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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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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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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The S&P’s 13th Trip Thru 2100 Since February 13th: Call It Monetary Rigor Mortis – The Bull Is Dead – David Stockman’s Contra Corner 08-19-15

Salient to Investors:

David Stockman writes:

  • The bull market is dead, yet stock option addicted corporate executives are buying their own drastically over-priced shares hand-over-fist. Corporate stock buybacks and dividends are back to late 2007 levels of all of net income, lured by 80 months of ZIRP and $3.5 trillion of debt monetization by the Fed.
  • Q2 S&P 500 reported earnings are down 5.6% from the prior year and 8.2% since the cycle peak in Q3, 2014. GAAP earnings are rolling over. The S&P500 is at 2100, 35% above its October 2007 high, despite earnings growth over the last 8 years averaging only 1.72% per annum.
  • The market is expensive at 22 times trailing earnings given tepid earnings growth, the very long-in-the-tooth domestic business cycle, and global deflation gathering momentum, triggered by China’s meltdown following its 25-year credit binge.
  • China cannot bailout the world economy this time around because of the short-term dollar debts of Chinese companies and speculators, now at near 10% of GDP, versus 3% at the 2008 financial crisis. China, whose capital outflows during the last 6 quarters have totaled nearly $850 billion, is for the first time in more than 2 decades being forced to shrink domestic credit, sending shock waves through commodity markets, which are down 50% from their 2011 recovery peak and more than 65% from their pre-crisis peak.
  • Fixed investment in industrial capacity and public infrastructure in China reached $5 trillion in 2014, equal to Europe and North America combined and which has inflated the Chinese economy to dangerously unstable levels.
  • The coming deflationary cycle will erode corporate profits for years to come, with central banks now out of ammunition. China’s 20-year boom based on a 56 times explosion of fiat credit has caused unprecedented overcapacity worldwide across the board, and it is only a matter of time before price cutting destroys the profits of global corporations.
  • Massive monetization of the public debt does not jump-start growth in an environment of peak debt.

Hans Redeker at Morgan Stanley said short-term dollar debt of 9.5% of Chinese GDP is a level that in emerging markets is a perfect indicator of coming stress, viz the Asian crisis in the 1990s.

Read the full article at http://davidstockmanscontracorner.com/the-sps-13th-trip-thru-2100-since-february-13th-call-it-monetary-rigor-mortis-the-bull-is-dead/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Wednesday

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Gross Sees Global Economy Dangerously Close to Deflation – BloombergBusiness 08-07-15

Salient to Investors:

Bill Gross at Janus Capital said:

  • The global economy is dangerously close to deflationary growth. Any whiff of deflation and things tend to reverse and go badly.
  • The CRB Commodity Index is lower than in 2008 when Lehman went bankrupt.  Oil, metals and crops have plunged due to the decelerating Chinese economy and gluts in multiple markets.
  • Commodity markets give a truer picture of the economy because they are subject to real-time supply and demand.
  • The Fed will raise by 25 basis points in September as it is mentally committed to moving before year-end, and despite the BoE voting 8-1 to keep its key rate at a record low until next year. A Fed 50 basis point increase would scare the market.

Read the full article at http://www.bloomberg.com/news/articles/2015-08-07/bill-gross-says-global-economy-dangerously-close-to-deflation

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Hedge Fund Losses From Commodity Slump Sparking Investor Exodus – BloombergBusiness 08-06-15

Salient to Investors:

Cargill, the world’s largest grain trader, shut its commodities hedge fund last month, a sign that commodity speculators are in trouble.

Donald Steinbrugge at Agecroft Partners said hedge funds are supposed to make money in both bull and bear markets but managers bias towards rising prices. Steinbrugge said demand for commodity-oriented hedge funds is very low as no one wants to catch a falling knife. Christoph Eibl at Tiberius Asset Mgmt said no money is going into commodities.

The Bloomberg Commodity Index is down 29% in the past year and 18 of its 22 components are in a bear market. Hedge Fund Research said assets of commodity hedge funds are 15% below the peak 3 years ago. The Newedge index suggests natural resource funds have lost money for clients during most of the past 4 years. At the end of June, the average commodity hedge fund had fallen 7% since the January 2011 peak vs. the S&P 500 index gain of 80%, including dividends. The index rose almost sixfold from 1999 to a peak in June 2008.

