The Perils of Fed Gradualism

Stephen Roach pens an article on Project Syndicate outlining the Monster that the Fed has created - financial markets.  He does on to discuss what the Fed should do to address overheated financial markets:

Only by shortening the normalization timeline can the Fed hope to reduce the build-up of systemic risks. The sooner the Fed takes on the markets, the less likely the markets will be to take on the economy. Yes, a steeper normalization path would produce an outcry. But that would be far preferable to another devastating crisis.

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Financial Advice For my New Son

Morgan Housel at the Motley Fool writes a piece on financial advise for his son.  And what great advice it is.  From the article:

Change your mind when you need to. I've noticed a tendency for people to think they've mastered investing when they're young. They start investing at age 18, and think they have it all figured out by age 19. They never do. Confidence rises faster than ability, especially in young men. Learn the skill of changing your mind, discarding old beliefs and replacing them with new truths. It's hard, but necessary. Don't feel bad about it. The ability to change your mind when you're wrong is a sign of intelligence.

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The day the Fed was created

From the Library of Congress:

On December 23, 1913, President Woodrow Wilson signed the Owen-Glass Act, creating the Federal Reserve System, an independent agency of the U.S. Government. Before the Federal Reserve began its operations in November 1914, America's banks functioned in widely divergent ways. These varied banking practices resulted in four major financial crises in less than forty years.

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Oil Inventories Peaking?

Existing Home Sales Plunge

The NAR is blaming a new Dodd/Frank regulation as the cause.  This is entirely possible, so we will have to wait for the coming months to see if this is a minor issue or something larger:

Mises on Money

Mises was a true intellectual giant.  What would our society look like if the majority of people understood the teachings of Mises?

Leuthold Group has been calling a market top for some time

Leuthold outlines the topping process in the below timeline:

Insightful and candid interview about the US empire

Why Capitalists Are Repeatedly "Fooled" By Business Cycles

Frank Shostak, one of my favorite modern Austrian Economists, outlines why capitalists are fooled by the lowering of interest rates.

The business cycle last many years.  So even if business men feel that the economy is weak and the government is attempting to coax them to invest by lowering interest rates, eventually, they will have to invest or go out of business.  

Interest rates must rise significantly in the future to extinguish the mal-investment that exists throughout the world.  It will be painful, but necessary.  From the article:

A businessman has only two options — either to be in a particular business or not to be there at all. Once he has decided to be in a given business this means that the businessman is likely to cater for changes in the demand for goods and services in this particular business irrespective of the underlying causes behind changes in demand.

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India could be an economic powerhouse, but it's not meant to be

This is a wonderful article about the outrageous bureaucracy that stifles the Indian economy like a wet blanket.  From the FT article:

High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/d0378a54-a046-11e5-beba-5e33e2b79e46.html#ixzz3uyLHBnYU

On my desk is the latest copy of the Indian magazine, Bureaucracy Today (“Fearless journalism, our habit, our history!”). It is not satirical. The cover story examines the merits of the budget-busting 23 per cent pay rise awarded to more than 10m serving and retired civil servants . Anil Kumar Jain’s astrology column in the magazine is notable for the way it recycles phrases through the 12 signs of the zodiac. They include “Planets indicate unbelievable financial gains during this month” and “You may be nominated for a plum post or for a foreign assignment”; or the disconcerting “The unusual behaviour of your spouse may be a cause of concern”.

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Intrinsic Versus Subjective Value

Many investors, some very talented investors, believe an asset has intrinsic value. But Austrian Economists believe assets have subjective value.  Meaning, we rank ordinally our preference for A over B.

Intrinsic value must have a fixed point to be measured against, but no such fixed point exists within human action.  Everything really is different this time.

So how is one to use this knowledge for investment purposes?

I will be starting an investment letter outlining the answers to this question.  Look for more to come.

"Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men."

Carl Menger. "1. The Nature and Origin of Value", Principles of Economics online edition, Chapter III., The Theory of Value, referenced 2009-05-14.

