QE rally has bought a decade of poor returns even without a bear market

To hear the finance types talk, you’d think they had invented some new method to grow hydroponic vegetables with a fraction of the water and a zero-carbon foot print or something…

But nope, they have just spent 6 1/2 years trying to make back capital losses, funded by taxpayers everywhere, and are flogging it as investment skill and brilliance…

TSX since 2008Fact is that even if stocks can miraculously retain today’s valuation highs (only ever seen briefly in 1929 and 2000 before prices collapsed and spent 25 and 15 years trying to recover); let’s say this time is different…present prices are so far above good investment value that they have now locked in a probable decade of flat to negative returns from here.  And that’s without even having them go through a bear market at any time in the next 10 years.

Even a best case dream of a ‘permanently high plateau’, begs the sobering question:  even if we get to keep this QE-inspired rebound in prices–even counting current portfolio values as permanent money in the bank–what’s the plan to patch up all the gaping holes that still remain in pension plans, budgets and retirement savings now all over the globe?

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Transforming farming for a sustainable future

Healthy food, healthy planet…

AeroFarms has developed a vertical farming system that can grow organic baby leafy greens in urban settings. They’re doing it using aeroponics — the process of growing plants in mist without any soil — and plan to launch a branded product from a new 80,000-square-foot warehouse in Newark, New Jersey. AeroFarms CEO and Co-Founder David Rosenberg talks to Bloomberg’s Sam Grobart about how the company is bringing their produce mainstream. Here is a direct video link.

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Central banks still ‘Spending it forward’

The film “Pay it forward”(2000) is about how thoughtful acts in the present can yield a cascade of compounding benefits for the future, when recipients ‘pay forward’ the kindness they receive by helping others.  It should be obvious by now, that the successive desperate monetary interventions from global bankers the past few years, have in fact done the opposite of this. By relentlessly trying to ‘stimulate’ ever-escalating demand through the use of excessive debt, bankers have in fact earned the world a financial future that keeps arriving increasingly weakened, year after year.

Each short-term focused, self-interested action has ‘spent’ years of future potential growth and recovery. Global GDP sinks lower each year (see below) on near-zero yields, wasting capital, and financial assets pumped to unsustainable levels on leverage (in green).QE Ponzi Nov 2014This cartoon from China Daily showing the world economy faltering under the weight of QE oppression, captures the dynamics perfectly.

QE killing global economy

John Hussman today explains it well in the quote below. Far from an encouraging sign, the obsessive compulsion of global bankers for more and more QE, only underlines the increasing desperation of these bubble-makers–out of ideas, and sensing their coming fall from grace. See: A most important distinction:

…the inclinations of central banks towards quantitative easing and interest rate suppression are increasingly taking on the tone of desperation in the face of accelerating economic weakness in Japan, Europe and China. While the stated objective is to increase inflation, low inflation isn’t really the economic problem–low growth, intolerable debt burdens, and mis-allocated capital are at the core of global challenges here. Unfortunately, QE only misallocates capital towards more speculation and low-quality debt (primarily junk and leveraged loan issuance), without much impact on real growth. China’s move was prompted in part by a surge in bad loans to the highest level in nearly a decade. The largest European banks now have gross-leverage ratios as high as 30-to-1 (during the credit crisis, one could order the sequence of defaults accurately using this metric, with Bear Stearns, Lehman, and Fannie Mae right at the top). But liquidity does not create solvency, and with credit spreads widening, the growing desperation of monetary authorities is a more negative signal than a positive one.”

One encouraging and historically consistent fact in all of this, is that excessive, short-term greed, eventually breeds its own end. And for that we shall be grateful.

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A couple of charts this snowy Saturday

Bouncing back from a brutal flu this week.  Wow! So good to have energy levels back near norm.  How we take excellent health for granted. I was thinking about those suffering from Ebola and other illnesses who don’t have first world comforts the past few days….

Also had extra time to do nothing but think in silence.  As always, clarity comes from quiet reflection.  Media this morning is all about the weakening global economy and soaring asset markets on news of another desperate rate cut in China and hopes for even moar Quantitative Easing–this time promised yet again by the ECB’s Mario Draghi.  In reality convincing the Germans to buy bad debts off other insolvent EU members will do nothing to alter the reality of a world economy oppressed by more debt than can ever be repaid.

