Tag Archives: economics

Germany Is Delusional To The Point Of Insanity

global investingMy Comments: Assertive headlines such as what you see here are usually outside my comfort zone. For one it implies a pathology that I’m not trained to comment on and two, Europe and European values are different from mine, given that I’ve lived here in the US for the past 65 years. (Warning: this post is LONG.)

That being said, what goes on in Europe does influence what happens to our markets, and since investing money is an expertise I have, then knowing and trying to understand this sort of thing is important to me. And perhaps to you.

The Mercenary Trader / Jan. 21, 2015

“It is as if it’s accepted that the euro area’s modus operandi is to clear things with Germany, and for the ECB to constrain its actions to what is best for Germany.” ~ Athanasios Orphanides, former member of the ECB governing council

Most of the eurozone is experiencing deflation. Even the countries who aren’t – Germany etc. – are well below the ECB’s official 2% inflation target.

This is dangerous because deflationary conditions can tip into recession… and depression… and political extremism born of civil unrest. Deflation – or rather the extreme results of such, in the aftermath of harsh slowdown – brought us the Nazis in the 1930s. Post-Weimar economic implosion, not currency erosion, enabled the political conditions for Hitler’s rise to power.
Need we say more?

Apart from political unrest, deflation is like having no fuel in the emergency flight tank.

A lot of people will say “what’s wrong with deflation,” e.g. why is it so bad?

It’s important to clarify there is a big difference between falling inflation levels (disinflation) and inflation falling below zero. Think of a plane that stalls out.
When an economy goes negative, the risk is that the plane fails to overcome the stall… and crashes before it can pull up. Deflation (as opposed to disinflation) can lead to compounding “downward spiral” impacts, not unlike gravity’s increasing pull on a nosediving airplane.

The German attitude toward inflation, and debt, is pathological (indicative of mental disorder).

Germany is paranoid of inflation on a pathological level. Germany is also pathologically allergic to debt. Consider, for example, that Germany as a country has serious infrastructure needs… and there is real risk that Germany’s economy will slow in future. Right now, German interest rates hover above zero (or even dip below it). This is a historic opportunity for “good” financing… for logical spending on real needs, financed by incredibly low-cost debt.

Yet Germany is so debt averse, they aren’t willing to borrow for the future – not even for themselves – even with rates in the zero to one percent range. That’s almost the equivalent of turning down free money, even when it is badly needed for repairs… even when it has obvious strategic use. That is not frugality as a virtue, it’s more like a miser complex worthy of therapy.

Worse still, Germany is delusional about its own economy and dangers.

Think about this: What happens to the German economy when China really and truly slows? And what happens to the German economy when Japan goes “next level” in its competitive devaluation plan?

China is slow-motion imploding. No matter what happens, China has to switch from an infrastructure led economy to a consumer led one. This is very bad news for Germany, one of the world’s largest exporters. As is the increasingly competitive currency stance of Japan. Bottom line: Germany’s present economic strength could easily evaporate… for strong reasons that make logical sense. And how much cushion would they have in that event? None…

Bottom line: Germany would rather slit its own throat, economically speaking, than allow for a rational approach to inflation and debt.

That is a deliberately harsh phrase, it’s true. But the writing is on the wall. Germany’s commitment to austerity is not just pathological, it is economically suicidal.
The entire eurozone is at risk… and Germany’s own economy is too… and the lessons of history speak loudly. Yet Germany continues to live in a bizarro dream world where saving money has been elevated to a fetish regardless of surrounding circumstances.

We don’t choose to pick on Germany. We have friends who are German… family members and loved ones with German roots. It simply “is what it is.” The pathologies of a country, to the degree they go separate ways from rationality, are leading to economic disaster (and who knows what in the aftermath).

There are questions as to whether German provisions will “neuter” euro QE.

