Do You Feel Lucky, Punk?

Based on market activity today, not so much apparently.  Lance Roberts emphasizes today a valid point that market direction is only loosely tied to valuations and more directly tied to market sentiment.


http://seekingalpha.com/article/3453466-all-bubbles-are-different?ifp=0&app=1


Thus, an undervalued market can continue to fall and, as we have been seeing, an overvalued market can continue to climb. 


It would seem we have passed through the light and are turning to the more pessimistic side of emotions.  Indeed, we generally did so some time ago, but the market has been artificially propped up for some time by corporate share buy backs and the like.  During a downturn last week, for example, all sectors were selling except the corporations themselves, thereby obviating what would have been a rather nasty negative market fall.  As Zero Hedge observed, Goldman Sachs, who does the buybacks for many corporations, set a new record that day.  You have to wonder whether any of said corporations exceeded their daily limits on buybacks that day.


Obviously there can be other manipulations impacting the market running counter to emotions, with China government intervention being the most stark.  Government wonks in the U.S. do their best to calm jitters as well, though not to the point of arresting those who dare short the market.


But alas, in the long term true valuations tend to rule the day on people's emotions and computer programs will in time multiply that effect.

Oh Dear, This is a Quandary

Janet has a bit of a quandary on her hands and I think it will get worse before it gets better.  The old CPI came in today at a MoM increase of just .1%, half of the forecasted .2%. 


http://www.zerohedge.com/news/2015-08-19/consumer-prices-rise-slowest-pace-2014-airfares-plunge-car-costs-slide-rents-jump


Oh what shall she do, where shall she go?  Now with inflation no where near the desired annual 2%, a rate increase in September is growing harder to justify.  And the market agrees, which is why Treasuries and the stock markets have all reacted pretty strongly to the news.


http://www.zerohedge.com/news/2015-08-19/low-inflation-print-sparks-panic-selling-treasuries


Oh my, my, my, this just will not do.


There are, however, a few ways out my dear Janet.  Behind door one we have the stand-by of making up or relying on other bogus stats to still justify an increase, with this abysmal number just being a flash in the pan that can be ignored.  While I would wager on this one, I think there are a few more stats coming out before the Fed meeting in September that will be equally bad and will be harder to brush off.  Specifically:





If these are as bad as I believe they will be, door number one may be locked.


Behind door number two is the old simply not doing the increase yet and telegraphing it will be likely in the near future, like December.  This I fear is the most likely scenario.


But then there is good old door number three.  This one is the Fed finally fessing up what they already know, that ZIRP and QE are not working as expected and Bernanke is a sack full of doo doo.  They can confess their sins and raise rates anyway as leaving them where they are will cause more long term damage from the ultimate recession upon us than the known short term damage from a rate increase.  This is the best door, with nice natural wood and brass fixtures and all, but Yellen ain't knockin' on this door any time soon.  Folks at the St. Louis Fed, however, are starting to see the light of day:


http://www.zerohedge.com/news/2015-08-19/after-6-years-qe-and-45-trillion-balance-sheet-st-louis-fed-admits-qe-was-mistake


As the St. Louis Fed sees it, all the stuff ZIRP and QE was supposed to bring us - and other countries - just is not happening and there is no proof it ever will.  Indeed, they go so far as to say that evidence shows QE has been "ineffective" at increasing inflation.  If they CPI number above does not take you there, then just look at Japan for good measure.


Yes, reality is setting in - or at least the ability to speak the truth about it seems to be.  Perhaps there is hope after all.


Let me add now, since positing the above this morning, minutes of the Fed July meeting were released and they eased market concerns over any rate increase happening in September, especially with the changes since that meeting dampening inflation expectations even further.  Most at the Fed seemed to still be taking a bit of a wait-and-see approach, wanting further employment improvement and higher inflation expectations before raising.  If we are like Japan, it could be a very, very long wait. 


http://www.bloomberg.com/news/articles/2015-08-19/u-s-index-futures-decline-amid-global-growth-concern-before-fed


And so the stock market has erased most of its earlier losses.  Yeah - more continuation of the stupid ZIRP policy that will destroy us!  Looks like most "investors," speculators, manipulators, economists now expect door number two as well.  What a shocker.

