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A Brief Chronicle of the Federal Reserve’s First Balance Sheet Contraction
If we follow the threads underlying inflation over the past year to their earliest beginnings, they run straight through the fog of pandemic, quickly pass by the financial crisis in 2008, and wind their way past the Great Inflation of the 1970s...
The Policy Repercussions of the Third Great Mistake Are Slowly Becoming More Apparent
As much as last year centered around the Covid-19 pandemic and its impact on the economy, the major topic of discussion in the financial markets this year has been centered around inflation, and its prospective impact on monetary policy.
A Look at Prospective Market Returns Amid a New Era of Negative Real Rates
One theme we have focused on in these letters over the past three years is what a transition into a regime of negative real interest rates looks and feels like, and the long-term consequences such a regime brings for the markets, and for investors.
This Era May Come to Be Remembered as the Federal Reserve’s Third Great Mistake
The Great Inflation of the 1960s and 70s, the earliest stages of which were already underway when Graham spoke at the St. Francis Hotel, eventually produced some of the most astonishing economic dislocations in U.S. history.
Recession is On the Way: Questioning One's Sanity; Beat the Crowd, Panic Now!
In 2006-2007 I called for a recession. We got a big one. I called for another one in 2011, as did the ECRI. That recession never happened.
50% is not a very good recession predicting track record except in comparison to consensus economic opinions that have never once in history predicted a recession. Consensus opinion is batting a perfect 0.00%
Diving Into the Payroll Report: Wages Rebound (But Don't Get Too Excited), Revisions, Huge Jump in L
Wages rebounded from the dip last month (but don't get too excited as per details below). Also, there were big upward revisions to many prior numbers. The unemployment rate rose this month because of a huge increase in the labor force. The civilian institutional population also leaped this month, and apparently these newly-found people are all looking for work.
Germany's "Time Pressure" Thesis; Noose Tightens on Europe
Today German Chancellor Angela Merkel proclaimed Greek Diplomatic Offensive Is Failing. Merkel’s Christian Democratic-led bloc in parliament has agreed not to give in to any “bad compromise that “defacto adds up to a debt writedown,” Hans-Peter Friedrich, a deputy leader of the caucus, said in an interview today.
Gallup CEO Calls 5.6% Unemployment Rate "The Big Lie": What's a Realistic Unemployment Rate?
On Linked-In, Gallup CEO, Jim Clifton proclaims 5.6% unemployment is "The Big Lie". And it is. I have talked about this for years, but perhaps it would be interesting to hear the same thing from a CEO of a big agency. I picked this story up from ZeroHedge.
Reflections on 2013: What's Important, What's Not, and What's Ahead
A tale of 2 halves with lingering questions characterizes what we can say was the story for housing for 2013. In the first half of the year, rates were low as the 10 year note was well under 2%. People were still refinancing, as home prices rocketed. Multiple bids were common, and pundits like Ivy Zelman cheered the improving market with praise like "Housing is in Nirvana".
Attention Investors: Don't Fear Rising Rates; Fear Perpetually Low Rates
This months Insight will take a look at the performance of bonds during two previous inflationary periods, the 1940s and the 1970s, and illustrate two very different total return experiences. Through these examples, we will show that bond investors-- and by extension, any investor with a traditional balanced portfolio, should not fear rising rates as much as they should fear perpetually low rates.
Prepare for the 1-2 Punch of Declining Earnings and Multiple Contraction
The market today is counting on continued earnings growth driven in large part by ongoing quantitative easing without inflationary consequences. In a recent strategy letter, we show that the markets expectation for future earnings growth is overly optimistic based on the fact that earnings are currently more than 40% above the long-term trend and mean-reversion and history suggests that real earnings are likely to decline over the next 5 years.
Inflation Lags Monetary Expansion: Prepare to be Swindled
In May 1977, the consumer price index (CPI), which measures a basket of consumer goods in the U.S. economy, had risen 6.7% from the year before. The indexes had doubled over the previous 15 years, and by 1977 investors were fully aware that the rate of change was increasingi.e. the inflation rate was spiraling higher. By then, this inflationary awareness had worked its way into every corner of the financial markets, as commodities, gold and interest rates rose, and the stock market remained in a deep funk.
Where Are the Bears? Evidence vs. Anecdotes in Assessing Market Sentiment Over a Full Market Cycle
Imagine the stock market as a national park with just three kinds of animals: bulls, bears, and pigs. The saying bulls make money, bears make money, pigs get slaughtered conveys the idea that one can be bullish or bearish and be successful depending on the market environment, whereas greedy pigs are almost always set up for catastrophe.
Sharp Decline in Earnings and Revenue Estimates
For the first time in three years, US Quarterly Earnings are Poised to Drop. "Third-quarter earnings of Standard & Poor's 500 companies are now expected to fall 0.1 percent from a year ago, a sharp revision from the July 1 forecast of 3.1 percent growth, Thomson Reuters data showed on Thursday. That would be the first decline in earnings since the third quarter of 2009, the data showed."
