“What is “obvious” to those embedded in the conventional, MSM/state-manufactured worldview is not the same as what is obvious to those outside the asylum.

Longtime readers know my analytic perspective is based on what psychiatrist/author R.D. Laing called the Politics of Experience.

Survival+ 6: The Politics of Experience (April 2, 2009)

Survival+ 7: Simulacrum and the Politics of Experience (April 3, 2009)

In his prescient 1972 lecture, The Obvious, Laing explained the inherent difficulty of understanding “the obvious” when a systemic madness is taken as “normal”:

To a considerable extent what follows is an essay in stating what I take to be obvious. It is obvious that the social world situation is endangering the future of all life on this planet. To state the obvious is to share with you what (in your view) my misconceptions might be. The obvious can be dangerous. The deluded man frequently finds his delusions so obvious that he can hardly credit the good faith of those who do not share them.

We can summarize one aspect of this analysis by asking: what is “obvious” to those inside a system and what is “obvious” to those outside the system? Our experience of what is “obvious” says a lot about our cultural context and assumptions: the manufacture of our “news” and consensus, the mystification of our experience via propaganda and simulacra, what we perceive as “normal” relationships, work, goals, etc.

What is “obvious” to most participants is that the stock rally is fueled by central bank liquidity and quantitative easing, and since there is no limit in sight to these policies, there is also no limit to the stock market running higher.

It is also “obvious” that betting against this trend is an excellent way to lose money, so the number of people shorting the market dwindles with each push higher.

Equally “obvious” is the incentive to borrow money via margin to invest in the rising market: the higher it goes, the more you can borrow, and the more you borrow and plow into the market, the more you make. It is a wonderful self-reinforcing feedback loop.

Thus record-high margin debt is not a warning sign but evidence that the music is still playing, so by all means, keep on dancing:

Near-Record NYSE Margin Debt Leads to Caution (Bloomberg)

That the disconnect between the real economy and the stock market is widening is obvious, but there doesn’t seem to be any intrinsic reason why it can’t continue widening. As a result, many analysts are calling for a brief retrace and then another leg up to new highs. Others see a serious decline (10%+) this summer and a new high in Q4 2013 or Q1 2014.

In other words, what might be obvious to those outside the system–that all liquidity-driven bubbles end badly, usually when participants are convinced there is nothing to restrain the trend from going higher–is not at all obvious to participants and those cheering them on (the MSN, the Federal government and the Fed).

What I sense is a near-universal resignation of those attempting to call a top in the market, an acceptance that the trend is up for the foreseeable future and that trying to short this market (i.e. profit from a decline) is a fool’s game.

The number of those willing to short the market, i.e. take the other side of the trade, has dwindled. Every sharp rally like last Friday’s eliminates entire divisions of shorts, leaving the trade even more one-sided.

Yes, the market is manipulated and totally dependent on central bank QE, liquidity and outright buying of stocks and bonds. But the market is not as stable as presumed, and one-sided trades tend to capsize when everyone who feels safe being on one side of the boat least expects it.

Every trader wants to short the market after it becomes obvious the trend has reversed. But since there are so few shorts left, the decline (should one ever be allowed to happen) might not be orderly enough for everyone to pile on board. More likely, the train will leave with few on board and the initial drop will leave everyone who was convinced the uptrend was permanent standing shell-shocked on the platform with margin calls in hand…..”

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“Last month we laid out the reasons why France was On The Brink Of A Secondary Depression—in short, due to a deadly collision of French politics with Frankensteinian monetary union. Unfortunately, subsequent data confirms the bleak trajectory:

The INSEE Business Climate Survey has fallen below 88 (or two sigma below the mean). This indicates France is entering into a recession as nasty as 1993 and perhaps as nasty as 2008-2009. She will enter into this recession with government spending at 57% of GDP, an all-time high, and with a debt-to-GDP ratio close to 90%—and that’s not including the liabilities for civil servant pensions. If they were included, the debt to GDP ratio could double, according to some estimates (see the report on public finances by Michel Pebereau).

Even Francois Hollande is beginning to wake up to just how destructive and anti-business the French agenda is. On Monday, Hollande announced measures designed to encourage the French entrepreneurial spirit – essentially by watering down programs he himself imposed after winning the presidential election last year.

The new agenda includes cuts in capital gains taxes. The effective capital gains tax will now decline by 2 percentage points, to 32.5%. This is better than last year’s outlandish move to effectively bump up the capital gains tax to as high as 62% in some cases. But the president’s reversal is the desperate move of a cornered politician, not a sign that we will see a steady hand on the tiller of reform in coming years.

