Fri Aug 31st – Today is Jackson Hole day, which you already knew. Investors have been anticipating a word from their bearded Santa Claus – Bernanke – for weeks if not months now. S&P futures are up 80 basis points roughly 40 minutes before “the event” (which doesn’t necessarily mean a whole lot).
Ben doesn’t want to muck up the chilled out scenery of Jackson Hole by making it into a policy signaling event, and he has the next Fed meeting in a couple weeks. If something big comes out of this meeting, it will be a real surprise. Early equity strength may be pinned to the hope that BB “jawbones” in satisfying fashion, giving sufficient hints to keep hope alive if not actually promising anything.
The real surprise will be if Bernanke chooses to give the markets some stern medicine, or a touch of cold shoulder. That probability is absolutely not baked into the cake (given the premarket action) and could ignite a swift selloff.
Elsewhere – as the Jackson hole focus is damn tiresome and thankfully close to over – two think pieces on China showed a powerful contrast.
One of them, titled “China is Okay,” was a bullish puff piece by ex Morgan Stanley guy Stephen Roach. The other, Everything You Know About China is Wrong, was a brutal takedown of the China dominance case by Minxin Pei.
Stephen Roach is one of the few unabashed China supporters left (or at least one of the few we pay attention to). The “China is okay” piece makes him sound like an out-and-out shill, shredding what credibility he might have had remaining as even a slightly impartial observer. The Roach piece was so bad, in fact, his case should actually encourage bears, and be a source of worry for China investors, because there was so little positive material to work with.
In essence, Roach actually has the chutzpah to base his “China will have a soft landing” case on the notion that, no really, all those ghost cities weren’t built to artificially inflate GDP – they were built because China will need them soon. Have faith in the great urbanization, Roach says. Have faith in the planners. In the face of major and mounting evidence that China’s hard landing risks are severe – more coming in each day – that’s all he’s got. It’s terrible, really. He should have turned down the op-ed.
The other piece, by Minxin Pei, is enough to make Jim Rogers shatter his brandy snifter against the wall. Minxin Pei argues, aggressively but convincingly, that the West has a history of fearing nation-state boogeymen, and China’s purported rise to dominance is a hollow-shelled fraud playing to that insecurity – sort of a cross between 1980s Japan and the old Soviet Union, which were both touted as up-and-coming world dominators prior to implosion.
Both pieces have their drawbacks. Roach’s soft landing piece felt like it was paid for by some PR committee working out of Beijing. (And maybe it was?) Minxin Pei, for all intents and purposes, sounds like someone who despises China.
But putting animosity feelings aside, the weight of historical evidence is on the side of the skeptics. Signs of corruption are rampant. China has aped the West’s foolish stimulus policies, likely fueling huge malinvestment. No economy in all of history has seen a run like China’s without seeing a severe hard landing, or some other form of mettle-testing crisis, in its early to mid growth stages. (Just think what America went through in the 20th century.)
All in all, China is most definitely not ok, and those who argue otherwise for the sake of pleasing whatever clients or masters they have in Beijing and Shanghai are simply making spectacles of themselves.
- “China is Okay” by Stephen S. Roach | Project Syndicate
- Everything You Think You Know About China Is Wrong
The two pieces mentioned above.
Yet more evidence the risks remain elevated…
It’s hard to know with Bill Gross – is he making a prognostication he genuinely believes, or is he just talking Pimco’s massive book? More QE would be a nice booster for PIMCO’s mortgage bet.
The argument is that the Fed will keep pounding away as long as unemployment stays elevated. But this cannot continue indefinitely, no matter how much investors might wish it to.
At some point, it becomes apparent that a large degree of US unemployment is now structural, not cyclical, and further some rubicon will be crossed where it is clear to even the most hard-headed of believers that QE is hurting more than it is helping. We are not there yet. But if the economy remains in a state of stagnation, rather than reaching escape velocity, there will come a day when the Fed’s credibility is lost and fears of the ‘liquidity trap’ then dominate.
- Distressed Home Prices Jump With Inventory Shrinking
- Don’t Believe the Near-Term Data, No Housing Bottom
According to the National REO Brokers Association, more than 50 percent of homebuyers nationwide are investors, paying 5 to 25 percent above market prices. Distressed home inventory is selling out.
On multiple levels this is good news, but does it really qualify as an honest to goodness foundation for a housing recovery? It just makes you wonder when Wall Street appears to be financing the thing, versus real organic demand.
Right now home values are being pushed up by eager investors competing with each other to snap up supposed sure-thing property bids. But what happens when that self reinforcing trend fizzles? And what kind of market strength will all these investors be selling into?
Without attempting to fight the short term trend, we are still more inclined to the view of Anthony Randazzo, of the Reason Foundation, who makes a clear-cut case that the recent pop in the Case Shiller numbers is likely a short term blip within a trend of longer-term decline.
Don’t underestimate the potential for weather and geopolitics to throw a monkeywrench into global economic recovery hopes (which were already weak at best)…
- Major US indices gapping down prior to Jackson Hole, gapping up day of?
- Friday final chance for “last deep breath of summer”
- Euro (EURUSD) bull flag breakout to confirm multi-week uptrend
- 10 year, 30 year still above 20 and 50 EMAs
- $USD (UUP) above 200 EMA support
- Emerging markets, China (EEM, FXI) in freefall
We are positioned short headed into Jackson Hole – though without major risk on the table – and are frankly not much interested in the bull case. This is a matter of pot odds (to use a poker term), as expressed in potential for follow-through: A further upside ramp from here has greater probability of stalling or reversing in the short term, whereas an expression of disappointment, even if lower in probability terms as a likely event, has much greater “snowball” potential in terms of building into a major move w/ US indices extended near multi-year highs. Per the usual, all positions and real-time rationale available via the Live Feed.
p.p.s. If you haven't already, check out the Mercenary Live Feed!