We’re at an important juncture for the global Bubble. There are growing divergences and anomalies. Market signals are increasingly conflicting and confounding: European equities in melt-up and U.S. markets at record highs, while China falters. Bond yields rising and commodities sinking. Talk of derivative issues and leveraged player struggles. Often discordant economic data providing fodder for bulls and bears alike.
One of the biggest investment fads today is a type of fund called risk-parity funds. If you’re unfamiliar with risk-parity funds, they are meant to achieve “risk parity” for investors by buying or selling stocks and bonds based on the perceived risk in the markets via the VIX. If the VIX is falling, meaning the perceived “risk” in the markets is falling, these funds sell bonds and buy stocks. If the VIX is rising, meaning the perceived “risk” in the markets is rising, these funds BUY bonds and SELL stocks. The problem with all of this is that these actions are ENTIRELY based on algorithms, NOT human decision making. Put another way, whatever the VIX does, these funds will be buying or selling stocks and bonds without judgment. All told there are over $400 BILLION allocated to these funds globally. So… if you want to force a stock market rally, all you need to do is push the VIX lower and BOOM! you’ve got $200 billion or so in buying pressure hitting the stock market.
Congressional demands for personal and business information from several of Donald Trump’s campaign advisers demonstrate how the Russia-gate investigation continues to spill over into a new breed of McCarthyism infringing on civil liberties, including freedom of speech and freedom of association…..However, instead of zeroing in on that central question, the Senate investigation appears engaged in a fishing expedition looking at virtually every contact between Trump advisers and Russians, who may or may not have ties to the government. The demands are so broad that they could entrap the targets for perceived obstruction of an official investigation if some name or contact is left off, intentionally or by accident.
Thanks to competition from so many new forms of entertainment — Netflix, Facebook, Snapchat — audiences for traditional TV networks, from ESPN to MTV, are declining. In the current TV season, the four major broadcasters have lost 8 percent of their audience. Because of the slumping ratings, advertisers who want to reach a certain amount of eyeballs can’t get what they need from television anymore. To make up for the shrinking audiences and keep ad sales high, TV networks have kept raising their rates, believing ad buyers will just have to spend more to reach the people they need. TV ratings have dropped 33 percent in the last four years while TV ad prices are up 20 percent during that period, according to Magna, the ad-buying agency owned by Interpublic Group of Cos…….But now, marketers are losing patience with the networks, and ad sales in the $70 billion U.S. TV market are slumping.
2016 earnings brought cheers for the end of the “earnings recession.” Analysts are saying that earnings growth is accelerating………Our analysis of the latest 10-K filings for the 2,600+ largest and most actively-traded companies shows that the much-hyped end to the earnings recession is an accounting illusion. Our review of 500+ first quarter financial reports published to date show the illusion continuing.
It’s really, really serious. I previously thought it was metaphysically impossible to have negative interest rates but, in the Bizarro World central banks have created, it’s happened. Negative interest rates discourage saving. Once again, saving is what builds capital. Without capital you wind up as an empty shell—Rome in 450 A.D., or Detroit today—lots of wonderful but empty buildings and no economic activity. Worse, it forces people to desperately put their money in all manner of idiotic speculations in an effort to stay ahead of inflation. They wind up chasing the bubbles the funny money creates. Let me re-emphasize something: in order for science and technology to advance you need capital. Where does capital come from? It comes from people producing more than they consume and saving the difference. Debt, on the other hand, means you’re living above your means. You’re either consuming the capital others have saved, or you’re mortgaging your future. Zero and negative interest rate policies, and the creation of money out of nowhere, are actually destructive of civilization itself. It makes the average guy feel that he’s not in control of his own destiny. He starts believing that the State, or luck, or Allah will provide for him. That attitude is typical of people from backward parts of the world—not Western Civilization.
We have created a bubble in average. Waiters and childhood friends are no longer telling us about what miracle gold, oil, or tech stocks they bought at the right time. They are exchanging stories about low management fees on their index-tracking exchange traded funds. This sounds like the warning bell at the top of a mania. Only now it is a mania in low transaction costs, average returns, and on-demand liquidity. Most professional portfolio managers sneer at the “technical analysis” momentum traders, who buy if price charts point up and sell when the charts point down…..Short term asset price declines have been reversed by the wall of money coming out of active investment managers and into the accounts of low-cost index products. But this comes at the expense of making the eventual decline in a broad range of asset values not just painful, but catastrophic.
A year ago, we noted that The Bank of Japan (BoJ) was a Top 10 holder in 90% of Japanese stocks. In December, we showed that BoJ was the biggest buyer of Japanese stocks in 2016. And now, as The FT reports, the real “whale” of the Japanese markets is stepping up its buying (up over 70% YoY) entering the market on down days more than half the time in the last four years. Since the end of 2010, The FT notes that the BoJ has been buying exchange traded funds (ETFs) as part of its quantitative and qualitative easing programme. The biggest action began last July, when its annual acquisition target was doubled to ¥6tn. Since then, the whale designation has seemed pretty obvious: the central bank swallows a minimum of ¥1.2bn of ETFs every single trading day (tailored to support stocks that further “Abenomics” policies), and lumbers in with buying bursts of ¥72bn roughly once every three sessions.
As a result, all those editors, reporters, columnists, and talking heads who characterize their labors as “now more important than ever” ill-serve the public they profess to inform and enlighten. Rather than clearing the air, they befog it further. If anything, the media’s current obsession with Donald Trump — his every utterance or tweet treated as “breaking news!” — just provides one additional excuse for highlighting trivia, while slighting issues that deserve far more attention than they currently receive. To illustrate the point, let me cite some examples of national security issues that presently receive short shrift or are ignored altogether by those parts of the Fourth Estate said to help set the nation’s political agenda. To put it another way: Hey, Big Media, here are two dozen matters to which you’re not giving faintly adequate thought and attention.
Rather than a fixed numerical target, Bernanke argues the Fed could target price levels. A 2% annual inflation rate implies that a basket of goods costing $100 today would, in 20 years, cost $148.59. If the Fed targets that particular price level, then years of undershooting 2% inflation would require years of overshooting to stay on target. Ben Bernanke’s conclusion: “The adoption of price-level targeting would be preferable to raising the inflation target.” Armed with novel justifications for letting inflation run higher, the Fed is far from being held down by its putative 2% inflation objective. The risk for investors is that inflation at some point does start running higher than 2% – perhaps significantly higher.