Take a look at the table above. France is a serious laggard against most of the other major European economies (except Italy) on almost all tax indicators.

• Between 2000/2011, the overall tax to GDP ratio went down about -1.6 percentage points across the European Union: -2.6pp in Germany, -1.4pp in the UK, and -7.2pp in Sweden. In France it contracted by just -0.3pp. France is now poised to overtake Sweden as the most heavily taxed major country among the 27 nations in the European Union, with an overall rate of 44% vs 39% for the EU as a whole.
• French implicit taxes on capital gains rose by 4.3pp in 2000-2011, an increase surpassed only by Italy and sharply at odds with the declining trend in Germany (-5pp), the UK (-9.1pp), Sweden (-16pp) and the Netherlands (-7pp), not to mention euroland as a whole (-2.7pp).
• In absolute terms French implicit taxes on capital are a gigantic outlier at 44.4%, compared to an average of 27.2% among the 17 nations in the euro area.

In this context, Hollande’s reversal on capital taxes reminds me of the guy walking up the steps to be hanged, who slips, falls and says “could have been worse.” France remains one of the deadliest environments for entrepreneurs…..”

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“The stock markets closed on Friday at their all-time highs.
However, one of the biggest headscratchers has been the nature of the stock market rally.
Specifically, the more conservative sectors like health care have been outperforming the more volatile cyclical sectors.
If people feel good about the economy, they should hunger for risk and invest in more economically sensitive names.
However, investors have been doing the exact opposite month after month this year.
Morgan Stanley’s Adam Parker talks about this in a new note titled “The Definition Of Insanity”:
Doing something over and over again and expecting a different outcome? Once again, high-beta stocks, cyclicals and smaller stocks underperformed in a strong market during April. In a break from the prior three months, junk narrowly beat quality while value beat growth.
One explanation for this discrepancy could be…”

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“(Reuters) – Warren Buffett said on Monday the U.S. economy is gradually improving, helped by the efforts of Federal Reserve Chairman Ben Bernanke to stimulate it.

Speaking on CNBC television, Buffett said the economy is benefiting from improvement in areas that had not previously performed well, particularly homebuilding.

He also said the improved economy is helping create increased traffic for NetJets, Berkshire’s private plane unit.

“The economy is moving forward, but at a slow pace,” he said. “Demand has come back, but slowly.” …”

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“The EU continues its chainsaw juggling act. The austerity pledge from France is holding about as well as its Maginot Line, while Greece has sworn to meet its fiscal targets in 2014 2015 2016soon, and the Italians promise they’re going to kick some serious fiscal butt as soon as the country returns from holiday.

Spain reassures that it will squarely confront its need to raise worker productivity whenever the unions call an end to protests against austerity. And the Portuguese high court ruled it is unconstitutional for civil servants to work for less than twice the wages of their private-sector counterparts.

This chronic “the sky is falling” in the EU had induced investor news-cycle fatigue and rendered last year’s black-swan threat level from red to this year’s collective yawn…

… until Cyprus tossed another chainsaw into the act. The Cyprus looting of private wealth was a cold-shower reminder of the tenuous security of assets that are concentrated within reach of a single government – doubly true of nations in a desperate fiscal situation whose financial sector is about to topple.

Depositor Creditor

The blatant theft of depositor money in Cypriot banks was at first peddled as a one-off emergency measure. Then a Freudian slip by the head of the Eurogroup finance ministers, Mr. Dijsselbloem, suggested this would be the new pattern for similar future events. Much back-pedaling and “clarification” ensued.

But don’t bother squinting as you try to read the lips of mumbling bureaucrats. Just follow what they’re doing and you won’t get blindsided.

What have they been up to? In October 2011, the Financial Stability Board (FSB) – a tentacle of the Bank for International Settlements, the central bank for central bankers – released a report that proposed a new regime to resolve financial-institution instability.

In the report, the FSB calls for solvency support for banks without taxpayer exposure and the allocation of losses to shareholders and unsecured and uninsured creditors. Deposits at a bank are considered a loan, and if a bank fails, its depositors become unsecured creditors for amounts that exceed the insurable limit.

It gets worse. To protect the integrity of the financial system, controls on both endogenous (the bank itself) and exogenous (other firms and cross-border cooperation) capital movement can be implemented. This is exactly what happened in Cyprus. To prevent capital flight out of the banking system, the movement of money out of or between banks was restricted, as well as capital sent outside the country.

