Pimco, the $1.5 trillion fixed-income manager located a stone’s throw distance from my office in Newport Beach, famously (or infamously) coined the phrase, “New Normal”. As former Pimco CEO (Mohamed El-Erian) described years ago, around the time of the Great Recession, the New Normal “reflects a growing realization that some of the recent abrupt changes to markets, households, institutions, and government policies are unlikely to be reversed in the next few years. Global growth will be subdued for a while and unemployment high.”
As it turns out, El-Erian was completely wrong in some respects and shrewdly prescient in others. For instance, although the job recovery has been one of the slowest in a generation, 14.5 million private sector jobs have been added since 2010, and the unemployment rate has been more than halved from 10% in early 2009, to below 5% today. However, the pace of global growth has been relatively weak since the 2008-2009 financial crisis, which has forced central banks all over the world to lower interest rates in hope of stimulating growth. Monetary policies around the globe have been cut so much that almost 25% of global GDP is tied to countries with negative interest rates (see chart below).
Source: Financial Times
The European central banks started the sub-zero trend in 2014, and the Bank of Japan recently joined the central banks of Denmark, Sweden and Switzerland in negative territory. The negative short-term rate virus has spread further to long-term bonds as well, as evidenced by the 10-Year German Bund (sovereign bond) yield, which crossed into negative territory last week (see chart below).
The New Abnormal
The unprecedented post-crisis move to a 0% Fed Funds rate target, along with the implementation of Quantitative Easing (QE) by former Federal Reserve Chairman Ben Bernanke, was already pushing the envelope of “normal” stimulative monetary policy. Nevertheless,…
These are the Federal Reserve’s expectations for where interest rates are headed, by year, from a Washington Post op-ed by Larry Summers. Suffice it to say, it’s not going well.
That orange line – let’s take a guess which direction it’s headed.
Here’s Sir Lawrence:
Watching the Fed over the last year there is a Groundhog Day aspect. One senses they really want to raise rates and achieve a more “normal” stance. But at the same time they do not want to tighten when the economy may be slowing or create financial turmoil. So they keep holding out the prospect of future rate increases and then find themselves unable to deliver. But they always revert to holding out the prospect of rate increases soon, partly for internal comity and partly to preserve optionality.
Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or turn a profit — and more importantly, do it consistently. How do they do that?
That's an age-old question. While there is no magic formula, Elliott Wave International's Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. Maybe you'll find some helpful ideas from Jeffrey's observations.
The following is an excerpt form Jeffrey Kennedy's Trader's Classroom Collection eBook.
Why Do Traders Lose?
If you've been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn't seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can't seem to prevent that invisible hand from depleting your trading account funds.
Which brings us to the question: Why do traders lose? Or maybe we should ask, "How do you stop the Hand?" Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.
Fatal Flaw No. 1 — Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won't work over the long run. If you don't have a defined trading methodology, then you don't have a way to know what constitutes a buy or sell signal. Moreover, you can't even consistently correctly identify the trend.
How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly,
"The American Dream is that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement."
That idea – and those words, written by James Truslow Adams in 1931 – forms the foundation upon which the country was built.
But that foundation has cracked.
It’s one thing to fantasize about living the American Dream from regions outside the United States. It’s another to be already living in America and to not be able to attain it.
And while the American Dream ensures that no one is legally barred from reaching their full potential, it doesn’t prevent individuals from being held back in other ways. After analyzing the cost of living and median income levels in 74 U.S. cities, we found significant obstacles to obtaining the American Dream across the country.
Picture Perfect, American Dream–Style
Imagine it: You own a 1,480-square-foot home with a one-car garage, perfect for your family of four and all your needs, all nicely contained by a manicured front lawn and a white picket fence. You also have the funds for two adults-only dinner dates and one trip to the movies per month.
Sounds nice, right? That version of material wealth and comfort will cost you roughly $3,547 per month, or $42,548 per year.
