Friday, March 6, 2015

Today's Links

1--Mark Cuban Does the Bubble Beat, CEPR

At its peak in 2000 the value of corporate stock was more than 30 times trend earnings, today it is closer to 20. The bubble was clearly moving the economy both by sending investment to its highest share of GDP since the 1970s and by causing a consumption boom through the wealth effect.
Neither story is close to being true today. If over-valued tech companies were to lose 95 percent of their value tomorow, few people outside of Silicon Valley would notice.

This issue about these companies being privately traded makes between little and no sense. If Mark Zukckerberg paid $19 billion too much for Whatsapp, who cares? It's a form of redistribution from the incredibly rich to the new superrich. That's hardly a publicly policy problem.

2--China cuts growth forecast, warning of “deep-seated” economic problems, wsws

Nomura financial analyst Rob Subbaraman told the British Daily Telegraph: “We assign a one-in-three chance of a hard landing—growth averaging 5 percent or less over four quarters—starting within the next two years.”
Such a fall would not only have major consequences in China but would send a shock wave through the global economy and could set off a major financial crisis.

3--NATO seeks regime change in Russia - envoy, RT

4--Americans Not In The Labor Force Rise To Record 92.9 Million As Participation Rate Declines Again, RT
End result: the labor force participation rate dropped once more, declining to only 62.8%, which as the chart below shows is just off the lowest print recorded since 1978.

Source: BLS

5--Nutty Valuations, Bill Bonner

Why are we raising the flag again now? Economist and fund manager John Hussman, of Hussman Funds, explains:
Last week, the CAPE ratio of the S&P 500 Index surpassed 27, versus a historical norm of just 15 prior to the late-1990s market bubble. [The CAPE ratio – also known as the Shiller P/E ratio – looks at inflation-adjusted earnings over a 10-year period to control for cyclicality in earnings.]

The S&P 500 price-revenue ratio surpassed 1.8, versus a pre-bubble norm of just 0.8.
On a wide range of historically reliable measures (having a nearly 90% correlation with actual subsequent S&P 500 total returns), we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks.
Advisory bullishness (Investors Intelligence) shot to 59.5%, compared with only 14.1% bears – one of the most lopsided sentiment extremes on record.

The S&P 500 registered a record high after an advancing half-cycle since 2009 that is historically long-in-the-tooth and already exceeds the valuation peaks set at every cyclical extreme in history but 2000 on the S&P 500 (across all stocks, current median price-earnings, price-revenue and enterprise value-EBITDA multiples already exceed the 2000 extreme).

6--Japan Now Spends 43% Of Tax Revenue To Fund Interest On Debt, ZH

7--15 Recent Bank Scandals That Show Just How Powerless You Really Are

8--Stuck in the housing middle with you: Americans moving less and inventory near record lows., Dr Housing Bubble

You had 7,000,000+ completed foreclosures since the crisis hit where many people moved into rentals and big investors bought a property to rent out. A one-off transaction. This also explain the massive decline in the homeownership rate.....

inventory for sale
During the bad years of the crisis, we had something like 3.8 million existing homes for sale on the market. Today we are closer to 2 million. With investors chasing yield and supply shrinking, prices got pushed up and we saw this hit strongly in 2013 and 2014. But this wasn’t driven by massive sales volume or your traditional channel of typical home buyers. This was largely done by a low rate environment, investors, and low inventory....

The market seems largely stuck. The national median home price is $208,000. That is certainly a reasonable amount and with very low mortgage rates, you would expect more buyers to be out on the hunt. But as we discussed, 6 out of 10 Millennials prefer renting over buying and this would be your next target audience to take the baton from the aging baby boomers. This is where the clash also occurs. Baby boomers seem to assume that their offspring have the same desire to own property as they do and that this applies to everyone. That isn’t always the case and also, desire and incomes don’t always align.
The fact that inventory is so low and current owners are staying put longer simply speaks to the lingering impacts of the housing bust. 

