No one story sticks out for me today. So I thought I would make a few comments on the stories making the rounds today in the Internet. Let’s start in the U.S.
The data I’m seeing definitely supports the notion that the labour market in the U.S. is steadily improving. Barry Ritholtz noted recently that we are getting about 240,000 more jobs per month in 2014. I first moved up from a 200-300k to a 250-350k pace on non-farm payrolls in July, due to the decline in jobless claims, which I see as the best real-time economic indicator we have in the U.S.. Some of the numbers since then have been disappointing to me. But the upward revisions and the now 240k pace for the full year are demonstrating that when we look back, the picture is brighter than we initially thought. We may even see GDP numbers get revised up for 2014. All that’s left from a macro perspective is wages.
The whole fortress balance sheet palaver is just a marketing gimmick apparently. JPMorgan Chase has more room to improve its capital base than any of the other big banks according to Stan Fischer at the Fed. That tells you the regulatory environment that we are going into will be harder on banks. The days of 30% returns on capital are long gone now.
Greece’s debt is unsustainable given the policy framework in place in the eurozone. The sooner we see a restructuring of debt held by the Troika, the better the prospects for Greece and the less we should worry about a eurozone breakup. I still think Greece will have to exit the eurozone eventually as none of the issues surrounding its too-high debt burden have been satisfactorily resolved.
This piece by John Cochrane reminds me how the Fed has failed. And here I mean the lack of rules in the Fed’s policy framework as it moves to normalize policy. The Fed is basically making it up as it goes along because we have never been at the zero lower bound. At the same time, however, the problem with time inconsistency in policy says we need to see the Fed create rules it had adheres to no matter what or there will always be questions about whether it will follow through in the future. No one is talking about this any more these days but my view here is that a lot of the volatility we are seeing is due to front running the Fed because of the time inconsistency of monetary policy. See my remarks on this from November 2013: Forward guidance, time inconsistency, and monetary policy.
I don’t have a strong view on this article right now. But the fact that UK house prices are always pegged as elevated on a price-to-rent or price-to-income basis in any international housing study I ever see, makes you think this is a bad thing. When you have people piling in when rental yields are so low and prices are already elevated, the potential for financial distress down the road increases. London has cooled off some in recent months but prices are still out of whack. Ann Pettifor is supposed to be talking to us at Boom Bust today. We will try to get her read on this.
Uber was worth $3.5 billion in a funding round in 2013. In its latest funding round, it raised money at a $41 billion valuation. Yet, at the same time, its legal and regulatory hurdles seem to be increasing. Personally I like the concept that we are getting greater choice and competition. Nevertheless, from an investing perspective, the numbers surrounding Uber scare me because they point to an accelerating mania-like appetite for these companies. And manias end badly, with lots of spillover effects into the broader market. Companies like Uber have a lot of money tied up in their residual value if one runs their projected revenue streams through a discounted cash flow model. This implicitly means that growth and discount rates matter a lot more to Uber so that you need a large margin of error to feel like this particular investment will work out. I think we are in a land grab scenario here. In that sense, a “bubble” seems almost inevitable. The question is what comes after this bubble deflates. That’s my worry.
My concern about froth associated with huge increases in credit is a lot greater than bubbles stemming from innovation, where debt is less of a factor. So what’s going on in shale oil and what we see in China is definitely more problematic for global growth and market contagion. This article highlights the risks. I don’t have much more to say about it.
Here’s another one on shale. The question is how long the prices stay low and what kind of breakevens these companies have. $50 oil is a situation the fracking industry cannot survive for long without a massive decline in capex. I am expecting the low oil prices to remain in place and for consolidation in this sector to occur. The more decline in price we see, and the more brutal the consolidation, the greater the likelihood of contagion. High yield and leveraged loans are already seeing the impact. There is no crisis there yet, however.
I am going to end it there except to note that Karl-Otto Pöhl, the Bundesbank head from 1980-1991 has died. he presided over an important era in German central banking history and is an important figure in German and European history. R.I.P.