Draghi and the European Central Bank will announce some kind of quantitative easing on Thursday (sic). There is no question of it now. If they tried for another stall – more “wait and see” – European equity markets would simply go into freefall. Investors would start betting on accelerated odds of euro break-up.

But it remains possible that the “shock and awe” of euro QE will be neutered by German demands. Via the FT: To appease QE’s German opponents, which include the chancellor Angela Merkel herself, Mr. Draghi is expected to say that bonds bought will remain with national central banks, so losses will not be spread among eurozone members. But other eurozone countries, as well as the International Monetary Fund, fear the concession could reduce QE’s effectiveness…

OF COURSE giving Germany what it wants would reduce euro QE effectiveness!

• Germany wants to reduce fiscal exposure to weaker eurozone members.
• But establishing a united support front is the whole idea in the first place!
• The house is on fire and liquidity crisis measures (firehoses) are needed…
• But Germany wants to avoid charges for the water…
• And make sure any fires are segregated away from itself…
• Thus increasing the odds the whole thing burns down.

The German justification for not wanting to participate is ridiculous.

The stance of Germany is essentially, “Why should we pay for these bums? Why should we create more risk exposure for ourselves? We are savers, they are spenders… why should we waste money on them?”

The answer is that Germany should have asked those questions SEVENTEEN YEARS AGO. Saying “Nein!” to an insanely stupid monetary union would have been very logical, and the best thing for all… circa 1998 before the euro actually launched! But now it is too late to avoid responsibility for actions.

What’s more, it is no longer a “moral” question… but a question of WHAT THE RISKS ARE.

This is the other amazing / maddening thing about the German stance. Germany still acts as if there is room to say “no” on moral grounds… when the final question is what will happen, not what is right or wrong. When a course of action is highly likely to invite DISASTER, the question of right or wrong has to be put aside…

Because of Germany, we don’t know how euro QE will come across… but we are willing to short more FEZ against our euro position. Our EURUSD position has a sort of partial absolute hedge in short European equities. If Germany throws a spanner in the QE works, and “Super Mario” disappoints, EURUSD could spike in a big short squeeze. But European Equities (NYSEARCA:FEZ) would fall hard in that instance. Conversely, if Draghi and the ECB come through in a big way, the reverse could occur – EURUSD goes into freefall, FEZ rockets higher. So they act as de facto hedges of each other…

Another scary thing… even if Draghi gets his “big bazooka” QE… what good will it do?
The other frightening thing to consider: It may be too little, too late for Europe no matter what size of QE they get. There is little point in lowering eurozone bond yields (already pressing zero). And there is little real hope in stimulating bank lending. So the true point of euro QE would be… what? Making the euro a hell of a lot weaker to stimulate exports one supposes. What else is QE supposed to do?

One argument is that, once euro QE starts, it never stops… until it goes nuclear…
Some argue it doesn’t really matter how much QE the ECB starts with… because QE just gets bigger from that point no matter what. We can’t be sure this is true. Germany might try to stop a “failed” QE program. Then again, if things get really ugly – e.g. if Germany falls into recession too – then maybe it keeps going and going…
And the ECB finally winds up going “nuclear,” taking a page from Japan. Understand this: There are plausible scenarios where the euro goes to 85 cents before all is said and done. That outcome would not be too hot for risk assets. (Hello understatement!)

Buy the Rumor, Sell the News

My Comments: As a financial advisor for almost 40 years, you’d think by now I would have this all down cold. That I’ve survived in this profession suggests I have at least a reasonable understanding of how “investing money” is supposed to work. Either that or I’m very good at talking people into doing dumb things.

Anyway, I’ve not been particularly aware that we have been in a bond rally. Scott Minerd says “Economic strength in the U.S. and the announcement of QE in Europe could spell the end of the recent bond rally”. Interest rates are very low, have been declining for many years. At some point they are going to start going the other way and that spells doom for bond holders. Here’s a chart I happen to have that seems to support this idea.