9--Biderman on FOX Business: Why economy will slow while stocks grow - See more at:

10--For 90% Of Americans: There Has Been No Recovery Lance Roberts

Every three years the Federal Reserve releases a survey of consumer finances that is a stockpile of data on everything from household net worth to incomes. The 2013 survey confirms statements I have made previously regarding the Fed's monetary interventions leaving the majority of Americans behind:
"While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.
With the average American still living well beyond their means, the reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service. The issue, of course, is not just a central theme to the U.S. but to the global economy as well. After five years of excessive monetary interventions, global debt levels have yet to be resolved."

11--In order to continue to drive the housing recovery forward you need fresh entrants into the housing market in the form of household formations. As discussed by Walter Kurtz recently:
"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. This is likely due to record low marriage rates as well as a slew of other factors (lack of employment, wage growth, etc.). Whatever the reason, household formation needs to stabilize before we see stronger results in the US housing market."
The current decline in housing is not a "weather related" anomaly but a function of "real" affordability. I say "real" affordability, because buying a house is not just about the price, but the ability for a family to qualify for and pay the mortgage. Unfortunately, despite the ever ebullient hopes of mainstream analysis, the core requirements of rising wage growth, full-time employment, loan qualification and the ability to save a downpayment keeps home ownership elusive for many. That is unlikely to change anytime soon. Of course, I have already told you that previously.

12--U.S. Strategy in Iraq Increasingly Relies on Iran, NYT

13--The US-NATO expansion of the conflict in Ukraine is indeed a declaration of war against Russia. And from what I can make out the Russian people see the writing on the wall - they can hear the train coming. Sadly the American people have no clue what is going on nor do most of those in Europe.

This project has been set up with criminal precision. After all the CIA and the Pentagon have had alot of practice over the years. This is what Washington does best.

It's all just far to neat and tidy to be seen otherwise. This is not a conspiracy but a well designed military plan to take down Moscow. They are playing with fire. In some respects the 'project' is now impossible to stop. The question for the moment is how long will this attack on Russia go on and what level of conflict will result? Will it go nuclear? If so the world is fucked.

The Pentagon role now is to send legions of NATO trainers into Ukraine to "push Kiev's reluctant troops forward" in order to "deter Russian aggression." It's a long term military operation that is going to be exceedingly expensive. It's got to be sold to the American people and folks throughout Europe. In order to make this public relations campaign successful the perpetrators have to flip the switch - turn the story ass backwards - blame the other side for doing what US-NATO are in fact doing

14---Bernanke's plan to nationalize the banks? ZH

Back on February 7, 2009, one month before the Fed unveiled its massive (for its time) first episode of Quantitative Easing, the Federal Reserve was flailing. And, as revealed today by the latest annual batch of Fed transcript releases, precisely one month before the Fed commenced monetizing tens of billions in government debt and MBS, Bernanke held perhaps the longest conference call in the Fed's history (the transcript alone is 65 pages) in which he revealed that he was working on something entirely different: an "aggregator bank" concept, which would have been essentially a quasi-nationalization of  the US banks whereby Fed funds is commingled with the bank's capital in order to avert public attention from the trillions of bad assets on the bank books.

It is during the discussion of this plan, which mysteriously disappeared from the Fed's plan of action between February 7 and a month later, when America set off on its path from which 7 years later it is still unable to ween itself (and in fact now everyone else is also pursuing QE), that we learn for a fact precisely what most have suspect if not known for a fact, namely that the resulting "bailout" of the US economy by way of QE was nothing more than a way to keep bank shareholders "thrilled."...

But I think there are some advantages to that from a political point of view. I will say that both I and the staff—Bill Dudley and others—are somewhat concerned, at least given the way things stand now, about the market reaction. First, the lack of details will create some uncertainty and concern, particularly because there’s not a great deal said about the “problem children,” the BAC and Citi. Secondly, I think the markets will be disappointed in the following sense: As I will describe, this is a real truth-telling kind of plan. It’s fundamentalist. It’s not about giving the banks a break. It’s not about using accounting principles  to give them backdoor capital. It’s very much market-oriented and “tough love.” And I think we all will like that. I like that. But the banks’ shareholders aren’t going to be thrilled about it.