Planning for the new year: Ben Franklin style

And other amazing creations and facts about Ben.  From the NY Times Article:

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Much talk from the Fed on neutral interest rates

But Frank Shostak destroys the myth of a neutral interest rate:

Interest rates directly effect asset price levels:

Lower interest rates, higher asset prices; higher interest rates, lower asset prices.  See the report from Haver Analytics:

What I learned when I followed Benjamin Franklin’s schedule for a week

By J. Money

As many of you know, I’ve been following in the steps of Benjamin Franklin all week long in an effort to find a better, and more productive, schedule for myself.

I’ve heard time and again that the most successful people in life rise and reflect before the sun does, so I figured why not give it a shot myself and see if I magically get successful over night too?

Even though I hated myself the second I hit “publish” on that post, because who the hell wants to wake up at 5 a.m. every day?

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International Rig Count

The average Baker Hughes International Rig Count for 2015 matches that of 2009.  How low can the count go?

Post Apocalyptic Fed Hike Action - SPX Edition

SPX down post Fed rate hike:

But the VIX does not care, at least not yet.  Who's right?

Post Apocalyptic Fed Hike Action - VIX Edition

Jobless Claims Are Very Low - Boom is on

Rate Tightening Since 1983

Industrial Production Continues to Weaken

One final check on the probability of a Fed rate increase

How the US Federal Reserve intends to raise rates

Excellent article on how the Fed will increase rates.  From the article:

The US central bank has maintained the effective Fed funds rate as its primary interest rate target at the upper end of a zero to 0.25 per cent corridor. Called “interest on excess reserves”, or IOER, this lets the Fed pay interest on money held at the central bank and when policymakers vote to lift interest rates, this IOER rate will presumably be lifted to 0.5 per cent.

In theory, this should drag the effective Fed funds rate up to this level, as banks should not be willing to lend to other financial institutions at a rate lower than what the central bank pays. But only actual banks have access to the IOER, and there are many other lenders in the Fed funds market that in practice have dragged the effective rate well below where the IOER is set.


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Bear Market Alert: Always Good Market Insight From The Leuthold Group

The divergence between the Dow Transports and the broader market indexes is cause for concern, according to Doug Ramsey at The Leuthold Group:

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I would not want to be Janet Yellen

It seems everyone is screaming "No Increase!"  But there is a political element to why the Fed must increase.  They cannot allow a recession to occur early in a new Presidential term.  Ideally, the economy is in a recession as a new President enters office.  Then new economic plans will follow.  If they allow the boom to continue, they run the risk of a recession occurring early in a new Presidential term.  The pressure on the Fed to "do something" will be intense and they will have to act - being fully exposed as serving the interest of the President.  The Fed wants to avoid this scenario at all costs.

Here is Larry Summers again stating the the Fed should not increase rates.  I suspect he is angling for a new role in the next administration.  He continues to say the Fed should not raise rates.  After a recession hits, he can then say "I told you so. Now put me in charge of the Fed.":

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What Will China Do Next?

China has truly altered the global economic landscape with significant, and I mean significant, mal-investment and over-investment.  Now that the tide is turning and price inflation is out of the bottle, what will China do next?  Allowing the free market to chart the course would be the best option, but China's leadership will not let that happen.  So I only see more money printing and more mal-investment over the comming years, unless inflation gets out of control:

Should the Fed raise rates?

Not according to this poll:

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Thomas Sowell - Culture Matters

Wall Street Week Interviews Icahn

He's a lot more colorful than Buffett:

Current Tightening Cycle Compared to History

Stock Pattern Recognition

There is a belief on Wall Street that patterns exist, can be identified and profited off of.  This is a mistaken believe.  Patterns do not exist, not at least in the way that one could use for predictive purposes.

The market is a complex system that is adaptable and self regulating.  It is always different. The factors are different, the people are different and most obviously is that we are not living in the past.  For a pattern to have predictive value, the factors must be the same, as is the case with scientific experiments.  Human behavior cannot be predicted.  Yes, there are some cute tests that show our biases, the they only remind us of our short comings.  As a group, we are very unpredictable.