Read the full article at http://www.bloomberg.com/news/articles/2015-08-06/hedge-fund-losses-from-commodity-slump-sparking-investor-exodus

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Central Banks Have Shot Their Wad – Why The Casino Is In For A Rude Awakening, Part I – David Stockman’s Contra Corner 07-25-15

Salient to Investors:

David Stockman writes:

The central banks have shot their wad after increasing their aggregate balance sheet from $3 trillion to $22 trillion over the last 15 years, which falsified financial prices.

The coming deflation will bring a plunge in corporate profits and collapsing prices of vastly inflated risk asset classes. The Bloomberg commodity index will fall below the 100 index level as the cycle from asset accumulation and inflation to asset liquidation and deflation continues. The lagged effect of the project completion cycle causes excess capacity to continue to grow, meaning the plunge in commodity and industrial prices and profit margins has only just begun, and will fall for years to come. Production cuts and capacity liquidation in virtually every materials sector is being drastically delayed by the continuing availability of cheap finance, meaning prices and margins will be driven even lower than would otherwise be with excess capacity.

Central banks engineered massive household borrowing and consumption/housing spending in the developed economies which then ignited an export manufacturing boom in China et al which over-taxed the supply of raw materials as the commodity price boom peaked with $150 oil in July 2008. Governments and central banks then battled the plunge in consumer spending and liquidation of bad mortgages, excess inventories and over-stocked labor by triggering a second artificial economic boom in CapEx and infrastructure spending in China and the emerging markets. China’s total debt went from about 150% of its GDP in 2007 to nearly 300% of GDP today.

Central bankers drove interest rates towards zero to try to spur spending by the middle classes, already at peak debt, but instead generated a scramble for yield among money managers and capital outflows of $4-5 trillion into emerging market debt: the resulting tidal wave of capital investment caused a second surge of commodity prices which peaked in 2011-2013. The monetary expansion has left the developed world at peak household debt and the emerging markets drowning in excess capacity to produce commodities and industrial goods.

CapEx by the world’s top 40 miners rose from $18 billion in 2001 to $42 billion by 2008, paused during the financial crisis, and then rose to a peak $130 billion in 2013. New projects then halted, but big projects in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being completed due to the sunk cost syndrome: thus on-line capacity continues to soar despite falling prices.

CapEx on oil and gas rose from $100 billion in 2000 to $400 billion in 2008 and to the peak at $700 billion in 2014. Lifting costs even for shale and tar sands are modest compared to the front-end capital investment so the response of production to plunging prices has been limited and will be substantially prolonged.

Steel capacity has doubled from 1.1 billion tons to over 2.3 billion tons during the past 15 years, far outstripping current demand. Excess capacity could easily reach 35%, or more than the combined steel industry of the US, Europe and Japan.

Thompson Reuters reports global CapEx for manufacturing, transport, construction, process industries and utilities rose from $450 billion in 1991 to $700 billion in 2001, a 4.5% annual rate, and to $2.6 trillion in 2013, a 12% annual rate.

Read the full article at http://davidstockmanscontracorner.com/central-banks-have-shot-their-wad-why-the-casino-is-in-for-a-rude-awakening-part-i/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

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Commodities Collapsed Just Before The Last Stock Market Crash – So Guess What Is Happening Right Now? – The Economic Collapse 07-22-15

Salient to Investors:

Michael Snyder writes:

  • Global debt is at record highs, too big to fail banks have never been more reckless, and global financial markets have never been more primed for a collapse. Most people lack the patience to wait for long-term trends to play out so if the stock market is not crashing today, they think that everything must be fine.
  • Commodity prices crashed a few months ahead of the financial crisis of 2008, and we are seeing a repeat. The Bloomberg Commodity Index is down 26% over the past 12 months to a 13-year low. Copper, iron ore, aluminum, zinc, nickel, lead, tin and lumber prices are leading indicators and their falling prices are forecasting a global economic meltdown. The FTSE 350 Mining Index dropped to the lowest since 2009 this week. Gold and copper are near the lowest in at least 5 years, and crude oil is down to $50.
  • The Australian and Canadian dollars are at 6-year lows, and the Brazilian real is at a 10-year low all vs. the US dollar – all commodity resource nation currencies. The Indian rupee is at a 17-year low vs. the US dollar because manufacturing is slowing, and if Americans are not buying, the Indians, Chinese, Vietnamese are not making things.
  • The junk bond market collapsed a few months before the last stock market crash and junk bonds are starting to collapse again.

