Cory's Chart Corner
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There are many similarities between financial markets today and the late 1920′s. Rampant insider trading is one. An unholy alliance between the financial sector and government is another. Key market moving reports being leaked to an elite few ahead of the masses is another. Record bullishness. Record margin abuse. Unreasonable faith in the powers of big men and women in high places to keep stock prices at permanent new plateaus regardless of over-valuations and a weak economy.
Today we have another one: as in the late 1920′s, some “journalists” are being paid financial incentives when they write market moving stories. This way corporate sponsors and financial firm algo traders can capitalize on the timely release of strategic news to play a naive public. See: Bloomberg pays reporters more if their stories move markets.
Anna Breytenbach has dedicated her life to what she calls interspecies communication. She sends detailed messages to animals through pictures and thoughts. She then receives messages of remarkable clarity back from the animals.
Anna can feel the scars hidden under a monkeys fur, she can understand the detailed story that is causing a birds trauma, she transforms a deadly snarling leopard into a relaxed content cat – the whole animal kingdom comes alive in a way never seen before – wild birds land on her shoulders, fish gather around her when she swims, and wild unfamiliar baboons lie on her body as if she is one of their own. Here is a direct link to an inspiring documentary.
The lack of connection and understanding between humans and the natural world is also mirrored in how little most of us are respectful and in harmony with our own health and bodies.
After a few years now of embarrassing banter on the Lang and O’Leary Exchange, it is nice to see Amanda Lang doing good work in this segment.
“Every day, trillions of dollars are exchanged by buyers and sellers on trading floors across the world. The places where that happens are colloquially known by the faceless moniker of “the markets” but every time somebody buys a barrel of oil, a shipment of potash, a Royal Bank share or a Japanese yen, there’s a real person behind that transaction.
Historically, the system works because people have confidence in the rules and believe they are treated the same as anybody else.
But it’s getting harder and harder to ignore the stories of powerful people cheating the system for their own gain.”
The new Volcker Rule is a step in the healing process toward some integrity and level playing field in capital markets. Next we need to curtail rampant high frequency gaming through financial transaction taxes and wider bid/ask spreads that will largely remove the opportunity to profit from millisecond buy and cancel orders that serve no legitimate function but to enrich a few at the expense of everyone else. As well as reinstate the Glass Steagall division between tax-payer backed banking and all other investment banking activities which must be pushed back into separate enterprises that place the risks of loss squarely on the partners and operators and far away from government coffers. Yes we can. And the world will be a much stronger, more accountable place to live.
We have no way of knowing for sure how this chapter in monetary history will end. All we know for sure is that today’s market valuations, leverage and fundamental supports are the least attractive we have seen since 2007, 2000, and 1929. We also know that these previous periods of extreme over-valuation resolved themselves with massive price declines for stocks (-50 to -80%) and there are no comparable historical precedents where this did not happen. We also know that Ben Bernanke came to power at the Fed as a scholar of the Great Depression vowing never to repeat what he cited as the monetary errors that preceded it. And then proceeded to roll out the same large asset purchase policies that were used as “stimulus” leading up to the crash of ’29.
“The Bernanke-led Fed’s enthusiasm for avoiding the mistakes that worsened the Great Depression—- a mistimed tightening of monetary conditions — has led him to repeat the mistakes that caused it in the first place: Namely, continuing to lower interest rates via Treasury bond purchases well into an economic expansion and bull market justified by low-to-no inflation… Here’s the kicker: The Fed (mainly the New York Fed under Benjamin Strong) was knee deep in quantitative easing in the late 1920s, expanding the money supply and lowering interest rates via direct bond purchases. Wall Street then, as now, was euphoric.
Fed policymakers felt like heroes as they violated that central tenant of central banking as outlined in 1873 by Economist editor Walter Bagehot in his famous Lombard Street: That they should lend freely to solvent banks, at a punitive interest rate in exchange for good quality collateral. Central-bank stimulus should only be a stopgap measure used to stem panics, a lender of last resort; not act as a vehicle of economic deliverance via the printing press.
It’s being violated again now as the mistakes of history are repeated once more.” See: Ghost of 1929 crash reappears
For another historically relevant valuation metric, we can view this chart of the Tobin Q ratio since 1900, which is the ratio of the total price of the stock market divided by the replacement cost of all its companies. This ratio is now at a level seen at every speculative market top in the past 113 years but for the blow off peak in 2000.