So with increasing odds that the stock market will soon hit a wall, and with this expression by someone I respect saying the current bond market rally could end, what are we supposed to do? I have some thoughts, but we’re looking at some deep water in front of us. If you have concerns, you should get in touch with me.

January 16, 2015  Commentary by Scott Minerd, Guggenheim Partners

One year ago, a 10-year U.S. Treasury bond yielded around 3 percent, up from around 2.50 just months earlier. At the time, the market fretted that rates would continue to rise; our view was the opposite. Today’s market is a different beast, however. With rates now around 1.8 percent—the lowest level since May 2013—we see Treasuries as overvalued and the recent rally getting long in the tooth.

At current levels of overvaluation, the only factors holding interest rates down are the expectation of declining inflation as a result of the oil shock and the prospect of quantitative easing in Europe. This means we may be facing the old Wall Street adage of “buy the rumor, sell the news” when it comes to Treasury prices. Once the one-time effect of declining oil prices has passed, inflation is likely to return to the underlying trend, which is higher than today. This, combined with a European Central Bank announcement of quantitative easing, could mark the end of the recent spike down in interest rates.

Even at a paltry 1.81 percent, U.S. 10-year Treasuries easily compete with Germany’s 0.41 percent bund yield today. While there is some prospect that QE in Europe will be announced at the ECB’s meeting in March, any announcement, especially if done in January, is likely to limit QE to a size smaller than what will be ultimately necessary. But if the ECB is able to implement a QE program of sufficient scale, the monetary elixir should cure fears of economic contraction, causing rates in Europe to rise. Likewise, while the oil supply shock has created a spike in Treasury prices, it is transient. When we emerge from this oil tantrum, we are likely to experience a fairly vicious snapback up in rates.

A key indicator that rates in the U.S. are nearing an unsustainable degree of overvaluation is the divergence of real 10-year Treasury yields, currently 0.40 percent, from the University of Michigan Consumer Sentiment Index, which shot up to 98.2 in the latest reading, an 11-year high. Real 10-year yields usually rise as the economy, and hence consumer confidence, improves.

We are currently witnessing the widest divergence between real rates and consumer confidence since May 2012 (see Chart of the Week). Then, as today, real yields headed south while consumer confidence shot upward. Subsequently, from July 2012 to December 2013, the nominal 10-year yield rose by 153 basis points, which closed the divergence. The current surge in consumer confidence suggests that the real yield should be somewhere around 3 percent (rather than its current reading of 0.40 percent). This large of a divergence is something to watch, as it is not sustainable.

While the near-term risk remains that interest rates in the U.S. may head even lower—we could easily get some piece of news that pushes the yield down to 1.6 percent—I believe this recent flight to ultra-low rates will draw to a close by the end of the second or third quarter. The bottom line is that we are closer to the end of this rally than its beginning.

As for the equity markets, the near-term outlook for major advanced economy stocks is positive, despite recent volatility. In addition to a brightening economic outlook due to falling energy prices and lower mortgage rates (which has led to a surge in new purchase applications), the expected announcement of quantitative easing by the ECB should help to push stocks higher over the next few months. Recent QE programs in the U.S., Japan, and the U.K. saw local stock markets rally in the months after they were announced, which is a near-term positive for equities, and Europe in particular.

The Stock Market Is Overvalued, No Matter How You Measure It

My Comments: Some of you will think I’m an alarmist. And perhaps I am. But the signals that have been present for some 18 months are getting louder, much louder.

I’ve not included all the charts that appeared with this article as there are too many of them and they are all negative. Here’s a link to the article itself: http://goo.gl/tIiQgQ  You should know I don’t have the talent to do this on my own.

Perhaps I’ll find some good news to share with all of you later this week. I hope so, because it’s on us to be prepared and avoid the inevitable mess.