Driving Me Crazy

So I have read from time to time about the soon "coming to a showroom near you" fully autonomous self-driving cars.  Just like we have been seeing in sci-fi movies and shows for years.  Indeed, they are expected to hit the markets by 2019.  And everyone is climbing on board, with most of the major auto manufacturers, Google and Apple all with plans in various stages.  What an exciting time to be alive!


http://www.businessinsider.com/report-10-million-self-driving-cars-will-be-on-the-road-by-2020-2015-5


Exciting for some anyway.  I, for one, love driving.  I find it relaxing and enjoyable - though you would not need to twist my arm to give up the 10 hour drive in a van with kids home to see the grandparents.  I drive a stick shift and love to be in control and based on commercials for most sports cars there are a lot of folks who love it too.  While I do recognize that not everyone might love driving like I do, I do think most people like the sense of being in control - or someone being in control - of something as dangerous as a car moving at high speeds.


I realize that the self-driving cars, when the bugs are worked out, should dramatically increase safety, not decrease it.  Indeed, I recently saw an article probing what auto insurers are going to do for premiums when the roads become abundantly safer due to self-driving cars with computers and sensors that can react to situations far faster than any human.  Premiums will have to adjust downwards and profits will narrow.


Well, fear not GEICOs and Progressives of the world, for I think I have a niche for you to fill.  You can sell cyber attack insurance against the inevitable hacking someone will eventually launch on self-driving cars.  These cars will be wirelessly connected and they are operated by computers, so it is just a matter of time before some hacker breaks a code and takes over a car.  They could do it to steal it, cause it to go some place other than where its passenger wants it to go (even with the captive passenger in it) or even wreck it.  Can you imagine what would happen if terrorists were able to take over thousands of cars at once or program their own cars to go on a rampage?  I can and it would not be pretty.


Now I am sure some smart techie funded by auto companies will tell me how this cannot happen.  Certainly tech titans like Google and Apple being in the business will lead to secure systems.  Certainly the resources of major auto manufacturers will also be brought to bear to insure the highest in security, just like the security on high-end luxury cars today that are so impenetrable.  Why with immobilizers and 96-bit encryption there is no way they can be hacked to run amok. 


Okay then, while you are thinking that through, check out the attached Bloomberg article on how some smart thieves have figured out how to break the code on keyless systems and immobilizers and steal some low-end cars, like Lamborghinis, Bentleys, Porsches and such.   Indeed, they report that 42% of the auto thefts in London are done just this way. 


http://www.bloomberg.com/news/articles/2015-08-14/vw-has-spent-two-years-trying-to-hide-a-big-security-flaw


Kinda' gives you that warm, fuzzy, safe feeling about self-driving cars, doesn't it.  Me thinks for now I will continue to enjoy driving myself, thank you.
And if the havoc driverless cars can bring gives you the willies, think about driverless trains.  Kind of sounds like a movie I once saw.


http://globaleconomicanalysis.blogspot.com/2015/08/driverless-trains-why-does-chicago-us.html
Of course, if you go to the link on wireless trains you will see a nice video of a train crash from when the operator fell asleep.  Tough choice - sleeping operators or hackers in charge.  Sort of sounds like the upcoming election choices.

Like He Said, And He Said, And He Said, and She Said . . .

