Powdering The GDP Pig – There Was No Escape Velocity Inside – David Stockman’s Contra Corner 10-30-15

Salient to Investors:

David Stockman writes:

The global economy is in deflation and the US economy is stalling and within months will be in recession and the market in panic. The Fed cannot prevent the US economy from sliding into the global slump. Since 2000, the Fed has twice before pushed on a string with the economy while inflating the Wall Street casino, with bad results.

The Commerce Department’s GDP deflator showing 0.9% inflation during the last 12 months understates true inflation.

Nominal GDP is the single most important macro variable in a debt-driven economy. Nominal GDP growth is down to 2.9% and headed towards zero – it has been decelerating since Q2 2012 – which last occurred in the 1930s.  During the 1990s recovery, nominal GDP grew at a 5.6% annual rate, during the Greenspan housing/credit boom after 2001 it grew at 5.3%, and since the pre-crisis peak it has gown at only 3.0%, even less since June 2009. Despite this, the Federal budget assumes 5.2% per year growth for the next 10 years.

If the GDP growth trend continues, federal tax collections will drop far below current projections and cause budget deficits and the national debt to soar.

Q3 2015 business plant and equipment spending rose just 0.6% from a year ago, while Q3 goods exports are down 7.8% from a year ago, due to the ending of China’s infrastructure building spree, and Q3 services exports have slowed to a 3.9% annual rate. Global deflation inherently means a strong dollar so service exports will start falling soon.

Nominal Federal consumption and investment spending is down to near Q2 2009 levels, removing another prop under the post recession recovery.

Business sales are rolling over, while the inventory correction has just started – the inventory to sales ratio is at October 2008 highs.  Auto sales have peaked due to the exhaustion of subprime customers.

Read the full article at http://davidstockmanscontracorner.com/powdering-the-gdp-pig-there-was-no-escape-velocity-inside/

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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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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.

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Inflation Targeting Unmasked – The August CPI Crushed The Case For ZIRP – David Stockman’s Contra Corner 09-17-15

Salient to Investors:

David Stockman writes:

The August CPI gives the Fed an excuse to keep shoveling free money into the casino. No Fed rate increase would be a clear indication of its fear of reining in Wall Street’s greedy and gamblers and that Keynesian central banking in the last two decades has been a fraud.

A market correction is long overdue and eventually unavoidable.

The BLS inflation report shows that prices of commodities and goods are falling due to global deflation, while the cost of shelter and domestic services is briskly rising: averaging the two is purely a statistical accident, and outside of the Fed’s ability to shape. Falling prices for commodities and goods cannot be countered by supplying more free money to the Wall Street casino.

The Fed’s 2% inflation target is arbitrary and there is no historical evidence that it is connected with economic growth or gains in wealth and living standards.

7 years of interest rate repression has fueled a near 45% rise in direct auto credit outstanding and even bigger rise in new leased vehicles, resulting in a flood of used cars, prices of which have fallen 1.5% during the past year, while new car prices have remained flat due to excess global production capacity.

Since 2000, inflation has outstripped real household incomes. The index for services less energy services has risen by at a 2.6% compound rate, with no deceleration evident. More than 66% of living costs for average households comprise shelter, transportation, medical care, education and entertainment; which have risen at annual rates of 3.1%, 2.1%, 2.2% 3.5%, and 2.7% respectively.

China is the epicenter of the global deflation and the leading edge of the collapse in the petro-states, commodity exporters and mercantilist exporters which fed on China’s boom. By pegging their currencies at artificially low exchange rates, they created huge current account surpluses which they then invested back into developed market stocks and bonds.

The US economy cannot be decoupled from the global deflation. Dollar denominated assets – treasuries, ETFs and individual stocks – were financed not out of savings from current global production, but from central bank fiat credit.

Saudi Arabia’s $350 billion annual surplus has become a deficit, where it will remain for years as world oil demand falters and supply increases from investments.

Financial markets will be hurt by petro states liquidating their assets to cover current account deficits.

Read the full article at http://davidstockmanscontracorner.com/inflation-targeting-unmasked-todays-cpi-crushed-the-case-for-zirp/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

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David Stockman Interview On Yahoo – The Fed Painted Itself Into A Corner, Confidence In The Casino Is Headed For A Fall – David Stockman’s Contra Corner 09-17-15

Salient to Investors:

David Stockman said:

  • The Fed is on a jihad against retirees and savers.
  • 80 months of ZIRP has not helped the economy because we are at peak debt, with US business $12 trillion in debt, versus $10 trillion before the crisis.
  • The massive money printing has all gone to Wall Street: into stock buybacks, M&A, etc.
  • The weak US economy is due to a lack of investment over the past 15 years and uncompetitive US labor costs.
  • China’s debt has increased from $2 trillion to $28 trillion in the past 15 years and created a house of cards with enormous overcapacity and huge speculation that is beginning to deflate.
  • If the Fed raises rates unequivocally expect a long market correction: if it does not raise rates expect a short-term relief rally before a huge correction. However, if the Fed raises rates today, expect them to hedge by saying they are ‘one and done’.

