Wall Street’s Latest Bounce – Ostrich Economics At Work – David Stockman’s Contra Corner 10-20-15

Salient to Investors:

David Stockman writes:

The price of financial assets is now artificial and wildly inaccurate. $300 trillion of global finance cannot remain stable much longer.

Bulls believe the Fed is on hold until at least next March, while Wall Street is projecting S&P 500 earnings of $130 per share on an ex-items basis for 2016, and which will never happen. The S&P is overpriced at 21 times earnings, and at 30 times trailing earnings or more when honest GAAP earnings for Q3, 2015 come in at $95 per share or less, versus the peak $106 per share in Q3 2014. More than $5 trillion of current cash flow and new debt is now allocated to corporate stock buybacks, M&A deals and LBOs.

Alan Blinder and Mark Zandi admit QE has possible negative side-effects, but say that for the most part they have yet to materialize. All the while the global economy heads into a deflationary conflagration.

This mother of all bond market bubbles will bring down the entire financial system when it inexorably bursts: central banks have vast powers, but they cannot repeal the law of supply and demand. $19 trillion of central bank bond-buying during the last two decades has dominated debt pricing on the margin for most of this century. Last week’s 60 basis points for 2-yr treasury notes or 210 basis points for 10-yr money do not reflect a surfeit of private savings or business and household hoarding of cash but a giant surplus of credit.

Real net business investment is still 17% below its 2000 level. Junk debt has risen from $1.3 trillion at the 2007 peak to more than $2.5 trillion today driven by yield-starved money managers and homegamers.

Debt-crippled, junk-rated Dell is buying EMC for $67 billion, or 17 times free cash flow for 1% annual growth, funded almost entirely with junk debt and tracking stock on EMC’s major asset, a public company that pays it no dividends or other regular cash returns. In a PC industry which is disappearing at a rapid rate.

China is headed for massive economic and financial conflagration, which will spillover into the rest of the world because the entire emerging market economy was built on China’s runaway economy and investment bubble. China’s insane accumulation of foreign exchange reserves over two decades of massive and blatant currency pegging could not continue indefinitely which is why it has seen $850 billion capital outflow of the last 4 or 5 quarters and a $500 billion drop in FX reserves since late 2014. There is no way to manage a $28 trillion house of debt cards, which grew by 56 times in less than two decades, to a soft landing.

The bubble is bursting in socialist Brazil, in Australian mining, in Canadian real estate, in the North Dakota Bakken, and in the German export machine, as China and its EM suppliers are being forced into liquidating dollar and euro credit, and stop buying luxury cars and engineering machinery on borrowed money.

Read the full article at http://davidstockmanscontracorner.com/wall-streets-latest-bounce-ostrich-economics-at-work/

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Why The Stock Market Casino Is Dangerous: The Case Of Looney Tunes In the Sand Dunes – David Stockman’s Contra Corner 01-02-15

Salient to Investors: 

David Stockman writes:

  • Emerge Energy Services’s parabolic rise from its IPO and absurd valuation demonstrates the momo play by robots, day traders and flavor-of-the-month hedge funds in a stock market that has been destroyed by the Fed. Emerge is a poster boy for the irrational exuberance that has become institutionalized throughout the Wall Street casino, and a template for the deluge to come.
  • Fed policy has massively subsidized momo speculators firstly because they mostly operate either through the options markets or use heavy, short-term position leverage, and secondly because day traders need to take out downside insurance against their momo bets by buying puts on the S&P 500 – at dirt cheap premiums thanks to the Fed’s drastic financial repression and market manipulation.
  • The absurd doctrine of “wealth effects” and the implicit Greenspan/Bernanke/Yellen “put” has generated a toxic deformation in the risk asset markets – buying-the-dips has purged volatility from the broad market index almost entirely. Nearly 6 straight years of continuous vertical rise would never ordinarily happen in an environment of virtually no GDP growth in the US and Europe since 2007 pre-crisis levels, and earnings that face massive headwinds from global cooling, deflation and the heavy anchor of “peak debt”.
  • No financial market can be healthy and balanced without an abundance of well-capitalized short-sellers, now destroyed by financial repression and conversion to longs.
  • Credit bubble oil prices attracted enormous supplies of cheap debt and capital into high cost energy production, especially the US shale patch where sand dunes became the equivalent of gold mines.
  • At $50 per barrel, the 1600 rigs in the petroleum patch will drop to under 1,000 as contracts run off, and then fall further. Fracking demand is driven by new drilling and not current production so its fall-off in demand will be as severe.

Read the full article at http://davidstockmanscontracorner.com/why-the-stock-market-casino-is-dangerous-the-case-of-looney-tunes-in-the-sand-dunes/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

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Fareed Zakaria GPS – CNN 11-30-14

Salient to Investors:

Fareed Zakaria said:

  • All through history, humans have advanced when they have been able to work together. Matt Ridley said human progress took off when human beings began exchanging things, ideas, skills, goods, services.
  •  Teamwork is the most crucial skill and yet education is mostly about solo performances.
  • If you want to innovate, think crazily, work with others, think big, be creative, and keep up with your math.

Walter Isaacson said:

  • Steve Jobs said creating a product is hard but creating a team, a company, is even harder.
  • Creativity is a team sport, a collaborative effort. You need a visionary and somebody who can everyday execute because vision without execution is just hallucination.
  • America has become a much more partisan society. The increased tension between government, corporations, and universities is diminishing the spirit that helped create the digital revolution.

Travis Kalanick of Uber said:

  • The most successful in Silicon Valley are the ones who do not accept failure ever – but are empathetic to reality.
  • Innovation is really about creative problem solving.
  • It’s so easy to talk about failure when you’re not failing. Those who talk of failure and how it is easy to do in Silicon Valley are people who have succeeded – but they were once scared out of their minds of failing.
  • It is very hard to be successful with something that the world hasn’t seen before.
  • America s dominance in technology will continue.
  • Beijing is a very young, vibrant Silicon Valley.

Peter Thiel said:

  • Most of what we call innovation is not innovation
  • Though we have had enormous innovation in the world of computers, we have had much less innovation in the world of atoms and energy and food technology, biotech, medicine, space travel, supersonic airplanes.
  • The companies that succeed in building breakthroughs are those that create the best bulk of all value.
  • Failure is very overrated. 20,000 people a year move to Los Angeles to become movie stars, but only 20 make it.

Linda Rottenberg at Endeavor said:

  • The two fastest growing groups in America that are starting businesses are women and baby boomers over 55. Yet only 6-8 percent of venture-backed businesses are started by women.
  • Entrepreneurs are a fancy word for doers, and are people who view the world differently and allow themselves to be contrarian.
  • Entrepreneurship is about a series of mini innovations and executing well.
  • You are the person that is holding you back.
  • The most successful entrepreneurs are those that believe being called crazy is a compliment and that if you are not called crazy you are not thinking big enough.

Vinod Khosla at Khosla Ventures said:

  • 80 percent of what doctors do will be done by computers in 20 years. There are 15,000 diseases, 15,000 devices, drugs, therapies, prescriptions so a doctor who graduated 25 or more years ago simply cannot remember what he learned. No cardiologist has read even 100 of the last 5,000 articles published last year on cardiac disease.
  • 20 years from now, there will be very few areas, maybe none, where human judgment is better than machine judgment.
  • The jobs eliminated will be those that people think of as work and drudgery
  • Within 50 years we will see an era of abundance and extremely high productivity – producing enough goods and services for all.

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

at http://edition.cnn.com/TRANSCRIPTS/1411/30/fzgps.01.html


The Boom Is Coming, and Sooner Than You Think – BloombergView 07-18-14

Salient to Investors:

Gary Shilling writes:

  • Persistently slow growth will NOT be the norm for years to come. When private-sector deleveraging is completed, real GDP growth will return to its long-run trend of 3.5 percent or more.
  • Productivity will return to 2.5 percent annual growth or more after deleveraging is completed, in 4 years or so. Productivity was higher in the 1930s than in the 1920s, driven by the new technologies from the 1920s.
  • Labor-force growth will return and the decline in the labor-force participation rate will slow when normal economic growth resumes.
  • High government debt does not depress GDP, as Reinhart-Rogoff contend, but rather the reverse – slow growth causes deficits and debt levels to rise. Rapid economic growth pushes down the federal debt-to-GDP ratio directly as the denominator rises. The debt-to-GDP ratio will fall significantly, as it did from 122 percent in 1946 to 43 percent in 1966, and in the late 60s and 70s, and in the 90s.
  • Slow economic growth, as from 2000 to 2012, pushes up the debt-to-GDP ratio directly.
  • The 800-pound gorilla in the room – Social Security and Medicare outlays for retiring baby boomers – will be solved by Washington when there is no other choice.
  • Technology – the Internet, biotech, semiconductors, wireless, robotics and 3-D printers – is in its infancy, and rivals the engines of the American industrial revolution and railroads in the late 1800s, and autos, electric appliances and radio in the 20th century. Only a third of the world’s population is connected to the Internet but 90 percent live within range of a cellular network.