The G20 has fully endorsed the plan, and its implementation is complete or under way in member jurisdictions. The US is a G20 member, so don’t kid yourself into believing it can’t happen in America. It can and will. The Cyprus event has been carefully framed as an anomaly when in fact it is part of a well-orchestrated script.

In the Year of Our Overlord 1 AF

January 1, 2014, will mark the start of Year 1 AF – “after FATCA.” In the run-up to the US reporting regime’s full implementation, many foreign banks have opted not to accept US persons as clients, and we can see why. FATCA is a huge burden on foreign financial institutions in terms of time and resources needed to identify, track, and report on their US clients….”

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“Stocks rose to new highs Friday following the upbeat jobs report, with the Dow Jones Industrial Average briefly touching 15,000 and the S&P 500 moving above 1600.

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“If copper’s a good indicator for economic trends and equity markets, then it may be sending investors a warning of bad things to come.

Prices for copper futures saw a big rally on Friday, but that doesn’t make up for its year-to-date loss. The July copper contract  HGN3 +6.43% settled at $3.315 a pound on Comex, up 21 cents, or 6.8%, for the session. It’s still trading down roughly 10% for the year.

Copper, which is also known as “Dr. Copper” because of its ability to serve as an indicator, is “leading the way downward,” Albert Edwards, a strategist at Societe Generale, told clients in a research note dated Thursday.

“Copper is acting exactly as it did when I wrote about the impotence of liquidity in the face of the (then imminent) 2007 recession,” said Edwards. “It is giving us an early warning that liquidity will not save risk assets: time to get out of equities.” …”

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“When Oklahoma energy billionaire George Kaiser opened the Northeast Gateway liquid natural gas terminal in 2008, the floating depot’s first delivery was shipped on the Excellence, a 909-foot supertanker that holds 138,000 cubic meters of LNG — enough gas to meet more than 4 percent of daily U.S. demand.

The Excellence is owned by the George Kaiser Family Foundation, a charitable organization that also owned a 36 percent stake in Solyndra LLC, the Fremont, California-based solar system maker that went bankrupt in 2011 after receiving a $535 million U.S. Energy Department loan.

The nonprofit organization paid $110 million for the tanker in 2003. It later gave control of the vessel to Woodlands, Texas-based Excelerate Energy LP, a for-profit gas delivery company Kaiser owns with publicly traded German electric utility RWE AG, according to RWE’s 2012 annual report.

“It is an excellent investment,” Frederic Dorwart, a trustee of the foundation and longtime attorney for Kaiser’s various banking and energy companies, said in a telephone interview. “It pays out this year and we’ll still own the vessel.”

The Excellence is also an example of how federal laws and U.S. Internal Revenue Service regulations forbid forms of self- dealing in one kind of tax-exempt organization while creating loophopes that allow them in another.

‘Anything Goes’….”

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“Billionaire investor Warren Buffett told CNBC that if the Federal Reserve were to increase its massive bond-buying program that would be “pretty extraordinary.”

In an interview that aired on “Squawk Box” Friday, the Berkshire Hathawaychairman and CEO said, “Basically [the Fed] is buying the debt we’re creating and to go beyond that is an awfully big number.”

After their latest meeting, Fed policymakers said Wednesday that interest rates will remain at historically low levels, while the central bank will not alter its $85 billion a month asset-purchasing program known as quantitative easing.

There was one notable change in the language used in the statement from the Fed—a declaration that it would increase or decrease the pace of its asset purchases depending on economic conditions.

Buffett said he thought that Fed Chairman Ben Bernanke “feels he needs a little help from elsewhere.” In the past, Bernanke has urged Washington to reach a deal to reduce the nation’s debt burden.

“But the economy is improving,” Buffett stressed, “not [at] a very rapid clip, but this country has done well since 2008, certainly compared to much of the world.”…”

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“Year-to-date, the U.S. dollar is up; does that mean we are in a rising dollar environment? Or is it an opportunity to diversify out of the greenback?

 

Last year, with all the turmoil in the Eurozone, the euro was up 1.79% versus the dollar; that appeared to be the best the U.S. dollar could do in times of turmoil. Of the major currencies only the Japanese yen was down versus the U.S. dollar:

Year-to-date, the dollar index, a trade weighted index comparing the U.S. dollar to a basket of six major currencies, is up 2.95% as of April 29, 2013. What many are not aware is that this index has not really been updated since it was first created in the early 1970s, giving the euro a 57.6% exposure. The dollar’s downward trend has been slowed in recent years in large part by the turmoil in the Eurozone. Additionally, the New Zealand dollar for example, which is not in the index, is up 3.37% year-to-date.

