1. Revised 2Q GDP data suggest that the economy is gaining momentum. After bottoming at 0.1% in 4Q of last year, growth picked up to 1.1% in 1Q and 2.5% in 2Q. Is the fiscal shock rapidly fading, opening the door to a September Fed tapering?
2. After 2 ½ years of an ever escalating civil war in Syria, a line was finally crossed that mattered to markets but there is no good outcome with what comes next, just the least worst. Cameron in the UK doesn’t get Parliamentary support, thus further limiting response options for now.
3. Crude Oil hits a 2-year high as fear escalates over Syria
4. Rising rates are killing emerging markets and their currencies. The rupee had its worst single day in 18 years
5. Home prices are increasingly bubblicious, as double digit gains keep new families away from ownership.
6. Durable goods fell 7.3% v expectations of a 4% drop (largest drop in nearly a year). Core shipments also fall
7. Pending home sales fell 1.3% v flat expectations.
8. Average 30 year mortgage is now up to 4.8%; MBA refi’s fall 5.4% — lowest levels since February ’11 and down for the 15th week in the past 16.
9. Personal Income and Spending both rise just 0.1% — same amount as headline PCE inflaton (no REAL growth) Estimates were for gains of 0.2% and 0.3% respectively.
10. Retail sales in Japan were weaker than expected in July.
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - August 25th - August 31st
The challenge to the world's credit cycle comes from both ends. An increasingly sluggish growth outlook creates downward pressures on earnings and internal cash generation. The slowdown is fairly widespread. In addition, the cost of funding is on the rise.
Credit, as an asset class, tends to perform best just coming out of a downturn when a growth recovery, coupled with balance sheet discipline, drives significant improvements in credit profiles. It can still do well in the middle parts of a cycle provided growth is stable and funding conditions benign, although carry is a more important return driver and idiosyncratic risks pick up as balance sheet trends become more mixed.
However, the downside skews begin to emerge in the later stages of a cycle when leverage has already increased and the cycle turns more adverse, and that is happening in Asia right now.
This is critical in our current benign default environment... because the combination of highly leveraged firms, slowing GDP and rising real rates was exactly what created the spike in defaults in 2007-2009 (that only the largest monetary policy bailout in history was capable of kicking down the road).
Periods where the gap between real GDP and real rates is narrow or negative represent particularly challenging funding conditions for corporates: either cash generation is poor or funding costs high, or both. As a result, these are often the periods where default rates tend to rise.
The rise in cost of funding is broad-based and has many drivers making it difficult to reverse even if UST yields stabilise. The rise in the cost of funding is ‘real’ – higher rates are no longer balanced by high inflation – and the rise now means that the gap between real GDP growth and real rates is the narrowest since the downturns in 2008/09 and before that 2001/02.
Source: Morgan Stanley
GLOBAL RISK GROUP
1 - Risk Reversal
ASIA CREDIT - India Rupee Collapse Showing Signs of Exhaustion
USDINR is showing signs of stalling. The Daily Candlestick against weekly and daily channel resistance and bearish momentum all point to a near term turn. WATCH US Treasuries. A break of key resistance (2.802%/125-09) would likely be the catalyst for a move constructive near term outlook for the Indian Rupee.
Consumers are carrying more debt than they did in 2007. (Consumer credit - ignoring mortgages - is up to $2.8 trillion.. In 2007, at the height of the “credit bubble,” it was just $2.5 trillion.)
Corporations are carrying more debt than they did in 2007. ( U.S. businesses owe $12.9 trillion - compared with $11 trillion in 2007.)
The Federal government is carrying 60% more debt than it did in 2007.
Cities and States are carrying more debt than they did in 2007.
Interest rates have jumped by 80% in the last three months.
The economy is clearly in recession, as retailer after retailer reports horrific results.
Stocks are as overvalued as they were in 1929, 2000, and 2007.
China is experiencing a real estate collapse.
Japan is experiencing a cultural/economic/societal collapse.
The Middle East is awash in blood.
The European Union is held together by lies, delusion and false promises.
What could possibly go wrong?
How the Fed could cause another 1987 crashCommentary: Rising interest rates and the gathering storm - By Brett Arends
Are investors high?
Stock market investors continue to ignore one of the biggest, fastest jumps in long-term interest rates on record.
Yes, the Dow slipped below 15,000 this week, but it remains near its long-term peak — despite the harrowing plunge in the bond market in the past couple of months, which has sent rates surging. Indeed, I suspect one reason the stock market has risen is that some naive investors have calculated that they can be safe by “rotating” out of bonds and into stocks.
At the start of May, the U.S. government could borrow money for 10 years at 1.6% interest. Today, barely four months later, it has to pay 2.88%.
At the start of May, someone buying a new home with a $200,000 mortgage was locking in monthly interest costs of $566. Today, thanks to the surge in mortgage rates, someone making the exact same purchase will have to pay $766 a month in interest.
A company with a BAA credit rating has seen its bond rates spike from 3% to 4% over the same period, and a riskier company with a BA rating jumped from 3.9% to 5.2%.
It’s easy to be fooled by the low absolute level of interest rates into thinking these are small moves. Rates are “only” up by 1% or 1.5%, after all. But actually these are huge moves, because they come from a low base. Mortgage costs are up about a third in a short period, from 3.4% to more than 4.4%. Uncle Sam’s cost of 10-year money has rocketed by 80%.
Traders continue to focus on the minutiae of Federal Reserve minutes and the timing of the Fed’s likely moves in the bond market. Ordinary investors should focus on the bigger picture. The Fed has announced that the era of quantitative easing, and aggressive manipulation of long-term interest rates, is coming to an end. We are due to move, sooner or later, back to an era of “normal” interest rates. Typically, that would mean 10-year Treasury rates about two percentage points above expected inflation, meaning today’s 2.88% yield would become more like 4.5%.
Not to belabor the point, but when Uncle Sam has to pay 4.5% for 10-year money, he will be paying almost three times the interest he was paying at 1.6%.
If 10-year Treasury rates hit 4.5%, mortgage rates will probably near 6% - meaning that a $200,000 home loan will cost $1,000 a month in interest, instead of $566. An investment-grade BAA borrower will have to pay about 5% on its bonds, instead of the 3.1% paid in early May.
At the very least, you had better understand the risks - of stocks, and not simply of bonds.
Rising interest rates will hit everything from car loans and credit card borrowers to closed-end investment funds, many of which have artificially goosed their yields with leverage. They borrow money at short-term rates and invest it at long-term rates. That has looked good for the past few years. It won’t look so good if the process reverses.
This surge in borrowing costs comes in an economy more in debt than any in history. It’s not just Federal debt and mortgages, either. Consumer credit - ignoring mortgages - is up to $2.8 trillion, according to the Federal Reserve. In 2007, at the height of the “credit bubble,” it was just $2.5 trillion. U.S. businesses owe $12.9 trillion - compared with $11 trillion in 2007.
The future is unknown, of course, and I am acutely conscious of Peter Lynch’s famous dictum, that an individual investor will probably lose more money fearing a stock market crash (over time) than he or she will likely lose in a market crash. Nonetheless, we do know that borrowing costs have surged, and if history is any guide, they have quite a bit further to rise. And we know how indebted the system has become.
People forget that the infamous 1987 stock market crash followed a surge in bond rates. In the months leading up to the October crash, the interest rate on 10-year Treasurys jumped about 45%, compared with the 80% hike we’ve just seen.
I asked my bond market guru over lunch what the risks were that the latest surge in interest rates could precipitate an ’87-style crash. “Quite significant,” he said.
