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We’re In The 'Whateva' Zone

Sunday, March 02, 2014

Economic data has us singing the blues, but is no deterrent to an undying drive to catapult the market to new heights. Everyone was listening to Janet Yellen testifying, and she literally said nothing of value, while promising to look into a variety of issues. The major point is that she confirmed that the majority of her answers will start with the adverb “So,” which is extremely difficult to comprehend, grammatically speaking, and was interpreted as “so up we go!” Granted, all of us have our quirks, and I tend to start answers with “Well…” and then add a bunch of “it’s like…” to dumb down the exchange when approached by someone looking for stock tips, when, in fact, I have none.

With a perfectly engineered S&P 500 (SPY) record high on February 27 that almost got away with 3 minutes to go (don’t trade on the millisecond but derive plenty of information), the headlines were set, only to be reset and rebroadcast on the last day of February despite the Russian warm up exercise that took place in the Crimean peninsula. In essence, the bad memories of January have been erased, and the “all clear” was given to anyone still watching the turkey getting fatter, feeding the desire to get their teeth on that succulent drumstick, which is far too tempting and a better alternative to settling for those endlessly appetizing giblets -- the edible viscera of a fowl -- such as dividends, bonds and CDs.

GDP was revised down but it was good news because it was still positive while nurturing the feeling that taper pressure would be relieved. Pending home sales were virtually unchanged, although I take statistics from the National Association of Realtors with a grain of salt due to past misrepresentations which were only corrected after CoreLogic pointed it out in 2011. As it stands, pending home sales have been negative every month since June of 2013 (after revisions), with the exception of last month when a 0.1% increase was registered, and we shall wait for next month’s revised data.

As some know, I moved west last year to sunny southern California, and while the East Coast was dealing with weather induced misery, I was enjoying that big, bright ball of fire without a cloud in sight. Amusingly, and taking into consideration the weather’s purported economic impact that has Janet Yellen also confused, the WSJ made an astute observation regarding a data subset of the pending home sales index with the headline “Mess in the West: Home Sales Index Hits 7-Year Low.”

The index fell in the West to its third lowest level since the NAR began its tab in 2001, surpassing only two months from the summer of 2007, when housing markets were beginning their free fall. Western markets such as Las Vegas and Phoenix have witnessed some of the largest price gains as they rebound from very low levels. California markets, meanwhile, have grown much less affordable given the combination of price increases and higher interest rates. Inventories of homes for sale had been very low last year in many Western markets, but they have climbed since demand fell last fall. It’s not clear that weather can be blamed on this: the index is seasonally adjusted, and this is the West, where winters are milder. The index is now down 27% since last June, when it nearly reached a four-year high.

As pure coincidence and not as proof of “guruism,” the article “Distorted Housing Market Gives False Hope” was posted in June of 2013, and maybe investment firms are done with their illiquid real estate shopping!

On a different note, I want to address a recent article by Michael Gayed, a guy that tends to be an out-of-the-box thinker. The headline reads “How China can save the world” and it starts by asking an important question:

Trillions upon trillions of dollars have been pumped into the financial system by the Federal Reserve, European Central Bank and the Bank of Japan. Five years ago, if you knew how much stimulus central banks would push, would you have guessed that we would be in a disinflationary environment characterized by continuous deflation pulses? Would you have thought gold would be below $2,000? Most likely, no one five years ago could have possibly thought that deflationary pressures would remain as strong as they have been in the system today.

The $2,000 gold question was addressed by Donald Trump when he accepted the metal as payment for a lease at the height of the price chart, and I am not sure whether he has looked in the mirror since, and yelled “You’re fired!” I think Trump can handle the humor, and I suspect that the move was a political stunt that didn’t payoff.

Regarding rising inflation, that is exactly what the Fed expected as well as most financial pundits that attended the same schools, because that is exactly what the playbook dictates. It worked in the past, why not now? Because now is different, and there’s no point in hammering the same nail. I have been on the record for over three years that all the money printed by all central banks is meaningless, and that inflation is not a monetary phenomenon (goes against the Milton Friedman grain), but rather driven by consumer sentiment. Here’s an excerpt from my book published in November of 2010 (100% of sales proceeds go to charity):

Zero interest rates and quantitative easing will fail simply because the consumer doesn’t trust the economic environment, and no one can be forced into borrowing and consuming against their will.

Certainly I don’t travel within main stream financial media circles and have no desire to do so, and as far as China saving the world goes, China must save itself first and won’t be able to. That very same call was made by a majority in the investment community, with China being cheered a couple of years ago as being the knight on a white horse that would save Europe. It didn’t pan out, did it? Inflating commodities by a country that relies on exports faces a simple obstacle: Importers not importing. After all, China has been throwing money at infrastructure and consuming tons of commodities in the process, while the other BRICs, or commodity exporters, are complaining about tough economic times.

