The financial distortions that central banks have orchestrated grow more grotesque by the day. Financial risk in the world has rarely, if ever, been higher. We are far past the last bubble peak in 2007 in terms of over-leverage, extreme asset valuations and complacency. And even those who have managed to block out the correction cycle of 2000-03, should still be able to recall what happened 2007-09 (if they try).
This chart courtesy of Bloomberg and TCW.com captures the big picture view of the last three most epic financial bubbles that have driven household asset values (in blue) far above nominal GDP (red) only to re-couple once more and trigger recession (grey bars). Here is an update on the S&P 500 showing the Fed-forged reflex rally since February. Note that virtually all meaningful economic indicators have worsened since then, as prices have rebounded on yet another round of nonsense.
Irrational exuberance has now infected everything from bonds to stocks, real estate, commodities, art and every possible collectible. This means the mean reversion back to realign with economic demand and income levels is set up to be even more extreme this cycle, than the last two bear markets.
This table captures a good comparison of 2007 and today on some critical metrics.
While assets are priced for large losses far and wide, a world of learned minds are wasting their energy parsing vapid Fed-speak rather than focusing on things that matter. Mal investment of resources has been the dominant theme of this time. The good news is that we are now in the death throes of Fed faith and economic reality is dawning once more.
For those who are levered or banking on present price levels to hold, conditions are not promising. But for those who can maintain liquidity and wait it out, there is generational opportunity baked into all of this. Time is the test of character.
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Another day, another Senate hearing into revolting, illegal and financially destructive activities at a too-big-to govern bank, where executives extracted hundreds of millions for years while keeping their jobs and perks, while customers and low-level employees paid the price. Unlike many previous hearings, most of the senators have come out swinging on this one (I guess the public outrage is too loud for them to do otherwise this time).
Dishonesty and hiding information are major themes of this year’s US presidential contest, with both leading candidates apparently adept at deception. Still in this contest of liars, it seems Clinton–the career politician is scrutinized more than Trump–the career salesman. According to a recent fact-checking study by Politifact, just 4% of what Trump said on the campaign trail was true, compared with 23% for Clinton, while 35% of Trump’s statements were rated “false” compared with 11% for Clinton. The salespuff standard may be working in Trump’s favor with voters. See Why Trump gets away with huge lies while Clinton gets trashed for little fibs:
…Hillary Clinton’s one and only image in the public mind is that of a politician. She was seen as a more politically minded First Lady. And she was seen as a more politically ambitious U.S. Senator and Secretary of State. We don’t look at her in any other context. Not only are politicians held to a higher truth-telling standard than salespeople, we don’t even focus on their “product” or policies all that much to balance what they say. For the most part, politicians are what they say and salespeople are what they sell. It’s the best way to understand why Trump gets away with some much of what he says. Ultimately, that’s not his product.
Sure, most of us don’t like boastful salespeople, but it doesn’t mean we won’t buy what they’re selling. Compared to the tough scrutiny his fellow Republican candidates and Clinton endure, the salesman standard is better. It’s infinitely better. We don’t fact check the commercials or the guys yelling in those commercials. Trump knows that. So, he’s playing the role of that guy in the commercial.
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Columnists at the Wall Street Journal have come up with a list of the 10 most pressing questions that the Senate Banking Committee (well that is, the members who are not so purchased by finance that they still have some self-respect) should ask the Wells commander-in-chief:
1) Wells Fargo and regulators say that the bank has fired about 5,300 employees over a five-year period because of the aggressive sales tactics. Who was the highest-level executive responsible for the problems and is that person still at the bank? Do you believe any of the 5,300 broke the law?
2) Wells Fargo called its cross-selling initiative “Gr-Eight” to encourage employees to sell each household eight products. Is that number good for the average customer? Can you name eight products the average customer needs from his or her bank?
3) Wells Fargo this month decided to scrap all product-based sales goals in retail branches. Why did you wait so long? Are such goals generally a bad idea, or were the sales goals simply set too high?.
And while Stumpf will most certainly offer the now well-worn c-suite plea denying any knowledge or responsibility of the illegal activities under his watch, at least a couple of the senators will correctly point out that in collecting many, many millions in performance based compensation, Stompf either knew or he ought to have known about how his employees were hitting the aggressive sales targets given to them by Strompf and his management team. Yes John, that is what they pay you the big bucks for…
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As pointed out by Stephen Roach here on Project Syndicate in August, if China’s 2016 GDP growth hits the government’s official 6.7% target– China will account for 1.2% (39%) of the IMF’s estimated 3.1% global GDP growth in 2016. That share massively dwarfs the contribution of other major economies such as .3% from the US, .2% from Europe, .6% from India and less than .1% from Japan. With China stumbling under the largest debt bubble in human history, the world economy will feel the fall out. Watch this video report.
The End of China Inc? As time is running out for China to pay off its bad debts, 101 East investigates if this could be the end of China Inc.
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