joe wiesenthal

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Get Bullish, Muppets!

Sounds like Goldman has some equities (AAPL?) to dump on its muppet clients.

From Business Insider:

Goldman portfolio strategists Peter Oppenheimer and Matthieu Walterspiler are out with a doozy of report, basically presenting a big bullish case for stocks, relative to bonds.

From Goldman:

In 1956, George Ross Goobey, the general manager of the Imperial Tobacco pension fund in the UK made a controversial speech to the Association of Superannuation and Pension Funds (ASPF) arguing the merits of investing in equities to generate inflation linked growth for pension funds.  He became famous for allocating the entirety of the funds investments to equities, a move that is often associated with the start of the so-called ‘cult of the equity’.

Prior to this, equities were largely seen as volatile assets that achieved lower risk adjusted returns than government bonds and, consequently, required a higher yield. As more institutions warmed to the idea of shifting funds into equities, partly as a hedge against inflation, the yield on equities declined and the so-called ‘reverse yield gap’ was born. This refers to the fall in dividend yields to below government bond yields; a pattern that has continued, in most developed economies, until recently.

In his speech to the ASPF, Ross Goobey talked about the long-run historical evidence that the ex-post equity risk premium was positive and that investors ignored this at their own peril.

The long-run performance of equities was much greater than for bonds having adjusted for inflation. As he said: ‘I know that people will say: ‘Well, things are never going to be the same again’, but … it has happened again, and again. I say to you that my views are that it is still going to happen yet again even though it may not be the steep rises which we have had in the past.’ Over the 50 years that followed Mr. Ross Goobey’s pitch, his predictions proved very successful. The annualized real return to US equities (as a proxy)  between 1956 and 2000 were 7.4%.

But things have changed since the start of this century and the collapse of equity markets following the bursting of the technology bubble. In this post bubble world valuations fell from unrealistically high levels. But the decline of equity markets continued well after most equity markets returned to more ‘normal’ valuations. The onset of the credit crunch, and the deleveraging of balance sheets in many developed economies that followed this have punctured the confidence that once surrounded equities, and the pre-1960s skepticism about equity returns has returned. Dividend yields are once again above bond yields and both historical, and expected future returns have collapsed.

That’s right muppets, time to get bullish and hoover up all the equities we want to offload! This is a once in a generation opportunity to own equities!

Or not. Let’s just say that prices aren’t exactly being supported by a surge in manufacturing:

That’s right: manufacturing is just about where it was at the turn of the millennium, and unsurprisingly so is the S&P.

However there is a sliver of a superficial hint that the muppet masters may be right.

Here’s the S&P500 priced in gold:


Looks cheap next to where we were ten years ago. But in the long run I don’t really think where we were ten years ago tells us much about the fundamentals; it tells us more about Greenspan’s propensity to grease markets with shitloads of liquidity and watch stocks soar. The deeper I dig into the data, the more I tend to conclude that we really need to throw all recent historical trends out of the window.

Here’s a choice data set:


Does that look like a normal recovery? It looks like a complete paradigm shift to me. I’ve already covered my underlying reasons for believing that we live in unprecedented times. But this chart from Zero Hedge speaks as much as anything else:


So, if you have money to burn and a gullible nature go ahead and throw your money at the muppet masters. In the long run, equities and other productive assets have proven themselves superior to any other asset class, because they tend to produce a tangible return.

But right now? The real problem is that the global economic system is a mesh of interconnected fragility where one failed party can take the entire system down. Well run companies can be dragged down by badly-run counter-parties, and badly run companies can just be bailed out, totally obliterating the market mechanism. This is not an environment conducive to organic growth. It’s a cancerous environment, juiced up on (priced in) central bank interventions. It is the very definition of iatrogenesis: when “medicine” causes deeper and worse sickness.

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Euro Psychoanalysis

Joe Wiesenthal does some interesting analysis on Greece:

In a post last night, economist Tyler Cowen asked: “Is the goal simply to irritate the Greeks so much that they leave the Eurozone on their own?”

Here’s what might be going on.

Sometimes in life you give someone a “shot” at something that maybe they don’t deserve. You hire them, despite the fact that their qualifications were marginal. Or something like that. Bottom line is, you think you’re doing them a favor, and you’re also putting your reputation on the line a little bit. But you expect that they’ll step up and really appreciate the opportunity they have. And you expect they’ll kill it.

And when they fail — which is likely, because they might not have deserved the opportunity — you’re furious at them, because you gave them this great opportunity and they totally blew it, and they made you look like an idiot at the same time. And you just hate them for it.