The bulk of your expense is not even the mortgage; instead, it’s the monthly groceries. Clearly, you have very hungry mouths to feed.
Based on three criteria, we can easily divide the 323.5 million people living in the United States into “those who can afford to live on easy street” and “those who cannot” – the “haves” and “have-nots,” a concept that American literature has widely explored and that American citizens experience every day.
This chart shows how much the Bureau of Labor Statistics (BLS) suppresses rent inflation in its CPI measure. It’s a major tool the government uses to suppress CPI.
A problem with the economic establishment’s focus on the CPI to measure “inflation” is that the CPI was never intended to measure “inflation” per se. Its purpose has always been to index government benefits, salaries, and contracts. The goal is to keep costs down by manipulating index to increase at the lowest possible rate that the BLS can present to the public with a straight face and the pretense of statistical accuracy.
The biggest tool that the BLS gives for manipulating CPI is the idea that housing prices do not count toward inflation because houses are assets, not consumption goods. Apparently the rationale is that assets don’t “inflate,” they “appreciate.” The BLS historically included house prices in CPI, but that became problematic because they were increasing too fast, pushing CPI up at a rate which the government simply could not afford. So the BLS stopped including house prices in CPI in 1982 after a couple of years of double-digit increases in CPI. In the place of actual housing inflation, the BLS substituted a made-up number called Owner’s Equivalent Rent (OER) .
The BLS starts with a survey of renters re how much rent they are currently paying. That becomes the basis for a line item in the CPI called Rent of Primary Residence. The BLS uses that item as a basis for annually benchmarking OER. Then they ask a tiny sample of homeowners how much they think their house would rent for. The BLS uses that survey of owners to estimate the rate of increase in OER, between the benchmark rent surveys. This method of “measuring” rent increases has consistently and systematically suppressed the recognition of the actual inflation rate of rent.
Anyone who spent half their life in the real estate business and anyone who has ever rented an apartment for a few years and then moved to another apartment, knows well that rent after a couple of years living in the same place is not the same as what the rent would be if they were moving to a comparable apartment.
The rent you are paying after you have lived in a place for a few years is set by the initial
In the wake of Orlando, I feel somewhat ambivalent about dragging us back to the world of economics. As I write this note, it is still unclear what the reaction of the country will be to the largest shooting massacre ever on US soil. Everywhere I turn, it seems that people are trying to spin this in one direction or another, always filtered through their own worldviews.
My friend David Kotok of Cumberland Advisors frequently offers common-sense commentary on a wide variety of topics, and he sent out his observations on the recent tragedy with a good summary of the rather stark and unpleasant choices in front of the American people. We are using drones to kill American citizens in Yemen. The surveillance of Americans is already intense. The terrorist in Florida was a homegrown American citizen and had already been investigated twice by the FBI. You can read David’s commentary here. This event has major implications for surveillance and what will pass for privacy in the future. Guaranteed to make Baby Boomers uncomfortable.
But moving on, for your Outside the Box reading today I bring you something I never expected to see: Ambrose Evans-Pritchard, writing in his regular Telegraph column that he is going to vote for leaving the EU, that is, for Brexit. Ambrose is unabashedly pro-European, while being very critical of the European Commission and the way Brussels runs things; but he is also a patriotic British citizen (who mostly lives in France, I think). His access to the inner circles of Europe is amazing and leaves me a tad jealous. His explanation as to why he will vote to leave the EU doesn’t focus on the usual rhetoric (which I think he probably disdains). Rather it is a thoughtful analysis of the role of nation states and the significance of national sovereignty.
He leads off like this:
With sadness and tortured by doubts, I will cast my vote as an ordinary citizen for withdrawal from the European Union.
Let there be no illusion about the trauma of Brexit. Anybody who claims that Britain can lightly disengage after 43
Most of the headlines in recent weeks have focused on Brazil’s troubling political crisis. But the country is also in the midst of a deep economic recession.
