“Equal and opposite move” likely to follow QE

Oops, CNBC is unlikely to be asking Abby back…(note the moans of the host at the end of the clip when she lays out the potential downside)…good for a giggle.

“Unfortunately, I think it could come on a crash similar to what happened in 2007,” the founder of Peak Theories Research said on “Squawk Box” a day after the S&P 500 closed above the 2,000 level for the first time ever. “It’s tough to know what the exact catalyst will be. But that’s the very nature of that kind of selloff. They start slowly and then happen very suddenly.” Here is a direct video link.

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Vicious snakes and shrinking ladders

An aggravating feature of this central bank magnified game, is that each snake finds players older each cycle with less income and time to recover losses. This is the critical point that financial types rarely acknowledge since their business models depend on desperate players willing to play the game even in the midst of irrational, reckless odds.
Snakes and ladders

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The sucking sounds of extractive thinking

Think record corporate borrowing to buy back shares is “brilliant” business management? Think again. For an excellent assessment of the extractive thinking swallowing the c-suite today, see the September Harvard Business Review, Profits without Prosperity. Here is a sampler:

“Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

The buyback wave has gotten so big, in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.

As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity…”

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Low rates and financial suicide

“Artificially depressed interest rates punish savers and cause them to seek yield by channeling funds to more and more speculative areas of the economy, while encouraging already indebted borrowers to take on more debt so long as the debt can be serviced for now.” John Hussman, Broken Links, Aug 25 2014

Individual families have borrowed themselves into financial demise the past few years.  The evidence of stress and financial fragility is everywhere we look.  See:  Canadians are indebted and stressed about it, for the latest staggering statistics.

Americans are a little less indebted than Canadians today thanks to some US debt write downs and foreclosures over the past couple of years, but the latest report shows that the median net worth for Americans as a whole declined by 6.8 percent between 2000 and 2011.  See:  Wealth gap widened.

Trillions of reckless monetary injections by misguided central banks have purchased negative net worth gains for the bottom 60% of American households (between 2000 and 2011), and just a 10% increase (less than 1% gain per year) for the top 20% of the population, as shown in this chart.

housenetworth_0Meanwhile corporations have borrowed themselves into a perilous future as well.  With poor demand and weak growth prospects, companies have also been enticed to borrow unprecedented levels at low rates in order to buy back their own shares (buying high) to boast short-term earnings and corporate bonuses at the expense of financial stability and longer-term health.  Here’s where corporate debt sits now.

Corp debt Aug 2014

So borrowers have gone postal.  But so too have those with savings to lose as they have increasingly tossed it into the highest risk bonds and stocks in a desperate push for yield even while sacrificing the capital itself. With every asset now over-bought and over-valued, only the junkiest, junk is yielding more than 4% as shown here. And the risk-reward tradeoff is completely unattractive.
Yielding little

This is now officially the largest credit bubble the world has ever known.  Borrowers never do repay that which they cannot. There is no chance the debt can all be repaid, many zeros will be crossed off balance sheets before this mess is resolved. This means that indiscriminate lenders will be the biggest losers here.  Which brings me to this lucid quote from Charles Gave this month:

“The big central banks seem to believe that printing money creates wealth. What such policies, in fact, do is ensure a different distribution of wealth that increases leverage and favors not legitimate risk takers, but groups which are politically well connected such as the too-big-to-fail banks. As such, the current approach is a clear expression of a policy captured by a crony class, and needless to say it is defended by the same group. This is not to engage in conspiracy, or to claim malfeasance by particular individuals. But what cannot be doubted is that even as those closest to the money source have made out like Cantillon, the outcome for pretty much everyone else has been awful. Looking forward, this cannot go on and I would hence avoid financials everywhere.”

And with Federal Reserve debt that looks like this next chart below, there is no one to bail out the banks this time.  A crazy cycle in history is thankfully headed to a much needed end/cleanse.
Central bank balance sheet

It has been said that suicide is a permanent solution to a temporary problem. It is financial suicide to pile cash into assets at irrationally high prices in order to appear like one is making short-term gains. Better to wait for prices worth taking once more. They will come for those who are ready.

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Danielle’s weekly market update

Danielle was a guest today with Jim Goddard on Talk Digital Network, talking about recent trends in the world economy and markets. You can listen to an audio clip of the discussion here.

