Bill Gross & John Kay: Low Yields, Low Carry, Future Low Expected Returns Have Increasingly Negative Effects On The Real Economy And The System Is Geared Around Trading Profits That Create Market Bubbles That Inevitably Burst
From Bill Gross of PIMCO
Well, there is my still incomplete thesis which when summed up would be this: Low yields, low carry, future low expected returns have increasingly negative effects on the real economy. Granted, Chairman Bernanke has frequently admitted as much but cites the hopeful conclusion that once real growth has been restored to “old normal”, then the financial markets can return to those historical levels of yields, carry, volatility and liquidity premiums that investors yearn for. Sacrifice now, he lectures investors, in order to prosper later. Well it’s been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution. Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution. Perhaps when yields, carry and expected returns on financial and real assets become so low, then risk-taking investors turn inward and more conservative as opposed to outward and more risk seeking. Perhaps financial markets and real economic growth are more at risk than your calm demeanor would convey.
Wounded heart you cannot save … you from yourself. More and more debt cannot cure a debt crisis unless it generates real growth. Your beating heart is now arrhythmic and pumping deoxygenated blood. Investors should look for a pacemaker to follow a less risky, lower returning, but more life sustaining path.
Financial system ‘waiting for next crisis’
John Kay, the economist and author, will warn this week that the world is heading for another financial crisis because the economic system is geared around trading profits that create market bubbles that inevitably burst.
Marc Faber: “People With Financial Assets Are All Doomed”
As Barron’s notes in this recent interview, Marc Faber view the world with a skeptical eye, and never hesitates to speak his mind when things don’t look quite right. In other words, he would be the first in a crowd to tell you the emperor has no clothes, and has done so early, often, and aptly in the case of numerous investment bubbles. With even the world’s bankers now concerned at ‘unsustainable bubbles’, it is therefore unsurprising that in the discussion below, Faber explains, among other things, the fallacy of the Fed’s help “the problem is the money doesn’t flow into the system evenly, how with money-printing “the majority loses, and the minority wins,” and how, thanks to the further misallocation of capital, “people with assets are all doomed, because prices are grossly inflated globally for stocks and bonds.” Faber says he buys gold every month, adding that “I want to have some assets that aren’t in the banking system. When the asset bubble bursts, financial assets will be particularly vulnerable.”
On the error of the Fed’s ways:
The Fed has been flooding the system with money. The problem is the money doesn’t flow into the system evenly.It doesn’t increase economic activity and asset prices in concert. Instead, it creates dangerous excesses in countries and asset classes. Money-printing fueled the colossal stock-market bubble of 1999-2000, when the Nasdaq more than doubled, becoming disconnected from economic reality. It fueled the housing bubble, which burst in 2008, and the commodities bubble. Now money is flowing into the high-end asset market – things like stocks, bonds, art, wine, jewelry, and luxury real estate.
Money-printing boosts the economy of the people closest to the money flow. But it doesn’t help the worker in Detroit, or the vast majority of the middle class. It leads to a widening wealth gap. The majority loses, and the minority wins.
The neo-Keynesians would argue that if the Fed hadn’t flooded the system with money, things would have been much worse. That might be true, but they would have been worse for a shorter period of time.
On the Bubble:
I am suggesting that in the fourth year of an economic expansion, near-zero interest rates will lead to a further misallocation of capital. I thought the U.S. market would have a 20% correction last fall, but it didn’t happen. I also said the market might explode to the upside before the correction occurred. We might be in the final acceleration phase now. The Standard & Poor’s 500 is at 1650. It could rally to 1750 or even 2000 in the next month or two before collapsing. People with assets are all doomed, because prices are grossly inflated globally for stocks, bonds, and collectibles.
The Great Plunge is Coming
Are you ready for the next stock-market crash of the century? The Hindenburg Omen was spotted by eagle eyes on April 15th. It was confirmed by a sighting on May 29th. That gives us 40 days approximately before the market takes a plunge (apparently). That’s enough to spark fears on the market that we are in for a shaky time, but are those fears really justified and will the market plunge as the Hindenburg Omen predicts?
The Hindenburg is a technical analysis pattern that predicts highs and lows of the stock market based upon Norman G. Fosback’s High Low Logic Index (HLLI). It was invented by Jim Miekka in 1995. It’s used as a way of predicting big turndowns.
The Hindenburg has to meet four criteria and it is calculated using Wall Street Journal figures daily.
1. The sum of new 52-week highs and the sum of new 52-week lows must be equal or greater to 2.8% of the sum of NYSE issues advancing or declining on any given day.
2. NYSE must be greater in terms of value than it was 50 days beforehand.
3. The McClellan Oscillator (money entering and leaving the market) must be negative on that day also (in other words, below zero equals a bearish market).
4. The 52-week highs must not be more than twice the 52-week lows (but the opposite does not hold).
Iraq Collapse Shows Bankruptcy Of Interventionism
We must learn the appropriate lessons from the disaster of Iraq. We cannot continue to invade countries, install puppet governments, build new nations, create centrally-planned economies, engage in social engineering, & force democracy at the bar…
DEUTSCHE BANK: We Don’t See A Bottom In Japanese Stocks — Should Correct For Several Months
The Japanese Nikkei 225 has corrected a staggering 15% since just May 22.
As a result, one of the world’s hottest stock markets is suddenly flirting with “bear market” territory – defined as a 20% price decline from the market’s previous peak.
In his latest note to clients, Deutsche Bank strategist Makoto Yamashita cautions that “we do not see a bottom,” and says it is “natural to assume that the Nikkei Average will correct for several months.”
Business Insider/Matthew Boesler, data from Bloomber