The chart below, via Bespoke Investment Group, shows just how extended we are. The 10-year yield is up to 33.3% above its 50-day moving average, the farthest it has been above its 50-day in at least 50 years.
This just goes to show how quickly rates have been surging. "Talk about extended!" exclaim the folks at Bespoke. "At what point does this see at least a short-term turnaround?"
ANNOTATIONS BY gordontlong.com
1- BOND SCARE
3- Bond Bubble
INFLATION EXPECTATIONS - Contributing to Volatiltiy
From last night's Bedtime with BTIG note, Dan Greenhaus (@danBTIG on Twitter) points to the below chart as something that's of increasing concern to investors:
It’s all interest rates all the time it seems. For the week, the bond market was thunderstruck as the 10 year yield rose by roughly 40 bps, one of the largest yield increases in a decade. But such an increase is not exclusive to this past week; the 10 year yield was higher in seven of the last eight weeks. What has elicited a fair bit of conversation has been not the increase but the decrease in inflation expectations. Given their relationship to stock prices (see chart below), we think this conversation is warranted. For their part, stocks dropped for the fourth time in the last five weeks although as has been repeatedly noted, the cumulative drop is a relatively tame 5%.
The World Bank cut its global growth forecast for this year after emerging markets from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe’s contraction.
The world economy will expand 2.2 percent, less than a January forecast for 2.4 percent growth and slower than last year’s 2.3 percent, the bank said in a report released yesterday in Washington. It lowered its prediction for developing economies and sees the euro region’s gross domestic product shrinking 0.6 percent. In contrast, forecasts were raised for the U.S. and Japan, which was helped by fiscal and monetary stimulus.
“Hard data so far this year point to a global economy that is slowly getting back on its feet,” the Washington-based lender said in its twice-yearly report. “However, the recovery remains hesitant and uneven.”
Efforts by European policy makers to stem the region’s debt crisis have alleviated the main risk to global growth and financial-market stability, according to the lender. The bank now sees smaller threats, including lower commodity prices and the impact of unwinding unprecedented monetary stimulus in advanced economies including the U.S., the talk of which has sent currencies from India to Thailand lower and Mexican bond yields higher in recent weeks.
Asian equities tumbled today, with the region’s benchmark index headed toward a correction, and the yen rose to the strongest in two months against the dollar after the World Bank cut its growth forecast amid concern central banks may pare monetary stimulus.
The MSCI Asia Pacific Index dropped as much as 3 percent, erasing this year’s gains. Bond risk in Asia climbed, and emerging-market stocks slid to a nine-month low, led by Chinese and Thai shares.
Debate among U.S. policy makers over when and how to dial back the Federal Reserve’s $85 billion-a-month program of asset purchases has shaken financial markets in developing nations. More than $2.5 trillion has been erased from the value of global equities since Fed Chairman Ben S. Bernanke said May 22 that the Fed could scale back stimulus efforts if the employment outlook shows “sustainable improvement.”
“In the short run, if the U.S. becomes a little more attractive, there will be some marginal movement of money,” World Bank Chief Economist Kaushik Basu said in an interview yesterday. “I don’t think this is the kind of fluctuation that will last past two months or so.”
The withdrawal of accommodative policy may have consequences in the longer run as interest rates in developing countries rise more than in their industrial counterparts, slowing investment and growth, according to the report.
The Bank of Korea kept its benchmark interest rate unchanged today after a surprise cut in May aimed at boosting an economy hit by a yen drop that gives Japanese companies an edge over Korean exporters. New Zealand’s central bank left its Official Cash Rate at 2.5 percent and cut its growth forecast for the year through March 2014 to 3 percent from 3.3 percent.
For next year, the World Bank said it expects 3 percent growth worldwide, compared with a 3.1 percent advance in its January forecast.
The World Bank predicts the U.S. will grow 2 percent this year compared with a forecast in January for a 1.9 percent expansion, though fiscal tightening is holding it back. The new forecast for the 17-country euro area compares with a 0.1 percent contraction seen in January.
Developing countries collectively were forecast by the World Bank to expand 5.1 percent, less than the 5.5 percent estimated in January.
China’s growth outlook was cut to 7.7 percent from 8.4 percent, according to the World Bank’s report. The 6.1 percent forecast for India was reduced to 5.7 percent and Brazil’s was lowered to 2.9 percent from 3.4 percent.