• The US stock market remains overvalued relative to the broader economy.
• We have reached the limits of monetary policy, and it is now time for fiscal policy makers to act.
• Over indebtedness continues to be the problem and de-leveraging the solution.

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” – Charles Mackay, Author, Extraordinary Popular Delusions and the Madness of Crowds

I believe investors would be wise to exert caution at this time in the economic cycle. We have seen the (NYSEARCA:SPY) market rally some 187.74% from the 2009 lows, and market levels are now overvalued by virtually every metric. In my previous piece “5 Themes for 2015″, I articulated the likelihood that indexers will be outperformed by stock pickers this year. This is because I believe the market is extremely overvalued on the whole, and investors need to be selective about what they own. There are parts of the market that remain undervalued as I have previously highlighted. But on the whole, stock indexes are overvalued when viewed using many different measurement methods as seen in the chart above:

Yes…This Is a Stock Market Bubble
Any who contends that we are not in the midst of a stock market bubble is ignoring the truth of the economic and historical financial data we have available. Many believe that the market can continue to push higher, and indeed we may see additional advancement in equity indexes, on account of capital coming in from overseas and investors continuing to search for yield in a low yield world. Ultimately, I believe this will only make the ending of this market cycle that much more severe.

I continue to believe that the macro-economic situation points investors to the Long-Term Zero Coupon U.S. Treasury market as a stable port in the deflationary storm. The marginal gains that may be had from any potential upside in equity markets pale in comparison to the enormous draw down that I believe will eventually occur.

It’s Different This Time
Investors continue to articulate the old adage “It’s different this time.” They are right, in the sense that we are in unknown waters with the Federal Reserve’s extraordinary monetary policy, but the lessons of financial history have a way of repeating themselves, and reminding us it is not, in fact, different this time.

The Federal Reserve has expanded the balance sheet to over $4 trillion, and yet we continue to see lack luster velocity and inflation below the Fed’s target rate, illustrating the strength of deflationary forces. The US is in danger of entering into a Japanese-style deflationary trap where there is no escape from QE, and higher GDP growth rates continue to elude us, necessitating more QE. This cycle in danger of continuing for some time, until we realize that debt is the problem and deleveraging is the only solution, painful as it may be.

Future stock market returns will likely be in the low single digits as a result of this QE influenced market rally, which we can see in the P/E 10 at 26.52. The Fed’s extraordinary monetary policy has proven disastrous to savers, and has created a stock market built primarily on financial engineering and excess liquidity in the banking system, demonstrating that economic policy and investment policy are not always aligned.

I believe that caution is warranted, as it is completely plausible to see a significant downward move in the market at a magnitude larger than any one sees coming. Most down trends come with little warning, and investors are left asking “What happened?” Current equity market valuations are not supported by the economic data. The US has only 2.5% GDP growth in the first three quarters of 2014, there is subdued wage growth, and bubbles in lending fueling consumer spending, and excess leverage, fueling stock speculation. With equity markets at all time highs and Main Street continuing to suffer, the bond market continues to predict the coming storm.

With No Wage Growth, Debt Takes the Place of Income
The United States economy has not shown a change in the real median household income for nearly twenty years.

The economy continues to show a lack of true wage growth. Feeling the lack of income growth, consumers are resorting to adding additional debt to their balance sheets, reversing a healthy period of deleveraging after the financial crisis. Consumption today, financed by debt, means lower consumption in the future. Positive economic growth cannot be fueled by mounting debt burdens.

Globally, debt levels have reached unsustainable levels in both the public and private spheres. In a previous piece, I talked about the deleterious role over indebtedness can play in stifling economic growth. Moving forward, I see these trends playing out over a long time horizon that will likely leave the Fed on hold in raising rates, and will see the long-term US treasury yields continue to ratchet lower. Velocity continues to remain weak, as do wages, the PCE, and other measures of economic health. Perceived strength in the employment situation is really driven by decreases in the labor force participation rate. The economy is hardly healthy, despite the continued rise in equity prices to lofty levels.

