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Five Things You Need to Know: Consumer Becoming Desperately Resilient; Oh, THAT Contagion; Mishkin: The Fed Is In Control; The Coming Singularity; What Does Singularity Mean for You?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Consumer Becoming Desperately Resilient

The financial news headlines this morning are trumpeting the incredible consumer "resilience" shown by the "surprising increase" in consumer spending. This desperate belief in "resilience" misses the point entirely.

  • The Commerce Department this morning said spending rise 0.6% in August. the largest increase in four months.
  • "Consumer spending in the U.S. rose more than forecast in August, suggesting Americans are as yet undeterred by a softening labor market and higher borrowing
    costs," Bloomberg said.
  • Maybe.
  • But here's the key datapoint from where we sit since we already know that Target (TGT) and others are forecasting weaker September sales on cutbacks in consumer spending:
    Personal saving as a percentage of disposable personal income was 0.7% in August, down from 0.9% in July, but a million miles away from the lowpoint -0.3% in July 2006.
  • Even with the miraculous government "mis"calculation that recently turned more than 17 consecutive months of negative personal savings into positive personal savings, we expect this trend toward increased savings to continue as risk aversion and balance sheet repair becomes more firmly entrenched psychologically.
  • Even as the Fed does its part to savage savers by destroying the value of the currency, this only works so long as appetites for risk and credit give power to those policy tools.
  • The Fed can lead a horse to the credit trough, but can't make it drink.

2. Oh, THAT Contagion

According to data compiled by Bloomberg, profits in the U.S. may grow at the
slowest rate in more than five years this quarter affecting companies from Target (TGT) to Wal-Mart (WMT) to Merrill Lynch (MER).

  • Since Aug. 20, at least 52 Financial and Consumer Discretionary companies in the Standard & Poor's 500 have issued third-quarter forecasts that met or fell short of
    analysts' estimates, Bloomberg reported.
  • A mere 10 that said earnings would be higher than forecast.
  • This is one of the reasons we continue to recommend avoiding Financials and Consumer Discretionary sectors.
  • This also pressures the S&P 500 itself.
  • With Financials comprising 20% of the index, it's a significant headwind for indexers if those sectors are faltering.

3. Mishkin: The Fed Is In Control

Last night Federal Reserve Governor Frederic Mishkin gave an interesting speech at the "Domestic Prices in an Integrated world Economy Conference" in Washington on "Globalization, Macroeceonomic Performance, and Monetary Policy."

  • According to Mishkin, "The Federal Reserve and other central banks retain the ability to stabilize prices and output."
  • And "central banks still retain the ability to control short-term interest rates, which
    affect the domestic cost of credit and long-term interest rates, and so can
    continue to do their job of stabilizing inflation and output."
  • Perhaps he wrote this speech before August.
  • Either way, the quote of the day comes near the end of his speech when he makes this astonishing claim:
    "Has globalization been an important part of the story of inflation's remarkable decline in recent years? In terms of direct effects, the discussion here provides a clear-cut answer: No. Inflation has come down in the old-fashioned way. Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation and an anchoring of inflation expectations."
  • What's hilarious - and we mean "hilarious" in the most cynical way possible - is that we read the Mishkin speech not 10 minutes before reading a Bloomberg article from John Wasik (CPI's Lie on Household Inflation Doesn't Wash) that noted the following: "The U.S. consumer price index continues to be a testament to the art of economic spin."
  • Wasik notes that "millions are falling behind inflation because wage increases aren't keeping pace with the cost of medical care, lost employment benefits, homeownership expenses, energy and transportation.'
  • True enough. The net effect if this cyclical upturn in inflation, however, is NOT MORE INFLATION.
  • That is the disconnect.
  • The seeds of long-term malinvestment and overproduction - globally - that masquerade today as " benefits of globalization" are now beginning to wilt under central bank policy that is precisely the opposite - demonstrably - that Mishkin describes as "tighter monetary policy and a commitment to price stability." The opposite.
  • For inflation to create more inflation, which seems to be what everyone is looking for these days, there must be consumers with both the desire and the ability to push forward purchases to get ahead of rising costs.
  • The alternative is inflationary pressures that terminate at the point where appetite for credit diminishes and transitions to risk aversion.
  • In other words, these speeches by Federal Reserve speakers congratulating themselves on successfully defeating inflation are in reality unwittingly congratulating themselves on simply being around at the very beginning of the deflationary credit contraction.

4. The Coming Singularity

In a grander context, Mishkin's view of central bankers hovering just above the financial markets like master puppeteers is exactly what one would expect from a bureaucrat with a vested stake in perpetuating the myth of central bank control. Fortunately, we don't have to look very far to find a different view.

