The Big Picture

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• Deflation Fears
• 10 Tuesday PM Reads
• Student Loans Are Going to Crush the Economy! (No, they are not)
• How America’s Consumers Spend Across States
• MAD Magazine recreates Norman Rockwell’s famous 1958 painting ‘The Runaway’
• 10 Tuesday AM Reads
• Stack: Competition to Call the Next Bear Market
• MiB: Sheila Bair, Chairman of FDIC

Deflation Fears Posted: 26 Aug 2014 04:30 PM PDT Deflation Fear David R. Kotok August 26, 2014     A worldwide deflation fear is expanding and may actually be rampant. BCA Daily Insights (August 25, 2014) notes that, "out of 32 OEC countries, more than two-thirds have domestic inflation rates that fall short of 1%." BCA analysts go on to argue that the worldwide inflation rate may converge to zero over the next couple of years. Debt markets currently reflect this fear. Here are examples of yields on the benchmark 10-year interest rate for sovereign debt. This is not about credit risk. This is about the risk that the global price-level change will approach or reach zero. 1.      United States 10-Year Treasury Yield, 2.4% 2.      Germany 10-Yield Bund Yield, under 1% 3.      Japanese 10-Year JGB Yield, under 0.5% 4.      France 10-Year Government Bond Yield, 1.3% 5.      Canada 10-Year Government Bond Yield, 2% 6.      United Kingdom 10-Year Government Bond Yield, 2.5% 7.      Mexico 10-Year Government Bond Yield, 3.2% 8.      Italy 10-Year Government Bond Yield, 2.4% These are unexpected and remarkably low yields.  They reflect the results of central bank policies and the results of growing fear of disinflation or even deflation. Is it any wonder that central bank actions which expand quantitative easing produce little or nothing beyond growing balances of excess reserves as those created monies recycle back into the central banks? Is it any wonder that an alternative form of recycling monies in the US, the reverse repo, is currently functioning at an administered interest rate of 5 basis points (0.05 of 1%).  The answer is No! Worldwide deflation risk is serious business, and it is rising in the eyes of market agents. It means that central bank policies are neutralized. The central banks of the world have tripled the amount of excess reserves since the financial crisis commenced. If they were to quadruple the amount of reserves in the next year, doing so would not make much difference. Does it make any difference if the Federal Reserve holds an extra half trillion dollars of Treasury securities that are reflected in a rising balance of a reverse repo or in additional excess reserves? The answer essentially is no. For the last six years, central banks worldwide have collectively offset the failure of their governments' fiscal policies. That is about all they could possibly do. They have enabled nearly all creditworthy corporate and institutional borrowers to successfully undertake refinance at very low interest rates. That is about all they could possibly do. They have enabled creditworthy individuals and households to refinance household debt in order to realign their debt service payments. That is about all they could possibly do. The burden of turning global economies around now falls on governments and their fiscal policies – policies that encourage growth, policies that diminish taxation, policies that expand trade, policies that address rising geopolitical risks that interfere with the expansion of trading. Government officials' criticisms of companies that want to seek better tax policies are specious and harmful. US Treasury threats to investigate "unpatriotic" transactions and other government interferences lead to contraction of trade, reduction of economic activity, and suppression of growth. Unfortunately, governing executive branches, including the Obama administration in the US, still do not get it. The legislative branches in the mature economies and governments of the world continue to appear to be broken. The culprits are not the central banks. They have done all that they can. We remain in the camp that suggests the short-term interest rate will be near zero for a long time in the world and for, at least, another year in the US. After that we expect that the short-term rate will rise very slowly here. It may not rise at all in some places in the world for the rest of the decade. Our US Exchange-Traded Fund accounts are fully invested. ~~~ David R. Kotok, Chairman and Chief Investment Officer, Cumberland Advisors

10 Tuesday PM Reads Posted: 26 Aug 2014 01:30 PM PDT My afternoon train readings: • Cutting the corporate tax would make other problems (The Upshot) see also The Republican civil war over taxes is coming (WonkBlog) • Financial Beliefs You Might Not Like (WSJ) • Active Versus Passive Is the Wrong Question (Morningstar) • More Economists See Fed Policy As Too Loose (Real Time Economics) • The Incomparable Advantage of Having to Work for What You Get (Mr. Money Mustache) • The mystery of the falling teen birth rate (Vox) • Why is Paul Ryan's embarrassed by Ayn Rand’s magnum opus, Atlas Shrugged? (Intelligencer) • There Are Millions of Michael Browns In America (FiveThirtyEight) • Facebook bans Clickbait: You’ll never guess what Facebook is cracking down on now (Re/Code) • I’m Chevy Chase and You’re Not (Grantland) What are you reading?     Draghi concerned about the record fall in inflation expectations Source: Frederik Ducrozet at Credit Agricole