The put created by excessive QE has driven margin debt to an all time high and created the same environment that was the catalyst for the financial crisis, over indebtedness.

The solutions to the challenges we face are not easy, and the responsibility does not rest solely with the Federal Reserve. I believe we have reached the limits of what can be achieved through monetary policy. The toxic effects of over indebtedness continue to plague real GDP growth, thus it is now time for fiscal policy makers to work together for the good of the country, and to put the nation on sound financial ground.

Given this reality and the case I made here, I continue to hold a portfolio predominantly composed of the US Dollar, (NYSEARCA:ZROZ) 30-Year Zero Coupon US Treasury Bonds and Swaps, and a focused group of select, undervalued equity securities. I believe this portfolio strategy can continue to outperform benchmarks in this slow-growth world that will characterize the global economy for some time.

the Future of Medicine is…

healthcare reformMy Comments: I claim no authority on this topic. However, because I often work with physicians, I’m very aware of the pressures that apply to the profession. There are many issues on which no individual has any control, one of them the apparent erosion of the profession in terms of college graduates not seeking admittance to medical school.

Demographics alone tells you there is likely to be a need for MORE physicians in the coming years, not less. How do we as a society create the conditions that will cause this demand to be met? Is there a way? What has to happen?

While this comes at the problem from the negative, there are lessons here, even though the message comes from Great Britain.

November 19, 2014 / By Clive Cookson / The Financial Times

The Reith Lectures 2014 on The Future of Medicine, Atul Gawande, BBC Radio 4, from November 25

We all know how personal anecdote can illuminate talks about grand themes such as the future of medicine. But few speakers carry off the art of storytelling as well as the surgeon and writer Atul Gawande in this year’s Reith Lectures on BBC Radio 4.

FirstFT is our new essential daily email briefing of the best stories from across the web
The first of four, “Why Do Doctors Fail”, to be broadcast on Tuesday, was recorded in Gawande’s home city of Boston, where he is a medical professor at Harvard University. It begins with a poignant account of his son Walker severely ill in a local hospital almost 20 years ago. The 11-day-old boy almost died because an oxygen probe was attached to a finger on his right hand when it should have been on the left hand.

The blood oxygen reading suggested to the emergency room staff that Walker’s problem lay in his lungs, when in fact the failure was cardiovascular – his aorta had not developed properly. An alert paediatrician detected the error just in time to open up Walker’s circulation but not in time for a baby in the next bed with the same diagnosis, who suffered multiple organ failure.

Gawande weaves the details of Walker’s illness and recovery into his exploration of the nature of fallibility in modern healthcare. As he says, doctors have acquired an enormous arsenal to fight disease and promote good health but far too often avoidable mistakes stop it being used to best effect.

“The story [of medicine] has become as much about struggling with ineptitude as with ignorance,” he says.

The second lecture, “The Century of the System”, was recorded in London and starts with an even longer story. Gawande devotes the first nine minutes of his 25-minute talk to a three-year-old Austrian girl. She “drowned” in an icy pond and was brought back first to life and then to health through a complex sequence of procedures, which Gawande describes in gripping detail.

The point is that great complexity is inevitable if patients are to benefit fully from modern medicine. But it only works – as with the Austrian system, which was developed originally to treat avalanche victims – if everyone knows his or her role and follows procedures.

“We have been fooled by penicillin” into imagining that medicine is about simple cures, Gawande says, while in reality it is about complex solutions to complex problems. This requires effective systems, implemented with the help of checklists of the sort that are routine in other safety-critical industries such as aviation but only now being implemented in healthcare.

Checklists have cut complication and mortality rates in hospitals around the world, as Gawande points out. A minority of surgeons dislike checklists on the grounds that they interfere with individual brilliance and daring, an objection that he dismisses with the memorable statement: “Discipline makes daring possible.”