To ascertain what may happen to the dollar, let’s look at the greenback from a couple of different angles:

Myth: U.S. dollar’s safe haven status

In recent years, when there has been talk about a “flight to quality” benefiting the U.S. dollar, we had a couple of observations:

•Flight to quality may be a misnomer: our analysis suggests the dollar tends to be in demand in times of turmoil because of liquidity, not quality considerations;
•Since the onset of the financial crisis, each time the pendulum swings in favor of the U.S. dollar, it may be swinging there less so;
•The balance sheet of the U.S. appears to be deteriorating at a faster pace than the balance sheets of much of the rest of the world;
•Wherever there is a crisis, it is being “patched up”, suggesting that when the pendulum once again favors risky assets, more money might flow towards those assets; and when the pendulum swings once again in favor of the U.S. dollar, it may be less and less of a beneficiary.

In other words, the safe haven status of the U.S. dollar may slowly be eroding.

Myth: a rising rate environment favors the U.S. dollar…”

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“The U.S. economy doesn’t look headed for recession in the next 12 months, but it’s no sure thing, says Bill Gross, co-chief investment officer at Pimco.

“That importantly depends on the global environment — Euroland, and how quickly they come out [of their recession,] and China, that vast mystery of growth that supposedly grows forever at 7.5-8 percent,” he told CNBC.

“I would watch those two areas to see whether or not the U.S. will be ultimately affected,” he added,

As for financial markets, “we’re not looking at Armageddon, but we’re looking at an increasingly risky environment.”

And why is that? “Because real growth has not been produced by these quantitative easing measures, and some day there will be consequences,” Gross explained.

Asked whether the stock market’s rise to record highs stems more from the Federal Reserve’s easing or improving corporate fundamentals, Gross said it’s both.

“Stock prices have been artificially elevated by the Fed’s check buying, no doubt,” Gross noted. …”

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“The Federal Reserve’s commitment to loose monetary policy is likely to lead to asset and equity bubbles in the next two years which could be worse than the previous crisis, renowned economist Nouriel Roubini said in an opinion piece for Project Syndicate.

Roubini, co-founder and chairman of Roubini Global Economics famously dubbed Dr Doom for his accurate prediction of the 2008 financial crisis, wrote earlier this week that “the problem is that the Fed’s liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk-taking in financial markets.”

“The issuance of risky junk bonds under loose covenants and with excessively low interest rates is increasing; the stock market is reaching new highs, despite the growth slowdown; and money is flowing to high-yielding emerging markets,” he added.

According to Roubini, a slow exit from the Fed’s quantitative easing (QE) policy would be similar to 2004, when the central bank began to slowly raise rates. Between June 2004 and December 2007, the Fed raised rates in 25 basis point increments. The gradual rate hikes were blamed for keeping monetary policy accommodative for too long and worsening the housing bubble….”

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“The European Central Bank on Thursday cut its main refinancing rate by 25 basis points to 0.5 percent, the first rate cut since July 2012 in a move aimed at boosting the ailing euro zone economy.

But it failed to announce any new measures to help the economy directly.

“Our monetary policy stance will remain accommodative for as long as is needed,” Mario Draghi, the President of the European Central Bank said at a press conference after the decision.

The bank also said it would keep its main refinancing operations until at least July 2014. Those operations, known as “fixed rate full allotment” allow banks under stress to access unlimited ECB liquidity at a fixed rate in return for collateral.

“The fixed rate full allotment will basically represent liquidity insurance for the banking system, so frankly, there can’t be fears of lack of funding for not lending,” Draghi said. “In other words, this is a kind of measure that benefits all banks.”

The 25 basis point rate cut was widely expected after data this week showed record high unemployment for the euro zone and lower-than-expected inflation.

Calls for the ECB to announce a funding scheme for the real economy have grown stronger in recent weeks amid evidence that the ECB’s cheap loans to banks have not trickled down to small- and medium-sized enterprises….”

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“Here’s your happy thought of the day from SocGen strategist Albert Edwards:

Over the last 15 years most investors have refused to contemplate that events in the West are playing out in a similar fashion to Japan in the 1990s. But the latest inflation data out of both the US and eurozone should ram home the fact that we are now only one short recession away from Japanese-style outright deflation. Similarly, investors refuse to believe that equities can fall in an environment of rampant QE. They are wrong.

Basically, we’re so close to deflation, that all it will take is another downturn, and we’ll be toast.

 

 

So is another recession on deck? …”

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“People have called me a “perma-bull” forever. Mish Shedlock called me a “wacko”. Zerohedge has called me insane. Nouriel Roubini has laughed in my face. My daughters still quote Don Luskin when he was on CNBC shaking his head and saying, “James, James, James…” while laughing after I said the market was going to hit new highs.