Email Comments From John Hussman Regarding the Start of a Recession and ECRI Track Record
In view of the ongoing "recession has started" and "there is no recession" debate, I'm cross-posting below a commentary that Mish Shedlock alerted me to a few minutes ago in an email. He received a nice email from John Hussman regarding his post earlier in the day 'Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears?'
Trends in Civilian Population, Labor Force, Employed
Here is an interesting chart from Tim Wallace on the Civilian Population, Labor Force, and the Employed. The chart compares June of 2012, to June in previous years. Population keeps growing but labor force does not. This is mostly due to the weak economy not boomer demographics (although demographics does come into play).
Modern Day Fairy Tale of 3 Economic Wizards (Except It's True)
Once upon a time (today), in a land not so far away (USA), there lived a trio of economic wizards (economists), whose names shall remain anonymous (Paul Krugman, Greg Mankiw, Ben Bernanke). A fourth wizard, Murry Rothbard, is no longer among the living but resides in the netherworld. The above wizards seldom agree with each other because they come from competing schools of wizardry. (1) Keynesian School of Fiscal Voodoo and Witchcraft (2) Monetarist School of Monetary Voodoo and Witchcraft (3) Austrian School of Sound Money, Sound Economic Principles and Common Sense.
Jumping Into The Abyss: A Bull Case for Gold Mining Stocks
Gold mining stocks, as measured by the AMEX Gold Bugs Index (HUI), are down nearly 40% from their August 2011 high. Representative ETFs such as GDX and GDXJ as down similar amounts, if not more. Mining company stock prices look to be falling into the abyss.
While buying mining stocks here could certainly look foolish in the near-term, NOT accumulating positions, or selling them for that matter, is likely to be the bigger mistake over the long term.
The Bernanke-Krugman Smackdown
Bernanke is trying like a madman to get banks to increase lending but Bernanke and Krugman both do not understand economic reality. Banks cannot lend because they are still capital impaired, hiding losses yet to come, and holding assets that are marked-to-fantasy instead of marked-to-market. Consumers are busted and holding interest rates at 0% when prices of food and gasoline are soaring exacerbates the problem. There are few credit-worthy businesses that want to borrow in this environment. The businesses that do want to borrow are not credit-worthy and banks would be foolish to lend to them.
Huge Dilemma: Do You Protect Your Job or Your Clients' Money?
I feel like a broken record. Jeremy Grantham, John Hussman, and Lance Roberts of Streettalk Live surely feel the same way. I have been preaching the "low returns for a decade" concept for quite some time. It is very tough preaching caution, when caution is routinely tossed to the winds. Yet history has proven time and time again, that such times are precisely when caution is warranted, even though timing the precise moment is simply impossible.
Is There a Bubble in Treasuries?
Both Sides of the Case; Explaining the 2011 Treasury Rally (It's Not What You Think); Where to From Here? People have been calling a bubble in treasuries for at least a decade. The shocking result, especially to hyperinflationists, has been a stair-step decline in yields for 30 years. That's quite a long time.
The Disingenuous ECRI Recession Call
Late last month in "ECRI Sticks with Recession Call on CNBC; More than a Bit of an Exaggeration by Achuthan to Make His Call?" I questioned the ECRI's use of coincident indicators to make a claim regarding recession....
In spite of all the above, I happen to like the ECRI recession call. Yes, I am biased, but it is hard to find anyone who is not....
To go out on a limb, I think GDP in 2012 is going to hugely surprise on the downside, and 1st Quarter GDP may be as low as zero to .5%. A negative number (or more likely a revised negative number) would not shock me in the least.
Will Greece Survive the Ides of March?
As a point of curiosity, the Greek 1-Year Bond Yield touched 682% today, now down to a mere 666%. Bloomberg quotes the open as 566%, if correct, the one year yield soared 116 percentage points from the open to the high. Deal "Really" Finalized? Open Europe says Many questions around the second Greek bailout remain unanswered.
The Student Loan Debt Bomb
It's interesting to watch some of the terms bandied about in headline news. For example, the LA Times headline reads "S&P says student loan debt could be next financial bubble". Next? Could Be? What with the word "next"? Also what's with the words "could be"? Without a doubt student loans are in a bubble and have been for many years. Another way to describe the situation is "Debt Bomb".
Bernanke on the Unemployment Rate and Labor Weakness
I nearly always disagree with Bernanke on monetary and fiscal policy. Specifically, the Fed ought not have a monetary policy for the simple reason the Fed should not exist. Indeed, the Bernanke Fed and the Greenspan Fed have both proven beyond a shadow of a doubt they do not know what they are doing, where the economy is headed, or anything else of relevance in setting monetary policy. However, on rare occasions, Bernanke can say a few snippets that seem to make complete sense. For example, Bernanke Says 8.3% Unemployment Understates Labor Weakness.
Some Facts About the 'Falling' Unemployment Rate
Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers. Digging under the surface, the drop in the unemployment rate is nothing but a statistical mirage.