Sue Lawley, who has presented and chaired the Reith Lectures since 2002, rightly calls them “the epitome of public service broadcasting”. They were inaugurated in 1948 to honour John Reith, the BBC’s first director-general, who believed fervently in the corporation’s duty to enrich the intellectual life of the nation. Gawande follows several figures from science and medicine who have given memorable Reith Lectures. Although listeners who have read his books such as The Checklist Manifesto will recognise recycled material, his warm and clear delivery gives it fresh appeal. And everyone will love his stories.

Supply Shock and Awe

oil productionMy Comments: The driving economic story these days is about the price of oil. That the sudden and dramatic drop will have global repercussions is a given. The challenge for financial planners is how to help clients take advantage of these repercussions.

Right now, having a few hundred extra bucks to spend on something else or to save is very satisfying. But it will come to an end and the landscape will have changed. This has happened before and when it did, some people profited and others lost money. What will be your fate?

Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Partners – January 17, 2015

If the mid-80s’ supply-driven oil crisis is a guide, we should expect further declines and a prolonged period where oil prices remain depressed.

In just one week, oil prices skidded by more than 10 percent, sparking a sell-off in U.S. equities of 3.5 percent, a Treasury rally of more than 20 basis points, and global headlines of growth fears and tumult. Surprisingly, I’m not talking about this week. The week I’m referring to was in early December, and it is rather similar to the present oil price action and market response.

During the week of Dec. 8, oil fell 12.2 percent to around $58 a barrel, the yield on U.S. 10-year Treasuries approached 2 percent from around 2.30 percent, and equities declined over 3.5 percent. At that time, I published a commentary establishing a downside target for oil at $50 a barrel and said that the yield on the U.S. 10-year note would slip further to around 1.9 percent. Many of those predictions seemed pretty extreme at the time, but here we stand. At the time of writing, oil is around $48 per barrel, and the yield on U.S. 10-year Treasuries is 1.96 percent.

Technically speaking, after breaking through the support level of $50 a barrel, the measured move for oil is now $34 a barrel (based on the minimum downside potential price according to the rules used by market technicians). I believe we are in for a prolonged period where oil trades in the $40 to $50 range and possibly lower. In fact, I have the investment teams running stress tests based on oil trading at $25 a barrel for an extended period of time.

Twenty-five dollars a barrel? Isn’t that a bit extreme? I would guess, but so were our stress tests in 2008, which assumed short-term rates could go to zero for an extended period of time. The current bear market for oil is the result of a supply shock brought on by fracking. Based on the unwillingness of global oil producers to reduce production, the current supply shock will take a while to work its way through the system, and oil prices have yet to find a bottom. Better to evaluate the downside scenarios now than to be unprepared.

The difference between this bear market in black gold and the bear market of 2008 or the 1998 experience, which was associated with the Asian crisis, is that both of those were demand shocks. The best historical comparison to what we’re witnessing today in oil prices is actually the supply-shocked world of the mid-1980s.

The 1985-86 bear market in oil was the result of oversupply—too much oil was brought online relative to demand. During that period, prices declined more than 67 percent over four months or so. When oil prices started to rise again in April 1986, credit spreads started to tighten a few months later and within 12 months, the stock market was up over 20 percent. If history is any guide—and in this instance, I believe it may be—we are likely to see a similar situation play out today.

But investors beware in the near-term. Even at $48 per barrel, oil is still a falling knife—I believe there remains another significant downside move. If we hit the $34 a barrel price target, which I believe we could, that would be another 30 percent decline in oil prices. Typically, people would rightly characterize a 30 percent decline as a bear market. We’ve already had a decline of over 55 percent from the high, so we’ve already been in a bear market, but if we started over today we’re going to have another one.

