I'm expecting a reboundbut the key for me is volatility.
Here's a thought: "...the end of the low volatility period leads to a strong and sudden crash in prices." Constantin Gurdgiev
I don't see why they want to keep stocks high
Bond yields are saying that we're headed for a long period of slow growth and no inflation.
Stocks are saying everything is hunky dory.
1--Wall Street terrorists steal money from pensioners to line their pockets: How a Public Pension Crisis Is Driving an Epic Credit Boom
Massively underfunded public pensions are driving an epic credit boom in the corporate bond market that will likely accelerate in the coming years.
Lawrence McQuillan of the Independent Institute explained on Financial Sense Newshour this week how public pensions are being operated under rules and assumptions that would be considered criminal under Federal law if operated similarly in the private sector.
We spoke with him about his very important book (see here), California Dreaming: Lessons on How to Resolve America's Public Pension Crisis, where he said that in order to meet their funding requirements the Big Three pension funds in California (CalPERS, CalSTRS, and UCRP) assume that "they will outperform the average portfolio return...by 21 percent every year for decades."
Given their massively growing liabilities, which collectively dwarf the size of the Fed's own balance sheet, and high return requirements, our other guest this week, Brian Reynolds, Chief Market Strategist at New Albion Partners, said pension funds across the nationa are pouring money into the corporate bond market leading to a "daisy chain of financial engineering."
"Pension funds," he said, "have to make 7.5%," so they are putting their money "in these levered credit funds that mimic Long-Term Capital Management in the 1990s." Those funds, in turn, "buy enormous amounts of corporate bonds from companies which puts cash onto company balance sheets...and they use it to jack their stock price up, either through buybacks or mergers and acquisitions."
"It's just a daisy chain of financial engineering and it's probably going to intensify in coming years," Brian said.
When we asked him why he thought this, New Albion's Chief Market Strategist cited two important factors: what came out of the Detroit bankruptcy and the eventual move toward Fed rate hikes.
With regards to the latter, he explained that private equity firms and hedge funds actually begin to buy corporate bonds more aggressively to paper over the losses from rising yields/lower bond prices. So, although most investors think a move towards higher rates will cause panic, Brian said, ironically, that's when you see things really start to accelerate.
2--Why do markets fall late in the day? A. Buybacks, perhaps, Kelly Evans
That said, corporate America has been pretty much the only buyer of this rally that most everyone else—individual investors, pension funds, macro hedge funds—has sold.
There were $141 billion of stock buybacks authorized in April alone--a new record, according to Birinyi Associates. If the year-to-date pace keeps up, 2015 will record $1.2 trillion in total buybacks, handily outpacing the previous annual high of $863 billion set in 2007.
3---Michael Hudson: Smoke and Mirrors of Corporate Buybacks Behind the Market Crash
what most of the commentators don’t get, that all this market runoff we’ve seen in the last year or two has been by the Federal Reserve making credit available to banks at about one-tenth of 1 percent. The banks have lent out to brokers who have lent out to big institutional traders and speculators thinking, well gee, if we can borrow at 1 percent and buy stocks that yield maybe 5 or 6 percent, then we can make the arbitrage. So they’ve made a 5 percent arbitrage by buying, but they’ve also now lost 10 percent, maybe 20 percent on the capital....
companies themselves have been causing this crisis as much as speculators, because companies like Amazon, like Google, or Apple, especially, have been borrowing money to buy their own stock. And corporate activists, stockholder activists, have told these companies, we want you to put us on the board because we want you to borrow at 1 percent to buy your stock yielding 5 percent. You’ll get rich in no time. So all of these stock buybacks by Apple and by other companies at high prices, all of a sudden yes, they can make that money in the short term. But their net worth is all of a sudden plunging. And so we’re in a classic debt deflation.....
You’ve had stock prices going up without really corporate earnings going up. Although if you buy back your stock and you retire the shares, then earning the shares go up. And all of a sudden the whole world realizes that this is all financial engineering, doing it with mirrors, and it’s not real. There’s been no real gain in industrial profitability. There’s just been a diversion of corporate income into the financial markets instead of tangible new investment in hiring....
The real problem is that low interest rates provide money to short-term speculators. And all of this credit has been used not for the long term, not for investment at all, but just speculation. And when you have speculation, a little bit of a drop in the market can wipe out all of the capital that’s invested.
4--fewer people are invested in the stock market today than at any time in nearly the last two decades (because they think) the rules of the game are rigged Duh?
fewer people are invested in the stock market today than at any time in nearly the last two decades -- the product of dogged wage stagnation and a dramatic loss of faith in markets.
Data varies by source. But according to the U.S. Federal Reserve's most recent survey, only about 48 percent of Americans reported owning stocks or stock-based investments, down from a 2007 peak of 65 percent, according to Gallup. A more recent study released in April by consumer finance firm Bankrate.comfound the same proportion as the Fed, which marks the lowest participation rate since 1995, when about 41 percent held some form of stock.
One is more likely to encounter a One is more likely to encounter a daily tea drinker in the United States than someone with money invested in the stock market -- and that includes so-called nondirect investments like mutual funds held in 401(k) accounts. Even fewer Americans, about 14 percent, own individual stocks like Apple or Microsoft....
But that doesn’t account for the full picture. Even people with the means to invest are steering clear of Wall Street. When asked what kind of investments “made the most sense,” more people said real estate or cash--savings accounts or certificates of deposit--than stocks, according to a separate survey released last month....
Many share a feeling that the rules of the game are rigged or that it’s too risky to invest savings in a system they cannot possibly understand
5--Michael Hudson on What's Behind the Stock Market's Roller-Coaster Ride
6--Turkey refutes tipping al-Qaeda group to US-trained fighters
Turkey has strongly denied a news report suggesting that Turkish authorities orchestrated the kidnapping of a group of U.S.-trained moderate Syrian fighters after they entered Syria last month to confront fighters of the Islamic State of Iraq and the Levant (ISIL), arguing that the report was “intentional.”...
“The rebels say that the tipoff to al-Qaeda’s Nusra Front enabled Nusra to snatch many of the 54 graduates of the $500 million program on July 29 as soon as they entered Syria, dealing a humiliating blow to the Obama administration’s plans for confronting [ISIL],” the report said.
7---Two arrested for insulting President Erdoğan during captain’s funeral
8--Erdoğan no longer credible
Erdoğan is the actor of the Sept. 12 regime. He is not hope but rather the source of the crisis. He has lost all credibility in the claim to promote democracy and peace.
9--US stock rally collapses amid fears of global slump
The failure to stage a reversal of Monday’s selloff underscored the disarray and perplexity of capitalist governments and central banks. There is virtually no confidence that any of the major imperialist powers—the United States, Europe or Japan—acting either separately or in concert, can lead the way out of the crisis. Instead, all hopes are pinned on crisis-ridden China.
This sentiment was expressed by Mohamed A. El-Erian, the former head of the world’s largest bond trading firm Pimco, who wrote that the only longer-term solution to the crisis gripping the world economy was an economic normalization in emerging markets, most notably China.
El-Erian declared that a significant portion of the selloff “arose from the correct realization that the primary response would have to come from the emerging economies that are the source of the growth and financial concerns.”
The prospects of China or another emerging market country (India, Brazil, etc.) even temporarily rescuing the world capitalist system are remote. In a statement announcing Tuesday’s rate cut, the Chinese central bank declared: “China’s economic growth is still facing downward pressure, and the task of stabilising growth, adjusting institutions, advancing reform, benefiting people’s lives and preventing risks is still extremely arduous.”
El-Erian admitted that “the best that can be hoped for right now is short-term market stabilization through another series of liquidity-driven Band-Aids.” He added, “This approach would provide much-appreciated immediate relief, but it wouldn’t be sufficient to deliver the longer-term anchor of stability that the global financial system is searching for.”...
Over the weekend, former US Treasury Secretary Lawrence Summers called for the Federal Reserve to abandon its plans to raise the federal funds rate for the first time in nearly nine years and instead extend its current policy of zero interest rates into the indefinite future.
Summers went further on Tuesday, tweeting that the Federal Reserve should consider further monetary expansion in response to the selloff. As the Financial Times put it, Summers “suggested… that the Fed should even consider another [quantitative easing] bond-buying programme
10--The atrocities of ISIS and the US wars of sociocide
The similarities between ISIS and the Khmer Rouge do not end with their barbaric assaults on culture and human life. In both cases, the preconditions for these atrocities had been created through the destruction of entire societies by US imperialism.
In Cambodia, a US bombing campaign dropped some 532,000 tons of explosives on the country in four years—more than three times the tonnage dropped on Japan during all of World War II. The resulting death toll is estimated as high as 600,000, while 2 million people out of a population of 7 million were made homeless and economic life was shattered.
