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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Alibaba Is the Canary in China’s Coal Mine – BloombergView 09-01-15

Salient to Investors:

William Pesek writes:

Alibaba’s shares slide with each new report of middle-class Chinese raising cash and delaying spending. Alibaba’s $166 billion market cap exceeds the annual output of many countries.

The Chinese economy will weaken further: domestic and external demand is sliding along with the stock market. China will experience a negative wealth effect as stocks fall. Mass austerity has only just begun. Most Chinese under 50 only know annual growth of above 10%.  Sentiment will plunge as more and more mainland Chinese sense that the economy’s and stock market’s troubles are beyond the government.

The conventional wisdom is that few mainland Chinese own stocks, but it said the same about Americans in the late 1990s.

Beijing appears to have given up trying to save the market. Directing banks to buy shares, turning off half the market, loosening curbs on margin trading, suspending IPOs, letting stock speculators put up houses as collateral, are all signs of desperation.

Wang Tao at UBS said risks are to the downside despite policy efforts.

Morgan Stanley lowered its forecast for 2015 Japanese growth to 0.5% from 1%.

Glenn Stevens at Reserve Bank of Australia warned of downside risks associated with developments in China.

Read the full article at http://www.bloombergview.com/articles/2015-09-01/alibaba-is-the-canary-in-china-s-coal-mine

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Forget The Dips, Sell The Rips – David Stockman’s Contra Corner 08-24-15

Salient to Investors:

David Stockman writes:

  • The S&P 500 has sliced through both the 50-day and 200-day moving averages. 2130 on the S&P 500 will prove to be a generational high.  CAT, China, European luxury brands, the NASDAQ Biotech Index are shorts.
  • Expect the Fed to announce they are well short of the their magic 2% on the PCE deflator and so defer a September rate increase: not because there is too little inflation but because it is scared about the stock market fall. This will catalyze a frenzy of dip buying, claims the market has bounced off support is ready to resume the bull market. Do not buy the dip.
  • In the past 15 years CPI has risen by 2.5% annually if you include housing and rent inflation. The Fed hurts savers and retirees in order to keep Wall Street gamblers in free carry trade money, hoping to generate economic growth by giving the 1%  wealth effect windfalls.
  • The Wilshire 5000 has gained more than $15 trillion of market cap during the last 6 years, while the total value of all corporate equity in the US economy has risen by more than $20 trillion – substantially passing the two earlier stock market bubbles – despite having virtually nothing to do with the long-term trends in the US economy, weak at best.
  • Zero interest rates can do nothing about global deflation caused by massive malinvestment generated by years of zero interest rates and central bank financial repression. The central banks have created a monumental falsification of prices in virtually every asset class, while divorcing the financial market from the real economy.
  • The post-2009 recovery is the final and radical expansion of the growth and capital spending bubble underway around the world since the early 1990s. Since 2013, the massive capital spending bubble driven by central bank policy has begun to roll-over. The cliff-diving phase of commodity and industrial prices and profit margins has only just begun, and worldwide capital spending will be plunging sharply for years to come. Chinese and Korean shipyards will soon be bankrupt, Australia and Brazil are heading for depression.

Read the full article at http://davidstockmanscontracorner.com/forget-the-dips-sell-the-rips/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Tuesday

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Fareed Zakaria GPS – CNN 01-25-15

Salient to Investors:

Fareed Zakaria said:

  • Radical Islam is the default ideology of anger, discontent and violent opposition for a small number of alienated young Muslim men around the world. Only Muslims and particularly Arabs can cure this cancer.
  • In the 12 years between 9/12/01 and 2013, only 42 Americans have died on US soil due to terrorism versus 32,351 who died because of firearms, 33,783 who died in-vehicle accidents in one year.
  • Little has changed in Saudi Arabia – women still cannot drive, there is still segregation by sexes, the religious establishment is still very powerful, and the country still adheres to a very puritanical version of Islam.

Tony Blair said:

  • King Abdullah was a genuine reformer and modernizer. Saudi Arabia is genuinely part of the solution, and in many ways the heart of Islam.
  • Islamist ideology is growing and is the biggest security issue we face – we are at risk of several Afghanistans.

Martin Wolf at The Financial Times said:

  • Saudi Arabia remains is the central oil producer, the biggest exporter, the cheapest producer, and the only swing producer. Saudi Arabia is stable enough so can outlast everybody else at current oil price levels.
  • The oil glut will last for quite a few years.

Oxfam said the 80 richest people had $1.9 trillion while the poorest half had just $1.8 trillion in 2014, versus $1.3 trillion and $2.6 trillion respectively in 2010. The wealthiest 1% owned 48% of the world’s wealth in 2014 versus 44% in 2010.

