Personal Finance

Today is the big day (2pm EST)

Investors are on the edges of their seats, waiting to find out what the Fed will do.

Taper? No taper? Or maybe it will taper on the tapering off?

Our guess is the Fed will not commit to a serious program of reducing its support to the bond, equity and housing markets.

It’s too dangerous.

Ben Bernanke – the man who didn’t see the housing crash coming – won’t want to see the stock market collapse just before he leaves office. He’ll want to go out on a high note…

…and that means guaranteeing more liquidity.

Investors don’t seem worried. Monday, the Dow rose 130 points. Gold was up $10 an ounce.

Most of the reports we read tell us the economy is improving. Unemployment is going down. Meanwhile, manufacturing levels are rising.

Compared to Europe, the US is a powerhouse of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence.

How much do investors love the US?

Let us count the ways:

1. GDP per capita is running 7% – ahead of where it was in 2007. Among the world’s major developed economies only Germany can boast of anything close. All the rest are falling behind.

2. The budget deficit – which was running at about 10% of GDP – is now down to just 4% of GDP.

3. Unemployment is going down, too. Heck, just 7 out of 100 Americans are officially jobless. Didn’t Bernanke say he would tighten up when it hit that level?

4. And look at prices. Consumer price inflation is running at just 1% over the last 12 months. No threat from inflation, either.

Statistical Folderol

But wait…

What if all these things were delusions… statistical folderol… or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along?

Well, dear reader, you surely expect us to tell that the US economy is a hidden disaster… and we won’t disappoint you.

GDP? Carmen Reinhart studied the performance of rich economies following a financial crisis. Her paper, “After the Fall,” showed that, six years after a crisis, per capita GDP was typically 1.5 percentage points lower than in the years before the crisis. But in the US, per capita GDP growth is running 2.1% lower than its pre-crisis level – significantly worse than average.

Deficits? Super-low interest rates have helped debtors everywhere. “Never have American companies brought a greater share of their sales to the bottom line,” writes Bill Gross. How did they do that? Largely by taking advantage of the Fed’s interest rate suppression program. But hey, the US government is the world’s biggest debtor. It is the primary beneficiary of the Fed’s miniscule rates.

That’s part of the reason why deficits are low. Let the yield on the 10-year T-bond return to a “normal” 5%, and we’ll see deficits soar again. (Interest payments, under this scenario, would add an additional $360 billion a year to the deficit.)

Besides, it’s not only the deficit that counts. It’s also the total level of debt… and particularly the debt financed with funny money from the Fed.

Only twice in US history has the ratio of US Treasurys held at the Fed gone over 10% – once in 1944 and again today. The first time, it was a national emergency: World War II. Now, the Fed is merely fighting to protect a credit bubble.

Inflation? Yes, consumer price inflation is low. But what that shows is that real demand is still in a deleveraging trough. The money multiplier – the ratio of money supply to the monetary base – collapsed in 2008. It has not come back. Neither has the economy.

Unemployment? The rate has been doctored by removing people from the labor pool. The workforce is now smaller – as a percentage of the eligible pool – than at any time since 1978.

Besides, what is important is not the rate, but what people get from employment. On that score, it is a catastrophe. According to a Brookings Institution study, the average man of working age earns 19% less in real (inflation adjusted) terms today than he did during the Carter administration!

A Strange Kind of Recovery

What kind of economy is it that reduces a man’s wages over a 43-year period?

We don’t know. But it’s not likely to win any prizes.

But why, with so many strikes against it, does the US economy still have the bat in its hands?

It’s partly because the Fed has pumped up stock, bond and house prices – not to mention net corporate profit margins (by reducing the interest expenses on corporate debt) and consumer spending (through entitlement programs funded through the Treasury with ultra-low interest rates). So, the averages look pretty good… and they mask the ugliness beneath them.

The rich got richer on the Fed’s EZ money. But the average “capita” is actually poorer.

The bottom 90% of the population – people in 9 houses out of 10 – have 10% less income than they had 10 years ago.

This is not a success story. It’s a disaster. And not one that tempts us into an overvalued US stock market.

Regards,

Bill

P.S. This is also the conclusion of our investment team at Bonner & Partners Family Office,the family wealth advisory service we set up with our eldest son, Will. We’ve received a number of enquiries about how to get access to our research. We’re not accepting new membership applications right now. But Will is considering making some places available to Diary readers. So look out for more on that soon.

Top Stories
World equities throw off pre-Fed caution. Helped by positive economic news (see below), global stock markets were mostly higher at the time of writing ahead of an announcement by the FOMC today over whether it will start the taper, with investors seeming to throw off their usual caution and nervousness about these things. Derek Halpenny of Bank of Tokyo-Mitsubishi UFJ reckons that a taper announcement would not only not hurt stocks but could even encourage a year-end rally, as it would help clear up uncertainty.

