Monday, April 28, 2014

Today's Links

1--Stockman on financial strip-mining, zero hedge

This eruption of late cycle bubble finance hardly needs comment. Below are highlights from a Bloomberg Story detailing the recent surge of leveraged recaps by the big LBO operators. These maneuvers amount to piling more debt on already heavily leveraged companies, but not to fund Capex or new products, technology or process improvements that might give these debt mules an outside chance of survival over time.

No, the freshly borrowed cash from a leveraged recap often does not even leave the closing conference room - it just gets recycled out as a dividend to the LBO sponsors who otherwise hold a tiny sliver of equity at the bottom of the capital structure. This is financial strip-mining pure and simple - and is a by-product of the Fed’s insane repression of interest rates....

Ironically, the recent surge in corporate lending by banks is being cited by Wall Street’s perma-bulls as evidence that the long-awaited “escape velocity” is about to materialize. But most of the up-tick in corporate loans has been for leveraged lending—an exact repeat of 2005-2007. And that, alas, means that the bubble cycle is in its final innings—not that economic nirvana is about to break loose.

The highlights from today’s Bloomberg story on how “private equity firms are borrowing money to pay dividends like its  2007

2---This Chart Is A True Picture of The Bank Credit Bubble In America, Now Bigger Than The Last One (Which Blew Up) , Testosterone Pit

Turns out, banks have been lending. Not only that. They’ve been lending more than ever before. They have been lending even more than during the last credit bubble, when too many easy loans were made helter-skelter by loosey-goosey loan officers while the Fed’s spigot was wide open, which helped blow up the financial system.

Note the beautiful big-fat bank credit bubble that emerged in 2002, picked up speed as it went, and took off in earnest in 2007, when the chart begins. And note how it soared exponentially in 2008. At the time, the banking system was coming apart at the seams, the housing market was tanking, Bear Stearns got cooked, and stocks were skidding. Nothing stopped the bank credit bubble. Nothing until Lehman Brothers went belly-up in September. Bank CEOs worried about being next. And that finally punctured it.
So the peak was reported in October 2008. Loans and leases outstanding at all commercial banks in the US (black line, left scale) hit $7.28 trillion and all bank credit (red line, right scale) maxed out at $9.56 trillion. Then the great cliff dive began, hitting bottom in February 2010 – outstanding loans and leases at $6.5 trillion, all bank credit at $8.9 trillion.
Now we’re back! Only this time, the bank credit bubble is even bigger. Last month, outstanding loans and leases reached $7.52 trillion and bank credit $10.3 trillion. Halleluiah...

The underlying idea is simple – an idea that has morphed into a special sort of higher religion at the Fed that everyone has to believe in and that no one is allowed to question: the US economy can only grow if debt grows even faster. So total bank credit rose 3% in 2013, for example, and US gross national debt soared by $883 billion, or 5.4%. But GDP rose only 1.9%.
This is what a credit bubble looks like: piling on debt and more debt at all levels while producing only anemic economic growth, so that the debt burden, relative to the economy, gets more and more onerous, and only the Fed’s zero-interest-rate policy can keep the whole construct from collapsing under its own weight, which it will do anyway even with ZIRP, but later and only after even more debt has been piled on so that the damage will be even greater.

3---Biggest Credit Bubble in History Runs Out Of Time , Testosterone Pit

Private equity firms have been ruthlessly taking advantage of that “insatiable demand.” And they have a special self-serving trick up their sleeve: Their junk-rated overleveraged portfolio companies issue new loans, but instead of using the funds for expansion projects or other productive uses, they hand them out through the back door as special dividends. It’s one of the simplest ways PE firms use to strip cash out of their portfolio companies. It loads even more debt on the already highly leveraged portfolio company without adding productive capacity. And those who end up holding this debt – for example, the mutual fund in your portfolio – have a good chance of losing it all.

“It’s kind of like an epidemic,” explained Martin Fridson, a money manager at Lehmann, Livian, Fridson Advisors LLC, in an interview with Bloomberg. “Once an investment banker sees that, he’s going to go to his clients and say, ‘Here’s a window of opportunity, you can take a dividend and get away with it.’