On the inflation front, we were showered with wise words from Chicago Fed President Charles Evans, suggesting that “allowing inflation to run above the Fed's 2-percent target would be a small price to pay for bringing the U.S. economy back to full employment quickly.” Let me get my pants on and sit up straight! After a gigantic parking lot was filled with wheelbarrows stuffed with dollars by the Fed, the non-seasonally adjusted inflation is still 1.6% as of last month. Let inflation run hot? It’s barely warm and cooling! What now? Shall we equip the wheelbarrows with turbo charged engines, and literally ram them into people’s houses. The disconcerting aspect of such speeches is that the speakers appear to be seriously professional. Here’s another question: Why 2%? Why not 1.5% or 2.5%? Why not an annual band between minus 2% and plus 2%? We’ve been conditioned to accept as gospel whatever numbers are thrown at us, and we gobble it up without a second thought.

I came across a story titled “Publishers withdraw more than 120 gibberish papers” and these papers were scientific in nature, which, unlike economics, can be tested and retested.

The publishers Springer and IEEE are removing more than 120 papers from their subscription services after a French researcher discovered that the works were computer-generated nonsense.

I am still an IEEE member and was unaware that manuscripts could be “composed by a piece of software called SCIgen, which randomly combines strings of words to produce fake computer-science papers.” The parallel here is that anyone can deliver an aura of knowledge without actually delivering anything useful, and the more complex it sounds, the more questionable it is. The main rule while in the corporate world was that if a business case could not be made in three bullet points, half-page or less, and understandable by an 8th grader, then the case was suspicious. Now imagine how much gibberish exists in the economics field!

While Europe has fallen off the immediate radar, so have the so called reforms and austerity measures that, supposedly, will get the old continent back on its feet. The Germans and Finnish are not pleased with recent developments.

The rebuke, in an eight-page memo obtained by the Financial Times, accuses the European Commission of using “a somewhat arbitrary approach” in granting the budget flexibility to Madrid and Paris, and suggests “a separate pair of eyes” is needed to ensure Brussels is properly applying the new budget rules. “Since 2012, the commission has substantially changed the way it assesses whether a member state has taken ‘effective action’ to comply with [EU budget rules],” the memo states. “The recent methodological changes imply the risk of watering down the newly strengthened [rules] at its implementation stage.”

We all get it, but austerity is a tough bone to gnaw, and they’re walking a fine line between stability and revolt, and nobody wants to be pinned to a wall because they can’t provide anymore of what they promised when they were elected.

Conflicts are spreading and besides the Russia-Ukraine exercise, an international display of machismo and a political test of wills, the China-Japan discord is not going unnoticed, while the Israel-Iran situation lingers without a satisfactory resolution that will never come despite whatever agreement appears to stand. Two months ago the articleChina's Countdown Continues, Russia's Turning Point And Conflicts Galore” indicated that “something must give in a serious and disruptive manner over the next 24 months, leading to a wider conflict with the enormous potential of being reminiscent of the 1940s in scale.” I also opined that the conflict will be gold’s catalyst (GLD), but to take credit for foreseeing a $70 increase since then -- $1,251 to $1,321 -- would be intellectually dishonest. As a matter of fact, the only two gold trades that I made this year were mildly profitable -- one long between January 27 and 28 (1.0%), and one short between February 18 and 20 (1.5%).

The conflict forecast is a product of the Generational Economic Cycle model -- GEC for short -- which also shows Putin’s rise within Russia, while I believe that the Middle East will be ground zero. Will Europe deal with Russia when it couldn’t resolve Bosnia, a region that was literally in its backyard, until Bill Clinton sent in the usual suspects? The picture is crystal clear! On the domestic front, Defense Secretary Hagel recently announced the shrinkage of the armed forces, but that proposal will dissolve into the ether, while the extreme left will be über-disappointed because President Obama will embrace the Pentagon tighter than the drone program, driven by the fact that Russia is determined to become an international annoyance, yet again. Partisan politics aside, which I detest, Barack Obama is entering the most difficult time of his presidency, domestically and internationally, and there isn’t a thing anyone can do about it. And there’s a GEC for that!

Regarding GEC, I am entitled to my own insanity, crazy models, unusual cuisine, theories and concepts, much like the Fed is, with the main difference being that I am not funded by taxpayer money, while personally footing the bill for all wrong decisions. Meanwhile, economics are feeble, earnings cannot keep up, global economic malaise is accelerating, and conflicts continue to spread and are gaining momentum. Say what? Markets shout in unison: “Whateva!”

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