Apple still in talks with China Mobile over iPhone deal. Apple (AAPL) hasn’t yet sealed a deal with China Mobile (CHL) for the latter to sell iPhones, with its chairman, Xi Guohua, saying that the companies are still in talk. Earlier this month, the WSJ reported that the deal could be unveiled today, but Xi’s comments suggest otherwise.

Top Stock News
BP in major oil find but also writes off $1.1B. BP (BP) has made a significant oil discovery at its Gila prospect in the Gulf of Mexico, which the U.K. company co-owns with ConocoPhillips (COP). BP will now need to carry out further work to determine the size of the reserve. However, BP is booking a $1.1B write-off related to an off-shore Brazilian well that came up short. Still, 2013 has been BP’s best year for new field exploration for nearly a decade.

DOJ to file civil fraud charges vs Citi, Merrill. The Department of Justice is preparing to file civil fraud charges against Citigroup (C) and Merrill Lynch (BAC) over the sale of mortgage bonds prior to the financial crisis, Reuters reports. The DOJ is also progressing in probes of RBS (RBS) and Credit Suisse (CS). The report comes a month after JPMorgan (JPM) reached a $13B settlement with the DOJ and other agencies over the issue.

JPMorgan sues FDIC for portion of Washington Mutual cash. JPMorgan (JPM) has sued the Federal Deposit Insurance Corp. for a portion of the $2.7B remaining in the FDIC receivership that liquidated Washington Mutual following the sale of its branches and deposits to JPMorgan for $1.88B during the financial crisis in 2008. The lawsuit is the latest development in the dispute between JPMorgan and the FDIC over who should assume Washington Mutual’s legal liabilities, such as those related to the sale of problematic mortgage bonds.

SABMiller Chairman dies of cancer. SABMiller (OTCPK:SBMRY) Chairman Graham Mackay has passed away at the age of 64 following a battle with cancer and will be replaced by acting chairman John Manser with immediate effect. Manser will delay his retirement by a year to July 2015 while the world’s second-largest brewer looks for a candidate for the long term.

EU Council approves tobacco directive. The EU council has authorized measures that would ban the selling of flavored tobacco in member states, including fruit, menthol, and vanilla. The EU also wants combined picture and text health warnings to cover 65% of the front and back of packages of smoking products

Top Economic & Other News
Budget passes key Senate procedural vote. The Senate has voted 67-33 to restrict the debate on the bipartisan budget bill that has already passed in the House, thereby ensuring that opponents can’t use a filibuster to stop it. The Democrat-led chamber is now expected to approve the budget legislation in a vote that could take place today. The bill sets spending at just above $1T over two years and eases some of the sequestration cuts in return for future savings elsewhere.

German businesses continue to gain confidence. The German Ifo institute’s business climate index has increased to its highest in 20 months, edging up to 109.5 in December from 109.3 in November and meeting consensus. The expectations print climbed to 107.4 from 106.4 and beat estimates, although the current-situation reading slipped a bit. Still, says Ifo CEO Hans-Werner Sinn, “the German economy is in a festive mood.”

U.K. unemployment falls to lowest in over 4 1/2 years. U.K. unemployment dropped to its lowest level since April 2009 in the three months to October, falling to 7.4% from 7.6% in July-September. The number of people who were employed was 30.09M, surpassing 30M for the first time ever. However, the growth in average weekly earnings excluding bonuses was just 0.8% on year, well below inflation of 2.1%.

BOE again united in keeping policy on hold. As expected, the Bank of England’s Monetary Policy Committee voted unanimously to keep interest rates at 0.5% and against more quantitative easing at a meeting earlier this month. However, the BOE’s has made an about-turn on sterling, notes Reuters’ Jamie McGeever. Only three months ago, the minutes showed that the rising pound would cool inflation. Now, further gains could hit the U.K.’s recovery. As if to drive home the point, the pound was +0.6% at $1.6367 at the time of writing.

Japan’s exports rise more than expected. Japanese exports climbed 18.4% on year in November vs +17.9% expected and +18.6% in October, while imports jumped 21.1% but eased from growth of 26.1%. Interestingly, the volume of merchandise exports rose 6.1% on year – the sharpest increase in a year and a half – indicating that the weak yen isn’t just boosting the value figure.

BOJ officials see room to loosen policy even further. Bank of Japan policy makers reportedly believe that the BOJ has significant scope to increase the rate of its bond purchases if it needs to in order to meet its 2% inflation target. The officials aren’t too worried about the perception that the bank is underwriting fiscal deficits, but they want more time to assess price trends. The BOJ is due to start a two-day policy meeting tomorrow.

India surprisingly leaves interest rates unchanged. The Reserve Bank of India has held its benchmark repurchase interest rate at 7.75%. With inflation rising last month, economists had expected the RBI to hike the rate by a quarter of a percentage point. However, the bank cited projections that food costs, a main component of inflation, could soften. The RBI could act in the future but it wants more data first, while it also wants to support stuttering growth. Indian shares jumped following the lack of action from the RBI.

