Brandon Smith & David Stockman & Sebastien Galy: The U.S. Economy Is Now Dangerously Detached From Reality. Everything’s Manipulated!! There’s Going To Be A ‘Brutal Reallocation Of Risk’, And Then We’ll See Where All The Hidden Leverage Is…
David Stockman Says The US Economy Has No Free-Market Element To It, Everything’s Manipulated
Brandon Smith: Recently I was asked to give a presentation on the current state of the global economy to a local group of concerned citizens here in Northwest Montana. I was happy to oblige but when composing my bullet points I realized that, in truth, there were no legitimate economic numbers to examine anymore. You see, financial analysts have traditionally used multiple indicators of employment, profit, savings, credit, supply, and demand in their efforts to divine the often obscured facts of our financial system. The problem is, nearly every index we used in the past, every measure of capital flow and industry, is absolutely useless today.
We now live in an entirely fabricated fiscal environment. Every aspect of it is filtered, muddled, molded, and manipulated before our eyes ever get to study the stats. The metaphor may be overused, but our economic system has become an absolute “matrix”. All that we see and hear has been homogenized and all truth has been sterilized away. There is nothing to investigate anymore. It is like awaking in the middle of a vast and hallucinatory live action theater production, complete with performers, props, and sound effects, all designed to confuse us and do us harm. In the end, trying to make sense of the illusion is a waste of time. All we can do is look for the exits…
There is some tangible reality out there, but it is difficult to find, and there are few if any mainstream numbers to verify. One has to remember always that the fundamental world of money and trade revolves around real people and real circumstances. No matter how corrupt our economic system is, as long as there are human beings, there will always be supply and demand that cannot be hidden. We have to look past the “official numbers” and look at the roots of trade. Where has demand fallen? Where has supply diminished? Where are the tangible goods and needs and how have they changed?
There’s Going To Be A ‘Brutal Reallocation Of Risk’, And Then We’ll See Where All The Hidden Leverage Is
Société Générale FX strategist Sebastien Galy thinks the second half of 2013 will be very interesting for markets.
In a note titled “Asset rotation or something more sinister? Pre-Lehman vs now,” Galy writes that once the market is able to anticpate a Fed tightening, which he thinks will happen “most probably” in the second half of this year, “we will see a rising U.S. Treasury 10-year yield drive all before it, leading to a brutal reallocation of risk.”
Galy says bonds are in a bubble, but the market isn’t collapsing as funds rotate into equities. He warns that “the pace of that rotation may be enough to create this collapse,” but he says the conditions for a collapse don’t appear to be set, at least in the short-term, with global economic data on an upswing.
“The difference with the last crisis is that the leverage is lower and different, writes Galy, “It is in fixed income and hence credit.”
The SocGen strategist expands a bit on just where the leverage may be hiding this time:
Leverage is now most probably at the level of retail investors or hidden in balance sheets (e.g. swaps of collateral done for pension funds and insurance companies on the balance sheet of banks). It seems that we are seeing investors reduce their concentration of positions in fixed income and credit.
Big round numbers always encourage reflection. Turning 40 or 50, for example, or making (or losing) a million dollars. Or a billion. And so it is with “Dow 14,000.” ConvergEx’s Nick Colas has three critical observations as we traverse this particular “Big round number.” First, it is clear that equity prices (and volatility, for that matter) are much more a direct tool of central bank policy than in prior economic cycles. Second, the rally off the bottom in March 2009 has left the investing world with very few money managers who can legitimately claim the title of “Smart money.” Lastly, you have to consider the way forward. The roadmap from Dow 6600 (March 2009) to Dow 14,000 was – in retrospect – clearly marked by signs labeled “Follow the central bank yellow brick road.” Good enough signage to get us here, clearly. But, as Nick notes, fundamentals – corporate earnings, interest rates, and economic growth – those are the metrics which will have to guide us as central banks inevitably reduce their liquidity programs. As he considers the way forward for U.S. stocks, he reflects on Spring 1994 – U.S. stock investors thought they had it all figured out as they exited 1993, just as they do now…
Nick Colas, ConvergEx: Up and Away in My Beautiful Balloon
My newly-turned-85-year old mother recently informed me that she is “Having a bit of a middle age crisis.” Since English is not her first language, I tried to tell her that this particular turn of phrase was usually reserved for people turning 40 or perhaps 50 years of age. The typical symptoms are a desire to trade in the family car for a convertible. In its more virulent form, that urge extends to trading in the first spouse for a newer, flashier model. For my mom, it seemed to signal an uncertainty about whether to start knitting another scarf, or go all-out and begin working on a sweater. I talked her off the ledge – we settled on a Rastaman-style knit cap. Crisis averted, at least for now. I just hope she doesn’t expect me to wear it.
Still, the urge to use large round numbers as an excuse for some navel-staring is a common one; consider the attention around the 14,000 level for the Dow Jones Industrial Average. Most institutional investors benchmark themselves against the S&P 500, which closed Friday at a distinctly non-large-round number of 1513. Still, the Dow is the longest running measure of the performance for U.S. stocks. Started in 1896 with 12 constituents and formed by adding stock prices together, it essentially the financial equivalent of an aging movie star who still makes headlines when they take an eighth husband or go into rehab for the umpteenth time….