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Bonds break faith with central banksters

Long bond yields are headed south pretty much all around the world today. Whether it be consumers and businesses pulling in on travel, trade and spending because of Ebola, ongoing conflict in the Ukraine, or the middle east, the world’s major economies were teetering on economic contraction in the first half of 2014, and the second half is now looking weaker still.  The Fed needing to raise rates soon to pull in accelerating growth and inflation?  In their dreams.

The US bond curve has flattened to just 1.50% of additional yield in 30 year treasuries over 5 year treasuries. This is the flattest the curve has been since January 2009 when the world was last in global recession and suggests that the bond market sees slower growth ahead.  Normally, this would also mean that central banks would be expected to cut short rates as the economy slows.  This time, of course, they are already at zero.  There is no cavalry left to come.  Stocks have yet to comprehend.

The chart below of the 30 year treasury yield shows that year to date, there has been a decisive break down of the rising yield trend that had been in play since Q’Ever spurred rabid accelerated growth hopes in late 2012.
30 year Aug 22 2014
But wait, Mad Mario says he’ll keep rates lower for longer in the EU even if the US Fed were to start hiking in 2015…but then real rates have already been negative for the past several years as shown in his chart here.

Real rates Euro and US

And still unemployment has soared since 2008 in the Eurozone as shown here.

Unemployment Euro and US since 2008







How does one push a gas pedal that is already fully down, through the floor-board and out the other side? Not to worry though, Mario says he’s “confident” stimulants are working. Any day now.

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More fun with Mario and Janet…

As the press builds up the second coming of Janet at Jackson Hole today (“The Oracle speaks at 10!!). The ECB’s Draghi will be layin’ it all down at 2:30! Stay tuned.  What will the great magicians propose next.

A client sent me this link today to a Vera Lynn song he remembers as popular after World War II. For me the song expresses a rather eerily naive sentiment for after the war, and for our present times as well. Here is a direct audio link.
Janet stay the course cartoon
Meanwhile the fruit of central bank handiwork: serial asset bubbles, massive malinvestment, destructive capital incentives and ominous systemic risk continue to rot the global economy from the inside out.

Global consensus growth 2014
Chart source: zerohedge.com

wage growth bbg

But I know, let’s not let facts get in the way today…All eyes on Janet.

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The endless potential to learn

Khan Academy is on a mission to unlock the world’s potential. Most people think their intelligence is fixed. The science says it’s not. Here is a direct video link.

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Bubble songs to start another day in Fed-land

Thanks to a reader for sending me a link to these cute Preschool Bubble Songs, that seem so perfectly applicable to our present times:

Bubbles EverywhereFed_bubbles_cartoon_07.09.2-14_large

Bubbles, bubbles everywhere,
Gently flowing through the air,
Bouncing around without a care,
Bubbles, bubbles everywhere.

Bubbles in the Air

Bubbles, bubbles up in the air,
Bubbles, bubbles you’re everywhere;
Bubbles, bubbles happy are you,
Bubbles, bubbles we are happy too!

The Bubble SongGreenspan bubbles

One little, two little, three little bubbles,
Four little, Five little, Six little bubbles,
Seven little, Eight little, Nine little bubbles,
Ten little bubbles go pop, pop, pop, pop, pop,
Pop those, pop those, pop those bubbles,
Pop those, pop those, pop those bubbles,
Pop those, pop those, pop those bubbles,
Ten little bubbles go pop, pop, pop, pop, pop.

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Stocks at cyclical highs while global economy slumps

This morning we see more confirmation that the much banked on rebound in the Chinese and European economies is not materializing.  What!! The stock market discounted this expected rebound months and months ago! You mean these cheques might not clear the bank??!! See:  Manufacturing slows:  from Europe to China on trade risks.  Heaven forbid one should be bearish of course, but stocks back at 6-7 year highs while growth continues to slump…

U.K. stocks may have passed their peak bringing an end to a five-year bull market, according to Michael Franklin, chief investment strategist at Beaufort Securities Ltd. He says investor sentiment is “quite fragile” due to geopolitical tensions in Gaza, Ukraine and Iraq. Here is a direct video link.

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China’s anticipated baby boom a bust

China’s expected baby boom, from the relaxing of its one-child policy, not materializing as increasing living costs are keeping couples from having more than one child Here is a direct video link.