I mentioned in my last post that I believe the economy would be in a recession in the last half of 2015 and the U.S. stock market will likely crash by the end of the third quarter.  I also opined that while the Fed desperately wants to adjust rates, the ultimate demise of the economy will prevent it from doing so.  On the latter point, Fed Governor Lockhart is quoted this week as saying that it will take "significant deterioration" of economic conditions for them not to raise rates in September.

http://www.philstockworld.com/2015/08/05/fed-yap-vs-futures-bloomberg-vs-cme-eighthpoint-baby-hikes/

I am just of a view that we will in fact see good proof of serious deterioration by then.  Indeed, I am of a view that we see it already.
On these points, I link a recent article by Lance Roberts that addresses some of the sound reasons I believe there is already significant deterioration.



http://seekingalpha.com/article/3406375-the-bea-is-still-overestimating-growth?ifp=0&app=1




His nice piece is obvious on why I think there will be a recession. And I could add a host of other charts and stats as further support a recession is upon us, showing liquidity concerns, rare divergences on market breadth, the debacle in commodity prices, China, Russia, Brazil, Australia, PIIGS, Canada, etc. all falling, Donald Trump combing his hair, etc. but hopefully you get the picture - and they all point to the same picture in my view, which is recession (or in Trump's case receding).




Now the linked Roberts article does note the BEA having a different picture and it does a nice job of pointing out how the BEA has adjusted the focus on its picture of GDP over the past couple of years to try to make it look better.  I believe we all adjust what we see to fit our desired version of reality, so it is no surprise the BEA does it too. 

The point being, however, that the Fed is looking - knowingly - at a number of cooked figures on GDP, unemployment, inflation and the like, and it is using these fake and distorted stats as justification for a hike.  They really desperately want to hike as they know it was stupid not to do it sooner and the rate has been in ZIRP territory far too long.  But they cannot justify the increase for the real reasons as the real reasons are not consistent with their Keynesian playbook, so they have to cook the books on the economic figures to make them fit.



Now I for one also see the need for them to raise the rates.  Indeed, I see the need for the Fed to disappear and stop meddling altogether, but that ain't happening any time soon, so for now them raising rates is the best they can do.  And they do not need to raise them because we have a hot economy that needs cooling, but rather because the low rates have simply encouraged and enabled fools to play with our money irresponsibly building financial bubbles and the only way to end this is to raise the rates. 




But alas I believe the reality of the economy will set in even in the cooked books before mid-September and a rate hike discussion will be history unless the entire Fed decides to use a new playbook and simply raise them because it is stupid to leave them there.  But stupid is as stupid does, so don't wait for this to happen.  Nope ZIRP and probably more QE is in our future, like it or not.  One bubble bursts and the next bubble cometh . . .


Update 8.6.15


I just saw that the Atlanta Fed, which is where Lockhart - quoted above - hails, has just released their third quarter GDP preliminary forecast at a whopping 1% - juuuust a taaad below bluechip concensus forecast that stands over 3%.  Ouch!  I wonder if Lockhart considers this "significant deterioration" from the 2.3 figure the BEA recently gave for the second quarter.  The drop is mostly attributable to that old inventory thingy.


http://www.zerohedge.com/news/2015-08-06/gdp-shocker-atlanta-fed-sees-q3-growth-laughable-1

"All's Well That Ends!"

No, I did not leave off a word from the famous quote.  This is my new saying and I am saying it today on the U.S. economic situation.  The Fed has distorted the economic world we live in so completely that there is no solution except for the markets to crash and burn and hopefully, just hopefully, we will learn some lessons and not let the Fed repeat this nonsense.  We do not need to push people to spend money they do not have and punish them for daring to save money.  We do not need to give interest free loans to corporations to buy back their own stock and artificially support overinflated stock prices and reward executives with big bonuses.  We do not need to be a nation of extreme debt.

We need instead to let people do what our parents taught us, which is the opposite of what the Fed wants; build a good savings and live within your means.  We need to let free markets be free with poorly run corporations going out of business, opening the way for honest, innovative corporations investing in our future. We need corporations with poorly conceived business models not to get dirt cheap financing to pursue their schemes for naught.  We need to let market forces do their natural work and get the government and the Fed out of it.  Unfortunately, I truly believe it will take a near disaster at this point to teach us this lesson.  Indeed a recession of epic proportions is needed and, like it or not, it is upon us sooner than we would like.  I am going out on a limb here and predicting just such a recession beginning in the last half of this year.  And I will be surprised if the markets do not crash before this quarter is out.  So then we will get to the bottom line and truly see if all's well that ends.