Read the full article at http://davidstockmanscontracorner.com/david-stockman-interview-on-yahoo-the-fed-painted-itself-into-a-corner-confidence-in-the-casino-is-headed-for-a-fall/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

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The Truly Stupid Case For More ZIRP – David Stockman’s Contra Corner 09-16-15

Salient to Investors:

David Stockman writes:

The global economy is transitioning into a deep deflation.

Irving Kellner erroneously recommends the Fed delay its rate hike for reasons including the recent plunge in stock prices, the market’s dislike of an end to the easy money which has kept it afloat, and because all other central banks are easing. Kellner says higher interest rates will brake the nascent recovery, hurt exports and encourage imports, and hurt interest-rate sensitive sectors such as autos and housing. Kellner is saying that just a 25 basis point rise – to rates inaccessible to Main Street Americans – will cause exports, housing and autos to crumble. In other words, if money costs anything at all, it will kill capitalist prosperity, despite several centuries of economic progress prior to 1995 at above zero rates. Unfortunately, the vast majority of Wall Street economists and strategists agree with Kellner.

Central banks have created a huge bubble that they dare not risk puncturing, even if it means maintaining the lunacy of ZIRP indefinitely. We have been globally easing for the past 20 years, expunging financial discipline and honest price discovery from the money and capital markets. In that time, central bank balance sheets have risen from $2 trillion to over $22 trillion. The global economy is saturated with unsustainable $200 trillion of public and private debt.

Lee Adler says the explosion of Fed credit since the early 1990s, and especially since the financial crisis, has inundated the banking system with $2.6 trillion of excess reserves versus required reserves of around $95 billion. This huge reservoir of money has inflated stocks and bonds, but not goods and services on main street.

Two decades of cheap, nearly limitless credit have created huge levels of excess capacity in energy, mining, manufacturing, transportation and distribution, and so naturally has morphed into a relentless deflation.

The Fed’s money printing over the last two decades would have collapsed the dollar but for other central banks following suit, which put an artificial floor under the dollar’s exchange rate, thereby suppressing US domestic inflation and fueling trillions of off-shore dollars by foreign governments and corporations. Yield-starved US money managers purchased $10 trillion of inherently risky foreign bonds and loans.

The best measure of the monetary deformation of the last two decades is the explosive growth of central bank balance sheets and foreign exchange reserves among the four major sectors of the world economy outside of the US and Europe.

Read the full article at http://davidstockmanscontracorner.com/the-truly-stupid-case-for-more-zirp/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Wednesday

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Why The Keynesian Chorus Is Cackling Like Chicken Little – David Stockman’s Contra Corner 09-09-15

Salient to Investors:

David Stockman writes:

Artificial monetary bubbles always crash. However, if the Fed listens to Wall Street and does not raise interest rates expect a short-lived run to the May 2015 highs before the ultimate day of reckoning.

ZIRP has not caused a credit fueled inflation of either the business or household sectors – instead it has fueled the third and greatest financial bubble of this century.

The Keynesian chorus is warning against a Fed rate hike. Paul Kasriel at The Econtrarian says that monetary policy has become restrictive, while Larry Summers says the markets have already done the job of tightening, and that financial conditions are helping the economy less than in previous years when interest rates were much higher.

The Goldman Sachs Financial Conditions Index components are so powerfully influenced by Fed policy that they are the closest thing to an auto loop. The inevitable collapse of the Fed’s bubble cycle causes the Index to go vertical in the direction of tightening. Like the boy who killed his parents and plead mercy as an orphan.

The Fed has been cutting or holding money market rates constant at mostly ultra low levels 80% of the time. Real interest rates are a fiction because households borrow at market rates. 90%+ of households are saturated with debt and cannot borrow more regardless of the interest rate. Household debt is 3% lower than it was in early 2008.

Corporate executives have put virtually any and all incremental borrowings into stock buybacks and other financial engineering, thereby inflating the secondary markets for existing financial assets, and not investing in real, productive assets. Since the mid-2008 peak, business sales have expanded at only a 1.1% annualized rate versus 4%-6% annual gains during the two prior cycles. Net business investment in Q2, 2015 was lower than it was in Q2, 2000.

Read the full article at http://davidstockmanscontracorner.com/why-the-keynesian-chorus-is-cackling-like-chicken-little/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Thursday

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Why Hedge Fund Hot Shots Finally Got Hammered – David Stockman’s Contra Corner 09-06-15

Salient to Investors:

David Stockman writes:

A growing chorus of investors blamed last week’s stock market sell-off on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.

Hedge fund performance has benefited from broken capital markets rigged by the Fed. Thesecasino gamblers bought every one of the 30 identifiable dips in the SPX since the March 2009 low, confident that the Fed would intervene to keep the stock averages rising. A few ten thousand punters have made trillions in return for little economic value added.

