More than half of these Fed asset sales occurred between the end of October and the end of November. But the balance sheet remains an impressive $3.8 trillion -- a huge difference with the pre-crisis monetary base of $820-$830 billion. It is interesting to note that even at these comparatively modest amounts of high-powered money, the pre-crisis U.S. monetary policy was very expansionary: the federal funds rate was fluctuating around 3 percent while the inflation rate was accelerating above 4 percent.
These excess reserves are now being drained by the Fed's bond sales; they have been cut by $286.1 billion from their peak of last August. There is still plenty of cutting to do, though. Just think that during the pre-crisis period from January 2007 to June 2008 banks' average excess reserves were fluctuating around monthly levels of $1.9 billion (sic). That is a far cry from the $2.4 trillion we have now.
Technically, the Fed can keep the federal funds rate within its current 0-0.25 percent range for some time because of large excess reserves in the interbank market.
But the Fed has to work fast to destroy the inflationary potential of excess liquidity before the actual inflation begins to edge up.
Equities are still my preferred asset class -- provided the portfolios are carefully reviewed toward a defensive posture. Also, think of putting some of that yellow stuff under your Christmas tree.DYI Comments: The Fed's are in a race against time to reduce to a significant degree their balance sheet to be prepared for the next recession. Knowing when that will occur is a bit of a guessing game for we've been in recovery (of sorts) for a long time. So time is no longer the Fed's friend as they will be looking for every opportunity to reduce their Treasury secuities. I'm not as worried regarding inflationary pressures as deflationary forces on balance are much stronger than the Fed's desire to create 2% inflation. Simply stated they need bullets available to shoot at the next recession whenever that arrives.
In my view, we are likely witnessing the peak of the third equity valuation bubble in the past 14 years, the first two which saw major indices plunge by at least 50%. It’s important to recognize that market peaks are a process, not an event. Internal deterioration has actually been developing since early July, and became measurable in early August (see A Hint of Advance Warning). This process has been quite like what we observed in 2007, when deterioration became measurable in July of that year (see Market Internals Go Negative). Despite an initial selloff, the major indices recovered to a marginal new high in October 2007 before continuing lower.
On the valuation front, based on measures that we find most reliably correlated with actual subsequent market returns (and many widely-quoted measures are not), equities are more overvalued than at any point in history except 2000, at more than double their historical norms, and the best-correlated ones are within 15% of the 2000 peak (see Ockham’s Razor and the Market Cycle to review a variety of these). With market internals still struggling and credit spreads widening, elevated valuations have now been joined by a subtle but measurable shift toward increasing risk aversion. In prior cycles, that shift has typically discriminated between overvalued markets that continued higher from overvalued markets that fell like a stone. Again, if that evidence eases, the immediacy of our concerns will ease as well. That wouldn’t make stocks any less overvalued, so a certain line of defense will be important in any event.
Generational
DynamicsForecasting America's Destiny ... and the World's
John J. Xenakis
Reuters and AFP and Bank of International Settlements (BIS)"It's the warning that the rising dollar could bring more (emerging markets) trouble in its wake - as it did in the 1990s - that is going to challenge FX [foreign exchange] markets tomorrow [Monday] morning while we're all thinking about what the U.S. non-farm payroll data mean for Fed rate hike timing."
(Reuters) - Sudden swings in financial markets recently suggest they are becoming more fragile and sensitive to unexpected events, the global organization of central banks said on Sunday, warning that a rising U.S. dollar could have a "profound impact" on emerging markets in particular.
"This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets," it said in its quarterly review. "Global equity markets plummeted in early August and mid-October. Mid-October's extreme intra-day price movements underscore how sensitive markets have become to even small surprises."
Emerging market economies expected to be hardest hit because "the outsize role that commodities and international currencies play there makes them particularly sensitive to the shifting conditions," he said.
Emerging economies have racked up to $3.1 trillion in dollar-denominated debt by mid-2014.
A continued appreciation of the dollar would therefore increase debt burdens, Borio said.
At the same time, some of these economies are dependent on commodity exports and have therefore come under intense pressure over falling prices.
Roubini is particularly worried about the increase in issuance of junk bonds. Low interest rates and an increased thirst for high-risk speculation have led to the junk bond market to being bigger than it ever has been. He also sees equities as a potential list, the P/E ratio is slightly above average but he thinks that tech and social media sector valuations are very stretched. “Throughout the world, we have low growth, low inflation and easy money. And where is liquidity going? Not in real credit or to the real economy, it’s leading to asset deflation,” he says.
But other forces are at work. Since the housing boom ended, mortgage volume has dropped by two-thirds and home sales are still about 30 percent below the 2005 peak. Meanwhile, the number of licensed and certified appraisers, now about 100,000, has fallen at only half the rate of home sales and much less than the drop in mortgage-origination volume. The result is an oversupply of appraisers, with more of them willing to come up with valuations to make a transaction work.
NEW YORK (TheStreet) -- During the depths of the bear market that followed the financial crisis, some investors desperately sought alternatives to the typical equity portfolio.
One solution, which dates back to the 1980s, is called the "permanent portfolio." In its purest form, this means allocating equal 25% portions to equities (via a broad-based index fund), gold, long-dated bonds and cash. The portfolio is re-balanced once a year.
The basic premise is that one of the four asset classes will always perform well.
The argument tied to the Fed is on very weak ground as gold peaked 27 months ago while the Fed has continued to buy Treasuries hand over fist. The correlation argument is alive and well as gold has had an almost perfect negative correlation to equities this year. For now there is not much of a fundamental catalyst for gold to go up, so the permanent portfolio would appear to have 25% allocated to something that is relying on hope to go up. Of course, hope is not an investment strategy.
The biggest obstacle for the future of the permanent portfolio in its purest form would be an end to the 31-year bull market in bonds as proclaimed by Barron's over the weekend. People have been able to borrow money essentially for free, but that can't last forever. If Barron's is right and the bull market ended last May, then the permanent portfolio would appear to have 25% allocated to something that can't go up.DYI Comments: Dear Roger in your article for the Permanent Portfolio Strategy to work all you need is one asset class to be a winner and the rest can be losers. Historically it has been one winner with a second asset in a supporting role. If long term bonds have dismal performance it will not affect your overall return unless you are trying to out guess the markets.
This thirty-year period has been a golden period for bonds. For sure, part of that period coincided with a strong bull market in equities, especially in the United States from the early 1980s until March of 2000. But since then, equities have been both volatile and flat, while bonds have continued their relentless bull-march, with yields falling and prices rising.
If technological innovation and the emergence of the global middle class continue, companies exposed to those phenomena will continue to reap disproportionate rewards, as they have been for well over a decade. That, in turn, would explain the strange yet undeniable strength in equities—at least as credibly as the thesis that equity markets are up and bond yields are down only because of central bank machinations.
So, in short, by all means prepare for the end of the bond bull market. It is probably done. By all means consider the possibility of a bear market in bonds and turmoil in equities. It would seem that most of us are doing just that. But we should also be prepared not for the trend to reverse but rather for it simply to stop, with stocks a beneficiary, as they most certainly have been, with or without the help of central banks.DYI Comment: Most likely is for the U.S. to have very low inflation/modest deflation for the next 4 to 5 years until the Boomer's begin to retire in mass causing a labor shortage and budget busting entitlement costs pushing up the rate of inflation in the 2020's. Until then it is very possible
Corruption among officials is most prevalent in Somalia and North Korea while the country where the authorities are seen as least likely to take a bribe is Denmark, according to an authoritative new study.
Out of a possible score of 100, where a higher number indicated less bribery, Britain scored 78. The best rated country was Denmark with a score of 92, followed by New Zealand on 91 and Finland on 89.
Of other notable nations, Germany was ranked joint 12th with a score of 79, Japan was joint 15th with 76, Ireland and the US were joint 17th with a rating of 74, and France was joint 26th with 69.
The country to suffer the biggest drop since last year’s survey was Turkey, whose score fell 5 points to 45, putting it in 64th place. China’s score fell by 4 points to 36, putting it in 100th place. Transparency International said noted that China’s lower score came despite a well-publicized crackdown on bribery there.DYI
It wasn't supposed to be like this. Young people born from the early 1960s to late 1970s believed that the future was theirs. As baby boomers aged, employment and prosperity would be passed along. Instead, "Generation Xers" complained that they were propelled into a changing, recession-driven workplace that offered little but "McJobs." They became the first post-war generation to be worse off than their parents, left with reduced expectations and downsized hope for the future.DYI Comment: This video is for Canadian demographics however it applies to Americans as well. Very well done well worth your time to view.
New York (MarketWatch) — If you are bad, you can expect a lump of coal in your stocking. But if you are good, go for a lump of gold. This holiday season, after a bear market of more than three years, gold-mining stocks finally look to be high up on the holiday shopping list.
In October, when gold and mining stocks first bubbled up in my screens, I interviewed Kevin Schweitzer, senior vice president at Maxim Group and a gold stock trader. He said that when the bottom is finally found, money will flood into the smaller mining stocks. I concur.
While Palome worked hard his entire career, paid off his mortgage and put his kids through college, like most Americans he didn’t save enough for retirement. Even many affluent Baby Boomers who are approaching the end of their careers haven’t come close to saving the 10 to 20 times their annual working income that investment experts say they’ll need to maintain their standard of living in old age.
About 7.2 million Americans who were 65 and older were employed last year, a 67% increase from a decade ago, according to government data. Yet 59% of households headed by people 65 and older currently have no retirement account assets, according to Federal Reserve data analyzed by the National Institute on Retirement Security.
They, too, are coming up short. Company-paid pensions are mostly a thing of the past, replaced in the last three decades by 401(k) accounts primarily funded and managed by employees. The median 401(k) balance for households headed by people aged 55 to 64 who had retirement accounts at work was US$120,000 in 2011, according to the Center for Retirement Research at Boston College.
How is the average middle-class person going to amass US$1,000,000 by the time they’re 65, which is what they’ll need to get US$40,000 a year in income from their retirement savings?
Other on-the-job nuisances include hail, mud, diamondback rattlers, wild boars, coyotes, bobcats, porcupines and skunks. Bull keeps on driving. Past stunted wheat fields of drought and disappointment, he rolls.
Fifty, 55, 60 mph. Turning up a driveway, he reaches out the window and, snap, the mailbox opens. Bull is a letter carrier with the longest postal route in America, 187.6 miles (301.8 kilometres) across some of the loneliest territory in the country. He’s 72, and part of the fastest-growing segment of the U.S. labor force — those who work past their 65th birthdays.
Older Americans’ reasons for staying in the workforce cover the spectrum in the post-recession economy. Some need the money to live day-to-day, some want to build up battered 401(k) plans or put more away for their kids, some find that the daily activity organizes their lives in ways they can’t on their own, keeping them connected and useful.
For Bull, who has a pension and Social Security and a $62,000 annual salary, it’s mostly about family. With what his wife, Susan, a second-grade teacher, makes, they earn six figures. He says his working helps them maintain a comfortable lifestyle, and allows him to save to leave something substantial for Susan, who’s 17 years his junior, and for his grandchildren.