Read the full article at http://www.bloombergview.com/articles/2014-07-18/the-boom-is-coming-and-sooner-than-you-think

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Boomers as Retail Clerks Shows Why Greenspan Saw Low Growth Era – Bloomberg 12-18-13

Salient to Investors:

  • Expanding populations fueled global prosperity with both workers and consumers but global aging threatens to cause chronically weak economic growth, a more volatile international economy and the risk of a new financial crisis triggered by innovative investments dubbed “death derivatives.”
  • Rob Arnott at Research Affiliates said our era of the most benign demography for GDP growth in history is ending, and a future with vast numbers who no longer produce and a diminished workforce assures class and generational conflict. Arnott and colleague Denis Chaves said living standards will rise more slowly as the demographic tailwind of the post-World War II era turns into a headwind.
  • A 2012 National Academy of Sciences study predicts US output per person through 2030 will rise only two-thirds as fast as in the past half-century due to falling birthrates and longer lifespans. The ECB says European workers must double their productivity – to levels seen in the 1990s Internet boom in the US – for economic growth to reach just 2 percent.
  • China’s working-age population over the next two decades will shrink as a result of its one-child policy, reducing more than 2 percent from annual growth.
  • The IMF posits that central bankers’ traditional tools may prove ineffective in economies dominated by older populations, leading to greater volatility, while persistently low interest rates could invite frequent brushes with deflation or reckless private-sector borrowing.
  • The BIS said that if people live just 3 years longer than current forecasts – or the typical margin of error – the $15 trillion to $25 trillion in global pension fund obligations will increase by $1.4 trillion to $3 trillion, and losses arising due to longevity risk may affect destabilize the financial system.
  • An American male born in 1940 had a life expectancy of just over 61 years versus over 76 years if born in 2012.
  • The National Academy of Sciences said that the US is not facing an insurmountable challenge if it adopts early changes to Social Security, Medicare and Medicaid, higher savings rates and longer working lives.
  • 19 percent of Americans age 65 and older work, the highest level since 1965 and almost twice the 1985 low.
  • Eurostat predicts that by 2050, fewer than 2 European workers will support each retiree versus 4 today.
  • The Census Bureau estimates that by 2030, more than 1 in 5 Americans will be at least 65 versus 1 in 7 today, and by 2056, the over 65s will outnumber the under 18s for the first time.
  • George Magnus at UBS said the labor supply is going to become stressed, and a return to 3 or 4 percent growth is not going to happen. Magnus said immigration at 10 to 20 times current levels could help Europe avoid further declines in the working-age share of its population but that is not going to happen.
  • The US labor force over the next decade will grow at an annual rate of just 0.5 percent, or one-fifth the rate between 1974 and 1981.
  • Annual US growth rates will likely fall below 2 percent versus more than 3 percent during the two decades that preceded the last recession.
  • National Academy of Sciences said that even if the US admitted almost 1 million extra immigrants each year, the retiree-to-worker ratio would continue rising.
  • More than 40 percent of Japan’s population is neither employed nor looking for work.
  • Greenspan said the sheer number of retiring baby boomers already has rendered obsolete the inverted yield curve forecasting tool.
  • Patrick Imam at IMF said older individuals have little appetite for borrowing or risk so may be less sensitive to interest-rate movements than younger populations. Imam said the Fed et al may need to act more dramatically to manage an economy dominated by the old: like raising or lowering interest rates by a full percent rather than the customary quarter-point moves.
  • Most corporate pension plans already are underfunded: Towers Watson say the 429 Fortune 1,000 companies that sponsor defined-benefit plans were $418 billion short at the end of 2012.
  • Amy Kessler at Prudential Financial said pension managers do not use up-to-date tables and so may perceive that their liability is lower than it actually is.
  • If each covered person lived on average one year longer than anticipated, the global pension bill would rise by $450 billion to $1 trillion. A cure for cancer, for example, would mean that the investment banks et al that assume longevity risk would face catastrophic losses as pension plan participants lived years longer than envisioned.
  • Adam Posen said the demographic changes facing pension funds and insurance companies is scary and remain among the biggest dangers for which there is simply no good answer.

Read the full article at http://www.bloomberg.com/news/2013-12-19/boomers-as-retail-clerks-shows-why-greenspan-saw-low-growth-era.html

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Jeremy Grantham’s Bullish Two-Year Outlook – Barron’s 11-19-13

Salient to Investors:

Jeremy Grantham at BMO writes:

The Greenspan-Bernanke policy of excessive stimulus, now administered by Yellen, will continue, and that the path of least resistance, for the market is up.

