing. This is a clear currency war denied only by government officials and their lackeys in MSM and economics.

Haruhiko Kuroda, governor of the Bank of Japan, opened the door for capital controls further recently when he suggested China might want to use capital controls to protect a run on it currency reserves owing to a weakening yuan. This is not a new idea. In fact, it's an old one. How old depends on how well you know your monetary history.

It was the  bureaucrats at the IMF who signed off after the Bretton Woods fixed exchange rate failure, opening the way for money to flow freely across borders. And now that same IMF led by Managing Director Christine Legarde is complaining about the situation, calling "the short-term nature and inherent volatility of global capital flow...problematic."

If the bureaucrats at the IMF are in favor of it, you should already be starting to build your underground storm center. This meaningless organization over wrought with layers of bureaucratic nonsense has been off base so often one of these days it will turn out to be correct. But this isn't one of them.

OVERNIGHT

Nervousness ahead of the U.S. jobs report apparently toned investor enthusiasm overnight in Asia as markets there with Shanghai share up ever so slightly  0.1% while South Korea's KOSPI dropped 0.1% and Aussie shares fell 0.7%, according to Reuters.

But it's just not U.S. jobs. The dollar has weakened a bit after being on an upward trend for some time, causing concern in many quarters as dovish sentiments from some Fed officials coupled with weaker than expected economic data roiled investor confidence.

Little changed at 116.92 to the yen, the buck lost 1% overnight, but it is now closing in on a 3.5% loss for the week, Reuters noted. Gold approached a three month high of $1,157.20 an ounce as the threat of higher interest rates competing with the non-yielding yellow metal fading pat least for now.

The Hong Kong Hand Seng traded higher while the Nikkei index fell 1.1% as worries the yen strengthening against a weaker dollar troubled investors there.

REGULATION RISK

 
Whenever you hear or see the term prescriptive, you better start checking not just your wallet but your freedom. And it holds true for the quasi-science called medicine as well as the financial world.

Side effects are common to both.

In this case, it's the Security Exchange Commission, a pseudo-government entity peopled with over paid bureaucrats. In the name of protecting us from ourselves these people pass stupid regulations that muddy the financial waters even more and, more often than not, help contribute to the next financial crises. The truth is we need protection from them, not ourselves.

Now these geniuses have liquidity on their narrow minds. Since the recent liquidity fallout in junk bonds at Third Avenue, they are concerned and that should mightily concern you. So their proposal as is their pathetic wont is to create more categories as in "six liquidity categories that would be convertible into cash," the WSJ reports in an editorial, "within a certain number of days: 2-3 business days; 4-7 calendar days; 8-15 calendar days; 16-30 calendar days; and more than 30 calendar days."

Imagine if you can how many government bureaucratic jobs that will create just to track it all. These nonsensical invasions even in semi-free markets, because that's really what we have now, are based on the false assumption these folks know how markets will react in the future. They don't and neither does anyone else. If you need proof just check the Fed's sterling record these last several years.

There's an old saying about the relationship between snoozing and losing. And that's what these people count on. Buried in this proposal are other asinine rules like limiting to 15% so-called "illiquid assets" funds can invest in. Last time we looked real estate can get pretty illiquid.

Life is a terminal illness an associate likes to say. Markets bode lots of risk. Volatility if you've been paying attention of late. Geo-political, interest rates, currency, earnings, weather, management, correlation are a few of the others. But one of the biggest risks also starts with the letter R--regulations.

DIVERGENCE DEAD?

It's difficult to admit you've been wrong. Most of us know that. Stubbornness is not the most admirable trait.

But it's even harder to admit error if you're a bunch of overpaid, much-in-the-media bureaucrats like members of the Fed's FOMC. But more and more with the global slowdown and an ever increasing U.S. dollar strength the divergence theme seems to be fading faster than a pleasant dream.

Divergence you will recall was ithe MSM mene that the U.S. economy would continue to show positive signs of growth while much of the rest of the world limped it way out of recession. Well, if the recent comments of New York Fed President Bill Dudley are meaningful, and apparently the futures market thinks so, the limping ain't over until it's over for the U.S.

Here's a read on his views zerohedge.com/news/2016-02-03/futures-jump-after-bill-dudley-hints-fed-relent-warns-significant-consequences

EARLY BIRD TIP

Nearly everyone's heard the saying" What goes around comes around. If you're looking for, to use another familiar phrase, the proof of the pudding, look no further than Wall Street and their recent push to revamp one of the banes of last time out--revamping no doc real estate loans.

Yes, they're back those big money managers, the likes Blackstone, Neuberger Berman and Pacific Investment Management, doing what they really do best--lobbying for special advantages to make tons of money with something called "Alt-A" loans, mortgage paper that offers higher payouts on loans, the WSJ reports today.