Debt and Deleveraging: A Five-Pronged Solution
Citing the latest report on "Debt and Deleveraging" by the McKinsey Global Institute, Ambrose Evans-Pritchard proclaims a light at the end of the tunnel and that America overcomes the debt crisis as Britain sinks deeper into the swamp. However, there is a big difference between alleged "light at the end of the tunnel" and "America Overcomes Debt Crisis" as Pritchard claims. US consumers may be one-third of the way through, but US debt-to-GDP ratios are low only because unsustainable government spending has taken up the slack.
Structurally High Unemployment for a Decade
Since 2008 I have been stating the US would have "Structurally High Unemployment for a Decade". Indeed, based on historical trends in labor force growth, the expected unemployment rate for the number of jobs created during the recovery would be well north of 11%. Yet, the unemployment rate is currently an artificially "low" 8.5% (not that 8.5% is anything to brag about). To show how difficult it will be to bring that rate down, let's take a look at job growth (or losses), for the last three decades (numbers in thousands).
Dollar Soars Following FOMC No Hint of QE3; Looking Ahead, What's Next?
I have read countless articles recently regarding the inevitability of QE3. I have disagreed for four reasons:1.Price of oil near $100 give Fed little choice 2.Rising price of food gives Fed little choice 3.Stock market has risen on hype of European bailout giving Fed little reason 4.Falling unemployment rate (even though it's totally bogus) gives Fed little reason 5.Why should the Fed react when hot air from Europe gave a huge lift to the markets? I would have been surprised if the Fed tossed a QE3 bone under those circumstances. And it didn't.
Decade-Long European Recession Coming Up
Reflections on the Un-Level Playing Field. What could possibly be more un-level than guaranteeing banks and bondholders will never take losses? When there are more losses, and there will be, the only way to guarantee banks do not take them, is to have someone else take them, namely taxpayers. If Sarkozy gets his wish, taxpayers, not bondholders will pay the price. The same holds true for Ireland, Spain, Belgium, and Italy. The only true way to level the playing field is to make banks and bondholders who take foolish risks to pay the price for their foolish actions.
Leading Indicators or Statistical Noise?
Inquiring minds are digging into the touted numbers of the day, the Conference Board's index of leading indicators. Month in, month out, one of the biggest leading indicator components is the treasury-Fed Funds Rate spread. One might think that the direction of the spread would be important, but one would think wrong. Month-after-month, the Conference Board woodenly add points to this leading index component.
France, Germany have"Intense Consultations" on Smaller Eurozone: Breakup Inevitable, but How?
Realization the Eurozone is no longer tenable is at long last at hand. In fact, "intense discussions" have been underway for months but are just now admitted to by senior EU officials. The Eurozone is a failed experiment. A breakup is inevitable just as it has been from the beginning. Structural flaws were too great, built up over the years. No currency union in history has ever survived unless there was also a fiscal union.
Perfect Storm: Eight Reasons to be Bullish on the US Dollar
One of my much appreciated contacts is Steen Jakobsen, chief economist for Saxo Bank in Copenhagen, Denmark. Today he passed on an "internal note" that he gave permission to share. Steen Writes..."One of my main themes over the last quarter has been a "relative outperformance" of the US economy relative to consensus. This has materialized and our call was almost entirely driven by Consumer Metric data which over the last three years has outperformed any other relevant predictor. This is now slowing down slightly, but still elevated..."
Employment and Unemployment
The irony is that the better the economy the more people will be tempted to come back into the labor force and the more upward pressure on the participation rate and unemployment rate as well. Therefore, we cannot assume that 158,000 jobs per month will necessarily take the unemployment rate to 7% by 2017. Should the economy slip back into recession, and I think it already has, either employers shed more jobs, corporate earnings plunge, or both. I suggest both. On that basis, earnings growth is not sustainable and stocks are certainly not cheap.
Are We There Yet? The Value Restoration Project Resumes
The declines in the stock market over the last three weeks have done a lot of damage to most investors portfolios. This would merely be an inconvenience if it meant that future returns could be expected to be robust enough to compensate for the losses. Investors in the stock market may rightly be viewing this recent decline of about 12% over the last 16 trading days as a painful, but necessary, correction in prices which will once again bring value back to the market.
Denominators Matter! What the Price of Gold Tells Us About the Value of Other Assets
In an environment where holding either U.S. dollar cash or a broad market portfolio may be detrimental to real wealth preservation, more active asset allocation is required. Portfolio managers who have a broad toolbox of assets to choose from, nimbleness and flexibility, and an eye on the denominators that show us real value, will be in an enviable position to capitalize on the next great bull market in stocks.
Modern Portfolio Theory IS Harming Your Portfolio
In a recent paper, Scott Vincent argues that the flawed foundation of MPT has allowed its advocates to control the language of the debate and set the stage for the obvious conclusion that passive index-based investing is inherently superior. And don?t think for a second that this debate is simply theoretical, academic, or unimportant? the basic tenets of MPT shape the decisions of nearly all investors in profound and often disturbing ways. YOUR money is almost certainly being managed with these ideas at the core. The traditional approach to asset allocation is built on false axioms.
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