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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Yellen’s Economy Echoes Burns’s More Than Greenspan’s – Bloomberg 07-07-14

Salient to Investors:

  • The economy resembles the 1970s more than the 1990s.
  • Alan Blinder at Princeton sees risk of the economy moving in the same direction as it did after 1973, though we are a long way from seeing a sustained rise in inflation. Blinder said the long-term trend in productivity growth is what is important in determining the inflation outlook.
  • Stephen Stanley at Pierpoint Securities said June’s drop in the unemployment rate to an almost 6-year low highlights the dilemma facing the Fed: slower productivity growth is causing joblessness to fall faster than the Fed expected while GDP is rising more slowly than expected. Stanley expects the Fed to raise interest rates in June 2015.
  • Martin Feldstein at Harvard sees rising inflation and expects the Fed to respond too weakly, too slowly.
  • Joe LaVorgna at Deutsche Bank Securities sees long-term interest rates going a lot higher, with the 10-yr T-yield hitting 4 percent, as price pressures intensify and the Fed’s response lags.
  • Michael Feroli at JPMorgan Chase said the Fed’s model recognizes that unexpected changes in productivity growth can affect inflation, so the question is whether this impacts their decisions on interest rates. Feroli expects the Fed to raise interest rates in Q3 2015 because the Fed’s mandate is not strong productivity growth, but full employment and price stability. Feroli said the economy’s cruising speed is 1.75 percent or lower, versus the Fed’s projection of 2.1 percent to 2.3 percent.
  • Charles Plosser at FRB of Philadelphia is not worried about short-term inflation, but dislikes Yellen’s emphasis on wage growth, which is a lagging indicator of inflation.

Read the full article at http://www.bloomberg.com/news/2014-07-07/yellen-s-economy-echoes-arthur-burns-more-than-greenspan.html

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Fed Taper Would Swap Stimulus for U.S. Market Stability: Economy – Bloomberg 07-08-13

Salient to Investors:

Stephen Stanley at Pierpont Securities sees nothing on the economy side to have precipitated such a seismic shift in the Fed’s approach to QE. Stanley said QE was contributing to a market environment where people were taking too much risk, and the beginning of tapering in September is a lot more predetermined than the Fed is letting on.

Michael Gapen at Barclays says making the unemployment rate the dominant factor in determining the course of monetary policy has made it easier for officials to make the case for taking the foot off the accelerator, so near-term there will probably be less volatility on any data point that is not related to unemployment. Gapen expects tapering to begin in September and end by March 2014.

James Bianco at Bianco Research said if the Fed were truly data dependent, it should have been talking about increasing or extending QE, not about getting out. Bianco said it is no longer just about the economy, it’s also about the markets, and QE is distorting markets – when you distort markets, things end badly.

Alan Blinder at Princeton said there is some sentiment on the FOMC that a primary consideration should be that investors are taking on excessive risk in search of yield, though how much of that sentiment in Bernanke himself is unknown.

Michael Woodford at Columbia University says it is also important to tell investors that as the Fed balance sheet gets bigger, the bar to justify additional purchases rises.

Read the full article at  http://www.bloomberg.com/news/2013-07-08/fed-taper-would-swap-stimulus-for-u-s-market-stability-economy.html

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Where Bank Regulators Go to Get Rich – Bloomberg 04-07-13

Salient to Investors:

William D. Cohan writes:

Mary Schapiro, the former chairman of the SEC is joining a firm loaded with former government financial-services regulators. Schapiro previously ran FINRA, Wall Street’s self-appointed watchdog.

Alan Blinder at Princeton is a co-founder of Promontory Interfinancial Network which offers Insured Cash Sweep, which splits large deposits into $250,000 pieces that each qualify for FDIC insurance.

Nassim Nicholas Taleb said Promontory’s Insured Cash Sweep allows the super-rich to legally scam taxpayers by getting free government sponsored insurance. Taleb says Schapiro is morally repulsive because there is an “implicit deal” whereby regulators such as Schapiro and Blinder make regulations complex and then sell their services at a higher price when they go to the private sector – no regulator will ever make a regulation that’s clean anymore.

Read the full article at http://www.bloomberg.com/news/2013-04-07/where-bank-regulators-go-to-get-rich.html

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Alan Blinder – Charlie Rose 03-20-13

Salient to Investors:

Alan Blinder at Princeton said:

Bernanke has done a very good job and will stay if he wants it. Has an A+ on keeping inflation low and D- on keeping unemployment low. His Lehman Bros decision was wrong and was a turning point after which everything fell apart.

Fed is fighting fiscal restraint or austerity headwind and does not have the tools to get to 7% unemployment because it is down to incremental policies and has nothing left in its arsenal to increase growth much.

Economy plagued with chronic weakness. Since early stages of recovery, we have had very few quarters with 3% let alone 4% growth seen in previous recoveries to be easy to get. Expect 2+% growth rather than 3+% in 2013.

Housing starting to bubble, scratch that, come back. Business investment is doing nicely but is hiring equipment and not workers. For example, housing starts are up 27 % but construction employment is up only 2.5%.

Watch the full video at http://www.charlierose.com/guest/view/6052

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