My hope is that a recession now will give some smart Presidential candidate who understands the situation an opportunity to capitalize on it and use it as a basis to garner a groundswell of support for a better structure.  Politicians love to campaign for change and nothing prods people into wanting change more than a recession.  We can only hope and pray - and vote!

So it  will not end well, but it most certainly will end.  We have to start somewhere.

Okay, so at this point I could start waxing poetic about a Phoenix rising from the ashes, attach a clip of some group singing "We Shall Overcome" or leave you with some touching quote to drive home my point.  On the latter, pick whichever one of the following quotes you think fits best and stick with it (or not).  They are from such intellectual notables as Wayne Gretzky, George Clooney and Babe Ruth, so you can't go wrong here.

"Experience teaches slowly, and at the cost of mistakes." James A. Froude

"Instead of 'stimulating' a recovery, the Feds have 'simulated' one.  Bill Bonner

"Failure happens all the time. It happens every day in practice. What makes you better is how you react to it." Mia Hamm

"Failure is the key to success; each mistake teaches us something." Morihei Ueshiba

"I've come to believe that all my past failure and frustration were actually laying the foundation for the understandings that have created the new level of living I now enjoy." Tony Robbins

"You’ll always miss 100% of the shots you don’t take." Wayne Gretzky

"Success is often achieved by those who don't know that failure is inevitable." Coco Chanel

"You build on failure. You use it as a stepping stone. Close the door on the past. You don't try to forget the mistakes, but you don't dwell on it. You don't let it have any of your energy, or any of your time, or any of your space." Johnny Cash

"Forget about the consequences of failure. Failure is only a temporary change in direction to set you straight for your next success." Denis Waitley

"What would life be if we had no courage to attempt anything?" Vincent van Gogh

"I really don't think life is about the I-could-have-beens. Life is only about the I-tried-to-do. I don't mind the failure but I can't imagine that I'd forgive myself if I didn't try." Nikki Giovanni

"No man ever achieved worth-while success who did not, at one time or other, find himself with at least one foot hanging well over the brink of failure." Napoleon Hill

"It is hard to fail, but it is worse never to have tried to succeed." Theodore Roosevelt

"Do one thing every day that scares you." Eleanor Roosevelt

"A person who doubts himself is like a man who would enlist in the ranks of his enemies and bear arms against himself. He makes his failure certain by himself being the first person to be convinced of it." Ambrose Bierce

"Don't be afraid of missing opportunities. Behind every failure is an opportunity somebody wishes they had missed." Lily Tomlin

"I can accept failure, everyone fails at something. But I can't accept not trying." Michael Jordan

"Our greatest glory is not in never falling, but in rising every time we fall." Confucius

"Try a thing you haven’t done three times. Once, to get over the fear of doing it. Twice, to learn how to do it. And a third time to figure out whether you like it or not." Virgil Thomson

"Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything - all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important." Steve Jobs

"One does not discover new lands without consenting to lose sight of the shore for a very long time." Andre Gide

"The only failure is not to try." George Clooney

"Fear is only as deep as the mind allows." Japanese Proverb

"If you're doing your best, you won't have any time to worry about failure." H. Jackson Brown, Jr.

"Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy." Dale Carnegie

"Take risks: if you win, you will be happy; if you lose, you will be wise." Anonymous

"We learn wisdom from failure much more than success. We often discover what we will do, by finding out what we will not do." Samuel Smiles

"Fear is the main source of superstition, and one of the main sources of cruelty. To conquer fear is the beginning of wisdom." Bertrand Russell

"Failure is success if we learn from it." Malcolm Forbes

"I've missed more than 9000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed." Michael Jordan

"He knows the water best who has waded through it." Danish Proverb

"Never be afraid to try something new. Remember, amateurs built the ark; professionals built the Titanic." Anonymous