The economy has been shrinking since the second quarter of 2014. It contracted by 3.8 percent in 2015 and is expected to shrink by a similar amount this year. Earlier this month, the Organisation for Economic Co-operation and Development (OECD) said it sees the recession continuing into 2017.
Yet it was only in 2009 – in the middle of the global financial crisis – that the Economist magazine featured a story entitled “Brazil takes off,” with a photo of the Corcovado – the iconic statue of Christ that overlooks Rio de Janeiro – launching like a rocket. That article emphasized why Brazil deserved to be one of the “BRICs” – the rapidly growing economies including Russia, India and China that now account for nearly 25 percent of global GDP.
How could the outlook for Brazil have changed so rapidly? Is this sort of boom and bust unprecedented or a recurring theme in Brazil’s history?
In this article, we provide a historical perspective on the current economic crisis, relying on our own scholarship and years of analysis of the Brazilian economy.
Brazil has been knocking at the door of the developed world for quite some time.
From 1900 to 1980, Brazil had one of the fastest-growing economies in the world. Income per capita rose faster in Brazil than in the U.S. The country was transformed from a rural, agricultural economy – producing coffee, sugar and other products for export – into an urban, industrial powerhouse.
Yet a closer look at Brazilian economic history reveals frequent cycles of boom and bust, where considerable optimism fell by the wayside, leaving behind unfulfilled dreams. The future, it seems, has…
With many students graduating with high debt loads, a growing number of students are becoming delinquent on their loans. The most recent estimate by the Federal Reserve Bank of New York estimates the percent of 90+ day delinquent loans to now be at 11.0%.
This puts student loans at a higher delinquency rate than credit cards (7.6%), auto loans (3.5%), and mortgages (2.2%). It’s also particularly interesting because historically credit cards have had the highest rates among all types of consumer credit. Despite this, student loans “passed” credit cards in delinquency frequency at the end of 2012.
Why are student loans the most troubled form of consumer debt right now? It’s the result of a clear mismatch between supply and demand for college-educated workers.
The Overeducation Bubble
Have college graduates been oversold on the prospects of a college degree? Or is the market for high-paying jobs not materializing as expected in the current low-growth economy?
Either way, many college grads are punching below their weight in the job market. In a 2014 study, economists affiliated with the Federal Reserve Bank of New York found that up to 49% of recent college graduates aged 22 to 27 were working in careers that do not requite any college education.
Based on this and other factors, renowned investor Peter Thiel has called higher education to be a bubble:
If a college degree always means higher wages, then everyone should get a college degree. But how can everyone win a zero-sum tournament? No single path can work for everyone, and the promise of such an easy path is a sign of a bubble.
In a 1997 U.S. News and World Report survey, 1,000 Americans were asked the following question: “Who do you think is most likely to get into heaven?” According to respondents, then-president Bill Clinton had a 52 percent chance; basketball star Michael Jordan had a 65 percent chance; and Mother Teresa had a 79 percent chance.
Guess who topped even Mother Teresa? The people who completed the survey, with a score of 87 percent. Apparently, most of the respondents thought they were better than Mother Teresa in regards to their likelihood of getting into heaven.
As the results of this survey suggest, most of us have a strong desire to view ourselves in a positive light, especially when it comes to honesty. We care very much about being moral.
In fact, psychological research on morality shows that we hold an overly optimistic view of our capacity to adhere to ethical standards. We believe that we are intrinsically more moral than others, that we will behave more ethically than others in the future and that transgressions committed by others are morally worse than our own.
So, how do these beliefs of our moral selves play out in our day-to-day actions? As researchers who frequently study how people who care about morality often behave dishonestly, we decided to find out.
One key result of our research is that people engage in unethical behavior repeatedly over time because their memory of their dishonest actions gets obfuscated over time. In fact, our research shows, people are more likely to forget the details of their own unethical acts as compared to other incidents – including neutral, negative or positive events, as well as the unethical actions of others.
