Tuesday, November 26, 2013

Today's Links

1---Google searches in the US in November for the term “stock bubble” was the highest since 2007 , Testosterone Pit

Last week, CNBC found that Google searches in the US in November for the term “stock bubble” was the highest since 2007 just before the last bubble blew up....

But a stock bubble cannot deflate until after retail investors have poured their money into it – the purpose of a bubble being redistribution of wealth from latecomers who put their hard-earned life savings at risk to early investors with access to the Fed’s free money. Stocks are a zero-sum game. Every share bought by a late retail investor must be sold by an earlier investor. When retail investors finally pour money into the market, they’re handing it to those who are pulling their money out – and end up holding the bag. This is the tail end of the Fed’s “wealth effect.”

And retail investors have been throwing their money into the stock market with gusto. For the first 10 months this year, they handed $172 billion to early investors, the most since 2000. In one week alone, ended October 23, they threw $9.2 billion at US stock funds, the highest since weekly records began in 2007, Bloomberg reported. And early investors took that money and ran.
Total funds allocated to equities hit 57%. There were only two times in the last 20 years when they were higher: in the late 1990s before the bubble imploded, and just before the 2007-2009 financial crisis. Not exactly soothing data points.

But just because it’s a bubble doesn’t mean it’s going to implode anytime soon. It’s during bubbles that you can make the mostest the fastest. The fact that it has already been driven to irrational heights proves that it can be driven to even more irrational heights; there’s no rational limit to irrational heights. The extent to which bubbles can grow has a nasty tendency to surprise those who see them and bet against them. Me included. In October 1999, I was a few months early and lost my shirt.
But this time, it’s different. In 1999, the economy was booming, unemployment was as low as it could get, the employment-population ratio was hitting all-time highs, corporate earnings were growing.... And the S&P 500 rose 19.5%, closing on the high for the year. That was less than three months before the bubble blew up.

This year, the economy is sluggish, unemployment is doggedly high, the employment-population ratio is stuck near multi-decade lows, corporate earnings are stagnating, and revenues have trouble keeping up with inflation. Real wages have declined since 2000, poverty rates are up, the number of people needing assistance to put food on the table has soared.... And the S&P 500 so far this year has jumped 26.5%. With Wall Street clamoring for a Santa rally, people are now envisioning 30% or even 40%. And it’s already up 164% from March 2009.

2---Is the Fed dabbling in the markets?, naked capitalism

I was intrigued to see Pam Martens write up some data points that align with the concerns of the stock market pros in a post titled, New York Fed’s Strange New Role: Big Bank Equity Analyst. If the Fed isn’t dabbling in the stock market, why does it need this sort of expertise? Key sections from her write-up:
But the New York Fed itself is helping to fuel suspicions about what’s going on within its cloistered walls…. Of the 12 regional Federal Reserve Banks, the New York Fed is the only institution with a trading floor and highly sophisticated trading platforms. But despite multiple requests, the New York Fed will not provide a photo of the full trading area. Photos of its gold vault and currency vault are on line, but photos of the trading area is off limits…

The resume of Kathleen Margaret (Katie) Kolchin is also noteworthy…she works for the Federal Reserve Bank of New York, “performing equity research on the large cap US and European banks. Throughout her career as an Equity Research Analyst, Katie has covered various sectors, including Global Consumer Products, Global Real Estate, and Metals and Mining, at UBS Securities and also at a boutique investment bank.”

Even more curious is the resume Kolchin has posted at LinkedIn. The resume states that the New York Fed has an “internal equity research team,” of which she is the Senior Analyst. The team’s coverage includes Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, UBS, and Wells Fargo… she has “Developed a sell-side style research platform, including work product branding, distribution strategy, and internal client marketing presentations…” Kolchin adds that she uses her “capital markets experience and contacts” to garner insights into the market’s reaction to “stock and bond prices.”
“Branding”? “Distribution”? “Marketing”? Stock prices? What’s going on here. There are famous, long-tenured bank analysts all over Wall Street….How is this the job of the New York Fed?
I too am curious as to what the justification is for this sort of position. Since when are stock prices part of the Fed’s job description?

3--Summers, Krugman: The defense of bubbles, naked capitalism

Within this neoclassical theoretical box, there is only one solution offered to move the economy out of secular stagnation. One must boost the Wicksellian “natural rate” by strengthening expectations of return. More precisely, the solution offered by both Summers and Krugman is to promote asset bubbles. Hence, instead of aborting the bubble that will ineluctably end in a crisis, we are told that we should be sustaining these bubbles and keeping them aloft. It is truly ironic that, while these economists would probably never recommend wage inflation (because it would supposedly cause unemployment), they have no problem in promoting sustained asset price inflation that would redistribute wealth towards those who already own too much of it!...

if Summers et al., are really worried about secular stagnation and truly want to kick-start the economy, what is needed is an expansionary Keynesian fiscal policy of massive public investment, not as a temporary measure (as partly happened during the financial crisis with the disjointed implementation of fiscal stimulus packages internationally), but as a long-term measure that would sustain aggregate demand in the long term. This measure will support not only employment growth in more well-paying and highly skilled jobs, but also long-term productivity growth, thereby encouraging private investment as well. To a large extent, this is what happened during the early postwar period that produced a virtuous cycle of growth, now remembered as the “Golden Age” of western capitalism. Instead of secular stagnation, with the precise political commitment and policy mix in favor of activist fiscal policy cum public investment, we could actually be looking forward to a world of strong expansion and a truly full employment environment that had largely characterized much of the early postwar era.

