recession

The Fed firemen are also the arsonists

Jim Grant of Grant’s Interest Rate Observer has a great article pointing out the irresponsibility of the US Fed. It criticises the very conditions that made the outcomes of coronavirus way worse than had they administered sensible monetary policies decades ago. FNF Media has been saying this for years. Now we are facing long overdue nemesis. It is true of the overwhelming majority of unimaginative MMT ‘me too’ central banks.

Grant wrote,

It took a viral invasion to unmask the weakness of American finance. Distortion in the cost of credit is the not-so-remote cause of the raging fires at which the Federal Reserve continues to train its gushing liquidity hoses…But the firemen are also the arsonists. It was the Fed’s suppression of borrowing costs, and its predictable willingness to cut short Wall Street’s occasional selling squalls, that compromised the U.S. economy’s financial integrity.

FNF Media keeps on hearing tales about the failure of evil capitalism. When the actions of central banks stifle the free market from achieving price discovery, distorted capitalism will inevitably backfire.

From hereon, sharp pain will be the only effective – and quickest – way to resolve this mess. Governments need to ensure bad companies go bankrupt by rejecting bailout money to zombie companies that will just be a drag on the economy.

Instead of doling out tax dollars, the government should take equity in any business that receives money. Taxpayers deserve a return and by this methodology, it will enforce a mindset that always rejects propping up companies with failed business models. Instead of the government calling the shots, the expertise of commercial lenders should be tapped, a valid point made by Jonathan Rochford.

Unfortunately, this will cause huge short-term disruption and impact large swathes of the community but it will allow markets to clear and provide a platform for risk to be priced appropriately. It is like yanking off a Band-Aid. It stings at first but the recovery becomes far more sound, based on rational economics. Failure to do so will just lead to a protracted Frankenstein economy which will frustrate the majority.

The sad reality will be that Western governments will try to emulate Japan’s lost two decades by crawling on our belly making marginal inches forward. This is somehow seen as superior to hitting the giant “reset” button.

The only major difference being that the Japanese monoculture is experienced and better suited than any other nation to share grief. Western cultures are not remotely close to being able to tolerate such conformity. Japan is not capitalism with warts. It is socialism with beauty spots. It will pay to remember this. In the West, we will demand that others atone for our mistakes. Moral hazard will be the order of the day. This mentality must be stopped dead in its tracks.

Grant reinforced our long-held view on distorting capital markets with this,

The Fed commandeered investment values into the government’s service. It seeded bull markets in the public interest…But investment valuations don’t exist to serve a public-policy agenda. Their purpose is to allocate capital. Distort those values and you waste not only money but also timeLike a shark, credit must keep moving. Loans fall due and must be repaid or rolled over (or, in extremis, defaulted on). When the economy stops, as the world has effectively done, lenders are likely to demand the cash that not every borrower can produce.

We must not forget that post-GFC authorities have been asleep at the wheel even after the introduction of poorly thought out red tape designed to protect us.

Right before the regulators’ eyes, so many blue-chip corporations (e.g. Boeing, GE) binged on ultra-cheap debt to buy back their own shares just to chase short term performance incentives. In recent years, companies like Boeing and GE spent around $45 billion each aggressively buying back their own stock despite being in the midst of severe balance sheet deterioration. Both are trading in a state of negative equity today.

Ford Motor has a junk credit rating. GE & Boeing won’t be far behind them. Over 50% of US corporates are trading one-two notches above junk.

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The financial community has merely taken advantage of all of this short-termism. Where were the financial analysts doing forensic work on companies? All of this balance sheet deterioration was plain to see.  Why couldn’t they see the obvious long term deterioration in cash conversion cycles? How could they miss that aggregate corporate after-tax profitability has been trending sideways since 2012? Where were the biopsies? We will be witness to plenty of autopsies that were preventable.

Corp Profits After Tax

For Australia’s part, 28 years of unfettered economic growth has bred untold complacency. Only now will we realise the conceited arrogance of government and industry alike. One day we will realise that all of the onerous regulations dripping in ideology (e.g. climate/environment) to confound foreign investment will blow up in our faces. They will not have forgotten that Australia is an unfriendly place to conduct business.

