We’ve Seen This Picture Before – Global Markets Down $13 Trillion Already – David Stockman’s Contra Corner 09-29-15

Salient to Investors:

David Stockman writes:

  • The global economy is drastically overbuilt on $225 trillion of debt. The 2008 collapse was quickly arrested by unprecedented central bank money printing, which is unavailable this time around because interest rates cannot go any lower and QE does not stimulate economies at peak debt, and only inflates financial asset prices.
  • Emerging market central banks must shrink their domestic monetary system and credit to prevent massive capital flight. Developed market central bank have inflated financial asset prices but not the main street economy.
  • Corporate profits will accelerate their decline in the year ahead and valuation multiples will contract for the foreseeable future due to the coming worldwide recession caused by accelerating global commodity price declines, capital spending plunge, and declining trade volumes.
  • The S&P 500’s rise of nearly 1000% from October 1987 to the May 2015 peak was due to central bank money printing and not the domestic business cycle or economic growth. Real median household income since 1989 has not changed.
  • Bull markets do not die easily, especially those caused by easy money and central bank bailouts, so expect market tops to be tested again and again – for the S&P 500 in the 2075-2125 range – until dip-buyers capitulate.

Read the full article at http://davidstockmanscontracorner.com/weve-seen-this-picture-before-global-markets-down-13-trillion-already/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Wednesday

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Fareed Zakaria GPS – CNN 09-27-15

Salient to Investors:

Fareed Zakaria said the Syrian civil war will not end any time soon.

Bill Clinton said:

  • Without a nuclear agreement with Iran 1 to 4 other states would get nuclear power in the Middle East. 10 years is a long time: from 1979-1989, the Berlin wall fell, the Warsaw Pact collapsed, the Soviet Union ended.
  • Ukraine is very resource rich and can do much with agriculture.

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/

or read the full transcript at http://transcripts.cnn.com/TRANSCRIPTS/1509/27/fzgps.01.html

It’s Not Over For Volkswagen; Deutsche Bank Downgrades ‘Polluted’ Stock – Benzinga.com 09-23-15

Salient to Investors:

Tim Rokossa at Deutsche Bank said:

  • Uncertainty related to Volkwagen’s emission scandal will persist and its impact poses even higher risks for VW’s future cash flows.
  • The history of recalls shows that the first ‘confessions’ are rarely the end of it.
  • Legal fees will be manageable as their effect is usually spread over several years.
  • More concerning is the impact on volumes, residual values, pricing and costs.

Read the full article at http://www.benzinga.com/analyst-ratings/analyst-color/15/09/5859512/its-not-over-for-volkswagen-deutsche-bank-downgrades-pol?utm_campaign=partner_feed&utm_source=marketwatch.com&utm_medium=partner_feed&utm_content=analyst_ratings_page

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Volkswagen emissions scandal could be just the beginning, Wall Street says – Wall Street Journal 09-23-15

Salient to Investors:

Barclays said car makers face more pollution control expense in the wake of VW’s scandal.

Stifel said the Intl Council on Clean Transportation has found questionable diesel emission results across several unnamed makers and more widespread vehicle recalls pose significant near-term risk for European car makers.

Morgan Stanley expects VW to face fines and compensation expenses from $9bn to $27bn and its earnings could be meaningfully affected, and maintained a Hold rating on the stock, citing insufficient clarity to rule out further downside risk. Morgan Stanley said VW’s global sales continue to be much weaker than many of its peers and the EPA disclosures could exacerbate this weakness.

Read the full article at http://www.marketwatch.com/story/volkswagen-emissions-scandal-could-be-just-the-beginning-wall-street-says-2015-09-23

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Opinion: Think VW’s stock can make you rich on a rebound? Think again – MarketWatch 09-23-15

Salient to Investors:

The final value of fines and lawsuits is not yet known so it is too early to bottom-fish Volkswagen stock. Cheating on emissions rules has affected 11 million VWs worldwide and it is not yet known how many countries’ regulators will get involved.

