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European Farce Endures And Fed’s Not Confident?

Tuesday, March 03, 2015

It has become increasingly more difficult to find something exciting to write about, and, in many cases, we resort to information recycling with different twists. We examine, we think, we forecast and it’s all about… central banks, debt and… central banks, debt and… oh yes, the mismatched, unrecoverable economy, corporate financial engineering, stock buybacks and the endless sprouting of questionable economic theories that shall remain theoretically unresolved. As indicated a long time ago, this is not our mom and pop’s market anymore, and it has now officially become a certifiable joke that hinges on adulterated information and constant price discovery interference. Everything lives in a permanent fog, and maybe the S&P 500 chart below is a pure depiction of the aggregate feeling of queasiness that has developed over the last three months or so.

Whether it’s the U.S. economy, Europe, Asia -- China joined the fray and lowered rates for the second time in three months -- or the various theories on how to boil the perfect egg, it’s obvious that there’s a state of confusion that is not easily shaken off, despite the most respected gurus (don’t know why) assuring us that the world has taken its medication, and is now well on its way to a blissful future. Meanwhile, everyone is afraid of missing the next leg up and dreading the possibility of having to live on social security payments alone, and zero interest income. The central bank cheerleading, mini skirts, pompons and all that jazz included, is becoming muted and it is a bit different this time around because they’re running out of road and will have to admit their failures in the near future, unless the media gives them a pass, which is not unheard of.

As a quick side note, about three minutes before the supposedly embargoed Chicago PMI report (pdf) was due to be released at 9:45 am EST on February 27, 2015, the S&P futures tumbled for no apparent reason. But then the PMI registered 45.8, a drop of 13.8 points from January’s 59.4, the “lowest level since July 2009 and the first time in contraction since April 2013” explained the action. The apparent data leak is exactly why people are turned off by the stock market, and it is quite sad that anyone would have to resort to such tactics to earn a buck. Do you know what that says? That those players are extremely dumb, and despite their million dollar homes and exotic automobiles, they feel extremely inadequate and unaccomplished and are in a constant state of personal turmoil on a daily basis. Trust me, I know the type.

A rather interesting development was the content of the most recent Fed minutes, creating headlines such as “Fed minutes show no rush to hike rates.” Aside from the obvious celebration, or lack thereof, here's the simple question: What are they afraid of? And is the promise of lower rates for longer enough to keep stocks on an upward path, especially as the number of unwelcome geopolitical developments continues to grow? What are the Fed members really saying after seven beautiful years replete of magical monetary and economic policies and theories? Afraid that going from zero to 1% will derail whatever is currently on track? Is it that fragile? It is one of those situations where one steps back, squints and murmurs: What the hell is going on? Are these people for real?

The simplicity of the Fed’s message is quietly seeping into the collective consciousness of the investing domain: it’s an economic vote of no confidence. But there’s a credibility issue, and as we get closer to interest rate D-Day, the economic numbers will get worse, and they cannot blame the fiscal side because, according to Krugman, Dumb, Dumber and Company, all the Keynesian spending is supposedly helping. Which one is it? On the bright side, Fed members are actually facing reality, although keeping rates lower for longer will turn out to be well beyond their control, and we’ll see why. Why repeat the same information?

On the European front, Greece played Germany, or vice-versa, and the one headline that says everything, although most people don’t see it, was “Germany approves Greek bailout extension.”

Germany's parliament approved an extension of Greece's bailout today after Finance Minister Wolfgang Schaeuble spoke in favor of the deal, telling parliament: "We Germans should do everything possible to keep Europe together as much as we can." The Bundestag vote was the only major parliamentary hurdle for the four-month extension to the bailout program, as other EU countries are expected to vote in favor of the deal, approved by Eurozone finance ministers earlier this week.

What’s wrong with the news above? What just happened would be the equivalent of Alabama approving federal aid for Louisiana. Let’s be clear: Europe is not a union, but rather a group of nations that protect their own interests, regardless of what the bureaucratic idiots state on a daily basis, and because it’s not a union, it will continue to fall apart because the so called “union rules” are nothing more than wishful thinking. Got it, or still want to debate the merits of the euro (FXE)? And do I have a union with my next door neighbor because both of us use dollar bills? In addition, it is extremely refreshing when someone delivers a simple and pure nugget of intelligence, as the European Union's financial affairs chief Pierre Moscovici did.