The average 30-year paper yield rates around 3.8% whereas many Alt-A stuff offers yields as big as 8%, according to the Journal. In the current-starved-for-yield environment that's an enticing menu to many investors, individual and institutional. Think about, for example, insurance companies and state retirement funds, many already underfunded, with huge fixed costs.

If you think hard enough you should reach two conclusions thanks to the Fed's long and lonely for investors on fixed incomes love affair with ZIRP, enticing the bait to take on greater risks and setting the blocks in place for another systemic financial castrophe. And for those big money managers the enticement is even bigger, bundling fees.

The twist here is, so the claim goes, none of these loans are being bundled. But to use another time worn saying: Necessity is the incubator of all creation and these boys and girls are word merchants of the highest order. Since "Alt-A" comes with a well-earned stigma, a name change is necessary. There's that word again.

Bet you just love this new one--"non-qualified mortgages" Here's the other tip off. By floating these farces money mangers are claiming "...they would reach an underserved corner of the housing market..." In this case, according to the WSJ, they mean people who " might be self-employed and report income sporadically."

Here's the end game in short. These folks never eat their own cooking and will find a way around it so that when the piper knocks on the door finally to be paid, they will not, rest assured, be holding any of this paper.

If it comes about and you want to play, take a tip from the early bird. Be early in and early out.

OVERNIGHT

China's central bank ahead of the upcoming Lunar New Year holiday injected 100 billion yuan--just over $15 billion, earlier in the day Tuesday giving a lift to stocks with The Shanghai Composite Index climbing  2.4%. The market remains significantly down, 47%, since it topped out in June of last year.

Over on the Nikkei stocks remained flat with Australia, the Hang Send and the Kospi in Korea down slightly. Rates in Australia were held steady by the central bank there, as many were expecting. Much of the negativity stemmed from a return of falling oil prices to the scene despite a story making the rounds Saudi Arabia is ready to "manage"" the supply of oil with a little help from its friend if everybody goes along.

Reuters reported: U.S. crude oil was down about 1.8 percent at $31.06 a barrel after skidding as much as 7 percent overnight, pressured by weak economic data from China, a U.S. forecast for mild weather and doubts that suppliers would be able to agree on steps to address the global supply glut. Despite the declines, U.S. crude is still nearly 19 percent above the more than 12-year low of $26.19 hit in mid-January.

"(Prices) have just come back to reality a bit, although they are holding water above $30 a barrel," said Ben Le Brun, market analyst at Sydney's OptionsXpress, pointing to concern over rising oil supplies and weaker economic data.

OVERNIGHT

Last week it was rising oil prices owing to talk about a Russia-Saudi collusion to cut back production.

In early trading overnight in Asia, the WSJ is reporting:

Crude-oil prices fell in early Asia trade Monday, dragged by lackluster Chinese manufacturing data and dimming prospects of a coordinated production cut by world’s dominant oil producers.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in March traded at $32.93 a barrel at 0349 GMT, down $0.69 in the Globex electronic session. April Brent crude on London’s ICE Futures exchange fell $0.74 to $35.25 a barrel.

Last week, prices rose on speculation Russia and Saudi Arabia were considering output cuts to support prices. The gains soon evaporated after Organization of the Petroleum Exporting Countries officials refuted such claims.

Hopes of a supply cut sank further after Iran said it “won’t consider a cut” until its exports have increased by 1.5 million barrels a day over current levels of roughly 1.1 million barrels a day.

Here's more about those lackluster Chinese PMI numbers from Business Insider.

The index printed at 49.4, down from 49.7 in December and missing market expectations of a read of 49.6.

It was also the sixth month in succession that the index came in below the 50 level that separates expansion from contraction, and marked the steepest decline in activity seen since August 2012.

As the chart below reveals, the stretch of sub 50 readings is unprecedented.Business Insider Australia

Keeping with the trend established in 2015, the nation’s services sector continued to outperform, although the improvement in activity levels also cooled compared to a month earlier. The NBS’ non-manufacturing PMI gauge fell to 53.5, down on the 54.4 level seen in December.

Meanwhile, Asian markets welcomed February on a cautious note as Reuters noted.



Asian stocks started a new month on a cautious note on Monday, with the Bank of Japan's surprise policy easing sparking some buying but further signs of economic weakness in China and a fall in oil prices keeping investors on guard.

The greenback continued to benefit from the growing monetary policy divergence between the U.S. and its counterparts in Europe and Asia while bonds, especially investment grade debt, received a boost after Japan's surprise decision to introduce negative interest rates last week.
MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.2 percent, after losing 8 percent in January.

Australia and Japan leading regional markets with gains of more than 1 percent each, while Chinese stocks slipped in early trade.
Some are suggesting that Japan's recent surprise move to negative interest rates will buoy equities but only temporarily because at the bottom line it shows just how weak the global economy is and without some stronger demand it will be difficult if not impossible to sustain any meaninbgful rally.