1 - Risk Reversal
JAPAN - DEBT DEFLATION
DOLLAR-YEN CROSS - Consolidation May Be Completing
BofA's MacNeill Curry warns that "several major FX, commodity, and bond markets are flashing warning signals of a change of trend." Specifically, he notes that JPY is set to resume its devaluation path (USDJPY bullish) with a 106.00 target; US 10Y Treasury bonds are "at risk" of a bullish turn on a break back below a yield of 2.802%. This would suggest the charts are beginning to price in a "Taper-on" story (as USD repatriation flows cease and allow the JPY to weaken and bonds rally back on 'moar printing') and perhaps that is what fits with his view that the Indian Rupee melt-down is showing signs of stalling.
Via BofAML's MacNeill Curry,
USDJPY Set To Resume Its Bull Trend
For the past 3 months, USDJPY has been confined to a well defined contracting range. Now that range is just about complete and NEAR TERM WEAKNESS MUST BE BOUGHT. Upside targets are seen to 106.00/105.80, potentially 109.80.
We have been and remain US Treasuries bears, targeting 3.045%/123-02 in 10s. However, evidence for a bullish turn in trend is RAPIDLY INCREASING. Specifically, the persistent Bullish Momentum Divergences and Friday Bullish Reversal Candles across much of the curve all warn of an earlier than anticipated turn in trend. For now we remain bearish, but a break of 2. 802%/125-09 in 10s would force us to change our view.
3- Bond Bubble
VOLATILITY - "Taper Talk" Gives Way to a "Taper Tantrum"
The 10Y Treasury yield has jumped nearly 130bp from its low point in early May. Given the tight ranges and low volatility of yields during the most of QE era, this kind of move in just over 3 months seemed stunning to some investors. Consequently, the question that has come up often recently is: what has been driving Treasury yields?
As UBS' Boris Rjavinski notes, several years ago a rate strategist would give you a straightforward and predictable answer:
Economic growth projections, and
Current and future monetary policy.
The “monetary policy” part of the answer would likely simple deal with the path of the key short-term policy rate. Terms such as “quantitative easing”, “communication policy”, “thresholds and triggers” were foreign to bond investors during the era of pre-credit crisis innocence.
But now, as Rjavinksi notes,
Central banks and
Politics in the driver seat.
Volatility will remain elevated as we await key messages from the Fed in September, and U.S. political calendar will start to heat up as we approach the “drop-dead” dates to fund the government and extent the dent ceiling.
Central banks and politics in the driver seat
The relative importance of these key Treasury yield drivers has flipped upside-down in the past couple of years, as central banks have assumed the key role. Through a host of unconventional monetary policy tools, such as
... central banks have effectively crowded out the effects of economy and inflation. Having brought its short-rate benchmark to zero, the Fed has boldly moved out on the curve directly targeting longer maturity yields.
Politicians and policymakers have closely followed the Fed as the next important Treasury market driver. Fights over
government borrowing limit,
budget deficit, taxation policy,
as well as pre-election sentiment swings and
major political developments in the eurozone
have affected government bond yields in a major way.
With central banks and political risk driving the bus, traditional factors have been pushed down to the bottom of our short list. Figure 1 below provides a good illustration of these developments, as it shows evolution of 10y Treasury yield relative to some of the key developments in the recent years.
Prior to mid-2008 the 10y yield and the UBS US Growth Surprise Index have tracked quite closely, generally trending in the same direction and matching each other’s turning points. However, it had drastically changed starting in late 2008. The first big divergence occurred when the QE1 asset purchase program was announced by the Fed. While the Growth Surprise index continued to drop for a while, Treasury yields had turned higher on expectations of higher future growth and inflation, thanks to the huge amount of monetary stimulus. The politics had also played a role, as the Obama administration rolled out a very large fiscal stimulus package.
Figure 1 shows that as the effects of the QE1 and the fiscal stimulus started to fade in 2010, the two lines began to converge again. 10y yield and the Growth Surprise index even managed to march upward together in the early stages of the QE2 in late 2010. However, the firepower of Fed’s balance sheet through ongoing QE2 bond purchases forced yields lower in the spring of 2011, even as the Growth Surprise index kept going up for a while. Rising stress in the eurozone related to Greece further strengthened bid for Treasuries.
U.S. politics had stepped into the spotlight during the sovereign debt ceiling extension mess in July-August 2011 (Figure 1). As U.S. lurched to possible default, 10y yield plunged 100bp in virtually one swoop. The escalating eurozone crisis added downward pressure on yields. Finally, the Operation Twist announcement by the Fed forced Treasury yields to the cycle lows. Curiously, while the one-two punch of politics and monetary accommodation kept yields at historically low levels throughout H2 2011, the Growth Surprise index had turned decidedly upward, as one can see in Figure 1. However, that mattered little for some time; the central bankers and politicians were in the driver’s seat.
“Taper Tantrum” – same rule in reverse
Figure 1 shows that the same rule can be applied in reverse to the recent massive selloff in Treasuries. The U.S. Growth Surprise index has been clearly trending down throughout summer 2013. At the same time, Treasury yields were taking its cue from the Fed’s “taper talk” in its march upward. Clearly, investors decided that the timing, size, and composition of the taper were the key to where yields should be, while treating mixed economic data as the second order effect.
Bond fund redemptions have added upward pressure on yields
Recent rush of redemptions from fixed income mutual funds and ETFs may also have played a key role in the big jump in yields. As yields went lower during the QE era, many investors dutifully followed Fed’s lead into fixed income products. These inflows have been spread out over the period of 2-3 years and therefore allowed the markets some time to digest them, although they clearly contributed to rise in Treasury process and narrowing corporate bond spreads. The record amount of recent redemptions from bond funds and ETFs coming in a short time span may have added fuel to the fire of the Treasury selloff, especially given lower liquidity in the summer months.
To illustrate that point, we estimated historical flows into and out of the three large popular fixed income ETFs: a core bond, an agency mortgage, and an EM bond funds. We then plot estimated flows against the 10y yield in Figure 2. One can clearly see that, as the period of relatively balanced flows throughout 2012-early 2013 gives way to the flood of redemptions starting in May, the Treasury yields begin to move sharply higher. A risk of large redemptions is something we have discussed in our publications earlier this year1. Figure 2 does seem to indicate that bond fund flows may need to become more balanced first for the Treasury yields to be able to settle in a range again.
Recent move is not outsized in historical context
While Chairman Bernanke and other FOMC members have been adamant that “tapering does not mean tightening”, the market seems to interpret it that way, at least thus far. Therefore, it is logical to compare the recent upward move in 10y yield to the similar moves during previous monetary tightening cycles. In 1994, the 10y went up about 180bp in the first 3 months after the initial hike in February. The reaction after the first hike in June 1999 was much more muted, but the 10y yield had already jumped about 80bp prior to the hike. The tightening cycle that started in June 2004 may be the most appropriate comparison, since rates were rising from historically low levels. There was an almost 120bp jump in 10y yield in about 3 months prior to the first policy rate increase (which was followed by about 80bp rally over the next 3 months). While the current volatility may seem excessive, it is not outsized in historical context.
Volatility is here to stay for some time
Given that central banks, politics, and the outsized fund flows continue to be the key drivers behind Treasury yield gyrations, everyone’s model will likely be challenged to come up with accurate directional calls. We believe the best course of action for Treasury investors in the current environment is to stay close to the benchmarks and keep risk low. Several large U.S. fixed income investors we met recently seemed to agree with us that right now is not the best time to take directional view on rates. However, we feel confident that volatility will remain elevated as we await key messages from the Fed in September, and U.S. political calendar will start to heat up as we approach the “drop-dead” dates to fund the government and extent the dent ceiling.
If we get more clarity from the Fed on the size, timing and composition of QE taper, and if key political issues get addressed later this fall, we may actually see economy and inflationary expectations start to return to their traditional role as the drivers of Treasury yields.