George Young at Villere looks for special situation stocks with single events that are assessable and containable, like Carnival and Apple, but unlike stocks like BP, where it took 3 months to cap the well and the ultimate total of fines and civil suits was indeterminable, and Volkswagen. Young prefers US companies because of GAAP accounting and liquidity and opportunities for diversification.

When picking stocks on special circumstances, look for growth and not just recovery plays.

Read the full article at http://www.marketwatch.com/story/think-vws-stock-can-make-you-rich-on-a-rebound-think-again-2015-09-23

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The Fall Of Volkswagen: How Analysts Are Reacting – Benzinga.com 09-22-15

Salient to Investors:

Tim Rokossa at Deutsche Bank said the consequences of Volkswagen’s intentional cheating could be far larger than in previous auto manufacturer cases, and makes its US turnaround significantly harder: though companies who fully cooperated with regulatory agencies received lower fines.

Harald Hendrikse at Morgan Stanley said Volkswagen faces penalties, significant costs to bring the cars involved into compliance, and a tarnished brand image, and while the company has plenty of net cash, its operating performance will suffer for some time.

Stephen Reitman of Societe Generale said a bigger concern for Volkswagen than the potential fine is the risk of criminal charges and the damage to its reputation because it used its clean diesel claims to differentiate itself.

Douglas Karson at Bank of America said the reported $37,500 fine per vehicle is very high considering the recall and penalties surrounding Navistar, GM and Toyota.

Alexander Haissl of Credit Suisse said Volkswagen’s €6.5 billion provision to cover legal costs is unlikely to be the final cost given regulatory penalties, civil litigation and market share losses, and will pressure its balance sheet and dividend payments.

Read the full article at http://www.benzinga.com/analyst-ratings/analyst-color/15/09/5857041/the-fall-of-volkswagen-how-analysts-are-reacting?utm_campaign=partner_feed&utm_source=marketwatch.com&utm_medium=partner_feed&utm_content=analyst_ratings_page

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Fareed Zakaria GPS – CNN 09-20-15

Fareed Zakaria said:

  • The US is more dominant globally than at any point since the Clinton era, with growth almost 2 times the Eurozone and 4 times Japan, and unemployment the lowest in 7 years. European businessmen are concerned with American dominance from technology to entertainment to finance. America’s big banks are more dominant than ever.
  • WSJ says JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley have increased their total value by $254.6 billion in the last 5 years versus $9.5 billion total increased value for Barclays, Credit Suisse, Deutsche Bank, UBS and RBS.
  • Japan is the poster child for economic stagnation and political paralysis.
  • Every Western country is experiencing greater anti-immigrant feeling.
  • We should not interfere in Syria.
  • The most serious place in politics remains the center because that is where the majority is.
  • Iran will accept the nuclear deal because Rouhani is the most popular figure there and Khamenei would not want to dash the people’s enormous sense of hope and expectation.

Ruchir Sharma at Morgan Stanley said:

  • The US has emerged from the 2008 crisis better than anyone, has reduced its debt more than Europe, and has outperformed all other equity markets. 9 of the 10 most valuable companies in the world are US. The US dollar is the currency of choice.
  • China’s debt is at extremely dangerous levels.

David Frum at the Atlantic said:

  • There is no end to the huge migration of people from all over the world. Migration in moderation could strengthen Europe but it is not happening in moderation and will transform Europe.
  • You cannot neatly distinguish between refugees fleeing for their lives and immigrants fleeing for better opportunities. You cannot screen out the danger to Europe because it has come from the second generation and from radicalization caused by unemployment, alienation and the inability to assimilate.
  • Germany’s decision on migrants was emotional, not thought through and has unanticipated consequences.
  • Europe has had very bad experiences with migrants: migrants have much higher levels of long-term unemployment, much more dependency on the state, and European prisons have a disproportion of second generation migrants.
  • European governments owe their first duty to their own citizens.