And that’s what’s going on now. Europe feels like it gave Greece a “shot” with Euro membership, and multiple bailouts. And now it looks to Greece, and sees people rioting, and the reforms not happening, and they’re furious like never before. Merkel, Schaeuble, and the rest just can’t fathom that Greece was given this great shot to be a rich, wealthy European nation and it’s totally blowing it.

Well, if that’s so, Europe never really understood the creature it was creating. For all the talk of the supposed various benefits of the Euro — lower inflation, integrated markets, and so forth— its one huge dilemma — that nations were now budgeting in a currency they didn’t control, and so could not just monetise debt — was always brushed aside. Of course, policymakers were aware of some of the problems, at least in an abstract sense.

As Romano Prodi put it in 2001:

I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.

I suppose what was never understood was that the problems might grow and multiply to the extent that they would pose a threat to global economic stability before such “policy instruments” were created.

I suppose the moral of the story is that it is dangerous to create systems with inherent problems, and assume that the solutions to these problems will naturally emerge later at a time of “crisis”.

And certainly, there does seem to be a sense of punishing Greece for their fiscal misdeeds (even though Germany themselves were the first nation to violate the Eurozone’s deficit rules).

From the BBC:

Some eurozone countries no longer want Greece in the bloc, Finance Minister Evangelos Venizelos has said.

He accused the states of “playing with fire”, as Greece scrambled to finalise an austerity plan demanded by the EU and IMF in return for a huge bailout.

Simply, if Europe wants to maintain the global status quo, the ECB needs to crank up the printing press, and fast, to pump huge liquidity into the system. Of course, this creates huge problems down the road, as exemplified by Japan.

If not, they had better be ready for huge changes to the global financial order. Personally, I believe that the global financial system is fundamentally broken, and that printing more money, kicking the can down the road and hoping for the best will just lead to a worse and bigger breakdown down the line. I favour liquidation. But policymakers can be very reactionary.

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Death by Hawkery?

Joe Wiesenthal presents an interesting case study:

These two charts basically explain everything.

The first chart shows the yield on the Swedish 5-year bond.

As you can see, it’s absolutely plummeting right now.

chart

Image: Bloomberg

Now here’s a look at its neighbor, Finland, and the yields on its 5-year bond.

chart

Image: Bloomberg

Basically they look identical all through the year up until November and then BAM. Finnish yields are exploding higher, right as Swedish yields are blasting lower.

The only obvious difference between the two: Finland is part of the Eurozone, meaning it can’t print its own money. Sweden has no such risk.

This is a narrow version of something that much of the media picks up on earlier last week that UK gilts were trading with a lower yield that German bonds, a reflection of the same principle: In UK the government can print. In Germany, it can’t.

Yes — investors are happier with the idea of buying bonds which may be debased by money printing, than they are with the idea of buying bonds which may be defaulted on because the sovereign cannot print. But there is another element at play here, which may be much bigger.

Easing, of any sort won’t solve the underlying global problem — as explained by Reinhart and Rogoff in better detail than I have ever done — of excessive debt levels. By conducting QE (i.e. taking sovereign debt out of the market) governments are simply artificially contracting the supply, and in my view pumping up a debt bubble.

It’s important to consider Japan here — yields in Japan are as low as ever, and creditors are still taking their pound of flesh. That can’t be a bubble, can it? Creditors aren’t losing their money? Well, it depends how you define return on investment. Investors in Japanese bonds may be getting their money back, but Japanese society is slowly being strangled by a lack of organic growth and a lack of any real kind of creative destruction. Wages and living standards fall while unemployment rises. So Japan has become zombified, and in theory similar cases like the United States and Britain should follow down the path of death by slow Keynesianism (they won’t, because they are far more combustible societies than Japan, but that is another story for another day).

In light of all that, while the Teutonic monetarist hawkery may superficially look stupid, if we look at the resulting Euro-implosion as a potential trigger to crash global markets, burst the global bond bubble, trigger a cascade of AIG -esque events, culminating in the breakdown of the global financial system, a debt reset, and a new global financial order well then it’s really quite clever. Ultimately, a debt reset is what is needed to effectuate new organic growth and new jobs, and to clear out the withered remains of umpteen bubbles that have been created in the last twenty years through easy money.

I doubt that the stern bureaucrats at the ECB are anywhere near as clever or far-sighted as this (their most significant concern appears to be sound monetarist economics) but there is quite possibly genius in this stupidity.

So — rather than death by hawkery, I foresee rebirth.

Of course, on the other hand the “hawks” may just end up printing like their American counterparts.