Judging by copper that the money will be flowing from China anytime soon...
A top is approaching in Copper
Copper is fast approaching levels from which we would expect a top and resumption of the bear trend. Into 7474/7534 we look for a top and turn lower for 6602/6635 and below .
Which makes sense since we remain confident that recent copper strength is as much about the cash-for-copper financing deals (which will likely be suppressed) as it is any fundamental-based demand for the much-vaunted economist-metal.
Russia has repeatedly stated that it would consider an attack on Syria as an attack on its national security. China has also strongly cautioned the U.S. against attacking Syria. China and Russia hold a lot of U.S. debt, and could make life difficult for us economically if we unnecessarily anger them
Even though the U.S. government claims that the Syrian government is the perpetrator, it admits that it has no idea who in the government ordered the attack. It could have been a rogue, low-level military officer. Given that American, British and other Western soldiers have pleaded guilty to massacring civilians and committing war crimes, should we condemn the entire Syrian regime if it turns out to be a crime carried out by one rogue officer? (Update: U.S. and British intelligence now that admit they don’t know whether it was the rebels or the Syrian government who carried out the attack)
America is not involved in Syria because that country poses a threat to America’s security … but for entirely different reasons
Many see the timing of the Syria crisis as an attempt by the U.S. government to distract from its domestic scandals. If you need a reminder about what’s going on inside our country, here’s a cheat sheet on spying
If Barack Obama is going to attack Syria, he is going to do it without the support of the American people, without the approval of Congress, without the approval of the United Nations, and without the help of the British. Now that the British Parliament has voted against a military strike, the Obama administration is saying that it may take "unilateral action" against Syria.
But what good would "a shot across Syria's bow" actually do? A "limited strike" is not going to bring down the Assad regime and it is certainly not going to end the bloody civil war that has been raging inside Syria. Even if the U.S. eventually removed Assad, the al-Qaeda affiliated rebels that would take power would almost certainly be even worse than Assad.
Even in the midst of this bloody civil war, the rebels have taken the time and the effort to massacre entire Christian villages. Why is Barack Obama so obsessed with helping such monsters? There is no good outcome in Syria. The Assad regime is absolutely horrible and the rebels are even worse. Why would we want the U.S. military to get involved in such a mess?
It isn't as if it is even possible for the U.S. military to resolve the conflict that is going on in that country. At the core, the Syrian civil war is about Sunni Islam vs. Shia Islam. It is a conflict that goes back well over a thousand years.
Assad is Shiite, but the majority of Syrians are Sunni Muslims. Saudi Arabia and Qatar have been pouring billions of dollars into the conflict, because they would love to see the Assad regime eliminated and a Sunni government come to power in Syria. On the other side, Iran is absolutely determined to not allow that to happen.
Saudi Arabia and Qatar have no problem with using Sunni terrorists (al-Qaeda) to achieve their political goals. And as a very important ally of the Saudis, the U.S. has been spending a lot of money to train and equip the "rebels" in Syria.
But there was a problem. The Syrian government has actually been defeating the rebels. So something had to be done.
If it could be made to look like the Assad regime was using chemical weapons, that would give the U.S. government the "moral justification" that it needed to intervene militarily on the side of the rebels. In essence, it would be a great excuse for the U.S. to be able to go in and do the dirty work of the Saudis for them.
So that is where we are today. The justification for attacking Syria that the Obama administration is giving us goes something like this...
-Chemical weapons were used in Syria.
-The rebels do not have the ability to use chemical weapons.
-Therefore it must have been the Assad regime that was responsible for using chemical weapons.
-The U.S. military must punish the use of chemical weapons to make sure that it never happens again.
Unfortunately for the Obama administration, the world is not buying it. In fact, people are seeing right through this charade.
The U.S. government spends $52,000,000,000 a year on "intelligence", but apparently our intelligence community absolutely refuses to see the obvious. WND has been able to uncover compelling evidence that the rebels in Syria have used chemical weapons repeatedly, and yet government officials continue to insist over and over that no such evidence exists and that we need to strike Syria immediately.
Shouldn't we at least take a little bit of time to figure out who is actually in the wrong before we start letting cruise missiles fly?
Because the potential downside of an attack against Syria is absolutely massive. As I wrote about the other day, if we attack Syria we have the potential of starting World War 3 in the Middle East.
We could find ourselves immersed in an endless war with Syria, Iran and Hezbollah which would be far more horrible than the Iraq war ever was. It would essentially be a war with Shia Islam itself, and that would be a total nightmare.
If you are going to pick a fight with those guys, you better pack a lunch. They fight dirty and they are absolutely relentless. They will never forget and they will never, ever forgive.
A full-blown war with Syria, Iran and Hezbollah would be a fight to the death, and they would not hesitate to strike soft targets all over the United States. I don't think that most Americans have any conception of what that could possibly mean.
If the American people are going to stop this war, they need to do it now. The following are 25 quotes about the coming war with Syria that every American should see...
1.Barack Obama, during an interview with Charlie Savage on December 20, 2007: "The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation."
2.Joe Biden, during a television interview in 2007: "The president has no constitutional authority ... to take this nation to war ... unless we're attacked or unless there is proof we are about to be attacked. And if he does, if he does, I would move to impeach him."
3.U.S. Representative Ted Poe: "Mr. President, you must call Congress back from recess immediately to take a vote on a military strike on Syria. Assad may have crossed a red line but that does not give you the authority to redline the Constitution."
5.U.S. Representative Barbara Lee: "While we understand that as commander-in-chief you have a constitutional obligation to protect our national interests from direct attack, Congress has the constitutional obligation and power to approve military force, even if the United States or its direct interests (such as its embassies) have not been attacked or threatened with an attack."
6.The New York Times: "American officials said Wednesday there was no 'smoking gun' that directly links President Bashar al-Assad to the attack, and they tried to lower expectations about the public intelligence presentation."
7.U.S. Senator Rand Paul: "The war in Syria has no clear national security connection to the United States and victory by either side will not necessarily bring in to power people friendly to the United States."
12.Syrian Foreign Minister Walid Muallem: "We have two options: either to surrender, or to defend ourselves with the means at our disposal. The second choice is the best: we will defend ourselves."
13.A Syrian Army officer: "We have more than 8,000 suicide martyrs within the Syrian army, ready to carry out martyrdom operations at any moment to stop the Americans and the British. I myself am ready to blow myself up against US aircraft carriers to stop them attacking Syria and its people."
14.Khalaf Muftah, a senior Ba'ath Party official: "We have strategic weapons and we’re capable of responding."
21.The Jerusalem Post: "The lines between Hezbollah and the Syrian regime are so blurred that Israel will hold Damascus responsible if Hezbollah bombards Israel in the coming days, Israeli officials indicated on Wednesday."
22.Ron Paul: "The danger of escalation with Russia is very high"
23.Pat Buchanan: "The sole beneficiary of this apparent use of poison gas against civilians in rebel-held territory appears to be the rebels, who have long sought to have us come in and fight their war."
24.Retired U.S. General James Mattis: "We have no moral obligation to do the impossible and harm our children’s future because we think we just have to do something."
25.Syrian refugee Um Ahmad: "Isn't it enough, all the violence and fighting that we already have in the country, now America wants to bomb us, too?"