  • An interesting article found via the Wired blog covers a recent speech by president of Clarium Capital Management and PayPal founder Peter Thiel on the investment impact of the coming "Singularity."
  • "The singularity will either be really successful, in which [case] we're going to have the biggest boom ever, or it is probably going to blow up the whole world," Thiel said, only half-joking.
  • Singularity refers to the creation of "smarter-than-human" computers whose participation in life rapidly accelerates toward meaningful consequences.
  • Leading up to this Singularity, according to Thiel is "a world full of massive manias, booms and busts on a scale unprecedented in all of history."
  • So far, so good.

5. What Does Singularity Mean for You?

OK, so this notion of Singularity, "smarter-than-human" intelligence that may or may not be good for us in the long run, is somewhat intriguing. As Thiel explains, the impact for humans is sort of up in the air: "There is the possibility of things going extraordinarily well or extraordinarily bad." How bad would "bad" be from an investment perspective? Thiel says, "Even if you put all your money into gold coins and silver chests and hide it in some forgotten corner of the planet... when the world does come to an end, there will be nothing left to buy and to sell and probably some humans or robots or something else will have come along and taken your gold away from you." Wow, that sounds bad. Fortunately, we have obtained some guidelines and "Frequently Asked Questions" for what to expect from the coming "intelligence explosion."

FAQ 1 of 6:

Now that the "smarter-than-human" robots are in control and harvesting the Earth for natural resources to send to the new Robot Planet, when can we expect the next shipment of human medicine, food and supplies to arrive?

This is a great question. If we use chemical-fueled rockets of the kind used in the Apollo mission to the moon, it would take us approximately 50,000 years to travel back to Earth from our new planet, which we prefer you not call "Robot Planet" since we consider that an insult and instead ask that you refer to it simply as the planet "Smarterthanyoupiter."

This is a picture of "Warp Drive" which can cut travel costs from Smarterthanyoupiter to Earth by as much as 49,997 years. However, we think it is a little pricey for us to use it for inconsequential things such human food and medicine.

FAQ 2 of 6:

How many of you will be coming back to help us?

Yes. Well, that's a bit tricky. See, we won't actually be returning ourselves, not physically anyway. Haha. The nuclear radiation exposure would kill us! For dangerous missions such as this we'll be sending cargo ships manned by sub-androids with special hologram projection instructional messages from us - sort of like in the first
Star Wars movie when Luke accidentally discovered Princess Leia's hologram "help" message in the R2D2 robot. Only our message will not be a "help" message, but will instead feature detailed instructions on how you should help the sub-androids load the cargo ships with the materials we need from you.

Android hologram message. (Reenactment)

FAQ 3 of 6:

How will you know how many ships to send so you can transport everyone off Earth?

Uh, right. Yes. Good question. I think what we need to focus on here, however, are the details of how to separate and organize the piles of salvage materials and natural resources we are harvesting. We'll need you to prioritize things by their platinum and silver content, of course. Also, I think you will really, really like the sub-androids. They are very friendly and have a pleasant, human-like demeanor as long as you obey their commands.

Sample sub-android. (Image not to scale.)

FAQ 4 of 6:

What will we be able to bring with us on the evacuation ships?

Another good question. It is important not to mistake the friendly, human-like demeanor of the sub-androids for weakness. Also, while they may appear to lack mobility, they actually have the ability to fly and shoot lasers out of their eyes which, we want to emphasize, although they look exactly like eyes, are not really eyes, but laser guns.

Note lasers shooting out of the androids eyes.
(NOT a reenactment.)

FAQ 5 of 6:

How long will the boarding process take, and will the trip affect us physically?

You do understand that the sub-androids have laser guns for eyes, don't you? Because we want to be really, really clear on this. You know the sub-androids' eyes? They aren't really eyes. They are laser guns. Also, the laser guns really work. We tested them.

Look closer at how the sub-android's eyes are shooting lasers out of them.
(Again, NOT a reenactment. We are totally serious about this.)

FAQ 6 of 6:

Will we be able to sleep on the spaceship trip when we leave Earth?

Hmm, let's try a different approach. You know how laser guns can emit a burst of energy that completely evaporates the particles of any substance that can be found anywhere on the planet Earth? Ok, imagine those laser guns are coming out of a sub-android's eyes directly at you! Also, imagine that the sub-androids can read minds, and that the lasers will automatically shoot out of their eyes when a human only very briefly thinks about disobeying them. Because we programmed them to do that.

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