The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Two interesting long term charts to help put today’s action into a bit of perspective: Both of these are sourced from JP Morgan funds:

The first chart shows various US Bear markets since 1980, and the Bull markets that followed. That may be cold comfort to people who are caught leaning the wrong way today, but its a reminder that “This too, shall pass.”

The second chart shows what it will take to recover the 2007 peak (note this is dated June 30th, and thus is from higher levels. Add 10% or so to the numbers).

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Source: BLS, FactSet, J.P. Morgan Asset Management.
Data reflect most recently available as of 6/30/11.
Source: JP Morgan funds

Interesting stuff!

Source:
What Is The Internet Doing To Our Brains?
Curiosity Counts

From Visible: UPDATED!

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Click To Enlarge Infographic:

Source:
The Idiot’s Guide to the S&P Credit Downgrade
Visible, August 17, 2011

Governor Perry and Fed Independence
David R. Kotok
August 18, 2011
www.cumber.com

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For the past twelve years, this writer has chaired the Central Banking Series of the Global Interdependence Center. The purpose of this series is to develop an understanding of central banking and to communicate the different views about central bank policy.

As its principal function, the Global Interdependence Center acts as a neutral facilitator for dialogue, conversations, discussions, explanations, and education. Policy making, research, studies of implementation, alternatives to implementation, distinguishing features among the central banks – all of these are among the items that are discussed and studied during this series.

One of the conclusions reached over the years and affirmed numerous times is the importance for citizens, investors, bankers, individuals – everyone who is concerned with finance and economics – to defend the independence of the central bank and to permit the central bank to function without political interference.

History has a terrible record when it comes to political interference in central banking. Under the worst circumstances, we get hyperinflations, like the Weimar Republic or Zimbabwe. In cases such as these, the central bank is completely folded into the government, succumbing entirely to the political whim of the individual in power. The more politics get involved with central banking, the worse the outcome.

History holds no examples of a benign governmental interference. Over time, there may have been some temporary interludes of positive intervention, but they remained short in length and deficient in output.

The bottom line is simple: the government is best contained by creating a barrier between the executive branch and the central bank of the country.

In the United States, we have now had a new phenomenon injected into our presidential race. A presidential candidate, Governor Rick Perry of Texas, has attempted to intervene and pledged to do so if he becomes president. He has used political campaign rhetoric to threaten the Chairman of the Federal Reserve; and when asked in detail about it, he subsequently affirmed his position.

Governor Perry did not have to do so. He could have said, “I am worried about central bank policy; it is something to be examined. We have to have an independent central bank, but we also need to watch what they do and weigh in on conversation.” That is not what Perry did. Perry reiterated the threat.

There is great danger in this notion that the United States of America could tolerate a president who would use the early stages of his political campaign to vilify the Chairman of the Federal Reserve and to threaten intervention in central bank policy making.

The Federal Reserve Act established staggered fourteen-year terms for the seven governors of the Federal Reserve board. The reason was to attempt to eliminate the interference of the executive branch. We have seen the corruption and destruction of central bank independence in the Federal Reserve appointment process. It occurred under President Bush when Senator Dodd, Chairman of the Senate Banking Committee, held up appointments. It happened again under President Obama when Senator Shelby, senior Republican on the Senate Banking Committee, held up an appointment. We now see additional uncertainty introduced as President Obama attempts to appoint new governors to the unfilled positions.

Readers, please note that the Federal Reserve, the central bank of the United States, has not had a full complement of seven governors during the entire financial crisis and the period following. Not one day did we have the benefit of the full board.

Is it not time for seasoned politicians who want to lead us declare their commitment to independent central banking? This does not mean they give up congressional oversight or the liberty to express their opinions. It does mean they cease to threaten and allow central banking functions to take place as much as possible outside the political spectrum.

Governor Perry of Texas should think about what he has done. I cannot recall any other presidential candidate taking such an extreme position. One exception may be a Congressman from Texas by the name of Ron Paul, who has called for the abolition of the central bank and sponsored the notion of the gold standard. Is Governor Perry claiming he wants to return to the gold standard? If so, let him say so.