FRANCE'SFrench Oppose War Against Syria BUT, HOLLANDE PRESENTLY SUPPORTS US (France has decided to buy some time to get a clearer picture of the situation in the United Nations, the White House and within its own Parliament before making any firm commitments. A parliamentary debate in France is scheduled for Sept. 4 to weigh the military option. The French president is not bound by the need for parliamentary approval of a strike, but his already low popularity will make it difficult for Paris to commit to an operation in its former colony without sufficient parliamentary backing. Read more: An Unwilling Coalition: U.S. Options Dwindle in Syria | Stratfor Follow us: @stratfor on Twitter | Stratfor on Facebook)
In a public address Aug. 30, U.S. Secretary of State John Kerry made a second attempt to sustain the credibility of a limited military response to the alleged Aug. 21 chemical weapons attack in Syria. In a tone similar to his address Aug. 27, he gave a graphic description of the attack and emphasized the deaths of children in order to keep the issue on the minds of U.S. citizens. He emphasized a U.S. intelligence report, rather than a pending U.N. inspections report, concluding with "high confidence" that the regime carried out the attack.
Despite facing a crumbling coalition, the United States appears willing to proceed with a limited punitive strike to maintain its credibility. Kerry's call for a dialogue with the U.S. public in weighing the strike will be managed through consultations with senior members of the U.S. Congress. The critical question concerns the timing of the strike and whether the United States will be able to assemble a coalition, however small, to enhance the legitimacy of the attack.
The United States would still prefer a multilateral effort based on the findings of the U.S. intelligence report. As Kerry emphasized, the pending U.N. inspection report will assess the nature of the chemical weapons attack, but it will not draw conclusions on the origins of the incident. It remains to be seen whether the United Kingdom or France will reconsider their current stances to reflect conclusions made in the U.S. assessment and their own intelligence reports rather than waiting for the potentially irrelevant U.N. report. The United Kingdom and France, after all, were initially the strongest proponents for responding strongly to the chemical weapons attack, and participation by at least one of these NATO allies would give the United States the legitimacy it seeks. The United Kingdom has yet to schedule another parliamentary debate on the matter, and though French President Francois Hollande is not legally required to obtain parliamentary approval to participate in the strike, France's parliament is scheduled to meet Sept. 4. Meanwhile, Turkey is readying its forces to prepare for possible blowback, but for now it will likely maintain a cautious stance toward active participation in the strike.
For now, we can assess the following: The United States appears committed to a military response to the chemical weapons attack. That action will demonstrate that consequences are attached to U.S. ultimatums, and it will be designed to discourage future use of chemical weapons. However, the operation will be limited in scope and will likely keep the Syrian regime intact. The response does not necessarily need to be rushed, either. The United States appears willing to give more time to potential coalition partners, with a particular eye on France and the United Kingdom, to come around to a military response based on their intelligence assessments. In the meantime, speeches like the one Kerry made Aug. 30 -- and more intelligence leaks from the administration -- will try to sustain momentum for an operation.
8 - Geo-Political Event
SYRIA - US Supporting Fully an "Al Qaeda Operation"
So the American government’s argument that “we must stop Assad because he’s brutally crushing a spontaneous popular uprising” is false. The U.S. started supporting the rebels 5 years before the protests started.
By supporting the rebels, we’re supporting our sworn terrorist enemies.
A War 20 Years In the Making
If there is any doubt about this timeline, please keep in mind that the U.S. and Britain considered attacking Syrians and then blaming it on the Syrian government as an excuse for regime change … 50 years ago (the U.S. just admitted that they did this to Iran)
Libya’s Gaddafi claimed that the rebels in that country were actually Al Qaeda.
That claim – believe it or not – has been confirmed.
According to a 2007 report by West Point’s Combating Terrorism Center’s center, the Libyan city of Benghazi was one of Al Qaeda’s main headquarters – and bases for sending Al Qaeda fighters into Iraq – prior to the overthrow of Gaddafi:
“There is no question that al Qaeda’s Libyan franchise, Libyan Islamic Fighting Group, is a part of the opposition,” Bruce Riedel, former CIA officer and a leading expert on terrorism, told Hindustan Times.
It has always been Qaddafi’s biggest enemy and its stronghold is Benghazi.
(Incidentally, Gaddafi was on the verge of invading Benghazi in 2011, 4 years after the West Point report cited Benghazi as a hotbed of Al Qaeda terrorists. Gaddafi claimed – rightly it turns out – that Benghazi was an Al Qaeda stronghold and a main source of the Libyan rebellion. But NATO planes stopped him, and protected Benghazi.)
There is a direct connection to Syria. Specifically, CNN, the Telegraph, the Washington Times, and many other mainstream sources confirm that Al Qaeda terrorists from Libya have since flooded into Syria to fight the Assad regime. And the post-Gaddafi Libyan government is also itself a top funder and arms supplier of the Syrian opposition.
The Bottom Line
The bottom line is that there are no few good guys involved in the Syrian war.
The solution is not to bomb the country … or to send more arms to the rebels.
The solution is to make sure that less weapons – chemical and conventional – get into that tinder box of a country.
And to stay the h@!! out of a conflict which has no bearing on our national security.
8 - Geo-Political Event
PUBLIC POLICY - Decision Already Taken to Bomb Syria
STRATFOR: As the United States weighs a military response to the Syrian regime's reported use of chemical weapons, one of the largest concerns will involve countering Syria's robust air defense network. With an estimated 54,000 personnel, Syria's air defense network is twice the size of former Libyan leader Moammar Gadhafi's air force and air defense command combined at the start of the NATO campaign in 2011. Syria's Air Defense Command consists of the 24th and 26th anti-aircraft divisions, which comprise thousands of anti-aircraft guns and more than 130 surface-to-air missile (SAM) batteries.
The bulk of Syria's SAM weaponry is composed of the SA-2, SA-3, SA-5, SA-6 and SA-8 SAM systems, which were also operated by Gadhafi's forces. However, the Syrians operate these systems in far greater numbers, have devoted significant resources to maintaining and upgrading these missile batteries and have also successfully deployed their SAM systems in a dense and overlapping layout that would complicate operations to suppress enemy air defenses. Though also a Russian ally, Gadhafi did not have the more advanced Russian air defense systems that the al Assad regime possesses. For example, Iran reportedly financed Syria's acquisition of 50 SA-22 systems first delivered in 2007 -- 10 of which allegedly ended up in Iranian hands. The Syrians are also thought to operate several SA-11 systems, which the Libyans did not have. Syria's defenses against an air campaign are not restricted to the ground. Its air force can contribute dozens of fighter aircraft and interceptors, which any intervention force would also have to contend with.
1) Strategic: Syria's port of Tartus hosts the only remaining international military base outside of the former Soviet Union.
2) Financial: As of June 2012, Russia’s economic interests in Syria total approximately $20 billion, about $5 billion of which are weapons sales.
3) Philosophical: Andranik Migranyan, director of the New York-based Institute for Democracy and Cooperation, a nongovernmental organization funded by private Russian donors that is considered close to the leadership in Moscow, told NPR's Robert Siegel: "Russia's position is very easy to understand."
"First, Russia is against any regime change from outside of Syria or any other country because according to Russia, any attempt to change the regimes, they are ended up in a chaos and results are quite opposite what were the intentions," Migranyan said. "This was proved in Iraq after the invasions of Americans over there. This was proved in Libya. This was proved in Egypt. And Russia is against principally this regime changes."
... topple the Assad regime and take over Syria. Yes, the Assad regime is horrible, but if these jihadist lunatics take control it will destabilize the entire region, make the prospect of a major regional war much more probable, and plunge the entire nation of Syria into a complete and utter nightmare.
It has been estimated that somewhere around 100,000 people have already been killed in the civil war in Syria, and now it looks like the U.S. military and the rest of NATO plan to become directly involved in the conflict. The Obama administration is actually considering an attack on Syria even though the American people are overwhelmingly against it, Obama does not have Congressional approval to start a war, and he will never get approval for military action from the UN because it will be blocked by Russia. This is setting up to become a colossal foreign policy disaster for the United States.
