No Free Lunches

The truth is the U.S. and the EU are two examples of countries living beyond their means. And now China's being forced to confront that prospect.

Nothing has changed. What little austerity happened it was way too little and most probably way too late. So the same old beat goes on with nothing really corrected or changed. If anything it's not only more of the same but more of the same only worse. Here's just one side effect of these low and negative interest rates.



Bonds were once marketed as providing some downside protection from sinking equity prices owing to there dependable yields. Sure their prices go down with rising interest rates, but for some there was the possibility of higher yields and some upside when rates went back down again. It is called total return or rerun to maturity.

The psychological effects of holding negative yield sovereign debt that keeps dropping in value will be interesting to watch.

businessinsider.com/goldman-bonds-make-less-effective-hedges-2016-6

How About You?

How about you?

"All my rich friends are hoarding cash," Richard Fisher. Who is he? Here's who.

Fisher was president of the Federal Reserve Bank of Dallas and a voting member of the Federal Open Market Committee (FOMC) from 2005 to 2015. He was one of, perhaps the only, skeptic on the Fed board going into the great financial crisis, warning on numerous occasions about the upcoming crash only to be ignored by his wiser peers and certainly Alan Greenspan and Ben Bernanke. He was also ignored in the post-Lehman era by both Bernanke and Janet Yellen. 

Among his biggest concerns:

• Government Debt: he is worried about the $19 trillion US government debt (up $11 trillion since 2008) because the Fed has fired all its monetary bullets and can’t expand the balance sheet any further.
• China and social instability: he thinks communist leaders care about production but not efficiency. "They might produce more, but our products work," jokes Fisher. There are entire cities in China with nobody living in them, according to him. Fisher says the biggest problem in China is social stability. "I'm deeply worried about their ability to maintain social stability,” but... “It doesn’t affect us directly.” Another risk in China is that millions of people are pulling their money out of the country.
• Low interest rates don't work: "We had a long period of moderation and low interet rares, which did nothing to adjust." The online countries that adjusted were Poland and Mexico, according to Fisher.
• The failed Brazilian experiment: Fisher said Brazil is a symbol of what's wrong with emerging markets. They lived through the crisis but learned nothing from it.“Brazil has always been a country with potential, and it’s never been realized."
• Raising rates is long overdue: he made the point that raising interest rates won’t ruin the economy. "The debt rollover is what we should be worried about. Yet nobody is talking about it."
• It's all one big Ponzi scheme: “Our government has to borrow money just to pay interest.” Or as Minsky would say, this is the Ponzi finance stage, just before everything goes to hell. "We have a lot of unsound policy in place. It is agreeable, but in my view, it is unsound.”
• The death of the middle class: Fisher says the lowest income quartile has seen an increase in income. The highest quartile has also seen a massive increase in income. The two middle quartiles were flat over a period of many years. “This is why we have such support for people like Donald Trump and Bernie Sanders.”
• A ritalin monetary policy: “We have what I call a Ritalin based monetary policy.” Now Janet Yellen’s job is to wean it. “It has to do with taking the distortions out of the financial markets and letting the markets down easier.” “These are the lowest interest rates in 239 years of history.”

But as Sagami points out, Fisher’s most telling comment came during the Q&A session when he was asked how his personal portfolio was positioned. Fisher’s response: “In the fetal position.” Moreover, he also said that “all my very rich friends are hoarding cash.”  

As we've pointed out before there is a saying in surgery, "The solution to pollution is dilution."

Take the $13 trillion U.S. government debt as the pollution and the endless printing of money as the dilution and you have your end result.  Solution:You have inflated your way debt free.

zerohedge.com/news/2016-06-10/former-fed-president-all-my-very-rich-friends-are-hoarding-cash

With All Due Respect

With all due respect to Canada and it's data keepers, this is yet another example of government numbers being mostly of the Fly-by-the-seat-of-you-know-what kind. Hype and revision are government staples in the economic data collecting world. They usually require a big dose of Pepcid.