While China’s slowdown was expected, “it is the timing, that it happened a bit quickly that caught people by surprise,” Basu said. “Given that China used to grow at 10 percent and it was pulling so much of the world along with that, that is indeed a concern,” especially in regions that benefited from Chinese investment such as sub-Saharan Africa, he said.
The effects could be neutralized if growth picks up in Europe or Japan, which the bank now sees expanding 1.4 percent this year from 0.8 percent in its January forecasts, he said.
Japan’s monetary and fiscal stimulus is the right policy for the country, even if it’s pushed up the currencies of some nations as the yen depreciated, Basu told reporters yesterday. The bank estimates higher Japanese exports could also benefit countries such as Thailand and the Philippines, which supply parts and components to Japan.
“For growth to remain strong through 2015, however, Japan will have to implement a robust set of productivity enhancing policy changes,” according to the report.
The World Bank has slashed its growth forecast for China's economy this year to 7.7 percent from 8.4 percent, warning of a potential "sharp" slowdown triggered by a fall in investment.
The projection is lower than the 7.8 percent expansion the country recorded in 2012, which was its weakest in 13 years, and comes as a slew of data indicate the economy is struggling to pick up pace.
"The main risk related to China remains the possibility that high investment rates prove unsustainable, provoking a disorderly unwinding and sharp economic slowdown," World Bank.
It tipped growth to pick up to around eight percent next year and in 2015 -- unchanged from the bank's previous forecast -- as "global conditions improve".
Chinese household debt is around two to three times higher than the level before 1997 when the Asian Financial Crisis hit, the report said. While the headline inflation rate is mild, price pressures remain in certain rapidly growing segments of the economy, including real estate, it added.
"Ensuring strong and stable consumption through raising household incomes to sustain growth is a priority in China,"
more investment should be directed into agriculture, human capital and services and increased efficiency of investment.
The government should also try to reduce non-performing assets at Chinese banks, most of which are state-owned, that have piled up "during years of investment-led growth".
In April, China announced unexpectedly weak growth of 7.7 percent for the first quarter, surprising analysts who had expected expansion to accelerate in 2013 after showing strength at the end of last year. Other recent indicators have raised alarm bells, with exports showing almost no growth last month, while industrial output expanded at a slightly slower pace than April and big ticket investment growth also eased.
A survey by British banking giant HSBC showed China's manufacturing activity measured 49.2 in May, an eight-month low, and below the 50 mark that indicates contraction. The World Bank's forecast cuts followed a recent lowering by the International Monetary Fund to 7.75 percent from the previous 8.0 percent.
NEW IMMIGRATION LAW - What is the Real Driving Force?
After decades of documenting the mad consequences of an "Open Borders" policy, voices of rational and sane immigration, ready themselves for definitive betrayal from their phony conservative brethren. Mark Krikorian, Roy Beck, Peter Brimelow and Pat Buchanan have waged the crusade to save the nation from the forces of greedy corporatists and demented egalitarianism. Proponents of limitless immigration are committed to the unilateral destruction of what once made America, "A City upon a Hill".
The Radical Reactionary essay, The Gang of Eight Immigration Constituency, sums up the plight thusly, "The hype that meaningful security of the borders would be an important aspect of this Senate initiative ignores the countless promises previously pronounced that the first duty of the federal government is to secure the nation."
"Senators struck a deal Thursday to boost border security in the immigration bill, including building 700 miles of fence and adding 20,000 Border Patrol agents to the Southwest, in a move those on both sides say could clear the way for a bipartisan vote next week."
The next complicity cover comes from the bureaucratic CBO accomplice.
"CBO estimates that fixing our broken immigration system will reduce federal deficits by about $200 billion over the next 10 years, and about $700 billion in the second decade. The CBO analysis made clear that the additional taxes paid by new and legalizing immigrants would not only offset any new spending, but would be substantial enough to reduce the deficit over the 20-year window."
"The Senate’s pending immigration bill would boost investors’ and owners’ share of the economy for at least twenty years, and shrink some Americans’ wages and salaries for at least 10 years, according to a report from the Congressional Budget Office.