"I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain." Frank Herbert

"Failure is a detour, not a dead-end street." Zig Ziglar

"Success isn't permanent and failure isn't fatal." Mike Ditka

"Never let the fear of striking out get in your way." George Herman "Babe" Ruth

"The only real failure in life is not to be true to the best one knows." Buddha

"Success is not final, failure is not fatal: it is the courage to continue that counts." Winston Churchill

"Develop success from failures. Discouragement and failure are two of the surest stepping stones to success." Dale Carnegie

"The greatest mistake you can make in life is to continually be afraid you will make one." Elbert Hubbard

"For every failure, there's an alternative course of action. You just have to find it. When you come to a roadblock, take a detour." Mary Kay Ash

"Most great people have attained their greatest success just one step beyond their greatest failure." Napoleon Hill

"One who fears failure limits his activities. Failure is only the opportunity to more intelligently begin again." Henry Ford

"No man is a failure who is enjoying life." William Feather

"Failure doesn't mean you are a failure it just means you haven't succeeded yet." Robert H. Schuller

"My great concern is not whether you have failed, but whether you are content with your failure." Abraham Lincoln

"Do not fear mistakes. You will know failure. Continue to reach out." Benjamin Franklin

Say What?

So, can someone explain to me how the following headlines on Bloomberg today can at all be read as being consistent?  First, let's start with a headline and article on what the Fed is going to talk about when it meets this week:

"The Fed Is Closer to Hitting Its Inflation Target Than People Think"

http://www.bloomberg.com/news/articles/2015-07-27/the-fed-is-closer-to-hitting-its-inflation-target-than-people-think

Fair enough.  I don't believe it but I do believe they have bogus stats that they might try to rely on to support an interest rate hike, which they desperately want to do.  Unfortunately, by September, it will be too late for them to justify any hike and they will be considering another round of QE instead.  Part of the reason why can be seen in other headlines of Bloomberg this morning, such as:

"These 10 States Will Be Hurting the Most After the Commodities Meltdown"

http://www.bloomberg.com/news/articles/2015-07-27/these-10-states-will-be-hurting-the-most-after-the-commodities-meltdown

This particular article recounts how commodities across the board are down, many to extremes.  It refers to the meltdown as brutal and notes that Bloomberg's own commodity index is at a 13 year low.  Yep, sounds inflationary to me.

And then there is that little old China thingy.  Bloomberg also notes that China's markets were down just a tad today:

"China Has Biggest One-Day Stock Crash Since 2007"

http://www.bloomberg.com/news/articles/2015-07-27/chinese-stock-index-futures-drop-before-industrial-profits

Indeed, the Shanghai stock market was down nearly 9% and one would likely see far worse but for the 10% cap on the amount a given stock can drop in a day.  A full 1700 stocks reached this limit today.  But hey, we're immune to what happens in China, right?

Let's just take a gander at other stock markets and see.  In the U.S., the Dow is 5% off its high for the year, Nasdaq 4% off and S&P 3% off, with most of these losses in the past week.  Indeed, each is off nearly 1% today as I write this, following an equally depressing drop last Friday.

Let's not forget the strengthening dollar either.  Tends to make imports cheaper and to dampen exports.  Last I checked, neither of these results is inflationary.  But hey, what do I know.  The stats the Fed is looking at must be a lot more accurate.  I'm just a dumb turd trying to figure things out and should stand in silent awe of Yellen.

Kicking the Can - Some Things Never Change

I was just looking back at some of my old posts that made it to Seeking Alpha.  Here is one from May 7, 2010 that was a bit prescient, if I do say so myself, and still in my view 100% on target.  There are a few references to Greece in there, for those who are counting, including a prediction it would eventually default or need a debt haircut as its debt load was simply unsustainable.  Ah, but no one listens to me.  I repeat it in full below:

Once Again, Kicking the Can Down the Road

May 7, 2010 2:48 AM ET  |  2 comments  |  Includes: DIA, QQQ, SPY by: Craig Brown

 

So while sitting at a conference in NYC, one of the speakers noted that his partner just emailed him that the Dow was down over 900 and the partner was wondering what he had done in NYC to cause this. Everyone chuckled and everyone pulled out their respective mobile devices to see if it was true and not just a joke. After all, I looked before I went to the conference on Thursday morning and futures were pretty much flat, but he was not joking about the Dow. I responded,"Wow, I did not see that coming."