We call this tendency “unethical amnesia”: an impairment that occurs over time in our memory for the details of our past unethical behavior. That is, engaging in unethical behavior produces real changes in memory…
Both Janet Yellen and Mark Carney may have previously announced they would withdraw from the ECB's Forum in Sintra, Portugal (due to pressing market stabilization issues), but it was what Mario Draghi said here that has captured the market's attention this morning. The head of the ECB avoided mentioning the U.K.’s vote to leave the European Union but instead called for greater alignment of policies globally to mitigate the spillover risks from ultra-loose monetary measures.
“We can benefit from alignment of policies,” Draghi said a...
By Jacob Wolinsky. Originally published at ValueWalk.
Bill Gross on ‘What’d You Miss'”>Bill Gross on ‘What’d You Miss’
Streamed live 5 hours ago
Today on ‘What’d You Miss,’ co-hosts Scarlet Fu & Alix Steel bring you live coverage of the market close and talk to Standard & Poor’s Chief Global Economist Paul Sheard about the G7 meeting. We’ll also bring you Erik Schatzker’s interview with Bill Gross, live from FI16 in Los Angeles (http://la.bbgfi16.com/). We’ll hear from the bond king on central bank policy and his outlook for global growth.
‘What’d You Miss’ with Alix Steel, Scarlet Fu, and Joe Weisenthal airs every weekday on Bloomberg TV from 4 – 5 pm ET:
Global markets erased another $69.2 billion from the combined net worth of the worlds 400 richest people Monday, bringing the total since the U.K. shocked investors with a vote to leave the European Union to $196.2 billion in the last two trading days.
Friday's global selloff continued today as the S&P 500 plunged at open and continued through the morning. The sell-off recovered slightly over the following hours, but hit its -2.24% intraday low in the final hour. The index continues in the red at -2.12% year-to-date.
The flight to treasuries continued today. The 10-year note closed at 1.46%, down 11 basis points from the previous session.
Here is a snapshot of past five sessions in the S&P 500.
Here is a daily chart of the index, which has dropped below its 50-day moving average. Volume, as we mentioned above, increased dramatically.
Here's a look at the VIX volatility index, the celebrated "fear gauge" market indicator. Today's selloff continued well...
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Long before last weeks Brexit vote, Germany’s DAX index has been an upside and downside global stock market leader, over the past few years. Below looks at the pattern the DAX has created over the past decade.
CLICK ON CHART TO ENLARGE
Since mid 2009 the DAX has remained inside of rising channel (A). The top of this channel was hit in April of 2015. Since hitting rising channel resistance, the DAX has ...
I have mixed feelings about Brexit today. Clearly the European institution need reforming. The addition of so many countries in the last 20 years has created a top heavy administration. The Euro adds more complexities to the equation as the ECB policies cannot fit every country's problem. On the other hand, a unified Europe has advantages as well – some countries have benefited from the integration.
For Britain, it's hard to say what the final price will be. My guess is that Scotland might now vote for independence as they supported staying in Europe overwhelmingly. Northern Ireland might be tempted to leave as well so possibly RIP UK in the long run. I was talking to some French people and they were saying that now there might be no incentive for France to stop immigrants from crossing over to the UK like they do now and simply allow for travel there and let the UK deal with them. The end game is not clear to anyone at the moment....
One week ago, when bitcoin first crossed above $700 on the seemingly insatiable Chinese buying which we forecast last September (when bitcoin was trading at $230) would take place as a result of China's capital controls (to much pushback by the "mainstream" financial media), we tried to predict what may happen next. We said that "it could go much higher. That said, anyone who bought last September when the digital currency was trading at $230 may be advised to take some profits, and at least make...
After a three-year bull run that more than quadrupled its value by its peak last July, IBD’s Medical-Biomed/Biotech Industry Group plunged 50% by early February, hurt by backlashes against high drug prices and mergers that seek to lower corporate taxes.
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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