ISIS and the current bloodshed across Syria and Iraq are the direct products of similar acts of sociocide on the part of US imperialism. In Iraq, the illegal US invasion of 2003, the subsequent occupation and the systematic destruction of what had been one of the most advanced health and social infrastructures in the Arab world claimed the lives of over 1 million Iraqis, while turning another 5 million into refugees. The divide-and-rule strategy pursued by the Pentagon stoked a sectarian civil war by deliberately manipulating tensions between Iraq’s Shia and Sunni populations.
The ramifications of this policy have long since spilled across national borders, with increasingly catastrophic consequences, all driven by Washington’s resort to militarism to advance its aim of hegemony over the energy-rich regions of the Middle East and Central Asia....
Nine months before the last US troops withdrew from Iraq in December 2011, Washington and its NATO allies launched another unprovoked war of aggression to topple the government of Muammar Gaddafi in Libya and impose their own puppet regime over the oil-rich North African country. The destruction of the Libyan state and the murder of Gaddafi plunged the country into chaos and bloodshed that continues to this day. Islamist militias used as US proxies in the Libyan war, along with tons of captured Libyan weapons, were subsequently funneled—with the aid of the CIA—into the civil war in Syria, strengthening ISIS and helping create the conditions for it to overrun more than a third of Iraq.
In the name of the never-ending “war on terrorism,” Washington is prosecuting another military campaign in alliance with the Shia-based government in Baghdad against ISIS in the predominately Sunni regions of Iraq, while in Syria it is stepping up military operations in alliance with Turkey, Saudi Arabia and the other Sunni Gulf monarchies, while attempting to find “moderate” Sunni Islamists it can utilize as proxies in the war to topple the government of President Bashar al-Assad.
11--As World Markets Drop, U.S. Economic Confidence Index at -14 Gallup
12--quick macro update, Mosler "must read"
13---Forget China, Here’s What’s Really Frightening U.S. Stock Investors
As earnings and revenues slide, the corporate balance sheets bloated with debt taken on to buy back the company’s own shares will provide an unwelcome headwind to grow earnings. Since 2009, S&P 500 corporations have spent over $2 trillion buying back their own stock.
According to the U.S. Treasury’s Office of Financial Research in a report released in March, “corporate debt outstanding has risen to $7.4 trillion, up from $5.7 trillion in 2006,” noting that a significant portion of that was spent on share buybacks. The report goes on to note that “Although this financial engineering has contributed to higher stock prices in the short run, it detracts from opportunities to invest capital to support longer-term organic growth. Credit conditions remain favorable today because of the positive trend in earnings, but once the cycle turns from expansion to downturn, the buildup of past excesses will eventually lead to future defaults and losses.”
Further angst on Wall Street stems from worries about just how the U.S. mega banks might fare in a market meltdown. As we reported in June, some of the largest banks are back to their dodgy practices, this time entering into “capital relief trades” with questionable counter parties like hedge funds and private equity firms. The capital relief trades allow the banks to enter into derivative trades that dress up the appearance of stronger capital while keeping the deteriorating assets on their books.
The Office of Financial Research (OFR) released a report on the practice in June and suggested these derivatives deals may present systemic risk to the financial system. What was particularly stunning about the report is that it directly linked the current behavior to the same type of behavior as that which collapsed the economy in 2008.
The OFR report referenced a memo that was disclosed by the Financial Crisis Inquiry Commission, charged with investigating and reporting on the underlying causes of the 2008 Wall Street collapse.
That memo was transmitted on September 16, 2008 – a day after Lehman Brothers had filed for bankruptcy. The memo was attached to an email to Tim Geithner, then President of the New York Fed. One section of the memo detailed what AIG, the giant international insurance company headquartered in the U.S., had been doing with European banks to dress up their capital. The memo said AIG had engaged in swaps that allowed European banks to hold “1.6% in regulatory capital as opposed to 8%.”
AIG was also on the hook for Credit Default Swaps purchased by Wall Street banks like Goldman Sachs and required a $185 billion taxpayer bailout to remain afloat.
One of the mega banks that is currently engaging in these capital relief trades is Citigroup, the recipient of the largest bank bailout in U.S. history during the 2008 crash. According to a February 2013 report at Bloomberg Business, Citigroup entered into a deal with private-equity firm, Blackstone Group. Citigroup obtained from Blackstone protection against initial losses on $1.2 billion of shipping loans, which allowed Citigroup to lower the amount of capital it had to set aside by 96 percent. According to Bloomberg, the loans remained on Citigroup’s balance sheet.