Australia has behaved like a bloated drunk bishop looking down upon his destitute disciples climbing the stairs on hands and knees putting what is left of their pitiful savings into the collection tin. From now, the roles will be reversed at prices that will be highly unfavourable such will be our desperation. Not to mention our currency could well depreciate to a degree which makes us even more vulnerable to foreign predators. Setting our FIRB at $0 will be irrelevant if we fold to the whims of the first suitor that shows interest. The show will be on the other foot.

In press conference after press conference, we continue to be told that hibernating companies will spring back to life and it will all be a case of ‘keep calm and carry on!’We hate to sound negative here.

However, we believe that we are merely being realistic about what is to unfold. The coming depression will force us to become truly appreciative about just how well we have had it while governments have distorted our markets. Had we truly reflected on decades of prosperity instead of wailing about how life has never been worse, things might have turned out differently. We are about to get a true taste of the latter.

On reflection, some positives will come out of this tragedy because we will focus on things that matter rather than getting enmeshed in the theatre of the absurd – identity politics and the cancel culture.

Coronavirus might be a black swan event to the global economy but we have been complicit by allowing our lawmakers and regulators to play slalom with the icebergs. We all knew our overloaded ship was in danger of listing before we left the safe harbour but it was simpler to be suckered into the weather forecasts that predicted endless sunshine and eternal millponds. The engines have now stalled because the tanks are empty. We find ourselves in the middle of a pitch-black, stormy night with howling gale-force winds and a 40-foot swell. Some continue to cling on to the blind hope that the incumbent crew can bail fast enough to avoid the economy capsizing.

It will be all in vain because the ship’s crew left a tape recorder playing on a loop over the tannoy promising passengers to stay in their cabins while they secretly slipped away in the early hours on the only lifeboats available.

Central banks had one mission – create confidence. They have been complicit in the failure. They doubled down on all of the same policies that got them in trouble in the lead up to GFC. They had a simple task of telling governments to embark on structural and tax reform. Instead, they appeased their masters by endlessly cutting rates.

Never again must central banks be allowed to use QE to rescue the economy in a downturn. Central bank balance sheets should be forced to unwind all QE assets. Interest rates must be allowed to set at normalised rates which allow positive returns but avoid reckless borrowing.

While a lot of this piece might sound pessimistic we simply view it as being a realist with experience.

Only one you can’t stop crashing at your place during COVID19 is the economy

Warning Signs Investors Ignored Before the 1929 Stock Market Crash ...

Brace yourself.

COVID19 will be defeated but the cure is turning out to be way worse than the disease.

Unfortunately, the sad reality is that at the rate governments are tightening legislation to keep us in shut down mode, we are day-by-day staring at a great depression.

While some will praise governments for throwing the kitchen sink at the economy with all manner of stimulus packages, the relief will be temporary because all of the ammunition for a sustainable recovery had been depleted years earlier. It is like supplying an alcoholic on rehab with an all-you-can-drink open bar.

Our feckless RBA has just embarked on QE, a mission that has failed every other central bank that has tried it. The velocity of money has been falling for decades. Who will be given access to borrowing at zero interest rates when the economy is in freefall? Which banks will lend against properties that will likely implode in value? 50% down? To think of all the reckless “first home buyer” schemes that loaded young people at the top of the property market. The RBA has been complicit. Not wanting to put pressure on the government to reform, it just kept cutting rates to keep housing afloat. It was totally negligent in its duty even though it will signal its role as a rescuer of last resort.

When will banks be forced to mark to book the value of mortgages on their balance sheet? Equity is thin as it is. 15-20% equity buffer to mortgages is pretty wafer-thin. They need to do this immediately so we can properly assess risk. Forget stress tests by APRA. They’re meaningless. Our housing market will collapse with higher unemployment. 50% falls from here are possible. Remember there will be hardly any buyers. Prices fell up to 90% in Japan after its property bubble popped.