So do not believe in chart patterns.  Here is the infamous Megaphone pattern.  It sounds really good, but it is just not true.  At best, the predictive value of this or any pattern is around 50% or random.  From the The Street article:

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Government Share of Consumer Debt: WOW

No good will come from this:

JOLTS Report Continues to Expand

The JOLTS report has exceeded the 2007 high:

What does the JOLTS report include:

Definition
The JOLTS report is the Labor Department’s Job Openings and Labor Turnover Survey. The headline number is job openings.

The JOLTS report defines Job Openings as all positions that are open (not filled) on the last business day of the month. A job is "open" only if it meets all three of the following conditions:
* A specific position exists and there is work available for that position. The position can be full-time or part-time, and it can be permanent, short-term, or seasonal, and
* The job could start within 30 days, whether or not the establishment finds a suitable candidate during that time, and
* There is active recruiting for workers from outside the establishment location that has the opening.

Active recruiting means the establishment is taking steps to fill a position. It may include advertising in newspapers, on television, or on radio; posting Internet notices; posting "help wanted" signs; networking with colleagues or making "word of mouth" announcements; accepting applications; interviewing candidates; contacting employment agencies; or soliciting employees at job fairs, state or local employment offices, or similar sources.

Job Openings does not include:
* Positions open only to internal transfers, promotions or demotions, or recall from layoffs
* Openings for positions with start dates more than 30 days in the future
* Positions for which employees have been hired, but the employees have not yet reported for work
* Positions to be filled by employees of temporary help agencies, employee leasing companies, outside contractors, or consultants. A separate form is used to collect information from temporary help/employee leasing firms for these employees.

JOLTS defines hires as all additions to the payroll during the month. JOLTS defines separations as all employees separated from the payroll during the calendar month.  Why Investors Care

Is M1 Topping?

M1 growth has topped out in April.  With the possibility of the Fed rising interest rates, it will be interesting to see if M1 continues to expand.

Bastiat: Seen and Unseen

This is probably one of the most insightful quotes I try to remember and emulate in all aspects of my life:

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

“Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

– From an 1850 essay by Frédéric Bastiat, “That Which Is Seen and That Which Is Unseen”

Here They Go Again

Fed is starting to give mixed signals.  This has been par for the course for many years leading up to decision time.  Here is Fed 's Kocherlakota:

He added: “What’s going on in the labor market does not strike me as a strong argument for tightening.”

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Never Believe a Forecast

Ever wonder how certain folks on TV are able to make predictions with no doubt whatsoever?  Barry Ritholtz has a good article on just that and even better advice, "just ignore them".  From the article:

It’s that time of year again when the mystics peer deep into their tea leaves, entrails and crystal balls to divine what’s ahead.

Which means it’s also time for my annual reminder: These folks cannot tell the future. Ignore them.

Most forecasters are barely familiar with what happened in the past. Based on what they say and write, it is apparent they often do not understand what is occurring here and now. Why would anyone imagine that they have the slightest clue about the future?

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Shiller on market reaction to Fed rate increase

From the article:

It could be argued that the Fed will surprise people only if it doesn’t raise rates after Friday’s strong jobs report, or raises them less than expected or issues a statement that is weaker than expected. Something like that may have happened on Thursday when the European Central Bank’s stimulus measures evidently disappointed the markets.

But a major surprise from the Fed? That would be surprising.

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Can central banks print money in perpetuity?

Theoretically, yes central banks can print money and inflate forever.  What can stop central banks from endlessly inflating?  A number of theories have been developed.  However, hyperinflation is the only thing that will stop the central bank from inflating.

Here’s Rothbard on the continuation of fiat currencies:

I am not saying that fiat money, once established on the ruins of gold, cannot then continue indefinitely on its own. Unfortunately … if fiat money could not continue indefinitely, I would not have to come here to plead for its abolition.[mises.com]

Here is Mises' on when it ends:

If once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse). [mises.com]

What is the Money Supply?