Danielle Pietka at the American Enterprise Institute said:

  • Western Europe must help the migrants, and Merkel has done the right thing, but there needs to be EU wide to make sure the people passing the screening are not shoved in voiliers in Paris or Saudi-run mosques in Hamburg.
  • Russia believes the US is not going to do anything over their involvement with Syria and are there to help Assad.
  • Letting hundreds of thousands of Syrians fight and kill each other is unconscionable, especially for the most powerful and richest country in the world.

David Milband at the International Rescue Committee said:

  • It is harder to get to the United States as a refugee than under any other program.
  • Employment for refugees up to 5 years is higher than for the rest of the population.
  • Merkel is responding to the reality that 350,000 refugees had already arrived this year and that the best way to get a burden sharing arrangement was to take the lead.
  • Migrants should not be confused with refugees, who have a well-founded fear of persecution and a right to international law.
  • The danger is that Britain thinks Russia is a declining power and Russia thinks Britain is a declining power.
  • Russia’s elevated support for Assad is a sign of his weakened position from a year ago. Russia could pull the rug from under Assad because he has become a problem for Russian concern over Islamic radicalism emanating from Syria.
  • In the solution for Lebanon, every community had a stake in government, which is impossible for Syria at the moment.


Thomas Erdbrink at the New York Times said:

  • It is getting harder to figure what Iran’s leaders want and which direction the country is heading.
  • Iran feels it was taken to the cleaners by the nuclear deal but will accept it. The bigger issue for them is whether or not to cooperate with the US in the region. Iran is the only stable state in a divided and troubled Middle East and a weakened Saudi Arabia.

Karim Sadjadpour at the Carnegie Endowment said:

  • Both Iranian supporters and the opponents of the nuclear deal believe their supreme leader agrees with their position. In the end, Iran will accept the nuclear deal because Khamenei does not want to stand between Iranians and economic deliverance.
  • Khamenei’s MO is to wield power without accountability and have a president with accountability but without power, so he will blame Rouhani when popular expectations of the deal are not met. Khamenei has emasculated Iran’s previous 4 presidents.

Gillian Tett at the Financial Times said:

  • Despite living in a hyper-connected world, we are as fragmented, if not more so, than ever before. We fool ourselves into thinking we are no longer captive to our social and cultural rules anymore, but we are.
  • Hyper specialization produces people who cannot see opportunities or risks.
  • Sony is an example of a company filled with bright individuals who did some really dumb things. Different departments did not collaborate with each other and instead cannibalized each other. The result is we now carry iPods and not digital Walkmans.
  • Every company says it wants employees to think outside the box yet almost every company deepens and makes those boxes more rigid. In the name of streamlining everything, companies eliminate opportunities for employees to stop, think, roam mentally or collide with each other. Facebook deliberately moves employees around and recognizes that a box or a boundary can also be dangerous without stepping back to think about the social structure created.
  • Having a background in cultural anthropology helps make sense of how modern companies or modern institutions exist.

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/

or read the full transcript at http://transcripts.cnn.com/TRANSCRIPTS/1509/20/fzgps.01.html

Looking for the lifeboats – The Economist 09-19-15

Salient to Investors:

  • Both equities and government bonds are overvalued but are unlikely to fall in tandem. Long-term investors should ignore short-term market declines because over the long-term, asset prices rise – US equities overcame the dotcom bubble and 2008 financial crisis to reach record highs in 2015.
  • However, equities could be in for a long slow decline, a la Japan, the first rich country to fight deflation and zero interest rates. Japanese equities are still down 50% since the end of 1989, while bond yields have remained very low since the late 1990s. At least Japanese investors could have escaped into foreign assets, but that option is narrowing because all the developed world faces deflation, including emerging markets.
  • Robert Shiller at Yale said more investors fear US stocks are overvalued than at any time since 2000. Deutsche Bank says government bonds are the most expensive they have ever been.
  • AQR research found that:
    • In the 10 worst quarters for global equities between 1972 and 2014, equities lost more than 18% on average, bonds gained 4.8%, commodities and gold gained. Corporate bonds lost value, relative to government bonds.
    • In the 8 bad equity quarters since 1990, hedge funds lost and average of 5.2%, excluding trading costs and fees, but a combination of value, momentum, carry, defensive and trend-following strategies would have produced very good returns, excluding trading costs and fees.
    • In the 10 worst quarters for government bonds between 1972 and 2014, bonds lost 3.9% on average, while equities gained 3.5% on average thanks to a big gain in Q2, 2009, gaining in 6 of the 10, and commodities rose.
  • In the 10 worst quarters for government bonds, cash averaged a small gain.
  • Back-testing strategies is unsafe because there is no guarantee that they will be as successful in future.

Read the full article at http://www.economist.com/news/finance-and-economics/21665026-which-investments-work-best-when-markets-decline-looking-lifeboats

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The zero rate trap – The Economist 09-18-15

Salient to Investors:

No Fed tightening was a sensible decision. The Fed is in a trap: low interest rates have raised global equity markets, whose collapse in August helped in preventing the Fed from raising rates.

Most British homeowners have variable rate mortgages so while interest rate cuts staved off a potential disaster in the housing market, the UK housing market did not return to more affordable price levels as it did in the US.

May Rostom at the Bank of England says:

  • The ratio of house prices to first-time buyer incomes in London is 9.4 versus 2.6 in 1996 and 7.2 at the last peak in London.
  • The 1971-1980 and 1981-1990 birth cohorts face sharply rising debts to get on the housing ladder but their incomes have not risen near as fast.
  • Since 1995, the debt of older generations has barely budged, while that of those aged 25-45 has shot up in real terms. A world where younger households reach 65 and still have debt is possible.
  • The widening wealth inequality across income or socioeconomic categories is also across generations as the low-rate regime has boosted asset prices for the older generations that own the assets.

The Bank of England is in a trap: if it raises interest rates and forces down house prices, young people not yet on the housing ladder would benefit, but for those with high debts, it would be a disaster. Building more houses is not enough: even Savill’s forecast of a 55% rise in homebuilding over a 5-year period would produce only 167,000 units in 2018, versus the 240,000 needed.

Read the full article at http://www.economist.com/blogs/buttonwood/2015/09/asset-markets-and-monetary-policy

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Three economic crises, cutting rates and banning cash – The Economist 09-18-15

Salient to Investors:

Andy Haldane at the Bank of England said:

  • Inflationary reputation is hard-earned and easily lost central bank promises to re-anchoring the rate at some future point is damaging to macro-economic stability.
  • Further QE, especially making it permanent, risks blurring the boundary between monetary and fiscal policy and hurts central bank independence.
  • The “Anglo-Saxon” crisis of 2008-09, the “Euro-Area” crisis of 2011-12 and the potential “Emerging Market” crisis of 2015 onwards are all caused by huge global liquidity, inflated then deflating capital flows, credit, asset prices and growth in different markets and regions. The emerging market growth cycle has turned decisively – The IMF forecasts growth will slow to below 4% in 2015.
  • The risk to UK growth and to UK inflation at the two-year horizon is significantly to the downside, so raising UK interest rates is a ways off.

The average central bank rate decrease in a recession is 3%- 5%, currently not possible, so central banks have 3 options. A) Increase the inflation target, say from 2% to 4% – acceptable because economists believe only double-digit rates are damaging – to try to get workers to demand higher wages to compensate and so create inflationary pressures. B) More QE. C) Impose negative interest rates on commercial bank reserves, which would result in consumers keeping their money out of banks.

Read the full article at http://www.economist.com/blogs/buttonwood/2015/09/economics-and-monetary-policy

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