Worse our regulators have been asleep at the wheel chasing financial institutions on their commitment to climate change, the absolute least relevant metric to save them from here. It shows how complacent they became.

Australia has made some interesting crisis policy choices. For instance, PM Scott Morrison is trying to pass rent moratoriums where landlords suspend payments from tenants until things return to normalcy. It is not enshrined in law yet. In principle that is a nice gesture even if the government is subsidizing the banks for forgone interest due to short term loan repayment moratoriums. Let’s assume this continues for 6 months. Apart from the astronomical size of the subsidy, who will ultimately end up sacrificing the 6 months? Landlords? It won’t be the tenants.

Shouldn’t landlords be free to choose whether they are prepared to forgo rent or not as a purely rational business proposition? Shouldn’t a landlord be free to enforce a rental agreement? Will contracts matter anymore?

At some stage, the free market must be allowed to function and the government will hit a tipping point of weighing stopping economic armageddon by allowing businesses to function and the marginal risk of infections. The people will be crying for this if shutdowns remain.

Landlords may be labelled un-Australian or worse but in 6 months time, if unemployment has surged to nose bleed levels well above the 6% we saw during GFC at what point will disposable income be able to support a daily coffee at a cafe?

A cafe might soldier on for a further 3 months on skeleton staff before realising that they can’t cover costs. A landlord would be well within reason to demand that early cancellation clauses and fees are enforced.

Then what of all the invoices to coffee suppliers, bakeries who provide muffins and croissants and utilities? Who misses out? What about the invoices of the coffee supplier? Will the bakery get called on by its flour supplier to pay upfront for future deliveries when it has no operating cash flow, instead of the long-standing 60-90 day terms? That happens overnight. It isn’t a managed outcome. Cash is king.

The question is why hasn’t the government taken advice from the banks on business lending so it can better assess the risks involved from those that deal every day with small companies?

We can’t just shut an economy down for 6 months and expect a return to normal when it is all over. Unemployment rates are likely to surge well above 10%.

As we wrote in an earlier piece, there are 13.1 million Australians employed as of February 2020. Full-time employment amounted to 8,885,600 persons and part-time employment to 4,124,500 persons. Retail trade jobs come in at a shade over 1.2 million jobs. Construction at 1.15 million. Education 1.1 million. Accommodation/restaurants /bars etc at 900,000. Manufacturing another 900,000. Noticing a trend in our employment gearing?

We can fudge the unemployment figures however we like. We can pay $1,500 a fortnight for 6,000,000 workers to pretend they still have a job. That is $18bn a month. The PM can talk about how this will help us bounce on the other side. If it continues for just over 6-months can the budgeted $130 billion will be spent. This is separate to NewStart payments too.

Yet, will people lavishly spend or pay down debt and economise as best they can? We think the latter unless moral hazard has truly sunk in.

What people need to understand is that our Treasury expects to raise $472.8 billion in taxes for FY2019-20. Throw in sales of services, interest and dividend income and that climbs to a total of $511 billion. Expenses are forecast at $503 billion. In the following three years Treasury anticipates $490.0 billion,  $514.4 billion and $528.9 billion in taxes. Expect those totals to be cut significantly.

So if ScoMo’s JobKeeper rescue package for workers goes beyond 6 months, that is equivalent to 27% of annual tax revenues. That doesn’t take into account the slug to tax collections of lower GST and vastly lower income tax for individuals and corporates. That is just at the federal level.

Note, states such as NSW have recently waived payroll taxes for small businesses in a  $2.3bn stimulus package. We shouldn’t forget that the NSW Government is the largest employer in the Southern Hemisphere at 327,000 staff.

We remind readers that according to the RBA small businesses employ 47% of the workforce. Medium enterprises employ 23%. That is 70% of the entire workforce who are most at risk from a slowdown.

In 2019-20 income tax collections will make up $220 billion. Company tax was forecast to generate $99.8 billion. GST $67.2 billion. Excise taxes (petrol, diesel, tobacco etc) $44.7 billion. This data can be found on page 21 here.