While record share buy backs by corporations the past 3 years have managed to manufacture earnings growth out of falling sales, no honest analyst with a straight face can acknowledge the glaring gap below between the S&P 500 price level and earnings growth since 2011 and call it rational pricing.

QE and EPS

The fact is that financial ‘engineering’ aside, it takes customer spending to drive sales and it takes sales to drive nominal GDP growth. Far from driving sales, as shown below, zero interest rate policies and quantitative easing have perversely suppressed cash flow while driving up asset prices. This makes future investment returns grim and negative from here. (Clearly corporations agree, as they have elected to use more than 80% of their cash to buy back shares and pay dividends rather than invest in business development or expansion the past 4 years).

There is no free lunch ever. Worse, QE has been a waste of funds and an expensive distraction from necessary reforms. A foolish indulgence for which today’s wildly inflated asset markets must eventually pay in spades.

GDP and S&P

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Money Talk radio today

Danielle was a guest with Michael Campbell on Money Talk radio today discussing risk management amid the mayhem of a slowing global economy and over-valued asset markets. You can listen here by advancing the play bar to 10:06.

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Secular bears die in mean reversion not wishful thinking

My recent article picked up by Seeking Alpha, S&P 500: generational opportunity in the making, sparked a flurry of reader comments some of which underlined just how little is understood about the cause and progress of secular bears. For those seeking more education and understanding, I highly recommend some time on Ed Easterling’s excellent site here at Crestmont Research. He has also written a couple of helpful books on the topic, see his latest Probable Outcomes, Secular stock market insights.

Some have optimistically asserted that the secular bear for stocks that began in 2000 off the highest stock valuations ever in history, ended in 2013 on some of the second highest stock valuations in history because the S&P 500 index finally broke above the previous 2007 cyclical peak.  If only a fresh nominal high in stock prices after 7 years of making back losses solved the problem!

Unfortunately fresh nominal highs aren’t the secular bear-ending-test.  A fresh nominal high for the S&P in 1972, did nothing to end the vicious down cycles of lower lows, that ran between 1966 to 1982.  It took a series of crushing cyclical declines before the secular bear could finally be killed.  Here’s Ed’s chart for those who want to see it.

In reality, secular bear-ending-progress requires mean reversion on a host of reliable metrics from historic highs to historic lows.  See a great visual summary here:  Secular cycle dashboard. (I also have included reference links on some of the key ones as I discuss below).

On the economic rejuvenation side, it will require at least a halving of today’s sky high total debt levels and oppressively large financial sector, along with a sustained uptrend in household income (flat now for 27 years) and doubling of saving rates (from today’s tiny 5% to historical norm’s above 10%).

On the investment side it will require at least a halving of today’s record after tax corporate profits/GDP (today 100% above historic norms), earnings per share, price to earnings (today 26 vs.secular bull births around 8), Tobin Q–market value of equities and debt over corporate net worth (today 1.12 vs .30 at birth of secular bulls), and Buffett’s favorite valuation measure–Market cap of US stocks/GDP (today at 127% versus a historical median of 65%).

Not to mention a crushing of animal spirits from today’s extinct bear sentiment (14.8% bearish Investor Intelligence, vs a long term mean of 30% and >50% at the start of previous secular bulls,  and a double, even triple, of today’s miniscule dividend yields (today about 2% to the 7%+ levels that marked the end of previous secular bears).

Just as liposuction doesn’t create fitness, quick price spikes and wishful thinking do not end secular bears.  Clearly this one has a lot more work ahead of it before we can earn the next 15 to 20 year, organically driven, investment boom, known as a secular bull.  See: Ed’s PE Report for more facts and context:

“The only way to reposition into a secular bull market is to experience a decline in the stock market due to significant inflation or deflation. This can occur either by a significant decline over a short period of time (e.g. the early 1930s secular bear market) or by minimal decline over a longer period of time (e.g. the 1960s-1970s secular bear market)…

Secular bull markets can only occur when P/E ratios get low enough (due to high inflation or significant deflation) to then double or triple as inflation returns to a low level. As a result, secular market cycles are not driven by time, but rather they are dependent upon distance—as measured by the decline in P/E to a low enough level to then enable it to have a significant increase.”

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