Well, actually, I did. I have seen it coming since March 9, 2009, when the market started its incredible climb off the recession lows. I was not sure exactly when, how or what the precipitating event would be, but looking at fundamentals it was just a matter of time. Now everything could be honky dory tomorrow or next week. I have totally given up trying to figure the market in the short to medium term as there are simply too many variables to consider, but I am still a bear in the long term and my investment strategy this year has totally focused on long term fundamentals.

The world debt problem has not been corrected. It has shifted to government coffers in many countries but is still there. Greece is one somewhat extreme example of it, but is by no means alone. This is a worldwide problem and few countries are immune. Even the "immune" countries, i.e. those with no real internal debt issues, are going to feel it as trading partners suffer. It ain't going to be pretty folks.

So what happens next? Undoubtedly governments in Europe, the U.S. and elsewhere will put new assurances in place that everything is fine to calm the markets. Perhaps a few billion more here or there will be spent to calm fears and we will have a recovery of sorts from the current anxiety. The VIX will go back down, credit markets will calm and all will be fine - at least on the surface. But then we will catch up to that damn can again. Each time it seems the can gets bigger and heavier and we cannot kick it as far as last time. When we catch up we will try to kick it again and will probably succeed a bit, but eventually we will not. Eventually it will be time to pay for our foolishness. Greece is already there and some other countries are not far behind. Eventually, virtually all of us will be there-- including the good old U.S. of A.

You see, this is what happens when you do not take your medicine. When you do not try, in an orderly fashion, to dismantle corrupt companies that caused the problem and do not deserve to survive, and instead spend hundreds of billions to keep them alive, continuing to do a lot of the same stuff that got us here. This is what happens when you try to solve a debt crisis with more debt. This is what happens when you have policies in place that promote people, corporations and governments living wildly beyond their means. This is what happens when you focus on short term gains over long term stability, which we have easily done for at least a generation.

So here is where I see things unfolding. As noted above, given the market woes this week, you will see some government support coming out; it could be the EU, IMF, U.S. or whoever, but some, probably many, officials will be making a lot of public statements on how the situation is controlled and Greece will be fine. The folks in Greece will, meanwhile, continue to riot as their lifestyles just got flushed down the toilet. Mind you, none of us would like this to happen to us, so I understand, but the truth is they made their bed - we all did. Greece will then be followed by other countries facing the same situations. It could be the other PIIGS, it could easily be the UK or the U.S., or it could be Japan. We could also see a bubble or two soon popping in China. There are so many ifs here no one can say, but I can say I do not see many rosy scenarios.

Debt is only going away if either those owing - either individuals, companies or governments - default, modify, or pay it down. I think default is in the long term cards for Greece and a few other countries, as the people simply will not live with the relatively long term pain of paying down the debt. The middle ground of some negotiated modifications, i.e. haircuts, is certainly possible and probably a good middle ground, but that still will cause some havoc in the markets as a lot of financial institutions - you know, the ones we just saved - hold a lot of this public debt. It is going to be painful any way you look at it.

So what do we do in the U.S.? It is not rocket science folks. Dismantle companies that should not survive. Put in place policies that promote people spending less, paying off debts and, God forbid, saving some money. But politicians cannot fathom this. If people spend within their means we cannot possibly support an economy built on excesses. The housing market depends on people spending beyond their means. Retailers do too, as do all those commercial real estate landlords. We would most certainly suffer a long and hard recession. It would be absolutely horrific if we have to live within our means as our U.S. economy would take a hit of several percentage points on the GDP. We, like those in Greece, do not have the tolerance for such financial pain. After all, we love our stuff. I am not immune, I love my stuff. I do not want to live without my stuff. No one does. And so, we incur more government debt and we kick the can again.

I don't know about you, but my toe is beginning to hurt.