Good video series from the Philadelphia Fed explaining the differences between the various money supply measurements.  M1 has the most direct impact on inflation and asset prices:

Key Insider: "Almost impossible for Fed not to hike"

El-Erian is a trend follower.  He has a way of summarizing what is happening, but is too smart to make any predictions.  So when he says it's almost impossible for the Fed not to hike, it is just about a sure thing that the Fed will raise.  If not, it will be a big surprise to markets.  From El-Erian's article on Bloomberg:

The jobs report for November released Friday doesn't just make it a near-certainty that the Federal Reserve will hike interest rates later this month. The data also further confirm the divergence in the policies of the Fed and the European Central Bank. And they highlight the cyclical and structural complexities facing the U.S. economy, which will require the Fed to pursue the loosest tightening cycle in its modern history.

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Stock Market Reactions to Past Fed Lift Offs

The market is very complex and you can only use history as a guide for general expectations about the future, not a prediction about the future.  So here is a great look at past market reactions from previous "lift offs."  From The Almanac Trader:

We currently appear to be tracking the historical pattern of positive market action leading up to the first rate increase, which would indicate a mild selloff after. However, as we have been thinking recently, this being the most debated and anticipated Fed move of all time, the removal of uncertainty may send stocks higher into yearend this time around.

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80% Chance of Rate Hike in December

Does Zuckerberg Think We're Suckers?

The NY Times takes down Zuckerberg's phony donation claim.  From the article:

Mark Zuckerberg did not donate $45 billion to charity. You may have heard that, but that was wrong.

Here’s what happened instead: Mr. Zuckerberg created an investment vehicle.

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Hillary's Interest Rate Prediction (Just Silly)

From the Reuters article:

"The Fed has been signaling this for a very long time if they do make this decision by the end of the year ... I think the markets in the U.S. and the world will have already processed that and they have laid out what criteria they think should be applied," she told reporters after a campaign event.

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Wages in China, Mexico and Brazil

The Big Short Trailer

ISIS - Que Bono

I have a few questions regarding ISIS, AL-Qaeda, etc.:

1. Why is it that the general public knows more about these groups than basic economics or other local issues that directly affect them?
2. Where do these groups get their money?
3. Who provides their training?
4. How do they get intell and who provides it?
5. How do they maintain supply chains?
6. Why do they have known operational basis?
7. Who benefits from their existence?

 Why are these questions not being asked?

Bernanke Pats China On The Head

In a somewhat bizarre post on his blog, Bernanke gives China a "gold star" for gaining access to the IMF's SDR.  From the post:

If your elementary school was like mine, when you did a good job on your homework you got it back with a gold star pasted on top. The gold star was not valuable itself—you couldn’t deposit it in the bank—but it recognized your good efforts and, maybe, motivated you to work hard on the next assignment. 

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ISM Dips

ISM Index Contracts

The ISM Index is below 50%, which suggests that the economy is slowing significantly on the manufacturing side.  Exports are dragging the economy down, which is mainly due to China's contracting money supply.  However, China is starting to ramp up money supply growth and should this continue, we except the economy to be in a very different place this time next year:

Mixed Signals From The Fed

Many complaints about the Fed's inconsistent message has surfaced of late.  It's possible, that the Fed is facing some discord from within.  It's also possible, that the Fed is trying to keep everyone guessing.  In a recent posted titled, "Keep 'Em Guessing," I argued that the Fed must keep every guessing once the boom is on.  Otherwise, the situation (i.e. prices) can easily go off the rails.  This will happen anyway, but they are trying their best to "manage" what is a price.  Price management or price controls have always failed and will always lead to significant economic disruption.

The Fed Needs to Get Its Story Straight

The U.S. central bank is sending mixed messages on when an interest rate hike will finally happen. The bankers better get their communications strategy in order. Now.

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Credit Growth Slowing

Credit growth is slowing according to the NACM Credit Manager's Index.  Although there is a lag, M1 has slowed for some time and that slower growth will show in indexes like the NACM: