Birinyi’s S&P 3200 Call – Bull From A 30-Year Bull – David Stockman’s Contra Corner 08-05-15

Salient to Investors:

David Stockman writes:

Laszlo Birinyi says S&P 3200 will be reached by 2017 because there is no reason it cannot keep rising. Since first meeting Birinyi in 1986, I do not ever recall when he was not bullish on equities. His call is wrong because the central bank fed 30-year bull run is over.

The S&P 500 Index’s inflation-adjusted gain of 6.2% per annum since January 1986 compares to only a 2.2% annual gain in real GDP and therefore is unsustainable – two more decades at this spread and the stock market’s capitalization would be several hundred times larger than GDP. From 1956 through the eve of the Greenspan Fed, the Index’s inflation-adjusted gain rose by only 1% per year; while US GDP grew at 3.5% per annum, or 60% more than during the last thirty years.

From 1956-1986, real median family income rose from $36,000 to $60,000, or at 1.7% annually, but has risen less than $4,000 since, at only 0.2% per year. The reason the stock market has gained over the last 30 years in the midst of decelerating real GDP growth and stagnating family incomes is because the Fed’s balance sheet has expanded 22 times, or 11.5% per annum nominal, 9.2% real, and 4 times the growth rate of real output.

During this bull market run, household, business, financial and government debt outstanding has risen $50 trillion, versus only a $13 trillion gain in GDP. In the 100 years prior to 1971, debt rose at 1.5 times GDP growth in real terms: since then it has risen at 3.5 times real growth up to the financial crisis. This huge growth of debt and leverage has come despite the household savings rate declining since 1971, thus has not been funded from honest savings but from fiat credit. This would have caused consumer inflation but for China, the oil exporters and the Asia including Japan buying US dollars by printing huge amounts of their own money, thereby inflating their own currencies and suppressing their exchange rates, and flooding the world with artificially cheap goods. The tidal wave of wage compression flattened labor costs in the developed market tradeable goods industries and spilled over onto their suppliers.

In a world of honest money and credit funded from real savers, China’s exports could not have risen 40 times in less than 3 decades, or at 17% annually – China would have run out of capital to build cheap factories and would have suffered soaring exchange rate increases long ago.

East Asian central bank printing presses recycled the Fed’s monetary inflation back into US financial asset inflation, fueling a massive increase in stock market speculation, LBOs, stock buybacks, and M&A, and the real reason why US stock market capitalization has risen from 60% of GDP from Greenspan’s appointment to 200% today. The true rate of US productivity gain since the late 1980s is a small fraction of pre-1986 levels.

ZIRP, QE, and the Greenspan/Bernanke/Yellen “put” fuel a cycle of debt funded speculation that drives asset prices ever higher, which then become the collateral for an even bigger credit-funded bid for financial assets.

Since 1986, the sum of the market value of equities and credit market debt outstanding has risen from $12 billion to $93 trillion. This bubble cannot continue because the central banks have reached the limits of money printing.  When the Fed begins normalization later this fall, they cannot reverse course because a new round of massive balance sheet expansion would be a repudiation of the last 20-years of Fed policy and trigger a collapse of confidence and selling panic.

China built the biggest pyramid of credit and speculation in history – from a few hundred billion of domestic credit in the early 1990s to $28 trillion today – but capital is now fleeing, upwards of $800 billion in the last year alone. China’s central bank is having to sell its dollar liabilities and shrink the renminbi supply in order to keep its exchange rate from collapsing. The world’s central banks lack the firepower to keep inflating the global financial bubble.

Read the full article at http://davidstockmanscontracorner.com/birinyis-sp-3200-call-bull-from-a-30-year-bull/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Wednesday

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Market Manipulation Goes Global – Project-Syndicate 07-27-15

Salient to Investors:

Stephen Roach at Yale writes:

Market manipulation a la China is now standard operating procedure in policy circles around the world – the West just dresses up their manipulation in different clothes.

QE is essentially an aggressive effort to manipulate asset prices: whether it has succeeded is debatable along with central banks’ unsubstantiated claim that things would have been much worse had they not pursued QE.

China appears less focused on systemic risks to the real economy because wealth effects are significantly smaller in China, where private consumption is 36% of GDP, half that in more wealth-dependent economies like the US. By keeping its benchmark rate well above zero, the PBOC is better positioned than other central banks to maintain control over monetary policy and avoid the open-ended liquidity that is so addictive for frothy markets. China’s targeted equity-specific actions minimize the risk of financial contagion caused by liquidity spillovers into other asset markets.

Nearly 90% of the 12-month surge in the CSI 300 was concentrated in the 7 months following the Shanghai-Hong Kong Connect in November 2014, so speculators had little time to let the capital gains sink in. The likelihood of forced deleveraging of margin calls underscores the potential for a further slide once full trading resumes. The development of stable equity and bond markets is a high priority in China’s effort to promote a more diversified business-funding platform, so the equity collapse calls that effort into serious question.

Time and again, regulators, policymakers, and political leaders have condoned market excesses, a growth elixir when labor income is under constant global pressure. These bubbles always burst and the false prosperity is exposed.