Well, the market has hit new highs. That’s ok for those guys. I’m sure they all do well on their newsletters. I have no newsletter. I only invest with my own money. I live and die in the markets and I don’t depend on anyone else.

Is there a reason to change my mind? Not really. Eventually, the market will be higher than it is now.

But for the first time in a long time, I’m not a super bull on the overall market (although I like certain smaller stocks, see below).

The overall market (let’s say, the S&P 500) price is a function of supply and demand. I know people know this from Economics 101 and they view this as a micro-economic principle but it’s also macro-economic. it’s not only the price of Oranges determined by supply and demand, the aggregated price of every company in the world is also determined by this.

So what is “Supply” in terms of the stock market? Answer: it’s the total number of shares outstanding.

What is “Demand”? It’s the appetite to buy shares.

Supply is going down. This is both a good thing and a bad thing.

The good: Companies have enormous profit margins and are using their excess cash to buy back shares. This, of course, reduces shares outstanding. When companies with $100 billion in cash like Apple buy back shares, this reduces supply for the big mutual funds, etc.

Also good: When supply goes down, price goes up. This is why the stock market right now is at all time highs.

But then there is the BAD: I am seeing first hand within the private companies that I am invested in: nobody wants to go public. How come? Private markets are valuing companies higher than the public is.

Thats really funny: the PUBLIC is actually smarter than the supposed smart money. Look at Facebook (FB), Groupon, and Zynga (ZNGA) for examples.

And even the companies that want to go public: it’s pretty damn hard. I can’t quote you statistics. I only see this because I’m getting all the calls from brokers. If a broker is calling me to dump their little shitty IPO it means they can’t get institutions in.

How come?

Demand: Everyone is still pretty nervous.

Someone asked me the other day: when will this recession be over?

Guess what? It’s been over for four years.

But people don’t seem to know that?

How come? Because they feel like shit. Because people are getting jobs less than what their skillset suggests they should get. Because people are taking jobs for pay that doesn’t match what they would’ve gotten ten years ago. Underemployment, as this is called, is supposedly around 20% but my guess is it’s more like 30-40%.

Things feel like they suck.

Nobody feels like the stock market is back. Or that housing is starting to creep up. Or that America is starting to insource manufacturing again because globalization has crept up prices  worldwide.

People look at their crappy jobs and salaries and say, “I don’t feel so good”. And so they get a scarcity mentality and don’t want to buy shares.

I don’t blame them.

Meanwhile, supply is going to flatten out. There’s only so much stock that people can buy.

So Demand will probably remain the same, but now Supply will stop going down.

What happens then? Stocks go down. Or struggle to stay afloat.

My solution: I am buying smaller stocks where I am not competing for information against massive hedge funds and mutual funds that do everything they can to cheat the system (insider trading, manipulative trading, high frequency trading, special access to secondaries, etc).

I also invest in long-term demographic trends that I believe in. These companies will do well regardless of the overall stock market. It’s why microcaps always outperform large caps in the long run.

So I’m invested in…”

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“Dis-aggregationof credit is the understanding that there are good forms of credit and bad forms of credit.  A good form of credit is something like a standard business loan in which a company obtains access to a line of credit in order to make investments in the firm.  It pays employees, invests in equipment, etc.  This form of credit, when issued prudently, is usually productive in that it helps the company expand and it rewards the lender for having taken the risk.

As a credit based money system we rely largely on the health of these sorts of loans to keep the system running smoothly.  But there are also bad forms of credit.  For instance, when a homeowner decides they want to speculate on real estate as an investment because they (incorrectly) believe real estate can outpace inflation over the long-term.  We could make this matter even worse by repackaging the original loan and selling it off to new investors as AAA rated securities.  In other words, disaggregation of credit was a core piece of the 2008 crisis.

I think another sign of disaggregation of credit is the extraordinary growth in borrowing that occurs around stock market booms.  As the market surges we inevitably see a sort of ponzi effect in the market where more confidence breeds more credit and the bidding up of prices.  It works until it doesn’t and when it doesn’t the air sure comes out fast.

So it’s rather alarming to see NYSE margin debt just shy of its all-time high….”

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Inflation is well anchored,

Purchase expected to be continued until outlook for labor market has improved substantially,

The Fed will change policy only when inflation becomes a problem or unemployment improves,

Inflation is running below expected long term rate,

Only one dissenter in today’s decision,

Markets largely unchanged currently down 108 on the DOW

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