"The rate of return on capital would be higher [than on labor] under the legislation than under current law throughout the next two decades," says the report, titled "The Economic Impact of S. 744."
Usually, fair-minded citizens look to the House of Representatives to safeguard the national interest. Even so, what does the Speaker say: John Boehner: ‘Bipartisan’ immigration reform only way, "And while the rest of his party maligns the Congressional Budget Office's report on the economic benefits of immigration reform, Boehner said: "If in fact those numbers are anywhere close to being accurate, it'll be a real boon for the country."
It should be apparent that the entire political process, held hostage to international corporatism, wants to destroy the domestic economy. Slave labor wages, ensured by an endless flow of low skilled immigrants is a formula for national destruction.
"After the Citizens United ruling, I warned on VDARE.com: "No matter what the constitutional merits of the Supreme Court's decision, this could be a disaster for patriotic immigration reform."
If you listen to conservative talk radio, you will certainly be familiar with ads from the 501(c)4, Americans for a Conservative Direction, funded by that great conservative Mark Zuckerberg, claiming that Gang of 8 Amnesty-Surge bill is really "toughest immigration-enforcement measures in the history of the United States" and gives us "border security on steroids." And, of course, Crossroads has its own blitz of pro-amnesty ads, and a coalition of big money GOP donors who support amnesty."
Amnesty is tantamount to the elimination of the last remains of the middle class. The prospect of derailing this juggernaut through Congressional action is inconceivable as long as cowardly conservatives capitulate to their corporate donors. Even more absurd are the lobotomized liberals. They purport to be champions of the worker, but are willing and eager to destroy any meaningful employment for their own compatriots.
Where is that elusive fairness for our own citizens? Soon the remnant economy will be reduced to the same level of third world exploitation, with the United States being the biggest loser. No wonder that the media presstitutes over at NBC, push their hit program - by the same name - to a dullard public.
Facts no longer matter to most masses. Understanding their self-interest is even more obscure. Exploiters use these shortcomings to their advantage. Accepting an amnesty capitulation illustrates the triumph of global corporatists over the merchant class that built the wealth creation economy. For this reason alone, it is imperative that sane citizens demand a reasonable and rational rejection of the proposed Senate bill.
The latest appeal from NumbersUSA says: Hold Nothing Back.
"Now, amnesty proponents know they have to shake up the game. The latest trick is an amendment by Sens. Corker (R-TN) and Hoeven (R-SD). The amendment solves nothing; the amnesty will still come before enforcement. It's simply a ruse to give the impression that the bill has changed since all of your calls and faxes were sent.
We now expect a vote on the Corker-Hoeven amendment on Monday and a final vote on Thursday. Both need 60 votes for passage. Before Thursday's vote, we need all our members to call their senators and tell them you still oppose amnesty before enforcement!
There has NEVER been a vote in Congress as critical for preserving America and its prosperity. This bill simply cannot pass. We're glad that hundreds of thousands of you have used NumbersUSA's toll-free calls, free services, and we are so grateful for your activism."
How many Americans will gets off their back side and challenge their Senators? Register an ultimatum. A vote in favor of amnesty means all out political war. Any incumbent that refuses to secure the borders needs to face a serious primary challenge. Nevertheless, perceptive political onlookers have a chilling feeling that this round of legislation will be the toughest to defeat.
The reason is simple. The secular society is rooted in self-destruction. Common sense no longer has a place in the immigration hysteria. Relinquishing traditional standards and historic values in representative government has produced a Congress that walk lock step in unison with big business.
The opportunity culture has become the entitlement society.
"If amnesty passes, is it time to ditch the GOP and start a new party? (Or would it already be too late?)
Too late. If the Rubio amnesty bill passes, the country will be finished. There will be no point in fighting for anything anymore. All we will have left to do is take revenge on the people who destroyed this country, starting with desecrating Teddy Kennedy’s grave and moving on to primarying every Republican who voted for it."
There is a death wish bent on collapsing the productive economy. Transnational businesses want an implosion and the inevitable reduction and permanent subsistence level of wage scales. The mercantilist is in the business of manufacturing monopolies.
After eons of debating the particulars of the negative consequences inevitable from accepting any and all of those hallowed huddled masses, by skipping the Ellis Island examination, the final extermination of the American experiment is in sight. That profound are the stakes.
