Wednesday, March 15, 2017

Today's links

"I hope I'm wrong, but I think we're in a big, fat, juicy bubble" and "if you raise interest rates even a little bit, (everything's) going to come crashing down.” Donald Trump (Fed expected to raise rates today)


"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." John Maynard Keynes, General Theory of Employment, Interest, and Money



Food for Thought:  On March 9, 2009 the Dow jones Industrial Average closed at a price of 6,547. Eight years later, on March 1, 2017,  the DJIA finished at an eye-watering 21,114, an increase of 14,567 points or more than double its value.




1--Atlanta Fed drops  first quarter forecast to 0.9 percent. Ouch


Fed plans to raise rates just as economy stops growing


2--Looking Back for Clues-- BIS report June, 2016


We suggest that the current predicament in no small measure reflects the failure to get to grips with hugely costly financial booms and busts (“financial cycles”). These have left long-lasting economic scars and have made robust, balanced and sustainable global expansion hard to achieve – the hallmark of uneven recovery from a balance sheet recession. Debt has been acting as a political and social substitute for income growth for far too long....




... debt may even shed light on the puzzling slowdown in productivity growth. When used wisely, credit is a powerful driver of healthy economic growth. But as the previous evidence indicates, unchecked credit booms can be part of the problem and leave a long shadow after the bust, sapping productivity growth. In addition, debt overhangs depress investment, which weakens productivity further. In turn, weaker productivity makes it harder to sustain debt burdens, closing the loop. ...


The world has been haunted by an inability to restrain financial booms that, once gone wrong, cause long-lasting damage. The outsize and unsustainable financial boom that preceded the crisis masked and exacerbated the decline in productivity growth. And rather than being the price to pay for satisfactory economic performance, the boom contributed, at least in part, to its deterioration, both directly and owing to the subsequent policy response. The key symptom of the malaise is the decline in real interest rates, short and long, alongside renewed signs of growing financial imbalances....


A shift to more robust, balanced and sustainable expansion is threatened by a “risky trinity”: debt levels that are too high, productivity growth that is too low, and room for policy manoeuvre that is too narrow. The most conspicuous sign of this predicament is interest rates that continue to be persistently and exceptionally low and which, in fact, have fallen further in the period under review. The global economy cannot afford to rely any longer on the debt-fuelled growth model that has brought it to the current juncture.

 

A shift of gears requires an urgent rebalancing of the policy mix. Monetary policy has been overburdened for far too long. Prudential, fiscal and, above all, structural policies must come to the fore. In the process, however, it is essential to avoid the temptation to succumb to quick fixes or shortcuts. The measures must retain a firm long-run orientation. We need policies that we will not once again regret when the future becomes today.

As the UK has found out the hard way, it's too late for that now


3--Why Is the Fed Raising Rates? Better to Ask, Why Not?


why is the Federal Reserve raising interest rates?

It’s illuminating to flip the question on its head: Why not?


The unemployment rate, one of the gauges the Fed watches most closely, fell to 4.7 percent in February, a healthy level by historical standards. Inflation, the other gauge, finally appears to be reviving. Prices rose 1.9 percent over the 12 months ending in January, close to the Fed’s 2 percent annual target.

The Fed continues to hold its benchmark interest rate at a level intended to stimulate economic growth by encouraging borrowing and taking risks. It sits in a range from 0.5 percent to 0.75 percent.


But the economy is still growing at a lackluster pace.

That’s true. The government estimates that the economy grew just 1.6 percent in 2016, compared with 2.6 percent in 2015. Moreover, private economic forecasters don’t see signs of an acceleration in the first quarter of 2017.


4--Shiller: Stocks as expensive as 1929


5--This is the most overvalued stock market on record — even worse than 1929


This is the most dangerous and overvalued stock market on record — worse than 2007, worse than 2000, even worse than 1929.
Or so warns Wall Street soothsayer John Hussman in his scariest jeremiad yet.
“Presently, we observe the broadest market valuation extreme in history,” writes the chairman of the cautious Hussman Funds investment group, “with the steepest median valuations on record, and the most reliable capitalization-weighted measures within a few percent of their 2000 peaks.”

On top of such warning signs as “extreme valuations, bullish sentiment, and consumer confidence,” he adds, “market action has deteriorated in interest-sensitive sectors... As of Friday, more than one-third of stocks are already below their 200-day moving averages.”
Don’t be fooled by the booming headline indexes. More NYSE stocks hit new 52-week lows last week than new 52-week highs, he notes.
In a nutshell: Run.

According to the World Bank, the total U.S. stock market is now valued at more than 150% of annual gross domestic product. That is way above historic norms, and about the same as it was at the market extreme of 2000.


6--This Crazy, Expensive Stock Market Is for Speculators, Not Investors -- The aging bull market is being sustained by optimism, and perhaps already becoming euphoric


7--Corporate Insiders Haven’t Been This Uninterested in Buying Stocks Since Ronald Reagan Was President --There were 279 insider buyers in January, the lowest in records going back to 1988


Corporate executives are buying their own firms’ shares at the slowest pace in at least 29 years, the latest sign of uncertainty as the bull market in U.S. stocks enters its ninth year.

Share purchases and sales by executives are parsed by investors searching for signals about what insiders expect from the market. Sales can show wariness about valuations, while purchases can signal confidence that more gains lie ahead.
Insider buyers have been scant. There were a total of 279 insider buyers in January, the lowest number going back to 1988, according to the Washington Service, a provider of insider-trading data and analytics....

While many investors expect corporate earnings to pick up in coming quarters, reflecting the continuing U.S. economic recovery and Trump administration tax-cut and deregulatory plans, the strong market gains mean that investors are paying more now for expected corporate earnings than at any point in over a decade.
The price-to-earnings ratio of the S&P 500 based on analyst forecasts for the next year is near 17.7, the highest since 2004, according to FactSet....