It is time to abandon that outmoded New Consensus model that seems to be keeping even some of the brightest in the profession stuck in an intellectual cul-de-sac. The real inhibitor of growth is not the zero lower bound, but the lack of desire to venture outside the neoclassical box. This lack of desire to pursue new fiscal policy measures that would commit government to long-term spending and full employment is not because the latter is not a viable alternative, but perhaps because, as Kalecki had long surmised also in the 1940s, it is the political fears of the wealthy who would benefit from asset booms that overrides good common sense and prevents the enhancement of the welfare of the majority who, under the existing policies, are faced with the continued spectre of long-term austerity and secular stagnation.

4---Pending Homes Sales Point to Party Over, economic populist

5--Bubbles: Qui Bono?, CEPR

The bursting of the current bubble will not have the same consequences for the economy because it has not yet grown large enough to move the economy in the same way as the stock bubble of the 1990s or the housing bubble in the last decade. Both of those bubbles led to consumption booms through the wealth effect, in addition to a boom in whacky Internet start-up investment and housing construction. That story could change if the bubble keeps growing, but thus far it is not large enough to move the economy in a big way.

The other issue is that bubbles invariably involve an important component of redistribution as the bubble pushers get rich at the expense of others. In the 1990s, people like Steve Case, a founder of AOL, managed to get incredibly rich by selling out his stake at the peak of the bubble. The big losers were the shareholders of Time-Warner, who were kind enough to give away most of their company for nothing.

In the case of the housing bubble, sellers of homes in the bubble years came out way ahead at the expense of the people who bought into bubble inflated markets. And the Wall Street gang who made a fortune in financing the deals also were big winners.

6---"Buy high" and be sorry, WSJ

Both the Dow Jones Industrial Average and the S&P 500 set record highs this week. Counting dividends, U.S. stocks have returned 29% so far this year. If returns stay flat through year-end, 2013 would rank as the 19th-best annual return since reliable data began in 1926.
About $23 billion flowed into U.S. stock mutual funds in the four weeks ended Nov. 13, estimates the Investment Company Institute, after more than $37 billion flowed out over the previous 12 months
...

Let’s say you have $400,000 in stocks and stock funds. Between November 2007 and March 2009, U.S. stocks fell 51% and foreign stocks 57%, according to Morningstar. Another such “drawdown” would shrink your portfolio by more than $200,000.
Even if you don’t think stocks are as overvalued as they were in 2007, imagine a drop just half as severe. Can you withstand a short-term loss of $100,000 in pursuit of longer-term gains?
You can perform the same exercise on any of your assets. Real-estate investment trusts lost 68% between February 2007 and February 2009, according to Morningstar. Gold fell 62% between February 1980 and September 1999, while long-term government bonds lost 21% from July 1979 to September 1981. (Account for inflation, and all these numbers look worse.)

7---Why Fed's taper is essential to stabilize agency MBS liquidity, sober look
 
While we've discussed some of the economic implications of the Fed's current policy, let's now take a quick look at the impact of QE on the overall mortgage bond market.

Here is a simple fact: the amount of mortgage-related securities in the US has been declining since 2008 - after reaching just over $9 trillion at the peak.
 
And now with these market dynamics as the backdrop, put the Fed into the mix. At it's current pace the Fed is taking about half a trillion of MBS securities out of the market. In fact the Fed is now removing more than 100% of the paper that is being issued
 
8--Corporate credit markets back to frothy levels , sober look
 
SFGate: - The extra yield company bonds offer over Treasuries approached the narrowest level in six years as Federal Reserve Chairman Ben S. Bernanke said interest rates will stay low and investors sought ways to boost income.Even within the middle-market credit space, pricing is looking quite rich. BDCs (public investment firms that focus on middle market debt - see discussion) have seen a nearly 60% total return over the past two years. In order to keep paying the same dividend they have been historically, BDCs are increasingly reaching for yield, flooding credit markets with more capital.
 
9--Home Equity Blowout: A new wave of U.S. mortgage trouble threatens, Reuters
 
10--Japan economy slows as 'Abenomics' boost fades, AP
 
 Japan's economy slowed in the third quarter as consumer spending remained sluggish despite government efforts to energize growth with public works and lavish monetary stimulus.The government said Thursday that the world's third-largest economy grew an annualized 1.9 percent in the July-September quarter, half the pace of the previous quarter. The annualized growth rate was 3.8 percent in April-June and 4.3 percent in the first quarter.

The preliminary data for the third quarter showed that the economy expanded 0.5 percent from the second quarter, slowing from 0.6 percent growth in April-June.

11--Abenomics hype wearing off: Data does not support Gov claims that economy is improving, japan times

Of the 14 categories in the report, including consumer spending and industrial production, only corporate profits merited an upgrade for persistently “improving, mainly among large firms.”
Exports have shown “weak tone recently,” although last month they were described as “almost flat.”
The expression reflects how reluctant the government is to play up the economy, which has shown nascent signs of challenging nearly two decades of deflation.
“The slowing down of overseas economies is still a downside risk for the Japanese economy,” the report said.
Exports, a major driver of the economy, declined 0.6 percent in the quarter through September, down for the first time in three, after climbing 2.9 percent in April-June, the latest gross domestic product data said last week....

It also maintained its line on consumption, which is responsible for about 60 percent of GDP.
Consumption is “on a trend of picking up” ahead of the first stage sales tax hike to 8 percent next April.
As for prices, the report said: “Recent price developments indicate that deflation is ending.”
Consumer prices rose 0.7 percent in September from a year ago for the fourth straight month of increase due to higher electricity and gasoline prices as well as hikes in some durable goods prices, government data showed last month. But if energy and fresh food are removed, prices were flat

12---Both sides claim victory in Honduran election, wsws

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