A cynic--if any are still welcome and we rather doubt it--might argue the upswing in workers over 55 and the decline in those 15 to 24 reflects something else. The millenials are too smart to take those burger-flipper jobs. businessinsider.com/canada-jobs-report-may-2016-6?

Canada's latest jobs report crushed it.

The Canadian labor market added 13,800 jobs in May, above expectations of 1,800.

The report noted that full-time employment surged by 61,000 last month, but this increase was offset by a decline of 47,000 in part-time work.

Employment increased for those aged 55 and older, but it dropped for people aged 15 to 24.

As for the unemployment rate, it unexpectedly fell to 6.9% - the lowest rate since July 2015.

Economists were expecting the unemployment rate to tick up to 7.2%.

The Canadian dollar strengthened by 0.4% at 1.2668 a US dollar right after the report.

Party Poopers

We all pay a price for what we are. And in the world of investing for perma-bears things are no different.

Albert Edwards, the in-house perma-bear at the big French bank Societe Generale, is well-known for his views in his weekly commentaries. His latest is no exception, according to Business Insider.

"The key to the Ice Age thesis is to sound CONDITION RED ALERT as each recession approaches, because the equity outcome then always proves much worse than anyone expects due to the additional phase of secular de-rating," the strategist wrote in a note to clients Friday.
Based on Edwards' reading of the latest data out of the US, it appears that it is time to sound the alarm. Here's Edwards (emphasis added):

In the aftermath of the latest, weaker than expected, nonfarm payroll data, economists are certainly more worried. The excellent folks at Advisor Perspectives highlight the Fed’s Labour Market Conditions Index as suggesting a recession is imminent (the cumulative peak is an average of 9 months ahead of the start of recession and we are now four months beyond a peak. For investors who think copper still has some predictive power, its recent move is disturbing.



As we said: We all pay a price for what we are. Here's Edwards' own words.

"We remain at the bearish extreme of the market," he wrote.
"It is not a pleasant place. It is cold, dark, and damp. People either don'’t speak to you or send you abusive emails. Members of your own family pretend not to know you. Actually, I made that last bit up."

Here's a link to the rest of the article. It's hard to be humble when you're perfect in every way go the words of an old song almost too long ago to remember.  And it's even harder to be a party-pooper even when one is needed.

businessinsider.com/condition-red-alert-recession-is-imminent-2016-6.

Russian Rate Cut

The Russian Central bank cut its benchmark one-week repo rate today, lowering it for the first time in in nearly a year to 10.5% from 11%.

The move, according to one report, was based on future inflation expectations as future cuts are anticipated. Russia's ruble is up against the  dollar nearly 15% so far this year and was up 0.4% in trading earlier today, trading at USD/RUB 64.5956.












businessinsider.com/russia-central-bank-cuts-rates-2016-6? 

When

We will simply relate this to a piece, Decision Time, we wrote earlier with a link for those who want to read the rest of this article. Things can go on for a long time, but not forever. And the difficult part is when. It never changes.

We might be at the very end of this economic cycle, and the remarks by legendary investors Carl Icahn and George Soros signal it, said Jeff Rosenberg, BlackRock's chief investment strategist for fixed income.
"I think the message there is that this is a very late part of current cycle. Nobody knows how far that cycle will go, but it's clear that you're seeing many signals," Rosenberg said Thursday, on CNBC's "Squawk on the Street." "You're seeing them in the fixed income markets, you're seeing it in the credit markets, you see it in profits, in the equity markets — that this is the later part in the economic cycle."

Soros, according to The Wall Street Journal, came out of trading retirement with a series of very bearish bets, selling equities in favor of gold and gold miners' stocks. Icahn, meanwhile, said Soros' strategy made sense as equities had been falsely propped up.

http://adf.ly/3554628/banner/http://www.cnbc.com/2016/06/09/blackrock-what-you-should-take-away-from-icahn-soros-bearishness.