The public fears the label of racist, and shuns a healthy aspiration that earns the respect of defenders of our noble heritage. For many, surrendering to authoritarian progressivism is a badge of dishonor, but most view such submission as a small price to pay to be accepted.
SARTRE – June 23, 2013
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - June 23rd - June 29th
Earlier we noted the rather peculiarly truthful (lack of optimistically-biased bullshit) annual report from the BIS as reading ZeroHedge-sermon-like. There is a smorgasbord of data, charts, and quotes strewn throughout the 204-page melodrama but one caught our eye. Reflecting on the fact that governments in several major economies currently benefit from historically low funding costs, and yet at the same time, rising debt levels have increased their exposure to higher interest rates, the BIS projects the dismal reality that any rise in interest rates without an equal increase in the output growth rate will further undermine fiscal sustainability.
Although predicting when and how a correction in long-term rates will unfold is difficult, it is possible to examine the potential impact on the sustainability of public finances and how any normalization of rates (or Abe's success in creating 2% 'inflation' in Japan) leads the nation's debt-ratio to explode (to over 600% debt-to-GDP).
What is more concerning is that even with no negative impact from demographics (age-related adjustments) and even assuming a central bank that can keep interest rates at their ultra-low levels for another 30 years, Japan's debt-to-GDP ratio will reach almost 400% (that's a best case scenario!!)
When a month ago the Central Banks' Central Bank, aka the Bank of International Settlements (or BIS) in Basel where the MIT central-planning braintrust meets every few months to decide the fate of the world, warned that the Fed-induced collateral shortage is distorting the markets, few paid attention. That the implication behind said warning was that QE can not continue at the current pace, was just as lost. A few short weeks later following the biggest plunge in markets since 2011 in the aftermath of Bernanke's taper tantrum, some are finally willing to listen.
However, they will certainly not like what the BIS just released as a follow up, both in the form of the BIS' 83rd Annual Report, and the speech by Jaime Caruana to commemorate said annual meeting. For the simple reason that it reads like a run of the mill Sunday morning Zero Hedge sermon, which says, almost verbatim, that the days of kicking the can via flawed monetary policy are now over, and that the time for central banks to end the monetary morphine drip has finally come.
The BIS message, as summarized by the FT, is that "central banks must head for the exit and stop trying to spur a global economic recovery... cheap and plentiful central bank money had merely bought time, warning that more bond buying would retard the global economy’s return to health by delaying adjustments to governments’ and households’ balance sheets."
Here is a better summary of the BIS' unprecedented U-Turn on its 5 year long monetary strategy, in its own selected words:
Can central banks now really do “whatever it takes”? As each day goes by, it seems less and less likely... Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy. If there were an easy path to that goal, we would have found it by now.
Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Hence, central banks must manage a return to their stabilisation role, allowing others to do the hard but essential work of adjustment.
Many large corporations are using cheap bond funding to lengthen the duration of their liabilities instead of investing in new production capacity.
Continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system.
Overindebtedness is one of the major barriers on the path to growth after a financial crisis. Borrowing more year after year is not the cure...in some places it may be difficult to avoid an overall reduction in accommodation because some policies have clearly hit their limits.
Of course, it would have been more useful for the BIS to reach this commonsensical conclusion some four years ago (or roughly when we started preaching to the choir, which now includes the BIS itself), instead of allowing the global private bank controlled syndicate known as "central banks" to inject $15 trillion into global capital markets in the past 4 years, and nearly $25 trillion (a #Ref! % increase!) since 2000.
Some of the "shocking" and painfully late observations on the chart above:
Since the beginning of the financial crisis almost six years ago, central banks and fiscal authorities have supported the global economy with unprecedented measures. Policy rates have been kept near zero in the largest advanced economies. Central bank balance sheets have doubled from $10 trillion to more than $20 trillion. And fiscal authorities almost everywhere have been piling up debt, which has risen by $23 trillion since 2007. In emerging market economies, public debt has grown more slowly than GDP; but in advanced economies, it has grown much faster, so that it now exceeds one year’s GDP.