Local cafes are reporting a 60~80% fall in revenue. Pretty much all casuals have been let go. It is a bit hard to survive on coffee when a lot of stores aren’t stocking pastries for fear of spoilage.

It is not hard to assume a scenario where government income taxes fall to $160 billion (-28%) due to mass layoffs. One assumes many people will be able to get a tax rebate come June 30th. So this number may end up being conservative on an annualised basis.

Company tax could plunge to $40 billion annualised due to the drastic fall in revenues as customers change the manner of contracts and reign in their own spending. Anyone that thinks that business will resume as normal is crazy. The ripple effects will be huge.

Excise taxes may drift to $35 billion as people cut back on drink (currently $7bn in tax revenue), are limited in places to drive negating the need to fill up (currently $18bn in total tax take). The $17 billion in tobacco excise may weather the storm better than most.

GST could fall to $50 billion. People just aren’t spending much outside of food. Massive retail discounts will not make much difference. GST will be the best indicator of how much the economy has slowed. Even if we start to see a massaging of the GDP numbers, GST won’t lie. It will be the safest indicator.

If our assumed tax revenue sums to $285 billion annualised from the budgeted $472 billion that equates to a 40% haircut.

Trim the ‘other revenue’ column to $30 billion from $39 billion and we have $315bn. Will the government then chop away at the $503 billion in expenses? All of the stimuli doesn’t arrive at once but a lot of it in relatively short order. Surely a $300~400 billion deficit is a fait accompli?

We should also anticipate forward year tax revenues be cut c.30% for several years after. The question is when does the government realise that it must cut the public service and scrap wasteful projects like French submarines and other nice-to-have quangos? We won’t see a budget surplus for decades.

We must careful not to fall into the trap Japan finds itself in. It has a US$1 trillion budget funded by US$600bn in taxes and US$400bn in JGB issuance. Every. Single. Year.

Nothing short of drastic tax and structural reform will do. Instead of behaving more prudently by cutting budgets when we had the chance, instant gratification created by governments desperate to stay in power has only weakened our relative position. Since 2013, the Coalition has been responsible for 46% of the total amount of all debt issued since 1854.

States should quickly realise that the $118 billion in federal grants going forward will also be curtailed. NSW will likely fare the worst because its financial position is by far the best.

If the government had a proper plan, it would be looking to what essential industries have been given up to the likes of China that we need to onshore. Medical equipment, masks or sanitiser. For cricketer Shane Warne to be converting his Seven Zero Eight gin factory to produce hand sanitiser shows how much of a joke our local manufacturing has become.

We must never forget that a Chinese government-owned company displayed the Communist Party’s mercenary credentials by (legally) buying 3,000,000 surgical masks, 500,000 pairs of gloves and bulk supplies of sanitiser and wipes. So not only was it responsible for covering up the truth surrounding the virus in the early stages of the pandemic, we openly let it compromise our ability to combat the virus when it hit our shores.

China has shown it doesn’t give a hoot for ordinary Australians. So why should we continue to fold to its whims and cowardly surrender our industries for fear it’ll stop dealing with us? It is nonsense. We have some of the highest quality mineral resources which it depends on. We can bargain. We have chosen to appease a bully.

Our Foreign Investment Review Board (FIRB) needs to be far more vigilant to prevent takeovers by Chinese businesses. We should openly accept the way China conducts business practices and recognise that it is often incompatible with ours when national security is at stake. Surely this crisis has highlighted the true colours of the political system in Beijing.

That leads us to Japanese companies. Many are seriously cashed up, have a favourable exchange rate and have a long-standing history of partnering with local businesses. We should be prioritising our relationship with Japan and look to have them invest in our inevitable capital works programs – specifically high-speed rail. It is the type of project that has meaning for the future and a long enough timeline to turn an economy around.

People need to be prepared for the reckoning. There is no point softening the blow. The brutal truth will eventually arrive and we will have only put ourselves in an even weaker position with the policy suite enacted so far. Time to be rational about risk/reward. Whether we like it or not, the minimum wage will need to be cut substantially in order to get the jobs market alive again. Don’t worry, unemployment will be so high that people will demand minimum wages are cut because it is far superior to the alternative!