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David R. Kotok, Chairman and Chief Investment Officer
Cumberland Advisors
www.cumber.com

click for larger graphic

Recalculated with base of 100.

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Gold! Are a new class of investors treating it like Treasuries?

The evidence: A stunningly high correlation of Gold to 20+ Year Treasuries (Symbol: TLT) from July 21 through August 16 is 0.89. Over that period, Gold is up 12.3%, while Treasuries up 11.8% (not counting today’s spasm).

Contrast this to a correlation of 0.5 over the periods July 21, 2009 – July 21, 2011 and it appears Gold and Treasuries are now behaving as one and the same, moving in lockstep fashion. Of course, Treasuries are a much broader and deeper market, and a move in Bonds represents trillions of dollars of activity, versus Gold, which is orders of magnitude smaller.

Perhaps investors who might otherwise flock to Treasuries during risk-off modes are now flocking to Gold? After all, S&P cannot downgrade a metal…

Source:
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC

Michael A. Gayed, CFA is Chief Investment Strategist at Pension Partners, where he structures portfolios. Prior to this role, Michael served as a Portfolio Manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Michael earned his B.S. from New York University, and is a CFA Charterholder.

11 million light-years away, deep inside the massive spiral galaxy Centaurus A (also known as NGC 5128), baby stars are bursting into existence. Although these enigmatic events appear to be choked by a thick shroud of dust, the Hubble Space Telescope has looked into the cosmic smog, revealing previously unseen intricacies of this well-known galaxy.

Below: The new Hubble image superimposed over an older photograph of Centaurus A, showing the region of detail.

Source:
Hubble Stares Deep into Dust-Choked Galaxy
Discovery News

The Dow was off 500 points, S&P down 60 points, and the Nasdaq down almost 150 points.

Quite astonishing to see the US 10 year bond with a one handle. Kudos to David Rosenberg, who wins his bet with Mark Faber over the below 2% yield.

As noted August 1, I have limited exposure to equities — mostly value indices, some managed funds that can run up heavy cash positions. Our tactical portfolio flipped form 100% stocks in June to 50/50 stock/bonds in July to 100% bonds in August.

All told, not a bad day to be a bear . . .

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Previously:
Lightening Up on Small Caps, Emerging Markets (August 1st, 2011)

There’s Something Happening Here . . . (August 2nd, 2011)

Sell the Bounce (August 3rd, 2011)

Man the lifeboats: This is not a drill! (August 7th, 2011)

Some interesting links for your market collapsing pleasure:

• U.S. Inquiry Eyes S.&P. Ratings of Mortgages (NYT); see also Fed Eyes European Banks (WSJ)
• Market psychology, high unemployment and rational bubbles (VOX)
• Gold Demand Falls 17%: World Gold Council (Bloomberg) see also Gold’s Newest Believers (Smart Money)
• Swensen: The Mutual Fund Merry-Go-Round (NYT)
• It’s the military, stupid (Reuters)
• BofA Mortgage Risk May Rise in MBIA Case (Bloomberg) see also BofA Said to Weigh Foreclosure Pact That Allows New York Probe (Bloomberg)
• Plosser calls Fed’s low rate pledge “inappropriate” (Reuters)
• Obama Plans Package to Boost Economy (Bloomberg) see also White House Debates Fight on Economy (NYT)
• Descended From Apes, Acting Like Slime Molds: Nathan Myhrvold (Businessweek)
• Is Google+ starting to get on Facebook’s nerves? (Gigaom)

What are you reading?

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Preface: Liberals shouldn’t ignore the media’s censoring of Ron Paul’s popularity in straw polls because he’s “on the right”. Many progressive candidates have been shut out of political races by the big corporate media.

Corporate Media Admit They Censor Ron Paul

CNN and Politico admit that the mainstream media is in the business of picking candidates:

The big media simply delete Ron Paul from their polls, even though Paul scored very highly in the Ames Iowa straw poll – and virtually every poll taken recently.

Indeed, CNN noted in May that Paul had the best chance of any Republican of beating Obama.