Some of the other, just as "shocking" observations: a dramatic surge in artificially low bond yields will result in crippling, systemic losses, amounting to trillions of dollars for bond (and certainly stock) investors around the globe, to the tune of 8% of GDP losses in the US, and a mindblowing 35% of GDP in losses for Japanese investors:
Consider what would happen to holders of US Treasury securities (excluding the Federal Reserve) if yields were to rise by 3 percentage points across the maturity spectrum: they would lose more than $1 trillion, or almost 8% of US GDP (Graph I.3, right-hand panel). The losses for holders of debt issued by France, Italy, Japan and the United Kingdom would range from about 15 to 35% of GDP of the respective countries. Yields are not likely to jump by 300 basis points overnight; but the experience from 1994, when long-term bond yields in a number of advanced economies rose by around 200 basis points in the course of a year, shows that a big upward move can happen relatively fast.
And while sophisticated hedging strategies can protect individual investors, someone must ultimately hold the interest rate risk. Indeed, the potential loss in relation to GDP is at a record high in most advanced economies. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.
All of which Japan's "sophisticated", yet joyously cartoonish, "leaders" recently found out when they almost lost all control of the bond (and stock) market.
What's the "wealth effect" solution: why buy stocks but don't sell bonds. Or if selling bonds, do so vewy, vewy quietly. Alas, not even the BIS is dumb enough to fall (or push) for this possibility any longer.
The BIS report goes on, doing all it can to distance itself from those central banks who merely implemented policy that the BIS supported (and encouraged) for the past 5 years, but which has suddenly turned a cold shoulder. It does so by dramatically and rhetorically blasting a litany of questions to which it fully-well knows the answers:
How can central banks encourage those responsible for structural adjustment to implement reforms? How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back from their expansionary policies? And in pulling back, how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions.
Regardless of the politics behind the shift in BIS sentiment, the days of Mario Draghi's "whatever it takes" shriek of desperation are over. Here are some more of the key soundbites from the BIS report:
Originally forged as a description of central bank actions to prevent financial collapse, the phrase “whatever it takes” has become a rallying cry for central banks to continue their extraordinary actions. But we are past the height of the crisis, and the goal of policy has changed – to return still-sluggish economies to strong and sustainable growth. Can central banks now really do “whatever it takes” to achieve that goal? As each day goes by, it seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect.
What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for fiscal consolidation, and time for reforms to restore productivity growth. But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.
Yes, in some countries the household sector has made headway with the gruelling task of deleveraging. Some financial institutions are better capitalised. Some fiscal authorities have begun painful but essential consolidation. And yes, much of the difficult work of financial reform has been completed. But overall, progress has been slow, halting and uneven across countries. Households and firms continue to hope that if they wait, asset values and revenues will rise and their balance sheets improve. Governments hope that if they wait, the economy will grow, driving down the ratio of debt to GDP. And politicians hope that if they wait, incomes and profits will start to grow again, making the reform of labour and product markets less urgent. But waiting will not make things any easier, particularly as public support and patience erode.
Alas, central banks cannot do more without compounding the risks they have already created. Instead, they must re-emphasise their traditional focus – albeit expanded to include financial stability – and thereby encourage needed adjustments rather than retard them with near-zero interest rates and purchases of ever larger quantities of government securities. And they must urge authorities to speed up reforms in labour and product markets, reforms that will enhance productivity and encourage employment growth rather than provide the false comfort that it will be easier later.
* * *
As governments responded to the financial crisis with bank bailouts and fiscal stimulus, their indebtedness rose to new highs. And in countries that experienced a housing bubble in the run-up to the crisis, households had already accumulatedlarge debts. In the half-decade since the peak of the crisis, the hope was that significant progress would be made in the necessary deleveraging process, thereby enabling a self-sustaining recovery.
However, that never happened.
Easy financial conditions can do only so much to revitalise long-term growth when balance sheets are impaired and resources are misallocated on a large scale. In many advanced economies, household debt remains very high, as does non-financial corporate debt. With households and firms focused on reducing their debt, a low price for new credit is not terribly relevant for spending. Indeed, many large corporations are using cheap bond funding to lengthen the duration of their liabilities instead of investing in new production capacity. It does not matter how attractive the authorities make it to lend and borrow – households and firms focused on balance sheet repair will not add to their debt, nor should they.