This year, executives at regional banks whose stocks have soared since the U.S. presidential election are among the biggest insider sellers.  ...

“The fact that we’ve gotten more selling is a sign of concern that maybe the market has gone a little too far too fast,” said Ed Clissold, chief U.S. strategist at Ned Davis. “We wouldn’t be surprised if there was a modest pullback given how far the market has run.”...

Historically, the most powerful signal from insider activity comes when executives ratchet up buying to benefit from a stock-market rebound. The number of insider buyers surged to nearly 3,200, the second highest on record, during November 2008, in the depths of the financial crisis, according to the Washington Service

8--BIS again--archive


A shift to more robust, balanced and sustainable expansion is threatened by a “risky trinity”: debt levels that are too high, productivity growth that is too low, and room for policy manoeuvre that is too narrow. The most conspicuous sign of this predicament is interest rates that continue to be persistently and exceptionally low and which, in fact, have fallen further in the period under review. The global economy cannot afford to rely any longer on the debt-fuelled growth model that has brought it to the current juncture.

A shift of gears requires an urgent rebalancing of the policy mix. Monetary policy has been overburdened for far too long. Prudential, fiscal and, above all, structural policies must come to the fore. In the process, however, it is essential to avoid the temptation to succumb to quick fixes or shortcuts. The measures must retain a firm long-run orientation. We need policies that we will not once again regret when the future becomes today.


9--Neocon wants to oust Putin


10--Mosul bombing is radicalizing Sunnis everywhere; Galloway


11--What Wage Growth?


12--US Senate passes resolution calling on Trump to escalate regime-change in Venezuela


Random Notes---
The Fed targets inflation at 2%, but relies on a measure called core personal consumption expenditure (PCE) to determine price growth. The core PCE index, which excludes food and energy, came in at 1.7% year-over-year in January, based on the latest available data. Meanwhile, the PCE inflation index strengthened to 1.9% annually.

The consumer price index (CPI) accelerated 2.7% in the 12 months through February, following a 2.5% annualized gain the previous month, the Labor Department said in a report on Wednesday. Analysts in a median estimate forecast annual CPI to grow by a similar amount

Core CPI, which strips out the volatile food and energy categories, increased 0.2% from January (o.2% expected) and 2.2% from the same month a year ago (2.2% expected).
The release was the highest headline gain for the index since February 2012 when it increased 2.9%

The Yale economist who predicted the dot.com bust and the 2008 financial crisis seems to think so. Check out this excerpt from an article on CNBC:

"The cyclically adjusted P/E (CAPE), a valuation measure created by economist Robert Shiller now stands over 27 and has been exceeded only in the 1929 mania, the 2000 tech mania and the 2007 housing and stock bubble," Alan Newman wrote in his Stock Market Crosscurrents letter at the end of November.
Newman said even if the market's earnings increase by 10 percent under Trump's policies "we're still dealing with the same picture, overvaluation on a very grand scale." ("Market indicator hits extreme levels last seen before plunges in 1929, 2000 and 2008", CNBC)


....slashing taxes for the wealthy does not boost growth. We know that. It doesn’t work. Period. Check out this blurb from an article on CNBC:
“A study from the Congressional Research Service — the non-partisan research office for Congress — shows that “there is little evidence over the past 65 years that tax cuts for the highest earners are associated with savings, investment or productivity growth.”
In fact, the study found that higher tax rates for the wealthy are statistically associated with higher levels of growth…
The CRS study looked at tax rates and economic growth since 1945. The top tax rate in 1945 was above 90 percent, and fell to 70 percent in the 1960s and to a low of 28 percent in 1986.
The top current rate is 35 percent. The tax rate for capital gains was 25 percent in the 1940s and 1950s, then went up to 35 percent in the 1970s, before coming down to 15 percent today — the lowest rate in more than 65 years.
Lowering these rates for the wealthy, the study found, isn’t aligned with significant improvement in any of the areas it examined…
There is one part of the economy, however, that is changed by tax cuts for the rich: inequality….
The share of total income going to the top 0.1 percent hovered around 4 percent during the 1950s, 1960s and 1970s, then rose to 12 percent by the mid-2000s. During this period, the average tax rate paid by the 0.1 percent fell from more than 40 percent to below 25 percent.” (Study: Tax Cuts for the Rich Don’t Spur Growth, CNBC)
http://www.unz.com/mwhitney/the-trump-bubble/

Here’s a short excerpt:
“The official line from U.S.-based multinational corporations is that if they get a huge tax break, they’ll bring home the trillions of dollars in profits they’ve stashed overseas and use it to hire tons of Americans.
But now that Donald Trump’s election means it might really happen, corporate executives are telling Wall Street analysts what they’ll actually use that money for: enriching their shareholders and buying other companies.
The Intercept’s examination of dozens of earnings calls and investor conference talks since Trump won the presidential election finds that many executives are telling analysts at large banks that they are eager to take the money to increase dividends and stock buybacks as well as snap up competitors. They demonstrate considerably less if any enthusiasm for going on a domestic hiring spree…
“The wealthy are going to create tremendous jobs. They’re going to expand their companies,” Trump asserted during the first presidential debate. “They’re going to bring $2.5 trillion back from overseas, … to be put to use on the inner cities and lots of other things, and it would be beautiful.” During the third debate he promised that “We’re going to start hiring people, we’re going to bring the $2.5 trillion that’s offshore back into the country. We are going to start the engine rolling again.” (Corporations Prepare to Gorge on Tax Cuts Trump Claims Will Create Jobs, Jon Schwartz, The Intercept)

“If rates go up, you’re going to see something that’s not pretty,”  

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