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Auto financing: the madness of robbing future demand for current consumption

The subprime lending madness that led to the bursting of the US housing bubble in 2006 has spread through auto loans ever since. Once lending and leasing rates were cut to zero, and wage increases remained flat, dealers turned to lower lending standards, zero down and longer and longer financing terms in their efforts to keep pushing product. But all madness must eventually meet its deserved demise. We must be getting close.

Experian, which analyzes millions of auto loans, says the percentage of US car loans that were delinquent or ended up in default with the vehicle being repossessed surged 70% in the second quarter of this year. Here is a direct video link.

And as for Canada, oh sure, we folks are a lot smarter up here… See: Eight-year car loans drive sales and deepen Canadians’ debt problems

“The average term of a light-vehicle loan in Canada is 69 months, close to a peak of 72 months set in the third quarter of 2013, according to data from marketing information company J.D. Power. The borrowing adds to signs Canadians are continuing to buy big-ticket items and tuning out warnings about unsustainable debt growth.

Longer-term car loans are leaving Canadians in debt for a longer time, Dennis DesRosiers, president of DesRosiers Automotive Consultants in Richmond Hill, Ontario, said in a telephone interview. “On a 96-month loan it takes 80-plus months before you are back in the money,” he said.

…The president of the Credit Counselling Society, a non-profit consumer service, says 10 to 15% of the 30,000 people his company meets every year are receiving advice because of car loans.

While stretching the term of a zero-interest loan doesn’t add to the total borrowing cost, it delays the point where the vehicle’s worth becomes greater than the debt. Hannah also said long-duration loans can entice people into taking on more debt than they may be able to handle… “It’s not in the consumer’s best interest to take out a longer-term loan for a depreciating asset.”

“Consumer’s best interest”? When was that ever a concern of corporate owned policy makers? The most recent dealership campaigns led by Hyundai Canada are for 96-month, zero-interest loans. Next up 10 year terms? This oughta end well…

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Jim Chanos in conversation

Chanos speaks in length on his long career as a short-seller. [Warning: short-selling is very high risk, and not a recommended strategy for most people.]  Here is a direct audio link to the Bloomberg business segment.

The interview offers interesting insights on the conviction needed to succeed with rules-based risk management and the courage to bet against the consensus view.   He also talks about the reckless deployment of capital routinely exercised by Wall Street and corporate executives that buy shares at high market valuations and freeze in fear at market bottoms. The following chart shows the pattern of corporate buy-backs since the last market peak in 2008.
Management buybacks 2008 to 2014
I am reminded that amid the crash of ’29, Herbert Hoover first sought an investigation of the ‘evil short-sellers’ rather than into the investment banks and the reckless sales forces that drove stock prices to nose-bleed levels that then collapsed on the masses. The more things stay the same…

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Six years making back losses. Now what’s the plan?!

If you haven’t seen this excellent Frontline report (originally released in April 2013), there was an encore presentation of it this week. Critical issues for financial market participants to comprehend.

Retirement is big business in America, but is the system costing workers and retirees more than what they’re getting in return, asks FRONTLINE correspondent Martin Smith. Here is a direct video link.

And now that the Canadian market has this month finally reclaimed its bubble peak from June 2008–and the few who were able to hang on through 50%+ losses, have now spent 6 long years making back their losses–the question to ask all those confident financial advisers today is, “ok, so what’s the plan to avoid repeating that painful cycle all over again?” Remember we are all 6 years older now, 6 years less time to waste in a journey to financial security.
TSX 2005 to 2014

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Bob Shiller floats his ‘Titanic theory’ for why “Everything is pricey”

Robert Shiller, Yale University professor of economics, explains his “Titianic” economic theory for why the stock, bond and housing markets all look pricey today. Here is a direct video link.

He points out that historically “there are always special factors” to argue why ‘this time is different’ and price to earnings ratios should remain permanently higher than their 144 year average. (Until they mean revert way below average once more of course)

“Stocks, bonds, real estate. How can it be that everything is expensive?” QE-seats on the Titanic everyone? Your friendly broker/dealer/financial advisers are all just itching to help you pick your seat. Step on up! Maybe you can enjoy the ride a little longer before all the passengers plunge below the waves. PE in blue below, interest rates in grey.

Shiller CAPE since 1870

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