David Leonhardt at The New York Times said US wages and incomes have gone virtually nowhere in the last 15 years: not paralleled since perhaps the Great Depression.

The Center for American Progress found that the bottom 90% of earners in Canada averaged over 1% annual income growth in the 2000s versus 2.5% annual in Australia and a decline of 1% annual in the US.

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

at http://transcripts.cnn.com/TRANSCRIPTS/1501/25/fzgps.01.html

Fareed Zakaria GPS – CNN 12-14-14

Fareed Zakaria said:

  • It is the big, contentious democracies, Britain and the US, that have prevailed in the world, not Nazi Germany, Imperial Japan and the Soviet Union.
  • No organization has ever benefited from being able to be the sole judge of its own performance.

Ruchir Sharma at Morgan Stanley said:

  • China’s stock market is just the newest bubble forming in the Chinese financial sector, fueled by huge liquidity injected into the economy through the real estate boom and the shadow banking system.
  • Europe is insignificant compared to China – a 1% reduction in Chinese growth was associated with a 10% decline in oil prices and on average almost 0.5% decrease in global GDP growth.

Joe Lupton at JPMorgan Chase said that even if people stopped lending to China, the government can and will intervene to avoid a crisis as it has done in the past and does have plenty of cash, though the credit binge will weigh on China’s economy for years to come.

Diane von Furstenberg said:

  • The most important relationship in life is the one you have with yourself, by being non-delusional.
  • The key to success is to be demanding of yourself, be disciplined and be kind to yourself – it is all about confidence.

The 2015 climate change performance index ranks Australia last in OECD countries and second to last overall in the climate changes performance index. The report said no country is doing enough to prevent dangerous climate change.

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

at http://edition.cnn.com/TRANSCRIPTS/1412/14/fzgps.01.html

Millionaire Hunters Lure Rich Chinese to Australia – Bloomberg 07-22-14

Salient to Investors:

  • Chinese millionaires who invest at least $4.7 million and qualify for Australian residency can get around China’s restrictions on converting currency and sending it abroad. China caps the amount of yuan that individuals can convert into other currencies every year at the equivalent of $50,000 and bars transferring currency abroad directly. China’s goal of free convertibility of the yuan is a step toward making Shanghai a global financial capital by 2020.
  • Baker & McKenzie estimate the flow of money into Australia could rise to as much A$10 billion a year. More than 1,000 people, almost all from China, have applied. Canada canceled a similar program in February with more than 65,000 pending applications because it felt immigrant investors pay less in taxes than other economic immigrants, are less likely to stay in Canada over the medium-to-long term and often lack the skill and language proficiency to integrate with other immigrants.
  •  Australia’s Significant Investor 188 Visas are similar to US EB-5 visas and carry a $500,000 investment minimum and the requirement to create jobs.( ‘8’ in Chinese sounds like the word for making a fortune and is considered lucky.)
  • Immigrants are required to invest the A$5 million into government bonds or complying funds that invest in assets such as infrastructure, real estate and agribusiness, for 4 years.
  • Bain & Co estimated in 2013 that 60 percent of high-net-worth Chinese – those with at least $1.6 million – have left China or are considering it.
  • Bill Fuggle at Baker & McKenzie said the Chinese rich want to hedge their bets and their closest option is Australia, which has a special and very long relationship with China. Fuggle said the purchase of a home in Australia does not qualify, though visa applicants typically buy them as well, and said the Canadian program termination has increased interest in the Australian one.
  • Chinese investment in Australian property climbed 42 percent to A$5.9 billion in the year to June 2013, surpassing Americans as the biggest group of buyers, the Foreign Investment Review Board said in its latest annual report.
  • Catherine Chow at Deloitte said their Chinese clients seek agribusiness focused on high protein, meat products and soy, and clean energy, largely solar and wind.
  • Australia’s A$1.7 trillion pension sector is the fourth-largest in the world.

Read the full article at http://www.bloomberg.com/news/2014-07-21/millionaire-hunters-lure-rich-chinese-to-australia.html

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Australians priced out of housing, report says – BBC News 03-05-14

Salient to Investors:

Credit Suisse said:


  • Chinese buyers are pouring into the Australian residential market every year, pricing out a generation of Australians from the housing market, with many facing a lifetime of renting.
  • Over the past 5 years, Sydney prices have risen by 45% and Melbourne by more than a third, as they remain the most popular destinations for Chinese buyers, who are buying 18% of new housing in Sydney and 14% in Melbourne.
  • The Chinese will continue to invest and their buying will rise 30% by 2020.
  • Australian companies should benefit from the next stage of China’s economic development.