Your Choice

We read it, we pass it along. Here's an excerpt with link for those who choose to read the whole thing.

June 8, 2016

In much of what was once called “the free world,” governments and economies are in the throes of self-destruction. Before long, we shall witness revolution in several of these countries.

The revolutions may prove to be violent, or they may prove to be “soft” revolutions – major changes in the political structure. They may vary anywhere from mere changes in the rhetoric of political hopefuls, to changes in the actual structure of governments. 

 

One incorrect assumption about revolution is that it took place because the entire population had become dissatisfied. Not so. Most every revolution occurs as a result of a fraction of the population (sometimes a tenth, sometimes a third or more) taking action significant enough to bring about the desired changes. 

 

This is an important point, as it serves as a reminder that revolution frequently comes about as the result of a minority dissatisfaction. The revolution may then succeed if the minority can pull off a coup. And revolutions are not necessarily morally right or wrong, they’re just successful bids for change. In many such cases, all that changes is the faces, not the fundamentals of governance. 

 

But, assuming that the objectives are clearly-stated objectives (as opposed to vague proclamations such as, “We’re not gonna take it anymore,” we can examine, whether, in hindsight, the stated objectives of the revolution have been realised. 

 

https://www.sprottmoney.com/blog/predicting-the-efficacy-of-a-coming-revolution-jeff-thomas.

 

Overnight

Stocks in Asia over the past month have generally gone up, but Friday was one of those down days as concerns about global growth bubble back into the picture particularly the U.S. Earlier this week the World Bank cut its forecast for global growth to 2.4% from its January figure of 2.9%

Gold though off overnight in Asia traded at $1,270 an ounce and Brent crude sat around $51.84 a barrel, both numbers most would have not expected a few short weeks ago The Nikkei 225 was off 0.5%, the Kospi edged 0.4% lower and Hong Kong's Hang Seng Index dropped 0.8%.

Markets in China were closed for holiday. One of the few bright spot was the MSCI Asian-Pacific Index ex-Japan trended as it has been higher, nearing a fourth straight week of gains.Yesterday the Bank of Korea surprised with an interest rate cut sending their benchmark to 1.25%, a new low, but equities overnight didn't seem to care as they drifted lower.

One meme making the rounds is subdued sentiment pending next week's Fed and Bank Of Japan meetings.This goes along with the "risk off" theme of late as caution and uncertainty set in and investors prove patience might be the better part of valor at this point.Will the BOJ expand its stimulus program next week is just one of many question on investor minds. There are times when a stronger currency ain't your friend and that's apparently the picture with the yen that put downward pressure of Japanese equities for much of the week.

Decision Time

It often takes a while before people start to notice.

It's the one global central bankers, government bureaucrats and their media apologists hoped people would never get--this economic boat's got a big hole in its side. A lot of people, some reported to be pretty smart, see rough global seas ahead. Sovereign bond yields, if they get any lower, they'll join whale dung and that rests on the ocean's bottom.

The UK now offers a 50 year gilt with a yield lower than that mysterious 2% inflation number central banker have been sniffing around for nearly a decade or more. The Chinese economy is still searching for a cliff to fall off despite what, if it were being pushed in any other venue than finance, would be one of the world's greatest cover-up stories.

Let's look at the Janet Yellen Fed. A year ago she was positive the U.S. economy was recovering, hiked rates 25 basis points and the stock market went into a tizzy, probably just to see what she would do. And she did what they thought--caved. Now a year later she and her minions were out talking up rate hikes when some rotten job numbers broadsided her. True to form she tries to play the numbers down, as does many of her apologists.

There's an old line in poker about if after an hour or so, you don't know who the patsy is, you're it. Yellen looks more and more in her stumbling, fumbling fashion the hand picked patsy to take the blame when Humpty Dumpty finally takes his fall. It happens to those who are usually in over their heads. There's another sign here with the recent push back in Japan against negative interest rates or ZIRP.

