Still Chop, Chop, Choppin’ At The Fed’s Front Door – David Stockman’s Contra Corner 08-06-15

David Stockman writes:

Wall Street believes the sideways market of the last 6 months is a healthy market correction in time, not price, and that markets cannot go down unless there is a recession and that none is remotely in sight.

We are in month 74 of the current recovery, beyond the 61-month average for post-war business expansions. The 105 month expansion of the 1960s took nearly 3 years of sub-par economic growth to stabilize the macro-economy and purge inflation. The 91 month expansion of the 1980s and 119 month expansion of the 1990s were largely fueled by cheap mortgage and consumer credit: the historically stable ratio of household debt to wage and salary income of 75%-80% prior to 1980 rose nearly vertically during the next 25 years to its peak in 2008. Households are not remotely in a position to re-leverage.

The US economy is saturated with $59 trillion of total public and private debt and faces unprecedented headwinds from the global economy. None of the prior post-war business cycle expansions were accompanied by the frenzy of construction, investment, borrowing and speculation by China and supplier base that we have seen since 2008.

Huge global excess capacity means gale force deflation as China and its supplier base attempt to ship materials and goods at any price to service their huge debt created over the last two decades. The modest contribution to US GDP from exports since the Great Recession is over. Global deflation will devastate US exports because China and the EM economies are entering a prolonged period of plunging demand for capital goods and raw materials.

The extended scramble for yield in EM debt will now turn into panicked flight as losses and cash shortages mount for EM borrowers; meaning the dollar has only begun its rise. The drying up of demand for exports and impending flood of dumped imports of steel and related industrial goods will curtail domestic capital spending. CapEx spending in the domestic oil and gas patch and other extractive industries is falling off a cliff, and government sector spending is hobbled by peak public sector debt. Business inventories are rising to pre-recession levels.

Most households are not in a position to increase their leverage and can only spend what they earn. Consumers are reaching the end of their spending limit is evidenced by the sharply falling 3-month rolling average of withholding taxes.

Read the full article at http://davidstockmanscontracorner.com/still-chop-chop-choppin-on-the-feds-front-door/

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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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China’s gold hoard will slay the mighty dollar – Daily Reckoning 06-27-15

Salient to Investors:

China last reported its gold reserves in 2009 at 1,054.1 tonnes, just 1% of the value of its foreign currency reserves, and less gold reserves than Germany, the IMF, Italy and France, and a fraction of those of the US.

Bloomberg Intelligence believes China’s reserves exceed 3,510 tonnes, which would be second only to the US.  Bloomberg says China may soon want to disclose its gold holdings in order to have the yuan join the IMF’s currency basket of dollar, euro, yen and British Pound.

China has $4 trillion in foreign currency reserves at a time when central banks are doing their utmost to devalue their currencies. China has called for a new currency to replace the US dollar as the global standard, so having assets other than currencies on its balance sheet makes sense.

The IMF estimates 63% of central bank reserves are held in US dollars, so an alternative currency could hugely decrease dollar demand and flood the market with dollars.

Read the full article at http://www.businessinsider.com/why-chinas-gold-hoard-will-slay-the-mighty-dollar-2015-6

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Don’t Worry About the Bull Market; Worry About the Dollar: Richard Bernstein – ThinkAdvisor 06-22-15

Salient to Investors:

Richard Bernstein at Richard Bernstein Advisors writes:

  • The bull market is intact. Markets rise after the Fed starts raising as earnings trump rising rates, and there is no end of cycle behavior, like excessive leverage or a big buildup in inventories except for energy.
  • The MSCI European stock index is up 11% year-to-date, but only 5% in dollar terms.
  • Currency is the most important issue when investing globally: between 2002 and 2008 the decline in the dollar accounted for 80% of the gain in the Euro Stoxx 50 index for US investors.
  • The dollar rise since 2011 will continue so US investors should hedge this risk.
  • Bullish on South Korea, which is where Japan was 2 years ago. South Korea has terrible corporate profits and is slipping into deflation so has no choice but to depreciate the won.
  • China is at a competitive disadvantage because their currency is somewhat pegged to the dollar and their companies have a lot of dollar-denominated debt, so they are unable to depreciate and will lose market share.
  • India is unable to depreciate because of high inflation so will lose market share to Japan and South Korea.

FactSet predicts S&P 500 earnings will fall 4.7% in Q2, rise 2% excluding energy: for all of 2015 rise 1.6%, 8.2% excluding energy.

Bank of America Merrill Lynch says fund investors remain bullish on European stocks.

Read the full article at http://www.thinkadvisor.com/2015/06/22/dont-worry-about-the-bull-market-worry-about-the-d?eNL=55886aae150ba045336e3852&utm_source=earlywire062315&utm_medium=enewsletter&utm_campaign=earlywire&_LID=179068825

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IMF asks US Federal Reserve to delay rate rise – BBC News 06-04-15

Salient to Investors:

Christine Lagarde at the IMF said:

  • The Fed should delay any rise in interest rates until 2016 and wait for more tangible signs of wage or price inflation.
  • Pockets of vulnerability in the US economy could cause serious trouble for the wider economy.
  • The IMF predicts US growth of 2.5% in 2015 and 3% for 2016; versus the OECD prediction of 2% growth in 2015.
  • The US dollar is moderately overvalued.
  • Greece will keep its word on the debt payment due on Friday.

Read the full article at http://www.bbc.com/news/uk-33011262

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Fareed Zakaria GPS – CNN 05-17-15

Salient to Investors:

Fareed Zakaria said:

  • Globalization and the information revolution is unstoppable. China cannot be stopped from growing and trading, and Africa from deepening its integration into the global system.
  • The average tariff in the developed world is 3%. China’s average tariff is under 10% versus 40% in 1985. It’s been too late to compete against low-wage countries for decades.
  • Mexico is a core component of the world’s most vibrant regional bloc, chiefly thanks to NAFTA.
  • In voter turnout. America ranks 31 out of 34 OECD developed countries according to PEW research, while only 65% of the voting population is registered.

Bill Gates said:

  • The US economy is very strong and GDP growth is better than it seems, because it does not capture massive improvements that take place, especially digital innovation, including services such as listening to music, finding videos.
  • The dollar is stronger than it should be which holds back export growth.
  • The middle-class lifestyle has immeasurably improved since 20 years ago – comparisons overstate the lack of progress. The ability to read books, find information, contact friends is not reflected in the equivalent income levels.
  • There is no direct connection between innovation and tax rates. The highest economic growth decade was the 1960s when income tax rates were 90 percent.
  • Corporate profit as a percent of US GDP is down to 2%.
  • Water shortage is about the cost of energy.  Desalination is very expensive and energy intense and so would benefit from any breakthroughs in energy.
  • Solar is still not competitive with natural gas, electricity production. We will only be able to convert the energy system to a zero CO2 system through big innovation in storage and reducing costs. Middle-income countries won’t pay a huge premium for their energy.

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

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Euro Forecasters See Pain After Worst Year Since 2005 – Bloomberg 01-02-15

Salient to Investors:

  • Strategists expect the euro to decline to $1.18 by the end of 2015. Over 90% of respondents surveyed in December predict the ECB will expand the supply of euros by purchasing sovereign bonds in 2015, versus 57% in November. 44 of 59 analysts expect the euro to fall against the dollar – the median projection sees a 2.5% decline by the end of 2015. Options premiums on the euro are the most bearish since October 2013.
  • Kit Juckes at Societe General said the best thing the ECB can do is to try to engineer a weaker euro and predicts it to drop to $1.14 by end of 2015.
  • Michael Sneyd at BNP Paribas expects the euro to decline to $1.15 by end of 2015.
  • Jane Foley at Rabobank Intl want to see how this plays out, certainly through January, before drawing strong conclusions, and predicts the euro will end 2015 at $1.20 – so much is already in the euro price so it cannot fall much further.
  • Simon Derrick at Bank of New York Mellon said the euro will fall in 2015 to reflect the economy and monetary policy.

Read the full article at http://www.bloomberg.com/news/2015-01-02/euro-forecasters-see-pain-after-worst-year-since-2005.html

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Billionaire Hedge Fund Chief Jones Sees U.S. Stocks Beating Globe for Rest of 2014 – Bloomberg 10-20-14

Salient to Investors:

Paul Tudor Jones at Tudor Investment Corp is believed to have said:

  • US stocks will outperform other equity markets for the rest of 2014.
  • The bubble in global credit will burst one day.
  • If we maintain the status quo on QE, we will end up like Greece with their level of debt within 15 years.
  • The dollar rally versus against every G-10 currency may have ended.
  • Is short the yen because the BoJ will continue to ease – the yen needs to decrease 15% for inflation to increase by 1 percent to 1.5 percent.

David Einhorn at Greenlight Capital is reported to have recommended buying renewable power companies, owns warrants on Greek banks, and is betting on declines in French sovereign debt.

Read the full article at http://www.bloomberg.com/news/2014-10-20/paul-tudor-jones-said-to-see-u-s-stocks-beating-globe-in-2014.html

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Shrinking U.S. deficit shows stability amid market jitters – PBS Newshour 10-15-14

Salient to Investors:

Eswar Prasad at Cornell and Brookings said:

  • The US economic numbers looks good and the recovery is strengthening, but the rest of the world is weakening and there is a real fear Ebola could become something bigger.
  • Policy-makers in the rest of the world have no room to move, and Germany, France and Italy have stalled. Draghi has no room on fiscal policy because of the huge amount of debt, while reforms to labor and product markets are not working well. Same for Japan and China is slowing.
  • The global economy remains weak, and the US alone cannot sustain itself.
  • Virtually every currency in the world other than the renminbi is weakening against the dollar so the question is how long can the dollar hold on against this background?
  • The strong dollar will hurt exports and jobs and make this recovery very difficult to sustain.
  • Ultimately the US stock market is a good place to invest.

Watch the video or read the full transcript at http://www.pbs.org/newshour/bb/shrinking-u-s-deficit-shows-stability-amid-market-jitters/

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Dollar Aids World Economy Amid Currency War for Faster Inflation – Bloomberg 10-02-14

Salient to Investors:

David Bloom et al at HSBC said:

  • A sustained rise in the dollar may be insufficient to push inflation back to target in countries struggling with the threat of deflation, but it could buy them time and help prevent inflation expectations becoming permanently detached from target.
  • History suggests a 20% rise in the dollar is possible as it will again be the strongest major currency in 2015.
  • Dollar strength this time is unlikely to be tripped up by the US current-account deficit getting too large like it did in the strong dollar periods of the early 1980s and late 1990s – today’s deficit is down to near 2% of GDP from almost 6% in 2006.
  • HSBC report only 8 of 34 economies monitored have inflation above their target, with expectations of a drop to just 3 in 2015.
  • It would take a 20% rally to halve a 2% inflation forecast.
  • This is a currency war where stealing inflation rather than growth is the goal.

Michala Marcussen at Societe Generale says commodity exporters will face a headwind from a higher dollar, despite the currency effect no longer being as big now, while currency weakness elsewhere could breed complacency among countries who should be revamping their economies.

Read the full article at http://www.bloomberg.com/news/2014-10-02/dollar-aids-world-economy-amid-currency-war-for-faster-inflation.html

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