4---Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones, economists view

 The deep recession wiped out primarily high-wage and middle-wage jobs. Yet the strongest employment growth during the sluggish recovery has been in low-wage work, at places like strip malls and fast-food restaurants.
In essence, the poor economy has replaced good jobs with bad ones. That is the conclusion of a new report from the National Employment Law Project, a research and advocacy group, analyzing employment trends four years into the recovery.
“Fast food is driving the bulk of the job growth at the low end — the job gains there are absolutely phenomenal,” said Michael Evangelist, the report’s author. “If this is the reality — if these jobs are here to stay and are going to be making up a considerable part of the economy — the question is, how do we make them better?”...
The National Employment Law Project study found especially strong growth in restaurants and food services, administrative and waste services and retail trades. Those industries — which often pay wages at the federal minimum — accounted for about 40 percent of the increase in private sector employment over the past four years.
There has also been strong jobs growth in some high-paying industries, like professional, scientific and technical services — a category that includes accountants, lawyers, software developers and engineers. That sector accounted for about 9 percent of the private-sector job gains in the recovery.

5---'Is the Stock Market Getting Bubbly?', economists view
Dean Baker:
Is the Stock Market Getting Bubbly?: Washington Post columnist Steve Pearlstein argues it is, taking issue with fellow columnist Barry Ritholtz who says it isn't. I'm going to come down in the middle here.
The market is somewhat above its historic levels relative to trend earnings. Pearlstein cites Shiller who puts the price to earnings ratio at 25 to 1, compared to a historic average of 16. ... I would agree that stock prices are somewhat above trend, but not by quite as large a margin as Shiller. ...

However, there are some points worth noting. The social media craze has allowed many companies with no profits and few prospects for making profits to market valuations in the hundreds of millions or even billions of dollars. That sure looks like the Internet bubble. Some of these companies may end up being profitable and worth something like their current share price. The vast majority probably will not.
The other point is that the higher than trend price to earnings ratio means that we should expect to see lower than trend real returns going forward. 

6---Japan's inflation rate has stalled as impact of yen depreciation wanes , sober look

Should Japan attempt to weaken the yen even further in order to move inflation higher? The problem with that approach is that it would exacerbate the "wrong" type of inflation. Over the past year in Japan, dairy products are up 4%, meats are up 5%, gasoline is up 6%, and electricity is up 10%. These are import driven price shocks and further yen weakness could spell trouble.

With wage growth remaining inadequate, the new consumption tax combined with these price increases could put severe pressure on the consumer. That makes further yen depreciation a difficult policy to embrace. Some however would argue that all the export growth created by weaker yen would more than offset these domestic issues. Making Japanese goods cheaper should result in better sales abroad (as it did in the past), more profits domestically, better economic growth, etc. The impact of the latest yen devaluation on exports however has been less than stellar - certainly not enough to offset these domestic price shocks. In fact, Japan's trade balance is now firmly in the red (see chart).

To be sure, currency weakness has helped Japan achieve a higher inflation rate, but at a significant cost. Further currency weakness could exacerbate the situation without necessarily boosting exports. Moreover, it is not clear how sustainable the price increases will be going forward, particularly in the event of consumer retrenchment. On the other hand, as the currency stabilizes and inflation stalls, it will become increasingly difficult to reach the 2% target rate.

7---Weak US household formation pressuring housing markets, sober look
Housing remains a weak spot in what otherwise looks like a fairly broad improvement across the US economy. The new home sales report today for example came in materially below expectations.

Signs of this soft patch in housing were already visible over a month ago when lumber futures experienced a significant decline (see chart). Home prices have risen quickly over the past couple of years, and that combined with higher mortgage rates creates a bit of a sticker shock for many potential buyers. Furthermore builders continue to complain about construction costs and tight credit. The biggest issue however remains household formation. As of the end of last year for example, the number of American households was not growing at all (see chart). This is likely due to record low marriage rates as well as a slew of other factors. Whatever the reason, household formation needs to stabilize before we see stronger results in the US housing market.

8---Has the Abenomics effect run its course, prag cap

Looks like it.