Bridgewater profited by buying more stocks when prices were rising and equity volatility was falling, and more bonds when prices were dipping and equity volatility was rising as investors retreated to fixed income securities. Pumping out volatility and milking the market on alternating strokes is only possible when the regularity of market waves are unnatural, engineered by a Fed held hostage to the casino gamblers. However, bond prices in August did not rise like they were supposed to when the stock market dropped 12%, so Bridgewater’s entire profits for the year were wiped out in a few days. Bridgewater now pleads for QE4, while Goldman Sachs said the latest jobs report calls for no rate increase in September, despite the failure of 80 months of ZIRP.

China’s 20-yr long, $4 trillion cumulative bids for US treasuries and DM fixed income securities has now become “offers”, and which will prove to be one of the great financial pivots of history. China bought US debt to peg the RMB exchange rate and keep its exports humming, but eventually was forced to let the RMB slowly rise against the dollar, drastically accelerating global fund inflows into the Chinese economy. Deng’s naivete unleashed a credit monster that sucked in capital and resources from all over the globe into a domestic spending boom that was inherently unstable. To prevent the RMB exchange rate from plunging and inciting even more capital flight, the PBOC has now shifted into reverse in a large, sustained and strategic way.

If the market holds above next week’s retest of the SPX 1967 low, the Fed will likely announce a “one and done” move in September, and if the market does not hold this low, then the Fed will defer its rate rise: both outcomes will cause a short-lived, half-hearted rally, but not another leg higher in the phony bull market because the global “dollar short” is unwinding and China’s house of cards is cratering, causing economies to plunge throughout the China supply chain.

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This Is Not A Retest – Its A Live Bear! – David Stockman’s Contra Corner 09-03-15

Salient to Investors:

David Stockman writes:

US stocks are in a bear market. Honest financial markets would have sold off long ago, but for central bank falsification of asset prices.

The S&P 500 is at 20 times trailing earnings as of June 2015: $97.32 per share versus $103.12 at the end of Q2, 2014, and the peak of $106 at the end of Q3, 2014, and $85 in mid-2007, when the S&P multiple was 17.6 times just before the crash. The gap between reported GAAP earnings and projected earnings – $35 per share – is the same now as then. At the end of Q2, 2008, LTM GAAP earnings had fallen to $51 per share, and by the end of Q2, 2009 to $8 per share.

The financial bubble is far bigger than in September 2008, and the global economy fundamentally much weaker.

The US faces an unprecedented global monetary deflation. Output and trade are falling nearly everywhere, including Canada, Mexico, Brazil, Australia, South Korea, Malaysia, Indonesia, Russia, Japan, the Persian Gulf oil states, and China.

Brazil is heading into depression and its worst recession in the last half century. It is leading the global monetary reversal now underway. In its boom, Brazilian wealth bought condos in south Florida, while US money managers invested hundreds of billions of dollars into Brazilian equity and bond markets. The US economy was not decoupled from Brazil during the boom and won’t decouple during the deflationary bust ahead. The flight of hot dollars from Brazil is an indication of the turmoil ahead as the massive dollar short unwinds on a global basis.


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The US Economy Is Not Awesome And It’s Not Decoupled – David Stockman’s Contra Corner 09-01-15

Salient to Investors:

David Stockman writes:

Reliable signs of an economic recovery are few.

Housing has not moved at all. Private construction spending is 7% below December 2007 levels, 43% below its early 2006 peak, at January 2002 levels nominally, and 1992 levels when adjusted for inflation. Spending is 2.1% of GDP, the same bottom ratio as July 2013 and versus 3.7% of GDP in January 2002, and 4%-5% of GDP during much of the prior two decades.

The apartment construction boom was partially driven by tax credits, which have expired. The new generation of home-buyers is buried under $1.2 trillion of student debt, and there is no sign that they are moving out of their parents’ homes, or that single family starts are breaking out of basement levels.

Commercial construction is essentially flat versus the prior year, at February 1999 levels, and down 40% when adjusted for inflation. No rebound is in sight: vacancy rates remain at quasi-recession levels, while shopping malls are being devastated by e-commerce. Much of the rebound in private non-residential construction from the 2009 bottom was fueled by energy, materials processing industries and manufacturing, all of which now face global deflation.

Jobs data is inflated by part-time jobs in restaurants, bars, etc., which are not full-time employment at a living wage. The index of hours worked in the non-farm business sector is at Q2, 2007 levels. Aggregate real wages and salaries have grown at only 0.5% per year since the crisis, a third of the real rate in the previous business expansion.

The personal savings rate remains at historically low levels, meaning consumption spending can only go down should the current modest rate of wage and salary growth falter.

The US mini-export boom, powered since the recession by energy products and processed materials which now face global deflation, are heading much lower. US exports are now only 10% above their pre-recession peak, so will be a drag on economic growth.

Non-defense capital spending excluding aircraft has been going nowhere since early 2012, and is barely above the pre-recession peak in nominal terms.

Total business sales have posted only a 1% annualized gain during the last 2 years, while inventories rose to record levels in Q2, 2015.

The executive suite in corporate America is now essentially a stock trading room, with options obsessed executives making decisions heavily influenced by the Wall Street casino.

On Wall Street, a recession is never in sight, including the last 10 recessions.

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