The dramatic (though fleeting) overshoot into 2000 has caused some to conclude that today could be the equivalent of 1997 and we could see the stock market rally for another couple of years from present levels before prices collapse again. Could be. With conditions this full of distortion and free flowing leverage (so far at least), even crazier prices could happen.
But that said, households, governments and the real economy, are much, much more indebted and fiscally emaciated today than in the late ’90′s. Back then we also had the legitimate revolution of the internet driving animal spirits. Today we have just hope that more debt and even more monetary liquidity will change the world…
In a financial world that banks on the magic of central bankers and only ever sees upside, growth disappointments are always “unexpected”…
Japan’s growth slowed more than an initial estimate in the third quarter while the country posted an unexpected deficit in its broadest trade gauge in October, underscoring headwinds to Prime Minister Shinzo Abe’s efforts to cement a recovery. Here is a direct video link.
Many commentators are praising “gains” in US household wealth over the past 3 years of central bank support. But as we look at this chart of US household net worth as a percentage of after-tax income, over the past 15 years, intelligent people should recognize that this might as well be a chart of the S&P 500 through its fleeting booms and busts since the secular bear began in 2000. As documented in Robert Frank’s great book: The High Beta Rich, how the manic wealthy take us to the next boom, bubble and bust, spending and economies that are dependent on asset bubbles (and the the boom and bust tax revenues therefrom) are inherently unstable and vulnerable. Bubble prices always mean revert, leaving individuals, families and society as a whole, further and further behind in terms of financial progress, wealth and life years to recoup.
“Compared with last year, the well-off are probably feeling much better this holiday season. The less well-off, whose spending power is dictated more by gains in wages than wealth, aren’t feeling nearly as flush.
Beyond its uneven nature, spending fueled by rising asset values lacks the staying power that income-generated spending does. The Fed reported that third-quarter household net worth equaled 615% of after-tax income, up from 570% a year earlier.
That isn’t as high as the 662% hit in 2007, during the housing bubble, or 616% in 2000, during the dot-com bubble. But those periods are hardly benchmarks of health.” See: Wealth tide doesn’t lift all boats
It seems that even those who have seen their stock portfolios reflate rapidly over the past 12 months are feeling uneasy today. They have now lived through this extreme roller coaster ride 3 times since Y2K. See: Wealthy go frugal this holiday:
“With memories of the 2008 financial crash still fresh, some wealthy shoppers are questioning whether stock market gains to record highs are sustainable and cite conflicting reports about the economy, said Robin Lewis, a New York retail consultant.”
Good far reaching discussion:
Bill Gross, co-chief investment officer at Pacific Investment Management Co., talks about the outlook for the Federal Reserve’s program of quantitative easing, the state of the credit markets, investment strategy and the future of the City of Detroit following its bankruptcy.Here is a direct video link.
Good discussion and good charts on the bank index reminding that even after an incredible rally the past 2 years paid for by central banks, the US bank share index has just retraced half of shareholder losses in 2007-09.
Graham Fisher Managing Director Josh Rosner, Bloomberg’s Phil Mattingly and Adam Johnson discuss the Volcker Rule ahead of approval by U.S. regulators.Here is a direct video link.
Today we have the vote finally to implement the long delayed “Volcker Rule” to reign in proprietary
double-dealing trading at big banks. The wording just last week morphed into a tougher stance with an outright ban on the nebulous “portfolio hedging” category that has come to encompass all manner of speculating at the taxpayer’s peril. See: Volcker trims the banking hedge. Last night wording was apparently watered down again at the financial lobby’s relentless behest to an allowance for prop trading but a restriction that bonus compensation not be directly tied to it. The bank lobby says the law is too strict and it won’t help to reduce systemic risk. Bank critics say that the rule is too weak and will only encourage the banks to find profitable workarounds and will therefore not reduce systemic risk.
In truth, great complexity, abuse and unintended harms have been born of the refusal (to date) to simply reinstate a division between traditional banking backed by deposit insurance/tax payers (deposits and lending) and the speculating and risk taking that should be allowed only at the financial peril of actors with their own personal skin in the game. Formal investigations have repeatedly confirmed that the implicit safety net of government backing to risk-seeking activities was a significant cause of the financial crisis of 2008 and continues to embolden investment banking conglomerates unto today.
The Volcker Rule in its present incantation is a start that will no doubt cause investment banks some frustration and loss of some profits. But the stage remains set for a further push now to enact the Glass Steagall 2.0 bill which was tabled by Senators Elizabeth Warren (D) and John McCain (R) last summer. 30 short pages of wisdom, clarity and effective policy, read their bill here for a quick reminder of the history and evolution of the rules that were implemented, repealed and are now desperately needed once more.
