February 22, 2017

Virtually Everyone Agrees That Current Stock Market Valuations Are Not Sustainable And That A Great Crash Is Coming

Current stock market valuations are not sustainable.  If there is one thing that I want you to remember from this article, it is that cold, hard fact.  In 1929, 2000 and 2008, stock prices soared to absolutely absurd levels just before horrible stock market crashes.  What goes up must eventually come down, and the stock market bubble of today will be no exception.  In fact, virtually everyone in the financial community acknowledges that stock prices are irrationally high right now.  Some are suggesting that there is still time to jump in and make money before the crash comes, while others are recommending a much more cautious approach.  But what almost everyone agrees on is the fact that stocks cannot go up like this forever.

On Tuesday, the Dow, the S&P 500 and the Nasdaq all set brand new record highs once again.  Overall, U.S. stocks are now up more than 10 percent since the election, and this is probably the greatest post-election stock market rally in our entire history.

But stocks were already tremendously overvalued before the election, and at this point stock prices have reached a level of ridiculousness only matched a couple of times before in the past 100 years.

Only the most extreme optimists will try to tell you that stock prices can stay this disconnected from economic reality indefinitely.  We are in the midst of one of the most outrageous stock market bubbles of all time, and as MarketWatch has noted, all stock market bubbles eventually burst…

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February 21, 2017

Alan Greenspan: Ron Paul Was Right About The Gold Standard

As John Rubino eloquently puts it, "when the history of these times is written, former Fed Chair Alan Greenspan will be one of the major villains, but also one of the greatest mysteries. This is so because he has, in effect, been three different people." Greenspan started his public life brilliantly, as a libertarian thinker who said some compelling and accurate things about gold and its role in the world. An example from 1966: "This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

Yet everything changed a few decades later when Greenspan was put in charge of the Federal Reserve in the late 1980s, instead of applying the above wisdom, for example by limiting the bank's interference in the private sector and letting market forces determine winners and losers, he did a full 180, intervening in every crisis, creating new currency with abandon, and generally behaving like his old ideological enemies, the Keynesians. Predictably, debt soared during his long tenure.

Along the way he was also instrumental in preventing regulation of credit default swaps and other derivatives that nearly blew up the system in 2008. His view of those instruments:

The reason that growth has continued despite adversity, or perhaps because of it, is that these new financial instruments are an increasingly important vehicle for unbundling risks. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. This unbundling improves the ability of the market to engender a set of product and asset prices far more calibrated to the value preferences of consumers than was possible before derivative markets were developed. The product and asset price signals enable entrepreneurs to finely allocate real capital facilities to produce those goods and services most valued by consumers, a process that has undoubtedly improved national productivity growth and standards of living.

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February 20, 2017

How A Major Bank "Calculated" That 20x P/E Is Now "Fair Value"

Carbon-based traders of a certain vintage - which excludes today's 20-year-old hedge fund managers - may recall a time when a 15x P/E was considered "fair." Not any more. In fact, according to a new analysis by Barclays' equity strategist Keith Parker, which tries to factor in so-called "animal spirits" as a driver of valuation has found that 20x P/E is perfectly normal and fair for the current market, further demonstrating just how deep into the goalseeking rabbit hole US capital markets have fallen.

First, to prove we are not joking, here is Barclays explaining why it is important to quantify animal spirits as a input factor of "permanently high plateaued" P/E multiples:

Core drivers of the P/E multiple and animal spirit indicators

In order to estimate the effects of “animal spirits”, or the potential effects of some of President Trump’s agenda, we first model the S&P 500 P/E using the core fundamental drivers of equity valuations. We then compare the residual from the model (actual minus fitted P/E) to various indicators of “animal spirits” or potential policy changes, including: tax policy, credit spreads, inflation, macro volatility, long-term growth expectations and corporate/consumer sentiment data.

Rates, growth and payouts are the core drivers of the P/E. Using a dividend discount framework, an equity price is the present value of future dividends. Dividing both sides of the equation by earnings, the P/E multiple is equal to the dividend payout ratio divided by the cost of capital minus the growth rate. Accordingly, the US 10y yield, US real GDP yoy and the dividend payout ratio explain 57% of the movement in the S&P 500 trailing P/E multiple from 1955 to 1997. We use the 1955-97 sample period because confiscatory tax policies prior to 1955 distorted returns to equity holders (excess profit taxes, etc), and thus affected valuations, while the 1998-2001 tech bubble would also distort results.

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February 17, 2017

Why Sub $50 Oil Is More Likely Than $70 Oil

It is more likely that oil prices will fall below $50 per barrel than that they will continue to rise toward $70. Prices have increased beyond supply and demand fundamentals because of premature expectations about the effects of an OPEC production cut on oil inventories.