Alpha-Rich Stock Movers and Great Calls
1) Investment firm Steamboat Capital highlighted red flags and deteriorating performance in recommending a short sale of LifeVantage (LFVN) on December 4. Shares are -17.2% to date. Read article »
2) On September 25, The GeoTeam argued that relative undervaluation and pending outperformance would combine to drive shares of Global Telecom (GTT) higher. Indeed, the stock is now +48.9% since. Read article »

Alpha-Rich Stocks To Watch
1) Execution and commodity risks have left First Quantum (OTCPK:FQVLF) trading at an attractive entry point, with growth potential leading to 40% upside, says Stephen Simpson, CFA. Read article »
2) Brian Langis says MTY Food Group (OTC:MTYFF) will continue to see shareholder value created through its smart and effective acquisition strategy.Read article »

Alpha-Rich articles are the best long and short ideas on Seeking Alpha. SA PRO subscribers receive early access to these Alpha-Rich articles, which often move markets. For more information about SA PRO and becoming a subscriber, click here.

Today’s Markets: 
In Asia, Japan +2% to 15587.8. Hong Kong +0.3% to 23144. China -0.1% to 2148. India +1.2% 20860. 
In Europe, at midday, London +0.3%. Paris +0.6%. Frankfurt +0.9%. 
Futures at 6:20: Dow +0.3%. S&P +0.3%. Nasdaq +0.3%. Crude +0.1% to $97.34. Gold +0.1% to $1231.80. 
Ten-year Treasury Yield -1 bps to 2.85%

Today’s economic calendar:
7:00 MBA Mortgage Applications
8:30 Housing Starts
10:30 EIA Petroleum Inventories
1:00 PM Results of $35B, 5-Year Note Auction
2:00 PM FOMC Announcement
2:00 PM FOMC Forecast
2:30 PM Bernanke Press Conference

Notable earnings before today’s open: FDX, GIS, LEN

Notable earnings after today’s close: ORCL, PAYX, SCS

See full real-time earnings coverage »

Wall Street Breakfast is sent out by email for free — Get it now »

Market volatility spurred by the U.S. Federal Reserve’s plans to scale back its massive stimulus program is far less of a concern now than it was earlier this year, Bank of Canada Governor Stephen Poloz told Reuters on Tuesday.

Investors understand the Fed’s thinking much better than they did when Chairman Ben Bernanke first mentioned the possibility of tapering the U.S. central bank’s $85 billion in monthly asset purchases on May 22, Poloz said.

The market’s huge one-way bets on the Fed continuing its so-called quantitative easing suddenly had to reverse at that time, causing market turmoil, but Poloz argued that the impact now will be much smaller.

“The good news is that we kind of washed that out last summer. People understand it much better now, and my sense of it is that there isn’t anything like that kind of stacking (leveraging) in the marketplace,” Poloz, 59, said in an interview at the central bank’s Ottawa headquarters.

“So I think that the volatility thing is probably not nearly as concerning as what we saw then.”

In addition, the Fed’s tapering will take place in the context of a strengthening U.S. economy, which should give a lift to Canada’s economy, he said.

A two-day meeting of the Fed’s policymaking Federal Open Market Committee, at which officials could decide to trim the monthly purchases, ends on Wednesday.

While recent strength in the U.S. labor market has raised the chance that the policymakers might start tapering as soon as this week, most economists expect the Fed to keep its stimulus program fully in place until next year.

 

….read page 2 HERE

China’s virtual monopoly on rare earth elements used in high-technology applications has been loosened, reducing the risk that supplies to U.S. defense contractors could be disrupted, according to the Pentagon’s latest assessment of the nation’s industrial base.“Global market forces are leading to positive changes in rare earth supply chains, and a sufficient supply of most of these materials likely will be available to the defense industrial base,” according to the Pentagon report by Elana Broitman, the Defense Department’s top official on the U.S. industrial base. “Prices for most rare earth oxides and metals have declined approximately 60 percent from their peaks in the summer of 2011.”

Rare earths are 17 chemically similar elements used in products from Apple Inc.’s (AAPL) iPads and hybrid-electric cars to smart bombs and Tomahawk cruise missiles made by Raytheon Co. (RTN)

“An increase in supply of material from outside of China” and the substitution of other substances have reduced reliance on China since 2011, when it controlled 95 percent of the world’s supply and imposed export restrictions, said the report, which was sent to Congress last week.

Congress in 2011 required the Pentagon to examine the use of rare earth materials in defense applications, determine if non-U.S. supplies might be disrupted, and suggest ways to ensure long-term availability, as well as secure an assured source of supply by 2015.

….full article HERE

Asian stocks rose, with the benchmark regional index climbing for a second day, as investors await a Federal Reserve decision on its stimulus program.

…full article HERE

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