Andy Pfaff at MitonOptimal calls the commodity bear market a train wreck in slow motion.

Marc Faber at The Gloom, Boom & Doom Report sees a stock market decline of easily 20% to 40% and cites the growing number of companies trading below their 200-day moving average, stock declines leading advances, and the high number of new 12-month lows.

Read the full article at http://theeconomiccollapseblog.com/archives/commodities-collapsed-just-before-the-last-stock-market-crash-so-guess-what-is-happening-right-now

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Investors Head for Exit as Commodities Extend Slump – Bloomberg 09-30-14

Salient to Investors:

  • Investors pulled the most money from US ETPs backed by raw materials since April.
  • US corn and soybean crops are the biggest ever, global stockpiles of nickel are at an all-time high, the US is producing the most oil since 1986, while China is headed for its slowest expansion in two decades.
  • The Bloomberg Commodity Index is set for a fourth straight annual loss, the longest slide since data began in 1991.
  • Societe Generale lowered its price forecasts for more than half of the 43 raw materials it tracks, and recommended shorting gold on rising US interest rates and a rising dollar, target below $1,000 over the medium-term.
  • Citigroup pared its outlook on crude oil, gold, corn and wheat.
  • Goldman Sachs still expects losses in copper and gold.
  • In August, Citigroup forecast the Arabica-coffee crop shortfall may leave a global production deficit lasting into 2016. Citigroup is bullish on palladium, copper, nickel, lead, coking and thermal coal, cocoa and coffee.
  • Deutsche Bank forecast commodities will end 2014 in a positive run with nickel, zinc and lead outperforming.
  • Donald Selkin at National Securities said certain markets are bullish because of supply issues, including cattle, nickel and coffee, while the worst may also be over for the big three – gold, crude oil and grains.
  • Jeffrey Currie at Goldman Sachs expects gold to fall to $1,050 by year-end, copper to fall to $6,200 a metric ton over 12 months due to a major increase in stockpiles.
  • The IEA said global oil demand will weaken because of weaker growth in China and Europe, rising exports from Libya, and booming US output, all outweighing potential output disruptions in Iraq.
  • Economists expect China to grow 7% in 2015, the slowest rate since 1990.
  • Quincy Krosby at Prudential Financial said you need growth in China to support a rally in raw-material prices.

Read the full article at  http://www.bloomberg.com/news/2014-09-29/gluts-spur-investor-exit-signaling-prolonged-price-slumps.html

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Correlations Revive as China’s Slowdown Beats Rates – Bloomberg 09-26-14

Salient to Investors:

  • China’s deepening slump is re-establishing the link between currencies and commodities, weakening the Australia dollar, New Zealand kiwi and Canadian loonie on concern their economies will slow and outweigh their relatively high interest rates.
  • Shahab Jalinoos at Credit Suisse said you can only resist gravity for so long as the tango between rates and commodities ultimately gives way to the weak commodity price story as the driver.
  • The Bloomberg Commodity Index at a 5-yr low means there is little to support the Aussie, New Zealand kiwi and Canadian loonie.
  • Luc De La Durantaye at CIBC Asset Mgmt said lower Chinese growth points to a correction in commodity prices and continued correction in commodity currencies and is short the Australian and New Zealand dollars, and increased his bearish bets on the Canadian loonie in July.
  • The median analysts expects China to grow 7.3% in 2014, the slowest pace in over two decades.
  • IEA said oil demand globally is growing at its slowest since 2011, while non-OPEC production is rising by the most since the 1980s.
  • An increase in US interest rates would erode the appeal of Australian and New Zealand assets, which is based on them having the highest benchmark interest rates in the developed world.
  • Steven Englander at Citigroup said commodity prices are more important to the loonie and the kiwi and the move in commodities and slowing US demand – the world’s primary locomotive of commodity purchases – is too big to ignore.
  • Steve Lee at Nuveen Asset Mgmt said the Aussie, the kiwi and the loonie have lost their appeal as they are now more vulnerable.

 

Read the full article at http://www.bloomberg.com/news/2014-09-26/correlations-revive-as-china-s-slowdown-beats-rates.html

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