Juggling Dynamite

America should brace for a final blow-off surge in stock markets akin to the last phase of the dotcom boom or the “Gatsby” years of the Roaring Twenties, followed by a cathartic crash and day of moral judgment, according to a Nobel prize-winning economist.  See: Donald Trump ‘could send America into the Next Great Crash’ warns Nobel laureate Robert Shiller.

Well catharsis is long overdue, but come now Robert, we can’t give Donald all the credit, he hasn’t even taken the seat yet!

The next great crash has been earned by a lot of reckless and fraudulent help from a whole bunch of people over the past 20 years.  No one person can be blamed for this mess.  One thing we can know for sure, ‘The Donald’ will definitely not be claiming credit for this one in the end.

…The Cape Shiller P/E index measures the average earnings of S&P 500 equities over 10 years in real terms, and is closely watched by investors as a gauge of underlying value. It is trading at roughly 25. This is the highest level in over 130 years, excluding the two anomalies of the late 1990s and 1920s.

Here is the chart of Shiller’s cyclical PE 10 (in red) along with other historically reliable indicators (Crestmont P/E, Q Ratio and composite from regression), showing today’s over-valuations compared with the infamous 1929, 2000 and 2008 pre-crash peaks.

Not only are large-cap stock prices crazy high, mid-cap companies (market caps of 300m to 2b) are even worse–the Russell 2000 is trading at some 237x net income.  Still given the trend of companies reporting Non-GAAP (inflated, massaged, orchestrated) earnings the past few years (70% of S&P and 80% of TSX companies, as charted below), today’s valuation calculations are likely understating the madness.

As attendees at the economic forum in Davos this week wax curious about the “populism” and “inequality” undermining world order today, irony and hypocrisy are thick and cognitive dissonance plentiful.

What has been great for grotesquely enriching Davos-ites and the .1%–finanicalization, globalization, debt securitization, asset bubbles, government bailouts, central bank largess, corporate welfare and environmental abuse–have been extracted directly at the expense of the masses and world stability everywhere. The resulting extreme wealth for some has begat extreme fragility for many, and yet few of the ‘elites’ acknowledge the connection.

None of this seems likely to change soon, as bankers and the corporate class are quietly expressing renewed excitement that the incoming Trump administration is set to make conditions even more favorable for them. To wit: Bankers in Davos see Trump’s Team making Wall Street great again.

Bank executives, speaking on condition of anonymity at events around the Swiss ski resort, said they’re not counting on Trump to overturn Dodd-Frank. Instead, they expect the federal agencies that enforce the rules to ease up on them and support bankers’ efforts to limit how much capital and liquidity their companies need to pay bills or absorb losses in a crisis…

Several bankers in Davos said they’re optimistic that regulators under Trump could do away with the gold-plating by the U.S. of the latest Basel benchmarks and ease the process by which banks are stress-tested annually to ensure they have adequate capital to absorb losses in a hypothetical crisis.

Corporate mergers, amalgamations, deregulation and increasing political purchase since the 1980’s, led to an explosion in the size, influence and leverage of global investment banking, financial engineering, non-GAAP corporate earnings and the executive pay linked to them.  This chart of CEO pay relative to the average worker since 1965 tells the tale.

Lest there be any doubt, this chart of the mirror rise in the US stock market capitalization (S&P 500) and CEO pay, shows the direct impact of ‘financialization’ on c-suite compensation.
Want to truly understand the cause of extreme wealth imbalance and today’s increasing global angst? Start here.  But realize that historically those who have benefited from undue privilege, have never relented anything until forced to by insurrection or financial collapse.  We wonder which one of these will prove the mean reversion catalyst this time.

We caught this 2015 BBC documentary on Netflix last night. Very well done, entertaining and educational.  At the moment at least, it is also available on Youtube at the link below.

Without us noticing, modern life has been taken over. Algorithms run everything from search engines on the internet to satnavs and credit card data security – they even help us travel the world, find love and save lives.

Mathematician Professor Marcus du Sautoy demystifies the hidden world of algorithms. By showing us some of the algorithms most essential to our lives, he reveals where these 2,000-year-old problem solvers came from, how they work, what they have achieved and how they are now so advanced they can even programme themselves.  Here is a direct video link.