“Amateur landlords are rampant in the Toronto condo market…50-60% of condos under construction are being sold not for owner-occupied but for “investment purposes”…this could hurt the Canadian banks but also the bank investors” [shareholders].Here is a direct video link.
Sure one could buy or hold Canadian banks here for the 3-4% dividend income….so long as one doesn’t mind holding through capital implosion in the process. Remember a cyclical gain of 100% is completely extinguished in a price decline of 50%, and the downcycles typically move at lightening speed compared with the multiyear price recoveries.
Chart source: Cory Venable, CMT, Venable Park Investment Counsel Inc.
Coming into the final hour of yet another crazy day in financial markets. As of 3:30 ET we have bonds and precious metals weaker, with the US dollar stronger, all three suggesting a FED QE taper is more likely on some of the stronger economic data the past week. While stocks had sold off the past 5 days on a similar assessment, today they are rebounding all in a world of their own dreaming. For those who believe it is smart to ride bubble prices up and then exit when troubles hit, the following graph shows the challenge. Like tidal waves, market bubbles are asymmetric: they take their own sweet time to crest, and then crash down in violent mean reversion as buyers vanish and sellers scramble to find a bid. By the end, typically all of the price gains seen from the beginning of the uptrend are evaporated. Sometimes more.
See more at: Business insider: Market bubbles are asymmetric
Frontline’s intimate portrait of one of the 20th century’s greatest leaders.
Here is a direct video link.
This morning we have bedlam as the algo computers troll global markets with millions of rapidly flashing lures hoping for bites on a belief trend one way or the other. Snapchat has nothing on high frequency trading: more than 95% of HFT orders self-destruct in milliseconds.
On the one hand, today’s US consumer sentiment (lagging indicator) and jobs report came in stronger than the consensus forecast, moving the unemployment rate (lagging indicator) down to 7% and making the case for the Fed to taper their bond buying sooner (Dec or Jan meeting) than later (ie., March). This is reflected so far this morning in a stronger US dollar and flat Canadian dollar and precious metals (all of which are down heavily over past several weeks).
On the other hand we learned that US personal income fell in November missing estimates for gains and in line with weak holiday sales (and surging inventories in yesterday’s GDP revision) and consumer spending of late which has been afforded only by drawing down the already anemic savings rate from just 5.2% to an even less 4.8%. Which underlines how under-funded and under-saved consumers actually are today and why consumption-led western economies will continue to struggle with lower than targeted growth. This suggests taper may be off for a while longer still, at least a thesis reflected in rebounding stock and bond prices (at least so far today).
This is what happens when finance and policy makers have become preoccupied with levered wagering in capital markets rather than investing in the businesses, innovation, people and infrastructure of the real economy. At the end of the day, it doesn’t matter a wit whether the US Fed cuts back 10 billion on its 85 billion a month bond buying starting in December, January, March or next summer. Demand continues to be weak, and asset prices continue to be unreasonably high and therefore unable to attract sober investors but only the same old pool of highly levered speculators.
Round and round prices go like water swirling ’round the top of a drain, circling, circling, but nevertheless destined to be sucked down the hole.
There is a belief system widely espoused today that the financial crisis of 2008 is behind us and the reckless and unethical policies, leverage and practices that caused the crisis, are no more. Nothing could be further from the truth. Unfortunately a reversion to old habits is the predictable outcome when people are saved from paying–legally and financially–for their destructive choices. This is Taleb’s “Antifragile” thesis personified, and it is the reason that our financial system will not recover until actors are finally left to their just desserts. I have no doubt that the financial crisis is alive and well and that the next wave will bring greater pain and less forgiveness for those who have made bad decisions to date.
Former Citigroup (C) forex trader Chris Arnade details why Wall Street has a hard time being ethical. It’s his view from working on Wall Street for 20 years (he left in 2012 to pursue writing and photography):
“What surprised me and ulitmately drove me off of Wall Street [was] I expected after the financial crisis, we would all sort of look at each other and say ‘this philosophy of unregulated free markets, it didn’t work’…I had expected many people on Wall Street would say ‘hey, let’s rethink what we’re doing,’ and actually the opposite happened…people doubled down in their philosophy…not only that…they managed to blame everybody but themselves.” Here is a direct video link.