It would take a severe economic shock to outweigh the effect of the Fed’s relentless pumping of the market as seen by its continued advance despite almost universal disappointment in economic growth.

US stocks, especially the non-blue chips, will rise 20% to 30% in the next 2 years, with the rest of the world including emerging market equities outperforming in at least a partial catch-up. Then we will see the third market bust since 1999.

US stocks are badly overpriced with the prospect of negative real returns over 7 years. The sharp and unexpected uptick in parts of the US IPO market indicates we are in the slow build-up to a badly overpriced market and bubble conditions.

Most foreign markets are overpriced but less so.

There are few signs of a traditional bubble in equities – US individuals are not yet consistent buyers of mutual funds. There are no wonderful and influential theories as to why the P/E structure should be much higher today as there were in Japan in 1989 or Greenspan’s theory of the internet driving away the dark clouds of ignorance and ushering in an era of permanently higher P/Es in 2000, though today’s unprecedented margins, usually the most dependably mean reverting of all financial series, are apparently now normal.

Prudent investors almost invariably must forego the fun at the top end of markets so should now be reducing their equity bets and their risk level in general.

Yellen also thought the housing bubble merely reflected a strong economy and has happily gone along with the failed Fed policy of hoping for a different outcome despite repeating exactly the same thing. The consequences threaten to be just as bad again within 2 or 3 years. Greenspan had had no serious job prior to becoming Fed chairman, and a proven record of almost laughable failure as an economic prognosticator to the stock market in the 1970s.

The crash of 2008 is overwhelmingly seen as a financial event, but commodity price rises and the only US-wide housing bubble in history are understated in their contribution. The general bias in our economic thinking exaggerates the significance of the financial, paper world at the expense of the more mundane, but more important, real world.

We had the largest ever price rise in oil and other commodities, despite the absence of inflation in wages and consumer prices, hurting demand. Oil prices rose due to the rapidly rising long-term cost of finding and delivering oil and short-term shortages. The housing bubble was GMO’s warning signal.

We are almost back to normal in home ownership, perhaps within a year of full readjustment of the excesses.

The wealth effect from housing is greater than from the stock market and more dangerous, because home ownership involves over 30% more of the general public and those additionally impacted had typically far less liquidity to deal with a crisis than did stockholders.

Economic growth is slowing down globally, most obviously in Europe, and has a 25% chance of overwhelm even the Fed in the next 2 years. The general lack of global fiscal stimulus and almost precipitous decline in the US Federal deficit do not help.

Economist Kenneth Boulding believed economics had lost its way in a maze of econometric formulas, which placed elegance over accuracy.

The theory of rational expectations does not fit the real world and resulted in 5-7 decades of economic mainstream work being largely thrown away.

Efficient Market Hypothesis is the most laughable of all assumption-based theories, which tells us that investment bubbles have not occurred and could never occur, despite at least 4 of the great investment bubbles in all of investment history in the last 25 years – Japanese stocks in 1989, the Japanese land bubble in 1991, US stocks in 2000, and the first truly global bubble in 2007 in global stocks, fine arts and collectibles, and almost all of the real-estate markets. Brainwashed by the EMH, Bernanke and Yellen could not, or would not, even recognize the risk.

During the 1970s and 1980s, EMH helped reduce the number of quantitatively talented individuals entering the money management business.

The S&P 500 is within ±19% of its trend two-thirds of the time. Volatility is 19 times more than justified by underlying fundamentals, caused primarily by individual investors driven by behavioral factors that result in herding – non-experts simply feel more comfortable in a herd, and being wrong on your own is the cardinal crime for an investment manager so managing career risk results in very destructive herding and a great deal of extrapolation.

Extrapolation dominates the workings of the market. Keynes said extrapolation is a convention we adopt even though we know from personal experience that it is not applicable in the real world. For example, in 1982, 30-year bonds peaked at a 16% yield as inflation touched 13% so to extrapolate a full 13% inflation is as foolish as extrapolating currently very low inflation for 30 years. The same is true for extrapolating profit margins.

Economist Hyman Minsky said periodic financial crises were well-nigh inevitable because a form of extrapolation would occur with stability generating more risk-taking and on into a spiral until something inevitably would go wrong.

Despite high UK housing prices, the UK government is encouraging more leveraged mortgages, guaranteeing new mortgages over 5% that will further push prices up so that new buyers can only afford houses at low mortgage rates.

Read the full article at http://online.barrons.com/article/SB50001424053111904253404579207793809107008.html#articleTabs_article%3D1

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