"If a country, any country, leaves, the question will arise: who is leaving next?"

The European farce got new actors but the plot is largely unchanged. The fresh minted Greek finance minister and master of game theory, Yanis Varoufakis, came into town with unrestricted cockiness, a rock star status (don’t know why) and a bag full of silly academic tricks. But the game is extremely simple: abide by the rules or walk, and while defaulting will hit Germany and the others hard, Varoufakis knows that walking will be extremely painful for the Greek people. German Finance Minister Wolfgang Schaeuble was arrogant, no doubt, when he said that now the Greek politicians should go back and explain what just happened to their people, because he wasn’t about to have his chain yanked by some two-bit punk without a neck tie. I don’t care for Schaeuble from a professional standing, but, in this case, kudos to the man! Furthermore, I gave all my suits and neck ties to Goodwill for practical reasons, not as a standing against capitalism, and if Alexis Tsipras and Varoufakis want to be viewed as cool Socialists and not wear a tie, then they shouldn’t be knocking on capitalist doors! It’s like those signs in some stores: No Shoes (Ties), No Service!

Problem here is that the Greek people don’t want more austerity (who can blame them?) and expect living conditions to improve. That is why Syriza won the elections, and it’s proof that voters will gravitate to any politician that pledges to give them something for free. Well, promises here, promises there, but the boat keeps sinking, and whether it’s Tsipras, Varoufakis, or anybody else, reality dictates that either Greece defaults or it will never get out from under the ever expanding mountain of debt, and austerity will live on indefinitely, making Argentina look delightful. That’s algebra, not brain surgery, and we can pretend all we want that there’s another viable solution, but the day of reckoning will come with all the unpleasant side effects. Repeat after me: there aren’t good solutions, not even mildly bad!

Maybe that’s why there’s confirmation that “Greece in talks for third bailout of up to €50bn, Spain says,” because workable solutions are non-existent, and time is the only thing that can be bought. According to the article, “Spanish government, which has been locked in an escalating war of words with Athens in recent days, would contribute 13-14 per cent of the new bailout.” Now, that’s the spirit: let’s all pitch in, whether we have the money or not! There’s yet another largely forgotten aspect of this ongoing saga, and that is the famous bank “bail-in,” as pointed out by the FT.

In plain English, debt investors in banks (as well as the shareholders) will lose their money when trouble strikes, something that has not happened before. The idea is deceptively simple and compelling. The public purse will not be called upon again. But where will the buck really stop when banks get into trouble in the future?

One must not forget that on May 2, 2015, five years will have passed since the first 110 billion Greek bailout was injected to prevent default, and despite austerity and a ton of political and financial nudging, we’re still awaiting resolution. What we have is a fluidity of movement where small pebbles are starting to reposition within the pile, which will eventually trigger the avalanche. The timing may be off, but the end result never is. Once again and in retrospect, the housing bust will look very appealing.

Central bankers around the world, enamored of questionable economic theory and banking (pun intended) on their Ivy League or equivalent educations have a delusional approach to what ails us. When we get a paper cut on our finger, there’s no quick fix, and we must endure the painful and discomforting burning sensation and wait for the wound to heal. Economics is no different, and we must endure the consequences of bad decisions.

At least on the American home front all appears well, as we celebrated the return to 5,000 by the Nasdaq Composite, the first time since March 2000, or 15 years later, and regardless of inflation adjustments. The headlines had been prepared in advance and it was going to happen, even as economic data flounders and disappoints, because the 5,000 number is an invitation to “Dinner for Schmucks,” although I don’t think the guests will come because they can’t afford it.

In real estate it is all about location, and in the stock market is about valuation, although we simply don’t know which method is the flavor du jour. Here’s the simple Price/Sales ratio for the S&P 500 as of February 28, 2015, and if one believes that sales will keep up, even outpace price, please hang on to those gems!

What has been lost in translation and is usually not visible from where most investors stand, is that there’s a lack of excitement in the futures’ market -- S&P 500 (SPY), Nasdaq 100 (QQQ), DJI (DIA) -- as the journey north continues, and without that, buyer beware. In addition, there’s yet another component, which is the Japanese yen (FXY) and how it plays into the equity markets! Time to ditch the run-of-the-mill advice and do some homework!

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