For one brief , fleeting instant, the Fed was willing to do what is right, and no only not halt Mark to Market (the Fed itself admits accounting gimmicks boost banks), but force banks to recognize their losses without "giving them backdoor capital" - something else the Fed now admits to doing. But the reason why the Fed's plan would have been applauded is that as Bernanke says it is "market-oriented" and "tough love."
But most importantly, the Fed revealed what the overarching motive behind the entire economic "bailout" has been- in other words what it was all about: the banks’ shareholders.
And.... he was right, even if he "liked it." Because someone else apparently did not.
Precisely one month later, unclear why, the Fed changed course 180 degrees, and instead of dispensing "tough love" and going with a market-oriented means to fixing the economy, one which however would have wiped out all bank shareholders, Bernanke unleashed central-planning unlike anything even seen in the USSR. Not only that, but we also know what QE is by what it isn't:

15--Expanding debt and leverage no longer boosted wages., zh


something changed around 2009. Expanding debt and leverage no longer boosted wages. For the first time in 30 years, juicing debt and leverage did not push wages higher--rather, wages declined or stagnated, despite trillions of dollars of Fed stimulus, near-zero interest rates and all the other tricks of financialization.
The returns on additional debt and leverage have diminished to near-zero. This is the endgame of financialization: expanding debt and leverage no longer move the needle on wages and household income. Rather, adding more debt is weighing on wages.
After 30 years of success, the endgame is finally here. We are witnessing a profound secular sea-change: the failure of expanding debt and leverage to lift the real economy of wages and household income.

The dollar index has gained around 18% since last July, when it started taking off and emerging currencies began to tumble...

The world is much more interdependent and globalized than in 1979 or 1997, the economies of the “periphery” are now half the world economy, and the US economy is weakened and in uncharted territory, printing trillions of new dollars and still attempting to force the world to continue to submit to its domination. It’s possible that we’ve entered an age when the US simply can’t continue to export its crises with impunity......

According to the Bank of International Settlements in early December, at mid-2014 non-bank borrowers outside the US owed $9 trillion of dollar denominated debt, a 50% increase since 2008. Of this $9 trillion, $5.7 trillion is in emerging markets, mainly in the form of corporate bonds and international bank loans to companies. This includes $1.1 trillion of dollar debt in China, more than double its amount at the end of 2012. Most of emerging market dollar debt is corporate and not sovereign, but states’ reserves could be tapped if major bailouts are needed....

If international speculators start dumping emerging market corporate bonds, these companies would be forced to acquire dollars to pay off their debts, thus accelerating the dollar’s rise. If there is a wave of defaults, contagion could set in (since speculators are herd animals) and capital flight could take off. There is the risk for a sell-off in emerging market bonds, leading to conditions like in 1997. The multitrillion dollar carry trade may be on the verge of unwinding, meaning capital fleeing the periphery and rushing back to the US. Vast amounts of capital are already leaving some of these countries, and the secondary market for emerging bonds is beginning to dry up. A rise in US interest rates would only put oil on the fire.....

While a stronger dollar will not hurt the consumption-based US economy, the rising dollar and US monetary tightening are about to give the developing world a severe blow. Ambrose Evans Pritchard of the Telegraph wrote on December 17:
“The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar. [...] The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries. Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are ‘short dollars’, in trading parlance. They now face the margin call from Hell…. Stephen Jen, from SLJ Macro Partners said that ‘Emerging market currencies could melt down. There have been way too many cumulative capital flows into these markets in the past decade. Nothing they can do will stop potential outflows, as long as the US economy recovers. Will this trend lead to a 1997-1998-like crisis? I am starting to think that this is extremely probable for 2015.’”
This is exactly in the interests of US financial imperialism: to economically undermine any rivals that question dollar hegemony...

