The Warren Buffett Economy – Why Its Days Are Numbered (Part 4) – David Stockman’s Contra Corner 06-15-15

Salient to Investors:

David Stockman writes:

  • The Fed has generated a $50 trillion financial bubble and made money and capital markets to little more than gambling casinos.
  • Speculative rent-seeking in the financial market has replaced entrepreneurial innovation and supply side investment and productivity, resulting in a severe drop in real growth and a massive redistribution of windfall wealth to the few, who own most of the financial assets.
  • Keynesian stimulus has artificially goosed the price of bonds and lowered their yields, while the implicit Fed “put” underpins the economics of buy-the-dip speculators.
  • Keynesian economics originated during the Depression: it was wrong then, and utterly irrelevant now in our global post-industrial economy. The Fed can do nothing to cause the US steel industry’s capacity utilization rate to be 90% or 65%, given today’s world of open trade and the vastly over-sized global steel market.
  • Keynes advocated for stringent protectionism and economic self-sufficiency 6 years before his General Theory – they are absolutely necessary to state management of the business cycle. Keynes made sure to publish his works in German, believing Nazi Germany was the ideal test bed for his economic remedies.
  • Potential labor supply is a function of global labor costs and comes atomized as hours and temporary contracts, not census bureau head counts. The government has no idea what the real world’s potential labor force computes to, thus the pursuit of “full employment” by Yellen is nonsensical and target of 5.2% on the U-3 unemployment rate as ridiculous.
  • The real unemployment rate is not 5.5%. The 210 million Americans between ages 16 and 68 represents 420 billion potential labor hours in full-time jobs, but BLS estimates only 240 billion hours were supplied to the US economy in 2014, meaning 180 billion unemployed labor hours, meaning that the real unemployment rate was 42.9%, a result of global economic forces of cheap labor and new productive capacity.
  • The Fed improved GDP and the labor utilization rate from the Kennedy administration to 2007 but only by using the one-time pony of leveraging up households and businesses through cheap debt. Households are still deleveraging relative to income, businesses are incrementally borrowing for stock buybacks, M&A deals and LBOs and not for new plant, equipment and other tangible assets.
  • At the limits of peak debt, the Fed’s default business becomes inflating the financial bubble and subsidizing carry-trade speculation.
  • The student debt bomb is $1.3 trillion, versus less than $300 billion only a decade ago, and will explode in the years ahead.
  • Off-shoring has spread to service work, resulting in wage suppression as those replaced workers accept low wages in adjacent activities.

Read the full article at http://davidstockmanscontracorner.com/the-warren-buffett-economy-why-its-days-are-numbered-part-4/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

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The Warren Buffett Economy – Why Its Days Are Numbered (Part 3) – David Stockman’s Contra Corner 06-11-15

Salient to Investors:

David Stockman writes:

  • The ratio of finance to GDP has risen to 540% vs. the historic norm of 200%. Central bank driven bubble finance since the late 1980s has resulted in the GDP deflator-adjusted value of corporate equities and credit market debt outstanding rising 8 times, while real median household income has not gained at all.
  • Warren Buffett’s real net worth rose 19 times in the same period, not by value investing – he is not a genius, nor invented anything – but by buying consumer names of the baby boom demographic wave, buying what he believed slower footed investors would be buying later, and by buying the banks and other companies that fed from the public purse. Under a regime of honest money and free market finance, no insurance company portfolio manager could make 19 times in real terms in 27 years.
  • The financial busts since 1987 were caused by the Fed, not by investor exuberance, deregulation, Wall Street greed and corruption, or Chinese workers saving too much money and causing low mortgage rates and a runaway housing boom in America.
  • Market capitalism is not chronically unstable, and the business cycle does not needs constant management and stimulus by the state. Every economic setback of modern times, including the Great Depression, was caused by either inflationary war finance or central bank fueled credit expansion.
  • The rationale for monetary central planning and state intervention – the Keynesian model – is completely wrong. Keynesian aggregate demand management tools seemed to work for three decades only due to a one-time monetary parlor trick – households, etc were repeatedly encouraged to “lever up” via periodic cycles of cheap money stimulus, and so did not generate new, sustainable wealth but borrowed economic activity from the future.
  • The potential GDP and full employment story is a crock and consists of made-up benchmarks that are absolutely meaningless in today’s global and tech economy.
  • Monetary central planning has been practiced on a global basis for most of this century and is causing enormous over-investment in industrial capacity owing to the repression of capital costs. For example, China has more excess steel capacity than the entire steel industry of the US and Europe combined.

