Nothing says buying panic like a “constitutional crisis” in America, crashing US ‘soft’ economic data, the world’s largest cyberattack ever, a slowing Chinese economy, and a higher VIX… S&P 500 tops 2400 once again…
……..and make way for Morgan Stanley’s ARIA, a monthly US macro indicator based on data collected through primary research on key US sectors (consumer, autos, housing, employment, and business investment). The reason why this particular index will likely feature prominently in financial commentary in the coming days and weeks, is that as Morgan Stanley’s chief economist Ellen Zentner writes, “ARIA appears to have fallen off a cliff in April, with a 0.72% decline, the largest since December 2008.”
As the drama continues to swirl around Russiagate, or whatever the central controversy of the Trump administration winds up being known as, that word keeps popping up, teasingly, seductively: “It appeared that there was a great deal more (former acting Attorney General Sally) Yates wished she could share,” the Washington Post informed us the other day, for instance, “but most of the information surrounding everything that happened remains classified.” And the drama continues! And I have yet to hear a mainstream journo challenge or question that word or ask what could be at stake that requires protective secrecy even as the U.S. government seemingly threatens to collapse around Michael Flynn, America’s national security advisor for three weeks, and his relationship to Russia. Is there really any there there?
At the end of the week, something special happened, something totally absurd but part of the new normal: the average yield of euro-denominated junk bonds – the riskiest, non-investment-grade corporate bonds – dropped to the lowest level ever: 2.77%……By comparison, what is considered the most liquid and safe debt, the 10-year US Treasury, carries a yield of 2.33%; the 30-year Treasury yield hovers at 3%.
While the Internet boom did cause an increase in productivity, it also had a very deleterious effect on the economy. As shown in the chart above, the rise in personal debt, which was fostered by 30 years declining borrowing costs, to offset the declines in personal income and savings rates supported the “consumption function” of the economy. The “borrowing and spending like mad” provided a false sense of economic prosperity. During the boom market of the 1980’s and 90’s consumption, as a percentage of the economy, grew from roughly 61% to 68% currently. The increase in consumption was largely built upon a falling interest rate environment, lower borrowing costs, and relaxation of lending standards. (Think mortgage, auto, student and sub-prime loans.) In 1980, household credit market debt stood at $1.3 Trillion. To move consumption, as a percent of the economy, from 61% to 67% by the year 2000 it required an increase of $5.6 Trillion in debt.
Ever since interest rates were slashed to near zero in the wake of the financial crisis, the world has gone property mad. Residential house prices from Abu Dhabi to Zurich have spiralled as hot money travelled the world looking for a home. For those who got in early it has been incredibly rewarding, even if – whisper it – stock markets have actually done far better. The global property bubble cannot blow much bigger. The best we can hope is that it deflates slowly… but it could burst.
“No one has a model for this,” said the CIO. “Everyone buying assets today is building somewhat plausible arguments, but they’re really all just geared to decisions made in Beijing.” The most crowded trade in the world is cognitive dissonance on China. “We need persistent increases in debt relative to GDP for the world economy to function. And since 2011, 100% of global non-financial private-sector net credit creation has occurred in China. Across the western world, it’s been zero.” Since 2008, non-financial private-sector credit has risen 20% per year in China. In the west, net credit creation occurred through rising government debt – but for that fact, our economies would’ve suffered profoundly. Instead, global asset and liability levels have grown inexorably, led by Chinese credit creation. “At 20% annual credit growth, China’s asset (and liability) base doubles every 3.5 years.” Seven years ago China’s asset base was roughly $15trln. Then it doubled. And doubled again.
The USA is still bogged down in Afghanistan (the 16 year-old occupation is the longest in American history) and in Iraq (since the unconstitutional, illegal invasion of the country 14 years ago). With about 30,000 poorly equipped fighters, the Taliban has held down a US equipped and trained Afghan army eight times larger in soldiers, plus the US forces – fluctuating from 100,000 at its peak to 8,500 now, plus contractors – with advanced air, sea and land weaponry that is second to none……Listening to the House and Senate Armed Services Committee hearings, one finds a sycophancy and level of questioning by the lawmakers of Pentagon officials that would embarrass a mediocre high school student.
Back when Jeff Sessions was attorney general for Alabama instead of the entire United States, he pushed for a bill that would have established mandatory death sentences for individuals convicted of a second drug trafficking offense — even if the drug was as innocuous as marijuana. While Sessions’ new directive as United States Attorney General doesn’t go that far, it is definitely a step in a draconian direction when it comes to American drug policy. The memo, issued by Sessions on Wednesday, instructs prosecutors to “charge and pursue the most serious, readily provable offense,” according to a report by The Washington Post. Sessions’ memo also immediately reverses a policy implemented by Attorney General Eric Holder, Jr. in August 2013, one that ordered prosecutors to refrain from pursuing drug charges if doing so would trigger lengthy mandatory minimum sentences — and if the defendants did not belong to a gang, cartel, or other large-scale drug trafficking organization.
Why are there 23,000 U.S. troops in Korea? It’s because the U.S. government, headed by President Harry S. Truman and his newly established national-security establishment, decided to intervene in another country’s civil war more than half-a-century ago. That’s right — a civil war. That’s all it was…….