With the development of fracking, we’ve had a huge increase in the supply of oil. By most estimates, fracking ceases to be profitable when oil prices hit somewhere in the neighborhood of $40 a barrel. Once the frackers stop drilling new wells, the following 24 months should see oil output gradually declining, allowing for prices to stabilize and ultimately rising to something viewed as normal above $60. Until supply begins to contract, oil will continue to languish. Between now and then, anything energy output-related should continue to suffer from weak oil prices.

Over the past 30 years, there have been six major declines in the price of oil (defined as a greater than 50 percent cumulative decline). The current decline now stands at around 55 percent, matching the magnitude of some of the worst historical oil crashes. However, most of the past declines have been due to faltering global demand, whereas the current slump is due to a glut of oil. Therefore, the best comparable decline is that of 1985-86, when a supply shock caused the West Texas Intermediate price to plunge by more than 67 percent over the course of four and a half months. With no near-term signs of supply letting up, oil prices could continue to fall.

Economic Data Releases

US economyMy Comments: These data points come from Guggenheim Partners. For some of you this is meaningless nonsense; for others, a quick review is intented to give you a glimpse of what is happening in the world, including the US.

To put some of this in perspective, I saw an article this weekend that compared the results of the DOW Industrial Average, from its theoretical inception in 1817, to now. When Obama became president in 2008, it was roughly 9,000. By the end of this past December, it was roughtly 18,000. The point was it took 190 years to get halfway to where it is now the other half happened since Obama was elected.

My point of this is no President is entitled to the credit for this nor is he entitled to the blame. It generally happens regardless of who is in the White House. However, I urge you to remember that market declines can happen and do happen regardeless of who is in the White House, and happen even when the economy is relatively strong. We are due for a correction.

Continued Strength in Payrolls but Wage Growth Falters
• Non-farm payrolls increased by 252,000 in December after an upwardly revised 353,000 in November.
• The unemployment rate fell by 0.2 percentage points in December to 5.6 percent, in part due to a lower labor force participation rate.
• Average hourly earnings slowed to 1.7 percent year-over-year growth in December, the slowest 12-month rate since October 2012.
• The ISM manufacturing index was weaker than expected in the December reading, falling to 55.5 from 58.7, a six-month low.
• The ISM non-manufacturing index missed expectations in December, falling to a six-month low of 56.2.
• Factory orders dropped in November, down 0.7 percent. Orders have now fallen for four straight months, the first such streak since 2012.
• The S&P/Case-Shiller 20-City Home Price Index showed continued slowing home price growth in October, with the year-over-year reading declining to 4.50 percent from 4.82 percent.
• Pending home sales rose 0.5 percent in November, slightly better than expectations.
• Construction spending fell in November for the first time since June, down 0.3 percent. Public construction spending led the drop.
• The Conference Board’s consumer confidence index ticked up in December, rising to 92.6 from an upwardly revised 91.0. The present situation index experienced a large gain, but expectations fell.
• The trade deficit narrowed in November, contracting to -$39.0 billion, a nearly one-year low.

Euro Zone Enters Deflation

• The euro zone Consumer Price Index fell into deflation in December at -0.2 percent year over year, lower than forecasts had expected. The core CPI inched up to 0.8 percent.
• The euro zone manufacturing Purchasing Managers Index was revised lower in the final December estimate, but still recorded an increase from the prior month at 50.6.
• Euro zone retail sales beat expectations in November, up 0.6 percent for a second consecutive month.
• Germany’s December CPI dropped more than expected on a year-over-year basis, falling to a five-year low of 0.1 percent.
• German industrial production unexpectedly declined in November, down 0.1 percent.
• German exports decreased for a second consecutive month in November, falling 2.1 percent.
• Industrial production in France was down 0.3 percent in November. Production has not risen since July.
• The U.K. manufacturing PMI unexpectedly fell in December, down to 52.5 from 53.3.
• The U.K. services PMI dropped much more than expected in December, falling to a 19-month low of 55.8.
• China’s official manufacturing PMI fell for a third straight month in December, reaching an 18-month low of 50.1.
• China’s non-manufacturing PMI ticked up in December, increasing to a four-month high of 54.1.
• China’s HSBC services PMI ticked up for a second consecutive month in December, reaching a three-month high of 53.4.
• The Chinese Producer Price Index dropped more than expected in December, falling to 3.3 percent year over year.
• Chinese consumer prices inched up in December to 1.5 percent year over year.