A potential war with Syria has been brought to the forefront because of a chemical weapons attack near Damascus last week that killed as many as 1,400 people. The Obama administration and several other western nations are blaming this attack on the Assad regime.
But others are pointing out that it would make absolutely no sense for the Assad regime to do such a thing. They appear to be winning the civil war, and Assad knows that Obama has previously said that the use of chemical weapons in Syria would be a "red line" for the United States.
So why would the Assad regime launch a brutal chemical weapons attack against women and children just miles from where UN inspectors were staying?
Why would Assad risk war with the United States and the rest of NATO?
Assad would have to be extremely stupid or extremely suicidal to do such a thing.
The ones that benefit from this chemical weapons attack are the jihadist rebels. The odds of foreign intervention in the conflict just went way, way up.
We will probably never learn the real truth about who was actually behind that attack. And even if it had not happened, the U.S. and the rest of NATO would have probably come up with another justification to go to war anyway. They appear absolutely obsessed with getting rid of Assad, but they have not really thought through the consequences.
The following are 15 signs that Obama has already made the decision to go to war with Syria...
#1 Syria has agreed to allow UN officials to inspect the site of the recent chemical weapons attack that killed up to 1,400 people, but a "senior U.S. official" says that such an inspection would be "too late to be credible".
#2 According to ABC News, the White House is saying that there is "very little doubt" that the Assad regime was behind the deadly chemical weapons attack last week.
#3 Four U.S. warships with ballistic missiles are moving into position in the eastern Mediterranean Sea. If the command is given, they will be able to rain Tomahawk cruise missiles down on targets inside Syria within minutes...
U.S. defense officials told The Associated Press that the Navy had sent a fourth warship armed with ballistic missiles into the eastern Mediterranean Sea but without immediate orders for any missile launch into Syria.
U.S. Navy ships are capable of a variety of military actions, including launching Tomahawk cruise missiles, as they did against Libya in 2011 as part of an international action that led to the overthrow of the Libyan government.
#4 CBS News is reporting that "the Pentagon is making the initial preparations for a Cruise missile attack on Syrian government forces".
#7 After a phone conversation with British Prime Minister David Cameron about the situation in Syria, the White House announced that both leaders expressed "grave concern" about the chemical weapons attack that took place last week.
#9 According to France’s second largest newspaper, rebel forces that have been trained by the CIA have been pouring toward Damascus "since mid-August"...
According to our information, the regime's opponents, supervised by Jordanian, Israeli and American commandos moving towards Damascus since mid-August. This attack could explain the possible use of the Syrian president to chemical weapons.
According to information obtained by Le Figaro , the first trained in guerrilla warfare by the Americans in Jordan Syrian troops reportedly entered into action since mid-August in southern Syria, in the region of Deraa. A first group of 300 men, probably supported by Israeli and Jordanian commandos, as well as men of the CIA, had crossed the border on August 17. A second would have joined the 19. According to military sources, the Americans, who do not want to put troops on the Syrian soil or arming rebels in part controlled by radical Islamists form quietly for several months in a training camp set up at the border Jordanian- Syrian fighters ASL, the Free Syrian Army, handpicked.
#11 According to a government document that Wikileaks released back in March 2012, NATO personnel have been on the ground inside Syria preparing for regime change since 2011.
#12 The Times of Israel is reporting that an internal military assessment has concluded that "Washington is seriously considering a limited yet effective attack that will make it clear to the regime in Damascus that the international community will not tolerate the use of weapons of mass destruction against Syrian civilians or any other elements".
#13U.S. Senator John McCain recently said that if the U.S. military does not hit Syria, it will be like "writing a blank check to other brutal dictators around the world if they want to use chemical weapons".
#14 According to the New York Times, "the NATO air war in Kosovo" is being studied "as a possible blueprint for acting without a mandate from the United Nations".
#15 The White House has released a statement that says that the Obama administration has no plans to put "boots on the ground", but it did not rule out any other types of military action.
This is not a conflict that the U.S. military should be involved in.
And we should especially not be on the side of the rabidly anti-Christian, rabidly anti-Israel and rabidly anti-western forces that are attempting to take control of Syria.
The terrorists that the Obama administration is backing are absolutely psychotic. Just check out the following example from a recent article posted on the Blaze...
New video posted on YouTube purports to show the graphic murder – execution style – of three Syrian truck drivers who did nothing more than belong to a minority faith the local Al Qaeda affiliate does not like.
In the video, a small band of Islamist radicals with the Al Qaeda-linked ISIS (Islamic State in Iraq and Syria) group is seen waving the tractor trailers off the side of an Iraqi road and then proceeds to interrogate the unsuspecting drivers about their prayer habits, trying to discover if they are Sunnis or members of the Alawite minority in Syria.
When they “fail” the Sunni jihadis’ pop roadside quiz, the truck drivers are seated in a line in the median of the road and shot in the back of their heads firing squad style by the self-appointed law enforcers, jury, judge and executioner.
Why in the world would the United States want to arm such people?
Why in the world would the United States want to go to war to help such people take power?
It is utter insanity.
And as I mentioned earlier, most Americans are totally against getting involved. According to a stunning new poll, 60 percent of all Americans are against U.S. military intervention in Syria, and only 9 percent are in favor of it.
So in light of all that you have just read, why is the Obama administration so determined to help the rebels in Syria?
8 - Geo-Political Event
CONSUMPTION - Consumers Using Savings to Maintain Life Style
Early-year tax increases and higher gasoline prices have probably dented U.S. consumer expenditures and as Bloomberg's Joseph Brusuelas notes, tomorrow's report of July’s personal income and spending report may illustrate the weakness that poses a significant risk to the much-anticipated economic growth renaissance in the second half of the year.
Via Joseph Brusuelas, Bloomberg Briefs,
The drawing down of personal savings and the flattening out of government transfers indicate that real wage gains must accelerate to support the optimistic Bloomberg consensus forecast that the U.S. economy will expand at the long-term trend growth rate of 2.5 percent in the second half of the year. Acceleration in wage gains can only happen if the pace of job gains, which has slowed during the past three months, increases.
Based on current data, it is going to be difficult for consumers to eke out a gain in disposable income in July. Real personal disposable income is up 1.7 on a year-ago basis and has increased just 0.4 percent when adjusted for inflation.
Nominal Income Doesn't Reflect Impact of Policy / Gas Prices (Yet)
The July non-farm payroll report showed a 0.1 percent decline in average hourly earnings and a 0.4 percent decline in average weekly earnings. Both expanded at a 1.9 percent rate on a year-ago basis, just below the 2 percent expansion in personal consumption expenditures. This suggests that Bloomberg consensus expectations for a 0.3 percent increase in spending may be overly optimistic. While retail spending on items excluding autos, building, materials and gasoline expanded at a 0.5 percent rate, lower outlays on auto sales, utilities and relative weakness in back-to-school spending indicate the consumer remains constrained.
The near 2 percent year-over-year pace of real personal consumption expenditures is due to two factors.
First, government transfers have helped fill the gap in wages and spending since the start of the recession.
Second, households have consistently drawn down savings to support higher levels of spending than their incomes alone can support.
These conditions cannot persist indefinitely.
Consumers Using Savings To Maintain Spending Levels
Since the first quarter of 2011 – with exception of the final quarter of 2012 when many upper income households pulled forward compensation to avoid the tax hike on Jan. 1, 2013 – the savings rate on a year-ago basis has declined and is down 1 percent through the second quarter of this year.
Real Wages Likely To Remain Tepid
Meanwhile, the gap between inflation-adjusted per capita disposable income and real personal consumption expenditures shows that households have yet to adjust to reduced incomes. While households have increased spending at a 1.7 percent rate, slightly above the 20-year average rate of inflation, they have seen adjusted per capita income gains of just 0.4 percent.