Read the full article at http://www.bbc.com/news/business-26445106

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Australian Growth Beats Estimates as Rebalancing Begins: Economy – Bloomberg 03-04-14

Salient to Investors:

Australia’s Q4 GDP exceeded the median economist estimate.

Paul Bloxham at HSBC said the rebalancing act is under way, and a great comfort for the RBA – rate cuts are off the table and interest rates may have to rise before year-end.

Katrina Ell at Moody’s Analytics said the Australian economy has not fallen in a heap since mining investment peaked and sees further gains as the monetary stimulus continues to filter through.

Glenn Stevens at RBA said some business and confidence indicators have improved, exports are rising, but resources sector investment spending is set to decline significantly and signs of improvement in investment intentions in other sectors are only tentative.

Read the full article at http://www.bloomberg.com/news/2014-03-05/australia-s-economy-expanded-faster-than-forecast-last-quarter.html

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Pimco Says External Growth May Lift ‘Not Stellar’ Asia – Bloomberg 12-17-13

Salient to Investors:

Ramin Toloui at Pimco said:

  • Asian growth is stabilizing but not stellar but may receive a boost in 2014 as developed markets accelerate.
  • Asia’s trajectory will continue to be shaped critically by the growth path in the U.S. and Europe
  • China’s growth in the next decade requires a rebalancing of the economy toward household demand, but near term, its performance will be dominated by the dialing back and forth of the credit conditions by policymakers.

Robert Mead at Pimco said limited evidence of any non-mining investment, except in housing, means Australia’s growth outlook is weak, and recently announced cuts in manufacturing will also hurt growth in the next few years. Mead expects the Australian dollar to depreciate further.

Economists forecast 4 of Asia’s 5 largest economies outside Japan are slowing as regional expansion stalls at 6.23 percent for a second year.

Read the full article at http://www.bloomberg.com/news/2013-12-17/pimco-says-external-growth-may-lift-not-stellar-asia.html

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Bubble Trouble Seen Brewing in Australia Home Prices – Bloomberg 11-06-13

Salient to Investors:

Housing in Australia accounts for 60 percent of average household wealth versus a global average of 45 percent.

Average household debt has been near 150 percent of annual income since 2006 versus 135 percent in the US. House prices have not fallen more than 10 percent in any one year for more than 40 years.

RP Data said houses in Sydney took 26 days on average to sell last week versus 36 days six months ago: In Melbourne, 34 days versus 46 days.

Saul Eslake at Bank of America Merrill Lynch said it is easy to see how a bubble could emerge, but for now price increases are not being accompanied by a rapid rise in borrowing or building. Eslake said rising sales to investors puts the housing market in a more precarious position if economic conditions unexpectedly sour because they are not as committed as owner-occupiers, and Australia’s tax structure encourages investors to buy when they otherwise would not.

Investment in residential property by self-managed superannuation funds has risen 65 percent since mid-2008 and 10 percent in the 12 months to June, borrowing on average 70 percent of the value of a home versus 90 percent for regular borrowers.

National Australia Bank said foreigners accounted for 12.5 percent of purchases of new homes in Q3 versus 5 percent through most of 2011.

Michael Blythe at Commonwealth Bank of Australia said Australia’s population concentration puts upward pressure on capital city dwelling prices.

Craig James and Savanth Sebastian at Commonwealth Bank of Australia said talk of a housing bubble appeared in Australian media articles more times in September than at any time since 2003.

First-home buyers accounted for 13.7 percent of loans in August, the lowest level since April 2004, and versus a high of 31 percent in May 2009.

Matthew Hassan at Westpac Banking said buyers are not looking to buy in anticipation of significant capital gains.

Population growth in Australia averaged 1.6 percent a year over the past decade, meaning it needs 170,000 new homes a year versus actual supply of 154,000. ANZ Bank said Australia has a shortfall of 270,000 homes, equivalent to 20 months of housing construction, and will climb to 370,000 by 2015.

Paul Bloxham at HSBC said developers and households are unlikely to build new houses unless prices are rising, so a housing price boom is a necessary evil.

Adair Turner said the UK economic recovery is heavily focused on that favorite old British activity – another house price boom.

The IMF said Sweden needs to take measures to prevent consumer debt and housing costs from spiraling out of control.

Chinese home prices rose the most in October for the 17th consecutive month of increases.

Read the full article at  http://www.bloomberg.com/news/2013-11-05/bubble-trouble-seen-brewing-in-australia-home-prices-mortgages.html

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