And, most of all, more stimulus cannot revive productivity growth or remove the impediments that block a worker from shifting into a promising sector. Debt-financed growth masked the downward trend in labour productivity and the large-scale distortion of resource allocation in many economies. Adding more debt will not strengthen the financial sector nor will it reallocate resources needed to return economies to the real growth that authorities and the public both want and expect.
* * *
Six years have passed since the eruption of the global financial crisis, yet robust, self-sustaining, well balanced growth still eludes the global economy. If there were an easy path to that goal, we would have found it by now. Monetary stimulus alone cannot provide the answer because the roots of the problem are not monetary. Hence, central banks must manage a return to their stabilisation role, allowing others to do the hard but essential work of adjustment.
Authorities need to hasten labour and product market reforms so that economic resources can shift more easily to high-productivity sectors. Households and firms have to complete the difficult job of repairing their balance sheets, and governments must intensify their efforts to ensure the sustainability of their finances. Regulators have to adapt the rules to a financial system that is becoming increasingly interconnected and complex and ensure that banks have sufficient capital and liquidity buffers to match the associated risks. Each country needs to tailor the reform agenda to maximise its chances of success without endangering the ongoing economic recovery. But, in the end, only a forceful programme of repair and reform will return economies to strong and sustainable real growth.
* * *
Ultimately, outsize public debt reduces sovereign creditworthiness and erodes confidence. By putting their fiscal house in order, governments can help restore the virtuous cycle between the financial system and the real economy. And, with low levels of debt, governments will again have the capacity to respond when the next financial or economic crisis inevitably hits.
* * *
Continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system.
The BIS conclusion:
Is this a call for undifferentiated, simultaneous and comprehensive tightening of all policies? The short answer is no. Concrete measures need to be tailored to country-specific circumstances and needs. And the timing need not be simultaneous, although in some places it may be difficult to avoid an overall reduction in accommodation because some policies have clearly hit their limits.
Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road. And it is a call for recognising that returning to stability and prosperity is a shared responsibility. Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilising public finances.
Finally, today’s large flows of goods, services and capital across borders make economic and financial stability a shared international responsibility. Cross-border effects of domestic policy action are intrinsic to globalisation. Understanding spillovers and finding ways to avoid the unintended effects is central to the work of the BIS. And continued discussions among central banks and supervisors – discussions that the BIS facilitates and promotes – are essential for avoiding national biases in policymaking. Such national bias runs the risk of undermining globalisation and thus blocking the road to sustained growth for the global economy.
And yes, the central banks' central bank really did say all of the above. Unpossible the Keynesian Magic Money Tree growers will say: surely there is an error in the BIS excel model...
Those pressed for time, if unable to read the full 204 page annual report, should at least read the following stunning speech from Jaime Caruana, General Manager of the BIS, titled "Making the most of borrowed time." (only 9 pages - pdf here). Because, if nothing else, it validates everything Zero Hedge has said for the past 4 years.
Paul Krugman says that the Federal Reserve may have made a historic blunder this week in signaling its intent to "taper" the pace of bond purchases, with an eye towards ending them completely sometime in 2014.
By taking a hawkish turn before the economy has recovered (it's still nowhere close on employment goals, and inflation trends are going the wrong way) the Fed may have lost any credibility to restimulate should it come to that.
Four days after Bernanke's guns-blazing press conference, we get another datapoint indicating that the central banks of the world are ready to say "no mas" in the fight against depression.
Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road. And it is a call for recognizing that returning to stability and prosperity is a shared responsibility. Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilizing public finances
The title of Caruana's speech is "Making The Most Of Borrowed Time," and it's filled with warnings about what happens if central banks keep stimulating for too long. Read these three paragraphs. It's basically a white flag, saying we're done here:
Central banks have borrowed the time that the private and public sectors need for adjustment, but they cannot substitute for it. Moreover, such borrowing has costs. As the stimulus is sustained, it magnifies the challenges of normalising monetary policy; it increases financial stability risks; and it worsens the misallocation of capital.
Finally, prolonging the period of very low interest rates further exposes open economies to spillovers that are now widely recognised. The challenges are particularly severe for the emerging market economies and smaller advanced economies where credit and property prices have been rapidly growing. The risks from such a domestic credit boom at a late stage of the economic cycle are hard enough to manage. Strong capital inflows exacerbate such risks and challenges for market participants and authorities; and they expose economies to large sudden reversals if markets expect an exit from unconventional policies, as volatility during the past few weeks seems to indicate.