Read the full article at http://www.project-syndicate.org/commentary/china-stock-market-bubble-intervention-by-stephen-s–roach-2015-07

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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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Urgent Warning: 6 Signs the Great Crash Is Upon Us! – David Stockman’s Contra Corner -7-16-15

Salient to Investors:

Harry Dent writes:

  • All the signs point to the end of the global bubble. The greatest trigger will be the bursting of the massive, unprecedented China bubble. China’s stock market loss of 35% in less than 30 days signals its stock bubble has peaked: a drop of 30% to 40% in short order is a clear sign of the first wave down in a major bust and the greatest sign that the next great global crash is imminent.
  • China’s stock market will bounce in the coming weeks and then crash again, with real estate and its economy to follow.
  • The Greek default proves that endless quantitative easing idiocy has proved unable to create sustainable long-term recoveries in highly indebted developed countries with poor demographic trends. Greece did the wrong thing by again kicking the can a little further down the road.
  • US stocks could be the last major market to make a new high before rolling over.
  • Oil prices will fall, killing the fracking industry, a $1 trillion investment with $600 billion of junk bonds and leveraged loans – much larger than Greece.
  • Emerging markets have led the global slowdown and are about to break to the downside out of a 4-month trading range.
  • Long-term rates for sovereign and Treasury bonds are rising despite governments stimulating and guaranteeing their economies. Rising long-term, risk-free rates hurt stock valuations and real estate even harder due to higher mortgage costs.
  • Gold will continue to fall but will have a minor bounce.

Read the full article at http://davidstockmanscontracorner.com/urgent-warning-6-signs-the-great-crash-is-upon-us/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

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Equities Reach Record $66 Trillion as S&P 500 Hits 2,000 – Bloomberg 08-27-14

Salient to Investors:

  • The value of equities globally is at a record $66 trillion versus $25 trillion in March 2009 and $63 trillion at the 2007 peak. The US stock rally is approaching the dot-com bubble in terms of speed, but not in valuations – at 16.8x estimated earnings versus 26x at the March 2000 peak.
  • Patrick Spencer at Robert W. Baird said significant geopolitical events are not enough to unsettle the global economic forces, especially in America, while Draghi is ready with further measures to stimulate growth.
  • Andrew Milligan at Standard Life Investments said we are moving from QE to conventional policy, rates moves only because central banks believe growth is sufficiently strong.
  • Oliver Wallin at Octopus Investments said the markets are complacent, given a lot going on in the background that warrants more concern.
  • Guillaume Duchesne at BGL BNP Paribas said rich valuations in the US are not a problem because economic momentum is good and investor sentiment is positive. Duchesne said equities will continue to be the best asset, but investors need to focus on markets with the strongest fundamentals because we have moved from a liquidity-driven market into a fundamental-driven one.

Read the full article at http://www.bloomberg.com/news/2014-08-27/equities-reach-record-66-trillion-as-s-p-500-hits-2-000.html

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Goldman Sees Risk of Stock Decline on Rising Bond Yields – Bloomberg 07-25-14

Salient to Investors:

  • David Kostin, Kathy Matsui, Peter Oppenheimer et al at Goldman Sachs lowered their rating on stocks to neutral and corporate credit to underweight on belief that global equities and bonds may drop in the next 3 months, and stocks may temporarily fall, as rising inflation boosts government bonds and other yields. Goldman said the selloff in equities will be temporary and in line with, but less than, that of last summer because the need for bond yields to correct is lower, and the S&P 500 will end 2014 at 2050. 2015 at 200 and 2016 at 2200.
  • Goldman expects the 10-yr T-yield to rise to 3 percent by the end of 2014 and to 4 percent by the end of 2017 due to strong growth and accelerating inflation in the US.
  • Goldman is bullish on equities longer term, and overweight global stocks on a 12-month basis on earnings driven by sustained economic growth.
  • 47% of financial professionals see equities at close to unsustainable levels, 14% see a bubble.
  • The S&P 500 is at 18 times earnings, 14 percent above its 5-yr average.
  • US GDP is forecast to rise to 3.3 percent in Q2, 1.7 percent for 2014, 3 percent in 2015 and 2016.

Read the full article at http://www.bloomberg.com/news/2014-07-25/goldman-sees-risk-of-stock-decline-on-rising-bond-yields.html

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BlackRock’s Koesterich Says Buy Volatility During Market Calm – Bloomberg 07-25-14

Salient to Investors:

  • Russ Koesterich at BlackRock said volatility is very low because monetary conditions are easy but when investors see the US and UK central banks tighten then we will get a long-awaited rise to normal levels, but not to those of 2008 with the VIX at 90.
  • Pimco expects a new neutral of low interest rates and lower, more stable global growth.

 

Read the full article at http://www.bloomberg.com/news/2014-07-25/blackrock-s-koesterich-says-buy-volatility-during-market-calm.html

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The Wild Card: Central Banks – Jim Rogers On The Markets 01-29-14

Salient to Investors:

Jim Rogers said:

The unknown wild card is what happens when central banks cut back. The Fed will cut back until markets around the world start falling, and get scared when they are down 15 or 20 percent and start printing money again.  This will eventually lead to inflation.

Read the full article at http://jimrogersonthemarkets.blogspot.com/2014/01/the-wild-card-central-banks.html

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Central bankers are Rock Stars today – Jim Rogers Blog 01-17-14

Salient to Investors:

Jim Rogers writes:

The heads of most central banks are all rock stars, but only a phenomenon of the last 20 years as they pump money into the markets. One day people will realize that they have led us down a terrible path. The Fed balance sheet has increased 500 per cent in the last 5 years and a lot of it is garbage.

Read the full article at http://jimrogers-blog.blogspot.com/2014/01/central-bankers-are-rock-stars-today.html

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