Musings Report #20 5-18-13 An Extraordinary Time
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An Extraordinary Time
It is difficult to justify the feeling that we are living in an extraordinary moment in time, for the fundamental reason that it's impossible to accurately assess the present in a historical context.
Extraordinary moments are most easily identified by dramatic events such as declarations of war or election results; lacking such a visible demarcation, what sets this month of 2013 apart from any other month since the Lehman Brothers' collapse in 2008?
It seems to me that the apparent ordinariness of May 2013 is masking its true nature as a turning point. Humans soon habituate to whatever conditions arise, and this adaptive trait robs us of the ability to discern just how extraordinary the situation has become.
In my 59-year lifetime, the dramatic, this-is-history-happening moments are obvious: the Kennedy assassination, 9/11, and so on. Other tidal changes developed over a period of months or years: Watergate, which ballooned from a minor break-in to a constitutional crisis, is a good example. So is the financial meltdown of 2008, which actually began back in 2001 when the Federal Reserve chose a policy of super-low interest rates and super-abundant liquidity to suppress the post-dot-com recession.
I have an unavoidable sense that May 2013 is the high water mark of the status quo political/financial response to the global financial meltdown of 2008. Nothing systemic has changed in the past five years; the status quo financial and political systems have made cosmetic reforms, but the power structures have not changed at all.
The status quo has simply ramped up its conventional policies: since lowering interest rates didn't spark a strong recovery, then lower rates to zero, and so on: more money creation,more credit creation, more bond purchases, more subsidies for housing, more transfers of private debt to the public ledger--more of what has failed spectacularly.
That's what marks May 2013 as extraordinary: the Powers That Be have gone all-in. If their policies fail to ignite a self-sustaining recovery in the real global economy, there are no meaningful policy options left.
Those who don't follow finance might not have noticed the extraordinary nature of recent financial events: Japan's stock market has risen by 75% since December, the U.S. S&P 500 has climbed 24% in 2013, gold crashed by over $200 in a matter of hours, and the Japanese yen has lost a quarter of its value (in U.S. dollars) in a matter of months.
None of this makes sense in terms of the real economy: U.S. corporations didn't suddenly become 25% more profitable; Japan's economy did not expand by 75% in five months, and none of the fundamentals in the value of gold suddenly changed overnight.
These rapid, gargantuan fluctuations are disconnected from the real economy. This in itself is extraordinary. The financial press explains these bubble-like advances and collapses in terms that only make sense to financiers: the yen-dollar pair, the yen carry trade, etc. That complex, abstract financier policies and trading strategies now dominate stocks, bonds and precious metals is also extraordinary.
I have endeavored to understand the fundamentals behind these wild fluctuations proposed by the media, and have concluded none of it makes any sense in conventional economic terms. To mention just one example: gold has traditionally been viewed as a hedge against inflation. Gold's collapse is being attributed to lower expectations of inflation. OK, so there's no inflation, ergo, the global economy is in slow-growth/no-growth mode, hence no inflation. But inflation has been low for the entire decade of gold's rise from $300/ounce to $1,900/ounce, so inflation clearly has not been the driver of gold's ascent.
Some observers claim gold dropped because the yen dropped and the U.S. dollar strengthened, but a glance at the 10-year chart of gold and the dollar quickly disproves any correlation: gold rose both when the dollar dropped and when it rose.
This is another extraordinary thing about the present: none of these major financial movements make any sense. Pundits and analysts are seeking explanations after the fact, postulating correlations as causes with little historical backing. It's as if the financial media is incapable of confessing none of this makes sense, and instead the media piles one complex explanation on top of another to justify what is clearly an extraordinary disconnect between the real economy and asset valuations.
Bottom line: even if the global economy is improving (and there is ample evidence that data is being juiced or manipulated), it isn't improving enough to justify stocks rising by 25% to 75% in a matter of months.