(Time to ditch your industry super and start shovelling your superannuation into gold)

Coronavirus will end up killing way more jobs than the people in them

GDANSK, POLAND - SEPTEMBER 3, 2018: Norwegian Air Shuttle airlines offers cheap flights. Airplane Boeing 737-800 takes off on from the International Lech Walesa Airport in Gdansk.; Shutterstock ID 1176630295; Purchase Order: -

None of this should be a surprise. 7,300 (out of 11,000) workers at Norwegian Air have been temporarily laid off as 85% of flights are cancelled.

This follows on from Scandinavian Airline Systems (SAS) which has temporarily suspended 10,000 workers and cut 90% of flights to combat coronavirus.

In short, Coronavirus will likely kill way more jobs than the people in them. Sadly, there isn’t a robust economic cycle to be able to weather this storm.

Note that Boeing shares fell 20% overnight as markets finally come to grips with what we mentioned yesterday. Boeing was also put on credit watch negative by Fitch. GE is back at $6.

And Trump’s S&P500 index reading was 2,264 when he took office. It is at 2,474 or 9.3% above that. We always said what he proudly attributed to his leadership on the way up could end up making him hoisted by his own petard on the way down.

Buy Gold, not toilet paper.

Macron talking utter bolloques on the Amazon fires

Jo Nova has done a cracking piece which undermines the hysteria surrounding the Amazon fires and how perfectly it fits in with the G7 summit angle on globalism. She tears shreds off Macron’s ludicrous claims and even more ridiculous antics at the G7. When the world needs to be focused on avoiding recession, these politicians are fixated on petty point-scoring issues where CO2 reduction will rapidly take care of itself if the world economy tanks. The peons will care not one jot about the climate once faced with economic hardship which is likely to be even worse than the Global Financial Crisis.

Jo Nova wrote,

“Global Fire Data shows this year is unequivocally a low fire season in the Amazon. But social media tears and outrage is running at 1000% driven by old photos and fake facts of the Amazon producing “20% of our planet’s oxygen”.

And the media experts reported the house was on fire in the lungs of the world or something to that effect. They didn’t check the data, didn’t ask hard questions.

Based on hyperbolic twitter pics French leader Macron is threatening to cancel a foreign trade deal. The hype serves the purpose of attacking the right-wing Brazilian leader Jair Bolsonaro in the lead up to a G7 summit this week…

Who’s feeding the twitter flames?

@EmmanuelMacron

The photo he used? It’s a stock photo from Loren McIntyre, a photographer who died in 2003.

Amazon Fires, Global Fire Count, 2019, graph

“US space agency NASA, meanwhile, has said that overall fire activity across the Amazon basin this year has been close to the average compared to the past 15 years.”

Remember when it comes to climate change, NASA are the definitive last word, but when it comes to Amazon fires, they’re just a casual addendum. “No comment”.

Jonathon Watts at The Guardian carefully words the panic. It’s almost as if he is aware of what is going on but not happy to make it too clear. With headlines like these, anyone would think the readers of The Guardian are 14-year-old girls.

Does this happen every year?

Yes, but some areas have suffered far more than usual. In the worst-affected Brazilian state of Amazonas, the peak day this month was 700% higher than the average for the same date over the past 15 years. In other states, the amount of ash and other particulates in August has hit the highest level since 2010.

Is the entire forest ablaze?

No. Satellite monitoring experts say the images of an entire forest ablaze are exaggerated. A great deal of misinformation has been spread by social media, including the use of striking images from previous years’ burning seasons.”

 

RBA should expect a dead cat bounce from the rate cut

The RBA has cut rates to a record low 1.25%. The irony here is people and businesses invest because they see a cycle, not because interest rates are low. Lowering rates will do little to spur investment, especially as the global economy cools.

Post the Hayne Royal Commission, the banks will likely pass on the full amount which will only impact margins and weaken them given the high reliance on wholesale funding.

The other problem the RBA faces is that banks have become so reluctant to lend post the RC that the net impacts of the rate cut will be negated by the unwillingness to lend at levels we have seen in the past given the penalties associated with it.