To be sure, MSM true to their code will attempt to soften it. In 1993 Coke Cola offered a bond with a 7.31% coupon that matures in 2093. That's right. It has a 100 year maturity date. Few thought tying their money up for 100 years even at that rate was a good idea. Twenty-three years later those who did are looking like bond gurus. The bond recently traded around $1,310.00 but it's 52 week high is somewhere in the $1,540.00 range.

If you listen to people like Mohamed El-Erian, one of the premier apologists for the Bernanke-Yellen Fed, he loves the term "inadvertently" when discussing them. In his newest book, The Only Game In Town, he uses it more than once to describe the Fed. He also throws around the term inherited and attempts to slide this gem by his readers. The Fed didn't know or purposely choose to destroy the COLA crowd and the poor when they decided to create and keep artificially low interest rates for so long.

In his twisted economic view it was a courageous save The Good Ship Globe from sinking act. For people who are supposed to have an economic fix on events these folks spend an inordinate amount of time, it seems, flying on Inadvertent Airways. Here's just one pathetic example: With the world suffering significant damage and dangerously standing on the edge of an even greater calamity as a result of financial irresponsibility, it was only a matter of time until the blame game started in earnest. Banks would find themselves in the direct line of fire, of course, and understandably so. Central banks would also be targeted, if only because they had evolved--inadvertently--into naive enablers of malfeasance. 

It's old news now but hedge fund icon George Soros has after a long hiatus returned to trading. Supposedly he has some concerns about China and he's buying gold and some commodities and selling equities. A while back we noted that real estate tycoon Sam Zell as reported was unloading his real estate holding after their big run-up. Stanley Druckenmiller, a former Soros associate and a pretty good hedge fund guy himself, recently expressed similar views. Two more well known Wall Street giants, Leon Cooperman and Carl Icahn, lately chimed in with comparable refrains.

We're not suggesting for a moment that these well known investors are right and people like Janet Yellen and El-Erian are wrong. We just saying they both can't be right. And won't be. In the investing world some people call that decision time.

A Dollar's Worth Of Growth

How much debt doe sit take to create one dollar of growth? Well, here's an interesting post from
zerohedge.com/news/2016-06-09/it-took-10-new-debt-create-1-growth-first-quarter.

When the Fed unexpectedly stopped reporting the data for Total Credit Market Instruments in September 2015, the most comprehensive series of total credit in the US economy, there were many screams of disappointment and frustration from US debt watchers. However, this was unnecessary, as all the Fed did was break up the series into its two constituent components: total debt (found here) and total loans (found here).

So today we had a chance to update the total US credit following the release of the Fed's Flow of Funds (Z.1) statement, which is usually parsed for its tracking of changes to household wealth. And while it showed that in  the first quarter the net worth of US residents, mostly the wealthy ones as the bulk of financial assets is held by a small fraction of the total population, rose by $837 billion to $88 trillion mostly as a result of a change in real estate holdings, we were more interest in the aggregate picture.

It wasn't pretty.

As a reminder, according to the latest BEA revision, nominal Q1 GDP was $18.23 trillion, an increase of just $65 billion from the previous quarter or an annualized 0.7% rate, the question is how much credit had to be created to generate this growth. Well, according to the Z.1, total credit rose to a new record high $64.1 trillion. This was an increase of $645 billion from the previos quarter. It means that in the first quarter, it "cost" $10 in new debt to generate just $1 in new economic growth.

 


And here are the two other key charts: the first, showing total credit (debt and loans) vs GDP growth since 1950. The trend is hardly anyone's friend, except for those who create the debt out of thin air to pocket the ever lower cash flows associated with it (and await the next inevitable bailout):


More importantly, on a leverage ratio basis, the US economy is now at a level of 352% total credit/GDP, the highest since Q1 2013, and a level which has been relatively flat since it peaked at 380% just before the crash. One way to read this chart perhaps is that the "carrying debt capacity" of the US economy is roughly 380% at which point something "unexpected" happens. At the current rate of surging credit relative to slowing GDP, the US economy should be there in the not too distant future.