The Financial Times wrote on February 22:
“History suggests that severe accidents are more likely when the Fed is tightening, and the dollar is rising. […] Whether it likes it or not, the Fed is the world’s central banker, more than ever before. The dollar has become the unit of account in a foreign credit market that is half as large as US GDP. All of the major emerging markets are deeply embroiled, including China, Brazil and India. The market is plenty big enough to cause trouble in the US economy itself, should an accident occur. An accident certainly cannot be ruled out. […] Even in retrospect, it is not easy to identify viable policy options for the emerging markets (EM), other than extremely cumbersome capital controls, that could have insulated the emerging economies from the Fed’s unconventional easing. […] Portfolio managers in the global bond market may dump EM debt very quickly as interest rates begin to rise, forcing some EM corporates to buy dollars to redeem maturing debt. This could push the dollar higher, tightening monetary conditions even more. And this would reduce capital investment in the EMs, raising the risk of recession and inducing bond managers to dump more EM credit into the market. The BIS is worried that the results could resemble the collapse of a traditional leverage bubble in the banking sector, even though the institutional components would be very different.”
This situation creates obvious risks even for the core economies, which are not exactly stable

17--New Financial Paradigm: shareholder payouts take precedence over productive corporate investment, NC

This paper provides evidence that the strong empirical relationship of corporate cash flow and borrowing to productive corporate investment has disappeared in the last 30 years and has been replaced with corporate funds and shareholder payouts. Whereas firms once borrowed to invest and improve their long-term performance, they now borrow to enrich their investors in the short-run. This is the result of legal, managerial, and structural changes that resulted from the shareholder revolution of the 1980s. Under the older, managerial, model, more money coming into a firm – from sales or from borrowing – typically meant more money spent on fixed investment. In the new rentier-dominated model, more money coming in means more money flowing out to shareholders in the form of dividends and stock buybacks.

These results have important implications for macroeconomic policy. The shareholder revolution – and its implications for corporate financing decisions – may help explain why higher corporate profits in recent business cycles have generally failed to lead to high levels of investment. And under this new system, cheaper money from lower interest rates will fail to stimulate investment, growth, and wages because, as we show here, additional funds are funneled to shareholders through buybacks and dividends.
Key Findings
• In the 1960s and 1970s, an additional dollar of earnings or borrowing was associated with about a 40-cent increase in investment. Since the 1980s, less than 10 cents of each borrowed dollar is invested.
• Since the 1980s, shareholder payouts have nearly doubled; in the second half of 2007, aggregate payouts actually exceeded aggregate investment. Today, there is a strong correlation between shareholder payouts and borrowing that did not exist before the mid-1980s.
• This change in corporate finance, associated with the “shareholder revolution”, means there is good reason to believe that the real economy benefits less from the easier credit provided by macroeconomic policy than it once did.

18---Investors just got another wake-up call on the bull market , marketwatch

The bull market in stocks just lost a major support: Total margin debt on the NYSE is now in a distinct downtrend.

Margin, of course, refers to what investors borrow from their brokers to purchase securities. The higher the number, the more bullish they are, owing to the fact that they pay interest to borrow the money. The New York Stock Exchange each month reports the total amount among member firms. Late last week, the NYSE released its data for January, and it’s that number that is so worrisome.
It’s not that the raw numbers are alarming: The NYSE reported that total margin debt for January stood at $445 billion, an undeniably big number. But it’s been falling steadily over the past year, from a peak of $466 billion in February 2014. The latest total is now below its average level in the trailing 12 months.

To put this in context, consider that when the bull market began in March 2009 and the Dow Jones Industrial Average DJIA, -1.07%   was below 6,600, total margin debt was only $182 billion. As the Dow nearly tripled over the next six years, margin debt also rose steadily — until recently.
Margin debt’s downtrend is bearish, according to research conducted by Norman Fosback, the former president of the Institute for Econometric Research and current editor of Fosback’s Fund Forecaster. “If the current level of margin debt is above the 12-month average, the series is deemed to be in an uptrend, margin traders are buying, and stock prices should continue upwards,” Fosback wrote in his investment textbook “Stock Market Logic.”

“By the same line of reasoning, sell signals are rendered when the current monthly reading is below the 12-month average. This is evidence of stock liquidation by margin traders, a phenomenon which usually spurs prices downward.”

19--Stephen Roach Warns: "The Fed Is In Total Denial... On What It Put The World Through A Decade Ago", ZH

KE  Why is the 10 year at 2.5%?
SR--certainly it indicates weak recovery and subdued inflation, but also a fed that it has no intention of being aggressive in normalizing interest rates
the fed is in complete denial that cheap money, accommodative policy, reduced price of risk had anything to do with the catastrophic outcome of 08 and 09

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