In short, the balance of costs and benefits entailed by continued monetary easing has been deteriorating. Borrowed time should be used to restore the foundations of solid long-term growth. This includes ending the dependence on debt; improving economic flexibility to strengthen productivity growth; completing regulatory reform; and recognising the limits of what central banks can and should do.
So you have the BIS and the Fed both signaling the end is nigh for how much central banks can do at this point. It looks like a central banker strike.
Meanwhile, this past week, we saw the People's Bank of China allow SHIBOR (a measure of intrabank lending similar to LIBOR) to surge, in what was seen as a tool to clamp down on speculation.
Thanks to political gridlock (especially in the U.S.), central banks have done much of the heavy lifting in the recovery. That seems to be coming to an end. Hopefully escape velocity has been achieved.
TECHNICALS & MARKET ANALYTICS
BONDS - Yields Improved, Especially Against Stock Yields
One of the biggest advantages stocks have enjoyed lately has been relatively high dividend yields when compared with bonds. Based on our work, this has provided a significant boost to stock market performance. For instance, ever since the S&P 500 dividend yield consistently exceeded the 10-year Treasury yield (in this cycle), stocks have gained an average annual return of 24.1%. This compares with 18.2% for periods where the dividend yield was below the Treasury yield and 5.5% if you exclude the “rebound” year of 2009. Needless to say, the yield advantage has clearly provided a strong tailwind for market performance, and in our view, made the “re-allocation” decision for skittish investors a little easier. Unfortunately, recent higher rates have pushed the S&P 500 dividend yield back below the 10-year Treasury yield for the first time in almost a year and a half -- a trend that is likely to continue given Fed posturing.
This is not to say stocks aren't attractive on an absolute basis. However, the relative value offered by stocks over bonds has narrowed significantly.
From its origins as a management consulting firm, Booz Allen has quietly grown into a government-wide contracting behemoth, fed by ballooning post-Sept. 11 intelligence budgets and Washington’s increasing reliance on outsourcing. With 24,500 employees and 99% of its revenues from the federal government, its growth in the last decade has been stunning (and until very recently with little to no knowledge from the main street that it even exists).
In 1940, a year before the attack on Pearl Harbor, the U.S. Navy began to think about what a war with Germany would look like. The admirals worried in particular about the Kriegsmarine’s fleet of U-boats, which were preying on Allied shipping and proving impossible to find, much less sink. Stymied, Secretary of the Navy Frank Knox turned to Booz, Fry, Allen & Hamilton, a consulting firm in Chicago whose best-known clients were Goodyear Tire & Rubber (GT) and Montgomery Ward.
The firm had effectively invented management consulting, deploying whiz kids from top schools as analysts and acumen-for-hire to corporate clients. Working with the Navy’s own planners, Booz consultants developed a special sensor system that could track the U-boats’ brief-burst radio communications and helped design an attack strategy around it. With its aid, the Allies by war’s end had sunk or crippled most of the German submarine fleet.
That project was the start of a long collaboration. As the Cold War set in, intensified, thawed, and was supplanted by global terrorism in the minds of national security strategists, the firm, now called Booz Allen Hamilton (BAH), focused more and more on government work. In 2008 it split off its less lucrative commercial consulting arm - under the name Booz & Co. - and became a pure government contractor, publicly traded and majority-owned by private equity firm Carlyle Group (CG).
In the fiscal year ended in March 2013, Booz Allen Hamilton reported $5.76 billion in revenue, 99 percent of which came from government contracts, and $219 million in net income. Almost a quarter of its revenue - $1.3 billion - was from major U.S. intelligence agencies. Along with competitors such as Science Applications International Corp. (SAIC), CACI, and BAE Systems (BAESY), the McLean (Va.)-based firm is a prime beneficiary of an explosion in government spending on intelligence contractors over the past decade. About 70 percent of the 2013 U.S. intelligence budget is contracted out, according to a Bloomberg Industries analysis; the Office of the Director of National Intelligence (ODNI) says almost a fifth of intelligence personnel work in the private sector.
It’s safe to say that most Americans, if they’d heard of Booz Allen at all, had no idea how huge a role it plays in the U.S. intelligence infrastructure. They do now.
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