CM still contends that the Aussie banks tread a perilous path given their leveraged balance sheets. CM thinks part nationalization or worse is a real prospect if the slowdown is severe enough. The equity buffers are tiny relative to the real estate portfolio. All contained in the above link.

The rate cut is unlikely to boost confidence other than loosen the noose around stretched borrowers’ necks.

Parker Hannifin order book sets worrying tone

Parker Hannifin is a fantastic barometer to measure the health of global industrials. It is a leader in pneumatics, pumps, hoses, hydraulics, drives, valves, filters, separators, refrigeration, seals etc. It’s products find their way into almost every conceivable part of the manufacturing chain. Think of it as a massive hardware store for corporations. From Caterpillar earthmovers to automation in food factories. When Parker announces orders, we get a good window on how the state of the economy is doing. The Q3 numbers released today showed:

• Orders decreased 4% for total Parker

• Orders decreased 6% in the Diversified Industrial North America businesses

• Orders decreased 4% in the Diversified Industrial International businesses

• Orders increased 2% in the Aerospace Systems Segment on a rolling 12-month average basis

Because aerospace is such a long lead time business, orders can buck trends. Having said that, orders for North America and International were soft.

Forget that Parker beat on EPS print. It’s guidance is the same. The orders are a worry. Q4 hurdles look tough.

Drinking the UnKool-Aid

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It appears President Trump has been bullying the US Federal Reserve to drop rates by 1% and get them to reopen the spigots on QE. What he is failing to grasp is that businesses invest because they see a cycle, not because interest rates fall.

Trump tweeted,

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

This is a frightening proposal. Rates are at 2.25~2.50%. Although it masks a more important reality. Can Trump avoid a market calamity ahead of the next election? The real engine of the economy is slowing.

Despite the headline US GDP print of 3.2%, consumer spending and business investment slumped to the lowest levels under his presidency. Business investment spending was dominated by “intellectual capital” (soft) which is a pretty hard metric to put a reliable number next to. Equipment and structures (hard) contribution to business investment was near as makes no difference zero. Personal consumption of durable goods slumped to their lowest reading since 2011. Wholesale inventories (ex-autos/petroleum) surged ahead of sales.

Trump might argue China is adding stimulus. He is right. China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 Trillion annualised (a Japanese GDP)). This was 55% above estimates and a full 80% ahead of March 2018. This pump priming added 8% to the Chinese stock indices but since then the market has been rolling off.

The world does not need more debt to be inflated away to get us out of the current mess we are in. A recession is inevitable. To put it into context, the world, since GFC, has added $140 trillion in debt for a grand total of $20 trillion in global GDP growth. That is right. $7 of debt only got us $1 of GDP. So if the Fed acquiesces President Trump he will probably get even worse metrics.

Then again perhaps we can take the words of a venture capitalist, Chamath Palihapitiya, who said on CNBC that “central banks have created an environment where major downturns and expansions are almost impossible.” It is statements like this that almost guarantee that central banks have lost control. Central banks have one role – ensure that markets maintain “confidence”. Powell’s latest move to cut rates after such a shallow peak tells us that “confidence” is waning. 

The gender unemployment gap

Changes in the Gender Unemployment Gap during Recessions

Another interesting piece was written by the St Louis Fed showing the gender unemployment gap of men relative to women. A negative spread shows that women have lower risk of unemployment relative to men in the 24 months after the start of a recession. Looking at the chart we see that in 1960 & 1969 female unemployment tended to rise relative to men after a recession began but in the following downturns of 1973, 1980, 1990, 2001 and 2007 the situation reversed. Participation rates for women in the workforce hovered at around 40% in 1970 vs 60% today. In 2007, the most aggressive spread emerged in favour of women by over 2%. The Fed report does not include what types of roles that women tend to do. Switching to the Bureau of Labor statistics (BLS) it makes sense that women over time have been retrenched at lower rates than males due to field of employment.

Women today tend to occupy more jobs in education, nursing, healthcare (defensive industries) whereas men tend to work in more construction, agriculture and manufacturing specialties (levered industries).