Student Loans Are Going to Crush the Economy! (No, they are not) Posted: 26 Aug 2014 11:19 AM PDT   Student loans are the next great subprime crisis! At least that’s what the usual purveyors of doom and gloom say (see this, this and this). The numbers are big, the default rates are high and soon enough this is going to tip the economy into the next crisis or recession. Not so fast, writes Torsten Slok, chief international economist for Deutsche Bank AG, in his forthcoming September chart-book continues here

How America’s Consumers Spend Across States Posted: 26 Aug 2014 08:30 AM PDT

MAD Magazine recreates Norman Rockwell’s famous 1958 painting ‘The Runaway’ Posted: 26 Aug 2014 07:00 AM PDT Source: Vulgar Trader

10 Tuesday AM Reads Posted: 26 Aug 2014 06:30 AM PDT Just because it’s Tuesday does not mean we don't have you covered with our dry-aged, prime reads: (continues here): • The US bull market looks like the dot-com bubble of the late 1990s, except when it comes to valuations. (Bloomberg) see also What stage of the bull market are we in? (A Wealth of Common Sense) • The Federal Reserve Is Not As Powerful As You Think It Is (Slate) • The Rise and Fall of Performance Investing (CFA Institute) see also It’s Not a Chase For Yield, It’s a Chase For Fees (A Wealth of Common Sense) • What “Smart Beta” Means to Us (Research Affiliates) continues here

Stack: Competition to Call the Next Bear Market Posted: 26 Aug 2014 06:00 AM PDT Jim Stack of Investech has described what he calls “the competition to call the next bear market.” We have been going discussing this issue, and I am saving his comments for a Bloomberg column next week. But here is a flavor of what he has been writing, from his most recent commentary: 2011 We're In a New Bear Market, Says One Technical Indicator – Wall Street Journal, 8/12/11 Signs of a Crash Ahead, Not a Recession – New York Times, 9/28/11 Wall Street Approaches a Bear Market – New York Times, 10/3/11 What if There's a Bear Market in 2012? – Forbes, 12/29/11 2012 3 Reasons Why the Bear Market is Back – Yahoo! Finance, 5/23/12 A bear market in bull's clothing – MarketWatch, 8/27/12 Big-name stocks fall into bear markets – USA Today, 11/9/12 2013 An epic bear market is coming – MSN Money, 1/2/13 Bear Market to Take Hold in 2013: Expert – CNBC, 3/14/13 Bear Traps Await Investors – Wall Street Journal, 7/31/13 Doomsday poll: still a 98% risk of 2014 stock crash – MarketWatch, 12/21/13 2014 Is The Next Bear Market Here Already? – Nasdaq.com, 4/2/14 Buckle Up! The New Bear Market Has Begun – Seeking Alpha, 5/8/14 Two signs a market crash is coming – Yahoo! Finance, 7/17/14 Three Signs That Point to a Stock-Market Tumble Ahead – Wall Street Journal, 8/1/14 4 Signs this bull market is on its last legs – MarketWatch, 8/13/14 It would be quite amusing if it weren’t such a money loser so far . . .

MiB: Sheila Bair, Chairman of FDIC Posted: 26 Aug 2014 04:00 AM PDT Sheila Bair, former chairman of the U.S. Federal Deposit Insurance Corp., describes what it was like in the room with former Treasury Secretary Hank Paulson and former Federal Reserve Chairman Ben Bernanke when the global economy was on the verge of falling into the abyss in this week’s “Masters in Business” podcast. Listen to the full interview below, or click through to Soundcloud. Early in her career, Bair was recruited by Kansas Senator Bob Dole to serve as a counsel on the Senate Judiciary Committee. She eventually rose to become counsel to Dole when he was Senate majority leader. Bair was commissioner and acting chairman of the Commodity Futures Trading Commission from 1991 to 1995 before serving as senior vice president for government relations at the New York Stock Exchange from 1995 to 2000. She was appointed as chairman of the FDIC in 2006. Under her direction, the FDIC was rated the best place in government to work. Her book on her time at the FDIC and the financial crisis is “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself.” Bair has some surprising things to say about women in politics, bipartisanship and what it was like turning the FDIC around. You can stream the podcast at SoundCloud or download it here. Next week, I’ll talk with James O'Shaughnessy of O'Shaughnessy Asset Management and author of “What Works On Wall Street.”

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