Danielle was a guest today on The Financial Survival Network with Kerry Lutz, talking about recent trends in the world economy and markets. You can listen to an audio link of the segment here.
Here is the chart discussed of bond yields falling while the S&P has rallied year to date.
This morning the down draft in yields continues, with US 10-year yields breaking below 2.50%, now at the lowest levels since July 2013.
There has been an incestuous circle of influence and selective rewards from Central Bank QE directly into financial markets and the coffers of the fortune 500 executive suite. More and more financial leverage and creative accounting supported abnormal (and historically unsustainable) corporate earnings growth the past few years notwithstanding less and less sales. Companies have borrowed at low rates, not to invest in their business but to buy back their own shares. This in turn has driven share prices to silly levels which has magnified the equity compensation of CEO’s and their boards.
Not surprisingly, management has continually proposed more and more buy-backs, putting short-term gains ahead of long-term investment and business stewardship…quite revolting really. Here’s the chart (notice how little these business wizards were buying back their shares in 2009 when prices had collapsed to the best investment levels in 12 years). Apparently they prefer to buy high!
Longer-term this intense self-enrichment of the few is destabilizing to the businesses, the labor markets, economic strength, democracy and the social fabric as a whole. The c-suite is genius alright. But overall incentives are self-defeating, as the number of consumers who can afford to participate in our consumption led economy weakens by the day. See: Top-paid CEOs get 400% raises for some good historical context.
“CEOs have been quietly (and some not so quietly) ratcheting up higher and higher paychecks throughout the past few decades. From 1978 to 2012, CEO compensation rose 875% — a rise that was “substantially greater than the painfully slow 5.4% growth in a typical workers’ compensation over the same period,” according to a study released last year by the Economic Policy Institute . Furthermore, the CEO-to-worker compensation ratio was 29.0-to-1 in 1978, compared with a whopping 272.9-to-1 in 2012, and CEOs now earn 202.3 times more than than the typical worker, compared with 26.5 times in 1978.
CEOs are even raking in loot at a far faster rate than very highly compensated professionals (those earning more than 99.9% of other wage earners). In the ‘50s, ‘60s and ‘70s, CEOs made 1.62 times more than ultra-high earners, but in 2010 that ratio was 3.08 times more.
Meanwhile, the 99% is struggling — and has been for decades, according to several studies. A report by the Census Bureau found that the real median income of Americans — $51,017 — is virtually unchanged from the late 1970s and early 1980s. And a study by the Economic Policy Institute released last year found that the median worker has seen wage growth of about 5% between 1979 and 2012, even as productivity grew 74.5% over that period. “The wage and benefit growth of the vast majority, including white-collar and blue-collar workers and those with and without a college degree, has stagnated, as the fruits of overall growth have accrued disproportionately to the richest households,” the study authors conclude.”
The NASDAQ 100 composite is off about 3.5% since its most recent peak 3 months ago. The smooth of that average decline however, masks a rockier ride for many constituents that are down more than 20% since March. Since tech tends to lead the broader market cycle, the question of the hour is whether the tech and small cap declines(49% of Russell 2000 also down more than 20% in 2 months) are signalling the next phase of cycle weakness in broad risk markets.
Since margin use and financial leverage in the world has never been higher or more concentrated among fewer participants than today, and since several key valuations metrics are at the highest or second highest (behind 2000) ever in history, while volatility has recently been the lowest in 25 years but for the sub-prime-induced-comma that preceded the nightmare of 2008, a broad market decline once it begins next, is likely to be one of the most spectacular loss phases ever recorded in the history books.
As shown in this chart, the price action of the NASDAQ over the past year has a similar look to the price action it followed to the previous market peaks in 2000 and 2007 (smaller inset boxes on left). Fireworks to follow? At some point here, one should count on it.