Real estate is also back in bubble territory, in those markets with plentiful capital and limited inventory: we're back to bidding wars and dozens of people competing for the right to buy an ordinary home.
The bond prices of fatally insolvent European governments have fallen, as if these economies have suddenly been restored to health and fast growth by European Central Bank (ECB) intervention. European stock markets are roaring higher as well. Neither makes any sense in terms of traditional risk-pricing, price-earnings ratios and so on.
We are living in an extraordinary global financial experiment, in which financier tricks (zero interest rates and massive injections of credit and liquidity) have been pushed to their red-line limit in the hopes that these extraordinary measures will finally, after five long years, trigger a self-sustaining expansion of the real economy.
Those in charge of the experiment are constantly reassuring us it has already succeeded. I think the data shows the experiment is in the final blow-off stage in which the beaker full of toxic ingredients is bubbling with dangerous vigor.
There is one last extraordinary feature of this time: the data "proving" the experiment is successful is self-referential: drop interest rates to zero and subsidize housing, and voila, you get a surge in building permits. Take one full-time job and turn it into 1.5 part-time jobs, and voila, the the number of jobs increases and the unemployment rate declines.
Then take these metrics (higher numbers of permits and jobs), weigh them heavily in your measure of leading indicators, and then declare the leading indicators "prove" the recovery is self-sustaining.
All this leads to a question: what would happen to the economy if all the financier tricks were stopped, and the price of risk, credit, assets, etc. were discovered by the marketplace?
It's as if we have two economies: the simulacrum one of stocks rising 75% in a few months, and the real one of household earnings (down) and hours worked (down). Eventually these two economies will have to merge into one. I sense 2013 will be the critical year when the schizophrenia is resolved one way or the other. The ancient Chinese curse comes to mind: "May you live in interesting times."
Market Musings
May 2013 reminds me of the Shanghai stock market (SSEC) and the U.S. NASDAQ market when each was in full-blown bubble mode, rising from 3,000 to 4,000 and then on to peaks around 5,000 in a matter of months. It made no sense, but there was no point in trying to bet on the final top. How high will global markets rise this month? I took a small position last week in SDS, an ETF that rises in value when the SPX declines. Obviously I am underwater on that trade. At this point my trading discipline forbids adding to the position.
If I am right that May 2013 marks some sort of extreme, then the market might roll over in June. I posited in an earlier Musings that the "sell in May" trade might fail simply because it was considered a "sure thing." Now a continued melt-up is considered a "sure thing," and those betting on it might suffer the same consequences as those who bet on the previous "sure thing" (sell in May).
I am also wondering if some of the "free money" flowing into global stocks might not start seeking a home in commodities like grain and oil should the global stock mania burst. I am also curious to see if gold double-bottoms at $1,321 (its previous low) or slices through that level to a new low.
The best thing that happened to me this week
My brother and sister-in-law took the time and made the effort to visit us from France, just as my sister and I had made the effort to visit them in Paris in October 2011. Alas, we can't walk across the street to visit each other; the mobility of the era conspires against such easy proximity. And so we savor every meal together and every new memory captured until the next time we can once again restore the bonds of our childhood years.
From Left Field
The mainstream news media is even worse than you think: 5 corrupting influences are keeping the public from the facts. This is an important story; the most durable and hidden cartels are informal and unspoken.
Reach for Hong Kong's sky: photos from the ground looking up through the thicket of high-rises
Dear Class of ‘13: You’ve been scammed: How the College-Industrial Complex drove tuition so high. It's shocking to see this sort of honesty in a mainstream media outlet. The disgust with the Educrat Cartel might be reaching critical mass.
"Unwanted treatment is American medicine’s dark continent. No one knows its extent, and few people want to talk about it. The U.S. medical system was built to treat anything that might be treatable, at any stage of life—even near the end, when there is no hope of a cure, and when the patient, if fully informed, might prefer quality time and relative normalcy to all-out intervention."
"Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies." Groucho Marx
Thanks for reading--
charles