Thus, the ability to increase spending now rests on either households ramping up leverage and continuing to draw down savings, or on the Federal government expanding transfer payments. Neither appears likely given the increasing probability of another game of budgetary brinksmanship in Washington and the low-wage bias that has been a persistent feature of the economic recovery.
Source: Bloomberg Briefs
20 - Slowing Retail & Consumer Sales
CONSUMPTION - Final Sales Signals Pending Recession
As the mainstream-media and its status quo "growth's around the corner" lackeys gloat hopefully over this morning's soon-to-be-revised GDP data beat, we noted a rather disturbing trend in a critical part of the report. Real Final Sales growth is collapsing. In fact, the current slow level of growth in real final sales has never occurred outside of a recession... So perhaps, as we commented (here, here, and here) things are not as 'great' as headlines would suggest.
On the surface, today's Personal Income and Savings data was not pretty: with Incomes and Spending both rising at 0.1% in July, both missed the expected growth rate of 0.2% and 0.3% respectively. This also meant that the US consumer's savings rate was unchanged at 4.4% in the month, and the downtrend from recent highs continues as more and more of the savings buffer has to be depleted.
But it was once again below the headlines that the truly ugly data lay. A quick look at the components of income showed something very disturbing. After holding relatively firm for the past five months (excluding the violent swings surrounding the 2012 year end accelerated bonus payouts), compensation of employees - the core component of personal income - tumbled by $21.9 billion. This was the biggest monthly slide since May 2012, and as the chart below shows, the downtrend in sequential wage growth has now resulted in a sequential decline in wages.
We eagerly wait to hear how collapsing wages are spun in the context of the "recovery."
20 - Slowing Retail & Consumer Sales
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
HITTING THE WALL - Imbalances Are Unsustainable Now That The QE "Sugar High" is Ending
The global economy could be in the early stages of another crisis. Once again, the US Federal Reserve is in the eye of the storm.
As the Fed attempts to exit from so-called quantitative easing (QE) – its unprecedented policy of massive purchases of long-term assets – many high-flying emerging economies suddenly find themselves in a vise.
Currency and stock markets in India and Indonesia are plunging, with
Collateral damage evident in Brazil, South Africa, and Turkey.
The Fed insists that it is blameless – the same absurd position that it took in the aftermath of the Great Crisis of 2008-2009, when it maintained that its excessive monetary accommodation had nothing to do with the property and credit bubbles that nearly pushed the world into the abyss. It remains steeped in denial: Were it not for the interest-rate suppression that QE has imposed on developed countries since 2009, the search for yield would not have flooded emerging economies with short-term “hot” money.
As in the mid-2000’s, there is plenty of blame to go around this time as well. The Fed is hardly alone in embracing unconventional monetary easing. Moreover, the aforementioned developing economies all have one thing in common: large current-account deficits.
According to the International Monetary Fund,
India’s external deficit, for example, is likely to average 5% of GDP in 2012-2013, compared to 2.8% in 2008-2011.
Similarly, Indonesia’s current-account deficit, at 3% of GDP in 2012-2013, represents an even sharper deterioration from surpluses that averaged 0.7% of GDP in 2008-2011.
Comparable patterns are evident in Brazil, South Africa, and Turkey.
A large current-account deficit is a classic symptom of a pre-crisis economy living beyond its means – in effect, investing more than it is saving. The only way to sustain economic growth in the face of such an imbalance is to borrow surplus savings from abroad.
That is where QE came into play. It provided a surplus of yield-seeking capital from investors in developed countries, thereby allowing emerging economies to remain on high-growth trajectories.
IMF research puts emerging markets’ cumulative capital inflows at close to $4 trillion since the onset of QE in 2009.
Enticed by the siren song of a shortcut to rapid economic growth, these inflows lulled emerging-market countries into believing that their imbalances were sustainable, enabling them to avoid the discipline needed to put their economies on more stable and viable paths.
This is an endemic feature of the modern global economy. Rather than owning up to the economic slowdown that current-account deficits signal – accepting a little less growth today for more sustainable growth in the future – politicians and policymakers opt for risky growth gambits that ultimately backfire.
That has been the case in developing Asia, not just in India and Indonesia today, but also in the 1990’s, when sharply widening current-account deficits were a harbinger of the wrenching financial crisis of 1997-1998. But it has been equally true of the developed world.
America’s gaping current-account deficit of the mid-2000’s was, in fact, a glaring warning of the distortions created by a shift to asset-dependent saving at a time when dangerous bubbles were forming in asset and credit markets.
Europe’s sovereign-debt crisis is an outgrowth of sharp disparities between the peripheral economies with outsize current-account deficits – especially Greece, Portugal, and Spain – and core countries like Germany, with large surpluses.
Central bankers have done everything in their power to finesse these problems. Under the leadership of Ben Bernanke and his predecessor, Alan Greenspan, the Fed condoned asset and credit bubbles, treating them as new sources of economic growth. Bernanke has gone even further, arguing that the growth windfall from QE would be more than sufficient to compensate for any destabilizing hot-money flows in and out of emerging economies. Yet the absence of any such growth windfall in a still-sluggish US economy has unmasked QE as little more than a yield-seeking liquidity foil.
The QE exit strategy, if the Fed ever summons the courage to pull it off, would do little more than redirect surplus liquidity from higher-yielding developing markets back to home markets. At present, with the Fed hinting at the first phase of the exit – the so-called QE taper – financial markets are already responding to expectations of reduced money creation and eventual increases in interest rates in the developed world.
Never mind the Fed’s promises that any such moves will be glacial – that it is unlikely to trigger any meaningful increases in policy rates until 2014 or 2015. As the more than 1.1 percentage-point increase in 10-year Treasury yields over the past year indicates, markets have an uncanny knack for discounting glacial events in a short period of time.
Courtesy of that discounting mechanism, the risk-adjusted yield arbitrage has now started to move against emerging-market securities. Not surprisingly, those economies with current-account deficits are feeling the heat first. Suddenly, their saving-investment imbalances are harder to fund in a post-QE regime, an outcome that has taken a wrenching toll on currencies in India, Indonesia, Brazil, and Turkey.
As a result, these countries have been left ensnared in policy traps:
Orthodox defense strategies for plunging currencies usually entail higher interest rates –
an unpalatable option for emerging economies that are also experiencing downward pressure on economic growth.
Where this stops, nobody knows. That was the case in Asia in the late 1990’s, as well as in the US in 2009. But, with more than a dozen major crises hitting the world economy since the early 1980’s, there is no mistaking the message: imbalances are not sustainable, regardless of how hard central banks try to duck the consequences.
Developing economies are now feeling the full force of the Fed’s moment of reckoning. They are guilty of failing to face up to their own rebalancing during the heady days of the QE sugar high. And the Fed is just as guilty, if not more so, for orchestrating this failed policy experiment in the first place.
THE CHOICE: Impose Capital Controls OR let the Fed run your economy.
We desperately need to regain our appetite for a new kind of financial system, says Robin Harding. The world is doomed to:
An endless cycle of:
Financial crisis and
Get used to it. At least, that is what the world’s central bankers – who gathered in all their wonky majesty last week for the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyoming – seem to expect. All their discussion of the international financial system was marked by a fatalist acceptance of the status quo. Despite the success of unconventional monetary policy and recent big upgrades to financial regulation,
We still have no way to tackle imbalances in the global economy, and that means new crises in the future.
Indeed, the problem is becoming worse. Since the collapse in 1971 of the old fixed exchange rate system of Bretton Woods, the world has become used to the
“Trilemma” of International Finance:
The impossibility of having free capital flows,
Fixed exchange rates and
An independent monetary policy
... all at the same time. Most countries have plumped for control over their own monetary policy and a floating exchange rate.
In an excellent new paper presented at Jackson Hole, however, Professor Hélène Rey of the London Business School argued that a global cycle in credit and capital flows – driven by the US Federal Reserve’s monetary policy – means that even a floating exchange rate does not give a country control over its own destiny. The trilemma is, in truth, a dilemma.
The choice is this: Impose capital controls OR let the Fed run your economy.
The shrugging acceptance of this gloomy analysis in Jackson Hole was striking, especially at a time when capital is fleeing the emerging world – pulling down exchange rates – as the Fed ponders a tapering of its asset purchases from $85bn a month. At a minimum, that threatens developing countries with higher inflation and higher interest rates; those that enjoyed the capital inflows a bit too much, such as India and Indonesia, could suffer something worse.
Yet all the debate was about how individual countries can damp the impact of capital flowing in and out. Prof Rey’s own conclusion was that it is hopeless to expect the Fed to set policy with other countries in mind (which would be illegal). She recommended
Targeted capital controls,
Tough bank regulation, and
Domestic policy to cool off credit booms.
In practice, this will never work well. It requires every country in the world to react with discipline to constantly changing capital flows. It is like saying we can cure the common cold if only everyone in the world would wash their hands hourly and never leave the house. Even if it did work, the necessary volatility of policy would still impose painful economic costs on the countries acting this way.
But it is not the only choice. Five years ago, after the collapse of Lehman Brothers, there was appetite and momentum for a new kind of international financial system. That appetite is gone – but we desperately need to get it back.
The flaws in the international financial system are old and profound, and they defeat any effort to work around them. Chief among them is
The lack of a mechanism to force any country with a current account surplus to reduce it.
Huge imbalances – such as the Chinese surplus that sent a flood of capital into the US and helped create the financial crisis – can therefore develop and persist.
Indeed, running a surplus is wise because there is no international central bank to rely on if investors decide they want to pull capital out of your country. There is the International Monetary Fund – but Asian countries tried that in 1997, and the experience was so delightful they have been piling up foreign exchange reserves ever since to avoid a repeat.
A reliable backstop is impossible when the international system relies on a national currency – the US dollar – as its reserve asset. Only the Fed makes dollars. In a crisis, there are never enough of them – a shortage that will only get worse as the world economy grows relative to the US – even if the problem for emerging markets right now is too many of them.
The answer is what John Maynard Keynes proposed in the 1930s: an international reserve asset, rules for pricing national currencies against it, and penalties for countries that run a persistent surplus. After the financial crisis there was a flood of proposals along these lines from the UN, from the economist Joseph Stiglitz, and even from the governor of the People’s Bank of China. None has gone anywhere.
Even the most basic first step towards that goal – boosting the IMF’s resources and handing more voting power to emerging markets so they can rely on it in time of need – has stalled in the US Congress.
The potential for reform, however, is greater than it has been for decades. The crisis and recession have reduced global imbalances – if only temporarily. So China, for example, would no longer have to make a big immediate adjustment to reduce its surplus. The financial crisis also gave the US a vivid lesson in the disadvantages of supplying the world’s reserve currency. Emerging markets are getting a reminder of the perils of importing US monetary policy.
Gradual change is more plausible than a sudden revolution – but the time to make progress is now. A stable international financial system has eluded the world since the end of the gold standard. The first condition for creating one, however, is the ambition to try.
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
VALUATION - Earnings & Profits Per Share Suggest Overvalution
Today's chart of the day was the result of a question by my friend Richard Rosso who asked if corporate profits were suggesting that the current market environment was becoming overvalued. The timing of the question was apropos as I was already pondering a statement made by Matthew O'Brien at the Atlantic who stated:
"Just because the price of something is going up doesn't mean it's a bubble. Even if it's going up a lot. And even if it's something you don't like. After all, there might be a good reason it's going up so much. A good reason like ... record profits."
While Matthew was addressing whether, or not, the artificially inflated markets have once again started to reach "bubble" territory, and there are certainly arguments that suggest it well could be, the importance of his argument really focuses around the notion of record profits.
The mistake that is likely being made by many is the assumption that when profits reach a new "record" it is the beginning of a new trend rather than the end of something that begin some time ago. The issue comes when mainstream analysts begin manipulating data in order to justify current market dynamics. In this instance in order to justify high market prices one must assume that the current "record" levels of profits will continue forward indefinitely. The problem with that assumption is that this has never been the case historically and one that will likely not manifest in the future.
The chart below shows several things of importance relating to the current valuation of the financial markets. The only valid measure of market valuation that is historically consistent is trailing twelve month REPORTED earnings per share. Using other measures such as operating, or pro-forma, earnings to try and justify current market levels is both inconsistent and inaccurate when performing valuation analysis. I have also included price to corporate profits (NIPA) per share for a comparative measure.
As you will notice each time that price to corporate profits (P/CP) and price to earnings per share (P/E) were above their respective long term historical growth trends the financial markets have run into complications. The bottom two graphs shows the percentage deviations above and below the long term growth trends.
What is important to understand is that, despite rhetoric to the contrary, "record" earnings or profits are generally fleeting in nature. It is at these divergences from the long term growth trends where true buying and selling opportunities exist.
Are we currently in another asset "bubble?" The answer is something that we will only know for sure in hindsight. However, from a fundamental standpoint, with valuations and profitability on a per share basis well above long term trends it certainly does not suggest that market returns going forward will continue to be as robust as those seen from the recessionary lows.
"The period of generally rich valuations since the late-1990’s (associated with overall market returns hardly better than Treasury bill returns since then) has created a tolerance for valuations that, in fact, have led to awful declines, and have required fresh recoveries to elevated valuations simply to provide meager peak-to-peak returns. At the same time, the intervening recoveries to the 2007 highs and again to the recent market highs, coupled with what Galbraith called “extreme brevity of the financial memory” have periodically convinced investors that the market will advance diagonally forever. History teaches a different and very coherent set of lessons:
Depressed valuations are rewarded over the long-term;
Rich valuations produce disappointment over the long-term;
Favorable trend-following measures and market internals tend to be rewarded over the shorter-term, but generally only while overvalued, overbought, over bullish syndromes are absent;
Market losses generally emerge from overvalued, overbought, over bullish syndromes, on average, but sometimes with 'unpleasant skew' where weeks or even months of persistent marginal advances are wiped out in a handful of sessions. The losses often become deep once the support of market internals is lost. When a broken speculative peak is joined by a weakening economy, the losses can become disastrous.
While there may not be an asset bubble currently; valuations by both of the metrics (P/CP and P/E) studied here are clearly rich. However, for investors, it is important to remember that valuation measures are horrible short term market timing devices. In the true long run valuations mean everything. While I am not suggesting that the market is about to plunge into its 3rd major reversion for this century, even though that possiblity does exist, I am suggesting that future returns will likely not be anything to write home about either.
PATTERNS - Markets Before and Immediately After Conflict Begins
How do markets (US equities, Gold, Crude Oil, and the USD) react around US military conflicts...? Citi shows what happened before-and-after the Gulf War, Kosovo, Afghanistan, Iraq, and Libya... and why Syria is arguably more complex than these previous conflicts...
S&P: trades better once conflict begins. This time should be no different.
Gold: falls after start of action. Again should be no different.
Crude: usually falls at or just prior to start of military action.
USD: reverts back to dominant trend. USD weakened post-action in 1991, 2003, 2011 as it was in a bear market. The opposite happened in 1999 and 2001 (USD bull market). This time around USD strength should return once military intervention begins.
One counterpoint: Syria is arguably more complex than these previous conflicts. Military objectives are also not as well defined. Russia and Iran will also weigh in both pre- and post-action. The usual market reaction may be more muted and short-lived because of greater uncertainties.
COMMODITY CORNER - HARD ASSETS
PRIVATE EQUITY - REAL ASSETS
2013 - STATISM
4 STAR GENERAL AND SUPREME COMMANDER OF NATO: Calls It Out!
No matter how hard the Washington crowd tries to sell an economic recovery, inconvenient and contrary facts keep rearing up to shatter their mythmaking. Few people any longer believe the claims of declining unemployment or low inflation at least based on purchases they make.
Rising interest rates are blamed for the housing reversal. As the late Gilda Radner would have said: “it’s always something.”
The recession, declared over in June 2009, never ended. Over four years later there has been no meaningful sign of a recovery. In spite of unprecedented government and Federal Reserve stimuli, the economy has barely budged These actions have only masked the true condition of our economy and will make us poorer in the future.
Some wonder how bad the recession/depression might have been had government not acted. Others worry that we will find out when the Fed tapers.
What is Going On?
Newspapers and the economic cacophony emitted by pundits and political hacks only confuse the average person as to what is really happening.
Rising interest rates, the reason given for weakening housing, provide a convenient and plausible excuse. But explaining complex economic issues rarely can be answered by citing a single variable. Such an answer is simplistic and begs the more fundamental question of why interest rates are rising now. Addressing this issue does not lend itself to snappy sound bites. Furthermore, it leads into complex relationships that few are able or willing to follow.
An unwillingness to explore these more complex issues is just fine from the political standpoint. They lead to a host of inconvenient and embarrassing issues regarding Washington’s mismanagement of the economy. The also enable economists to leap into the weeds of their particular jargon, theory, empirics and political leanings regarding the economy.
Let’s keep this discussion simple, which can be done by assuming away some of the noise and complexities like economists are wont to do. Let’s assume away economics and economists for the moment. Let’s pretend that neither exists and try to take a common-sense approach to the economic problems of the country.
As an economist, I think it worthwhile so that others, untrained in this so-called discipline, may better understand the simplicity of what ails the country. The pejorative “simplistic” is one hurled usually by people trying to protect their turf by using smokescreens.
Economics for Dummies
The reason why the economy is not recovering and will not recover can be explained in five simple points:
Wealth and standard of living increases can only be achieved by producing more, not less.
Capital increases are required to produce more. Wage gains are directly tied to productivity gains and more capital enables productivity to rise. US workers earn more because they are more productive as a result of having more capital (tools and equipment) to work with.
The private sector uses and expands capital. Firms cannot achieve this result, go out of business. The remaining capital is taken over by better stewards. Successful firms grow, creating value, jobs, incomes, wealth and more capital.
Government destroys capital. It confiscates it from the private sector and uses it for consumption, effectively reducing the supply. Jobs, income and growth that otherwise would have developed do not. The rare exception is if government “invests” in capital projects like roads, infrastructure or meaningful education. If properly chosen, this government spending can assist in the production of capital.
The proportion of assets and capital confiscated has increased greatly over the last century. At some point, the capital and wealth left behind in the private sector is inadequate to reproduce itself. That is when economic growth turns negative and standards of living decline. Long before that point growth rates diminish.
It is this simple process which has crippled the US economy. Pointing to rising interest rates, declining innovations or a host of other variables as the cause of the problem is to miss the root cause of the problem.
The golden goose has grown old and tired. It no longer has enough capital to achieve the performance of the past. The country is poorer than it should be as a result. Washington’s policies, interventions and disincentives are making it poorer still. These policies help Washington and its cronies. They lower the standard of living of the rest of the country.
Wealth (capital) enables economies to grow. It is the primary requisite for a rising standard of living. It provides the means to work less and have more. Workers are made more productive and achieve higher earnings. The well-known socialist economist Joan Robinson begrudgingly admitted to that fact at the height of Keynesianism and the intellectual attraction to socialism when she said the following of capitalism (my emboldening):
The system is cruel, unjust, turbulent, but it does deliver the goods, and, damn it all, it’s the goods that you want. Joan Robinson
A Simple Choice
Politicians do not want to discuss the economic problem in simple terms. They are the biggest beneficiaries of the welfare state which feeds their egos, desire for power and as a means to buy votes to retain office.
The golden goose upon which the horde of political parasites feeds is not immune. It grows ever weaker and unproductive as a result of the predations. A decision must be made between two options: the Welfare State or the Prosperous State. There is no third way. The choice is to continue down this road to serfdom or to make a U-turn back toward prosperity.
Advanced stages of the welfare state will lead to its eventual demise. History is replete with governments that extended themselves beyond what their populations were willing or able to support. That is the point the US has reached. The so-called economic crisis did not begin in 2009 or even 2001. These were symptoms of the disorder and maladjustments that had been introduced into the economy years before.
We can continue down the current road and never see a return to economic vitality that was experienced only a few decades ago. Poverty, jobless and continued declines in the standard of living will increase. Ultimately the economy will collapse under its own weight or civil unrest will bring it down.
Or we can repeal much of the nonsense that has contributed to this problem and return to the vitality, growth and rising incomes that characterized most of our history. That requires a massive reduction in government’s role in the economy and its spending.
These are the only choices that affect our destination. All other considerations are mere distractions and excuses. It is just that simple!
These comments are as relevant for the welfare states in Europe as they are the US.
What Happens Next
The choice above will likely not be addressed until an economic tragedy renders our economy dysfunctional.
Before that occurs, a collapse of financial asset prices (stocks and bonds) is a probable next event. The timing of such a collapse is not reasonably predictable, but current asset price levels reflect Fed-created smoke and mirrors liquidity. This reinflated bubble will collapse just as the now deflating housing bubble has. What is certain is that something as irrelevant as rising interest rates will be blamed.
Without rollbacks in confiscations of wealth, harmful policies and the removal of perverse incentives, this country must continue to decline.
Why There Can Be No Recovery — Simple Supply and Demand
Individuals are adjusting their behavior to the new normal — a declining real standard of living. That means driving cars longer, downsizing homes, dining out less often, buying new clothes less frequently, etc. etc. These adjustments are all demand side. They are rational in a world where the standard of living is falling short of expectations. There is no short-term fix for this problem.
The supply side of the economy is not as easily rationalized. Commitments in the form of fixed investments and long-term debt are in place. As the country becomes poorer and demand shifts downward, the supply side is not easily downsized. Workers can be laid off as a partial adjustment, but many of the costs are fixed and not downwardly adjustable. The number of retail stores, dry cleaners, car dealers, restaurants, malls and virtually everything else was built for a higher expected standard of living than is forthcoming. This supply must shrink to the level of demand. That process inevitably involves layoffs, closures and bankruptcies.
Many of the marginal businesses that held on through the first wave (2009) will not make it through the next one. The great Recession that policy analysts claimed was cured has yet to come. It will, it is unavoidable.
For lack of a better term, the process the entire country is headed for is “Detroitification.” The term represents a declining if not dying economy. Higher interest rates, “slow growth,” lack of innovation, worldwide slowdown or many other variables will be used to rationalize what is coming. The tragedy results from one cause and one only — the idiocy of our federal government and its greed.
At this stage, the damage is done and cannot be undone quickly enough to avoid this crisis. Even if there were time, there is no way that politicians would willingly address the problem.
2012 - FINANCIAL REPRESSION
2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS
2010 - EXTEN D & PRETEND
CORPORATOCRACY - CRONY CAPITALSIM
GLOBAL FINANCIAL IMBALANCE
STANDARD OF LIVING
CORRUPTION & MALFEASANCE
NATURE OF WORK
CATALYSTS - FEAR & GREED
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Tipping Points Life Cycle - Explained Click on image to enlarge
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