In 2017, employment breakdown between men and women was as follows.

employment of men by industry BLS的圖片搜尋結果

Another interesting table from the BLS was that of educational standards of 1970 compared to 2010. As we can see more women are pursuing higher levels of education. 67% in 2010 took some college or higher degree vs only 22% in 1970. One would imagine in 2018 those numbers are higher again.

Where men once went to college in proportions far higher than women—58% to 42% as recently as the 1970s—the ratio has now almost exactly reversed with women comprising more than 56% of students on campuses nationwide, according to the U.S. Department of Education (DoE). Some 2.2 million fewer men than women will be enrolled in college this year. By 2026, 57% of college students in the US will be women.

It will be interesting to see how the gender unemployment gap develops during future recessions with a far higher level of educated women in the workforce.

Wile E. Coyote market action ahead

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One of my former colleagues has a Bloomberg header that reads, “I no longer see the point in pointing out the pointless!” He is spot on. Global markets remind me of Wile E. Coyote holding a severed cliff edge, suspended in animation before inevitably falling to the ground with a thud. We are at that point.

Dow can’t break 20,000 and even taking into account the fact that Christmas and New Year’s took steam out of the market, it was already tired and breathless. VIX is at chronically risk taking levels and would seemingly only have a blow up around the corner. Gold is picking up and the yen is firming. Like it or not, as doomed as the Japanese economy is, everything is relative and the amount of yen kept offshore means that money is repatriated. Ask yourself why every time there is a natural disaster in Japan the yen rallies. The yen dropped from 82/$ to around Y78/$ 6 months later.

The markets have been running on fumes. Even taking out the Trump effect, central bank policy is impotent, the global debt pile continues to rack up and the world is by and large run by wimps not willing to take drastic action. The lack of accountability is staggering. Independent central banks are not a virtue but a vice. For all of the supposed benefits of a free and unleashed central bank maybe it becomes the perfect fall guy for governments to operate in the vacuous, indifferent and soft policy settings they do. Central banks in the reverse can apportion blame on governments for not providing policies that benefit from low interest rate settings. The Fed should be disbanded.

I remain bearish to be sure. Trump can’t right almost two decades of irresponsible corporate, individual and public sector behavior. Perhaps my biggest concern is the risk that governments and central banks become the ones using moral hazard as an exit clause. In that world all bets are off. Don’t think it isn’t been considered. Even Japan’s policy advisors are considering converting the $10 trillion (240%od GDP) debt into zero coupon perpetual debt. It is a polite way of saying that we’ll print the debt away.

As poor old Wile E. Coyote knows too well, it ends in a massive plume of smoke. You can control (manipulate) markets up to a point but eventually relative asset values come to the fore and the premium/discount gap widens to extreme levels. Market confidence is shot to pieces despite what the indices tell us. Don’t be fooled. Meep Meep.

King Kong needs to rescue this NY damsel in distress

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Recently I’ve had the privilege of being inundated by Democrat supporters feeling confident that the White House reports things are already “Great in America”. They assure me first, poverty rates have fallen off a cliff and real wealth has soared. Now I’m only guessing they conducted the census survey in the Hamptons. Uncanny how such news is released before the election.

Speaking of pie in the sky forecastiing the NY Fed Empire State Survey showed a miraculous rise from -4.21 to -1.99 (still lower than expectations of -1.00) despite all that the components fell off a cliff in most cases.

New orders fell to -7.45 vs 1.04
Shipments tumbled to -9.38 from 9.01
Unfilled Orders fell to -11.61 from -9.28
Delivery time fell to -4.12 from -6.25
Inventory fell to -12.5 vs -4.12
Number of employees fell to -14.29 vs -1.03
Work hours fell to -11.61 vs 2.06
Prices received fell to 1.79 from 2.06

Prices paid rose to 16.96 from 15.45 Which converts to lower profits so it isn’t a positive move.

While the Fed admits business conditions remain poor it only goes to prove the devil is in the detail. I’d love to see how the White House got to its conclusions.