Hedge Fund Manager Who Remembers 1998 Rout Says Prepare for Pain

1994-2015My Comments: This is another example of an article that talks about what might happen to our investments in 2015. For many of us advisors, there is an increasingly pervasive odor surrounding the markets. It has nothing to do with the solid economy developing here in the US. The odor, however, is giving me an increased incentive to move clients away from the markets in general and place money where there is zero chance of a dramatic decline.

I’m reluctant to use fear as a motivator, but looking at the S&P 500 chart since 1994 suggests that something bad is likely to happen soon, if not in 2015. Couple this with the fact that all of us are older than we once were. What this means is we have less time to live through a recovery if it takes several years.

There are many people who have yet to recover from what happened in 2008-2009. For some, they are still traumatized and have money in Certificates of Deposit, or bond funds, thinking they are now safe.

Regardless of your circumstances, realistic choices can be made to minimize the upcoming pain. It may be caused by the current collapse of oil prices or something entirely different, but it will happen.

December 16, 2014 • Bloomberg News

Stephen Jen landed in Hong Kong in early January 1997 as Morgan Stanley’s newly minted exchange-rate strategist for Asia.

He was soon working around the clock when investors began targeting the region’s currency pegs, first felling Thailand’s in July. The rout spread through Asia before rocking Brazil and Russia. It led to the collapse of Long-Term Capital Management, an event that introduced the Federal Reserve-brokered bailout.

If the 48-year-old native of Taiwan, with a PhD from Massachusetts Institute of Technology, sounds a little jaded now, it’s not without some reason. He worries that many Emerging-Market analysts are too young to remember the late 1990s. Instead they learned the ropes in an era dominated by the rise of Brazil, Russia, India and China — a supposed one-way bet to prosperity.

“Many became EM specialists after the term ‘BRIC’ was coined in 2001 and don’t know any serious crisis,’’ says Jen, who now runs the London-based hedge fund SLJ Macro Partners LLP.

The youngsters are about to be schooled. Jen says echoes of 1997-1998 may be at hand.

Investors woke up today to Russia’s 1 a.m. interest-rate increase to defend the ruble. There’s the mounting likelihood of a Venezuelan default. Stocks from Thailand to Brazil are reeling. The Fed hasn’t even begun raising interest rates.

Jen is bracing for more pain. “At some point, the risk of fractures in parts of EM will rise sharply,” said Jen.

Currency Dangers
While unwilling to draw up a blacklist for now, he says exchange rates reveal emerging-market dangers. Russia’s ruble, Brazil’s real, Mexico’s peso, Turkey’s lira, the South African rand and Indoniesian rupiah have all hit the skids.

The biggest causes for worry, bigger than a recession in Russia or the oil-price plunge: the slowdown in China, which has already upended commodity prices, and the likelihood U.S. growth will propel the dollar higher and suck assets out of emerging markets.

Sounding a similar alert, the Bank for International Settlements has warned an appreciating dollar could have a “profound impact” on the world economy. It estimates that international lending to non-financial companies totalled $9.5 trillion at the end of June. Claims on China alone have been growing at an annual rate of 50 percent to reach $1.1 trillion.

International Monetary Fund economists also reported this month that the frequency of sovereign debt crises is 15 percent higher at the start of a U.S. monetary tightening cycle.

“My long-standing view on EM currencies is that they could melt down because there has simply been way too much cumulative capital flows,” said Jen. “Nothing the EM economics can do will stop these potential outflows as long as the U.S. economy recovers.”