9--Detention of OSCE mission provides pretext for US escalation, wsws
US, European Union, G7 set to impose new sanctions on Russia

10---The fight against color coded revolutions, Bug Pit

11--The Ukraine crisis and the political lies of the media, wsws

The powerful bond that united Ukraine and Russia arising from the 1917 Bolshevik revolution that overthrew tsarism and opened the door to the liberation of the oppressed masses; the heroic struggle of the Red Army to liberate Ukraine from the murderous grip of German fascism in World War II; the catastrophic consequences of the dissolution of the Soviet Union, the final act in the Stalinist betrayal of the October Revolution—these issues are a closed book to this ignorant, complacent, but lavishly paid flunkey of the US ruling class.....(Thomas Friedman)...

The Times ’ standard is followed by all the major newspapers and television outlets. In following the coverage in the American media, one would never know that the new government in Kiev is populated by individuals from the anti-Semitic Svoboda party, which was condemned in a 2012 vote of the EU parliament. Nor would one know that the Right Sector militia and Svoboda party glorify Nazi collaborator Stepan Bandera, whose Organization of Ukrainian Nationalists participated in the Holocaust of Ukrainian Jews.
The fact that the US has been aggressively backing the crackdown in eastern Ukraine—including sending CIA director John Brennan to Kiev—is covered over. The leaked phone call between US State Department official Victoria Nuland and US Ambassador to Ukraine Geoffrey Pyatt before the putsch, discussing whom to install as Ukraine’s prime minister, is never mentioned...

Over the past two weeks, the Times has been caught in a series of fabrications. Last week, it ran a front-page lead story replete with photographs handed to it by the State Department and the US-backed Ukrainian government purporting to show that Russian Special Forces are directing the protests in eastern Ukraine.

The Times report was quickly exposed as a fraud, including by the WSWS. It took only a quick search on the Internet to expose the so-called evidence as either doctored or fabricated. Subsequent acknowledgements of the “controversy” over the photographs—exercises in damage control and cover-up—have been buried on the newspaper’s inside pages.

Far from being chastened by these exposures, the Times rapidly moved on to its next assignment from the State Department—a front-page article published yesterday alleging that Russian President Vladimir Putin has a secret fortune of between $40 billion and $70 billion. The Times acknowledged in its own article that the allegations consist of “rumors and speculation” with “little if any hard evidence.” That did not prevent it from seeking to legitimize the gossip by elevating it to the status of a prominent “news” item. ...

The final nail in the coffin of anything remotely resembling an independent media came with 9/11 and the “war on terror,” as demonstrated by the media’s “embedded” role in the invasions of Afghanistan and Iraq and its brazen propaganda in support of the wars for regime change in Libya and Syria.
The major newspapers today acknowledge passing articles through government channels before publication, a practice that in other contexts is called state censorship. The media talking heads and columnists make it their business to assist in the witch-hunt of whistleblowers like Edward Snowden and Julian Assange.
The fact that the entire foreign policy of the corporate-financial elite is erected on the basis of lies that cannot withstand the slightest critical examination is a sign not of strength, but of weakness. A vast gulf separates the working class from the warmongers in the American ruling class and their lackeys in the media.

Has the Abenomics Effect Run its Course?

We all know that QE has a substantial psychological impact on the market.  Perhaps more importantly, depending on how such a program is implemented and in what environment, it can be extremely powerful.  One of the more noticeable stories has been that of Japan where Abenomics has appeared to be at least a marginal success in recent years.  Whether this has been mainly due to the exchange rate or due to other factors is impossible to know, but one thing appears to be certain – the positive directional trend of many indicators appears to have changed from a steady rise to a steady sideways.
As our friends over at Sober Look note, inflation appears to have stopped rising as the persistent low inflation trend continues to exert itself:
Japan core CPI
The Nikkei Index, which looked like a one way bet for 6 months, has stalled:
The Yen rally has stalled:
This remains one of the most interesting monetary experiments in the world today.  If the central bank is able to pull Japan out of its sustained deflation then we will likely see a permanent change in the way central banks engage their economies.  But I wouldn’t get too hopeful.  Not only do I fear that this has been primarily exchange rate driven, but I also fear that Japan’s terrible demographic trends are something that no central bank can overcome.  And of course, that assumes QE has the power to sustain a recovery or avert disaster in the first place, which I tend to think is a position that’s overstated.



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