“Not Electable” Is Code for “Challenges the Powers-That-Be”

The pundits claim they are only censoring candidates who are “not electable”. But just as “not politically feasible” is code for “the powers-that-be don’t want it”, “not electable” simply means that the candidate would champion the interests of the little guy, and challenge the powers-that-be: the large defense contractors, the giant banks, big pharma or the mega-energy producers.

As Kara Miller notes, the media won’t cover Ron Paul:

because he doesn’t fit the media narrative. He’s anti-war and pro-small government …. Heavily influenced by each other, media outlets have sidelined Paul and embraced Bachmann ….

Corporate Media Always Serves the Rich and Powerful, And Acts As A Booster for War

In fact, the corporate media have long been presstitutes for the rich and powerful, and knee-jerk in supporters of all wars.

They have always shut out candidates from either the left or right who challenge America’s imperial wars, America’s imbalanced policy towards Israel, the perpetual bailouts of the giant banks, Federal Reserve policy, or the inherent right of big corporations to do get all of the benefits of corporate personhood, without any of the responsibilities of being a person.

The corporate media is owned by a handful of giant defense contractors. As I’ve previously noted:

The government has allowed tremendous consolidation in ownership of the airwaves during the past decade.

Dan Rather has slammed media consolidation:

Likening media consolidation to that of the banking industry, Rather claimed that “roughly 80 percent” of the media is controlled by no more than six, and possibly as few as four, corporations.

This is documented by the following must-see charts prepared by:

• Media Channel

• The Nation

• Free Press

And check out this list of interlocking directorates of big media companies from Fairness and Accuracy in Media, and this resource from the Columbia Journalism Review to research a particular company.

This image gives a sense of the decline in diversity in media ownership over the last couple of decades:

Big Media Promotes Those Who Sound Empathic … But Will Serve the Status Quo

These handful of giant corporations wield enormous power. Just think Rupert Murdoch.
The last thing they want is a candidate who will shake things up.

The people’s wishes? They are wholly irrelevant to these media behemoths. Indeed, these big companies have a vested interest in picking candidates who are good at acting like they care about the little guy, but who actually couldn’t care less about the average American, and have no problem picking his pocket at the first opportunity.

July CPI rose .5% m/o/m headline (est was up .2%), the most since June ’09 and the y/o/y gain is now 3.6%, matching the highest since Oct ’08. Ex food and fuel saw a .2% m/o/m gain and a 1.8% y/o/y rise, both in line with forecasts. The absolute CPI index, aka the cost of living, is again at another record high. Energy prices rose 2.8% after a 4.4% decline in June and food prices rose .4%. Owners Equivalent Rent, 25% of CPI, rose .3%, the biggest gain since Nov ’08 and is a major problem for the Fed as landlords gain pricing power as the home ownership rate declines and vacancies fall. Apparel prices rose 1.2% and it’s the 3rd month in a row of 1%+ gains. Used car prices rose .7% but new car prices were flat. While markets and the Fed are betting on a fall in inflation readings over the next year as measured by the implied inflation rate in the TIPS and comments from the Fed, the data is proving more sticky than thought. To humanize the 3.6% y/o/y inflation reading, the average saver is getting less than .5% on a bank account, thus in real terms, savings of the savers are getting confiscated everyday by the Fed and for the average worker, wages and salaries as of June are up 3.4% y/o/y, thus running in place. With this week’s inflation data as a backdrop and as we look to Jackson Hole next week, some think Bernanke is going to announce something more but we already got quasi QE3 on Aug 9th in the face of 3 dissenters so don’t expect anything.

Initial Jobless Claims totaled 408k, 8k higher than expected and last week was revised up by 4k to 399k. The 4 week average did fall however to 403k from 406k, the lowest since mid April. Continuing Claims rose by 7k and were just a touch above estimates. Extended Benefits fell by a net 44k. Bottom line, encouragingly the pace of firings are moderating to near the lowest since summer of ’08 but the level of hiring’s of course remain still at a sluggish pace and well below what is needed to put a real dent in the unemployment rate.