Read the full article at http://davidstockmanscontracorner.com/the-warren-buffett-economy-why-its-days-are-numbered-part-3/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Thursday

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Americans With Best Credit in Decades Drive U.S. Economy – Bloomberg 08-05-13

Salient to Investors:

Joseph Carson at AllianceBernstein said:

  • Household finances are in the best shape in decades, and the US is entering a new, stronger growth phase as healthier finances revive borrowing, spur consumer spending, generate business investment and jobs.
  • Household wealth measured by net worth rose to $70.3 trillion in Q1, up almost $20 trillion from its recession low.
  • The two-quarter average for the financial-obligations ratio was 15.2 percent in March, matching the lowest since at least 1980.
  • Household liquid assets rose by $10 trillion in the past 4 years, and the ratio of coverage for liabilities is 2.43, the highest since 2000.
  • Credit demand and supply have been slow to recover because the housing rebound was delayed, unlike after most recessions, but home sales are rising, foreclosures have waned and banks are more willing to lend against an asset that’s gaining value.

    The rebound in housing and employment needs to be sustained for credit to pick up.

  • All the easy monetary conditions won’t work if the consumer does not take advantage of credit and banks are not willing to lend.

James Paulsen at Wells Capital Mgmt said:

  • The credit-driven cycle is good for investors and could help the S&P 500 to double-digit gains in 2014 after an advance of as much as 20 percent in 2013.
  • Financials like banks will continue to outperform as they are at the heart of the credit-creation process, which is becoming noticeable.
  • Industrial, materials and tech stocks are attractive.
  • Consumer cyclicals have less room to rise after outsized increases, but if unemployment falls close to 6 percent, expect a lot more demand for credit and spending.
  • The improvement in borrowing and lending is not yet strong enough to get front-page coverage

  • We won’t get another bubble economy or Gekko environment.

Keith Leggett at  the American Bankers Association said bank-card delinquencies in Q1 were the lowest since June 1990, and said we are on the cusp of a trend toward more risk-taking, with consumers becoming a bigger contributor to economic growth.

Michelle Meyer at Bank of America said property prices may jump 11.8 percent in 2013 after climbing 7.3 percent in 2012, and mortgage debt as a share of disposable income will continue to fall. Meyer said consumers will provide a bigger lift to consumption over time as the housing recovery helps to heal households’ balance sheets.

Barry Bosworth at Brookings said Americans said the Fed may keep the federal funds rate near zero until 2015.

Read the full article at http://www.bloomberg.com/news/2013-08-05/americans-with-best-credit-in-decades-drive-u-s-economy.html

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Stock Inflows Beat Bonds First Time in 10 Weeks, Citigroup Says – Bloomberg 11-29-12

Salient to Investors:

Markus Rosgen and Yue Hin Pong at Citigroup said EPFR Global reported stock funds this week had their second-largest weekly inflows in 2012 and more than the inflows into bond funds, while US funds reversed an outflow trend and Asia attracted the second-largest inflows this year.

Pong said most economic data have positively surprised, and more people are starting to believe the US fiscal cliff may turn out to be ok. Pong said it would take more time for equities to gain full speed against bonds given lingering issues in Europe and weak global trade.

Global investors say the world economy is in its best shape in 18 months

Strategists at three of the world’s biggest banks are advising investors to buy Asian equities most tied to economic growth after valuations fell and the global economy showed signs of recovery.

Niall MacLeod at UBS  predicts technology, industrial and materials stocks will climb in 2013 as China’s expansion accelerates and fiscal-cliff concerns fade. Jonathan Garner at Morgan Stanley said valuations for cyclical shares are 40 percent lower than defensive equities, including household-products makers. Rosgen said an improving earnings outlook will help lure investors.

Read the full article at http://www.bloomberg.com/news/2012-11-30/stock-inflows-beat-bonds-first-time-in-10-weeks-citigroup-says.html