Last week’s 13.8 million barrel addition to U.S. storage was the second largest in history. It moved U.S. crude oil inventories to new record high levels.

Meanwhile, 130 horizontal rigs have been added to tight oil drilling since the OPEC cut was first announced in September. That means that U.S. output will surge and will continue to be a drag on higher prices.

Comparative inventory analysis suggests that the current ~$53 per barrel WTI oil price is at least $6 per barrel too high. Don’t hold your breath for $70 oil prices.

Inventory Is The Key

Most analysts believe prices will increase steadily now that OPEC has decided to cut production. Their logic is that over-production caused lower oil prices and lower output should bring markets into production-consumption balance.

The problem is that production is not the same as supply and consumption is not the same as demand. Inventories lie in-between and modulate the flows from both sides of the production-consumption equation.

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February 16, 2017

U.S. Consumer Prices Post Largest Gain in Nearly Four Years

U.S. consumer prices recorded their biggest increase in nearly four years in January as households paid more for gasoline and other goods, suggesting inflation pressures could be picking up.

The Labor Department said on Wednesday its Consumer Price Index jumped 0.6 percent last month after gaining 0.3 percent in December. January's increase in the CPI was the largest since February 2013. In the 12 months through January, the CPI increased 2.5 percent, the biggest year-on-year gain since March 2012. The CPI rose 2.1 percent in the year to December. 

Economists polled by Reuters had forecast the CPI rising 0.3 percent last month and advancing 2.4 percent from a year ago.

Inflation is trending higher as prices for energy goods and other commodities rebound as global demand picks up.

The so-called core CPI, which strips out food and energy costs, rose 0.3 percent last month after increasing 0.2 percent in December. That lifted the year-on-year core CPI increase to
2.3 percent in January from December's 2.2 percent increase.

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February 15, 2017

The Globalists Strike Back With A Major Push Toward A Cashless Society

Their agenda may be on the rocks in the United States at the moment, but that doesn’t mean that the globalists are giving up.  In fact, a major push toward a cashless society is being made in the European Union right now.  Last May we learned that the 500 euro note is being completely eliminated, and just a few weeks ago the European Commission released a new “Action Plan” which instructs member states to explore “potential upper limits to cash payments”.  In the name of “fighting terrorism”, this “Action Plan” discusses the benefits of “prohibitions for cash payments above a specific threshold” and it says that those prohibitions should include “virtual currencies (such as BitCoin) and prepaid instruments (such as pre-paid credit cards) when they are used anonymously.”

This new document does not mention what an appropriate threshold would be for member states, but we do know that Spain already bans certain cash transactions above 2,500 euros, and Italy and France already ban cash transactions above 1,000 euros.

This is a perfect way to transition to a cashless society without creating too much of an uproar.  By setting a maximum legal level for cash transactions and slowly lowering it, in effect you can slowly but surely phase cash out without people understanding what is happening.

And there are many places in Europe where it is very difficult to even use cash at this point. In Sweden, many banks no longer take or give out cash, and approximately 95 percent of all retail transactions are entirely cashless.  So even though Sweden has not officially banned cash, using cash is no longer practical in most situations.  In fact, many tourists are shocked to find out that they cannot even pay bus fare with cash.

So most of Europe is already moving in this direction, and now this new Action Plan is intended to accelerate the transition toward a cashless society.  The public is being told that these measures are being taken to fight money laundering and terrorism, but of course that is only a small part of the truth.  The following comes from the Anti-Media

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February 14, 2017

What Will Trump Do About The Central-Bank Cartel?

The US is by far the biggest economy in the world. Its financial markets — be it equity, bonds or derivatives markets — are the largest and most liquid. The Greenback is the most important transaction currency. Many currencies in the world — be it the euro, the Chinese renminbi, the British pound or the Swiss franc — have actually been built upon the US dollar.

The world is effectively on a US-dollar-standard, and the US Federal Reserve (Fed) has risen to the unofficial status of the world’s central bank. The rise of the Greenback has to a large extent been propelled by international banking, which has basically “dollarized” in terms of its lending and issuing activities.

The Fed Sets Global Policy
The Fed’s policy not only determines credit and liquidity conditions in the US, but does so in many financial markets around the world as well. For instance, movements of long-term US interest rates regularly have effects on credit and equity markets in, say, Europe and Asia. The Fed’s actions are the blueprint for monetary policymaking in many countries around the world.

The graph shows the Fed’s supply of newly created US dollar liquidity sent to other central banks around the world. It also shows the so-called “euro cross currency basis swap,” which can be interpreted as a “stress indicator”: If it drops into negative territory, it means that euro banks find it increasingly difficult to obtain US dollar credit in the free market place. The Fed’s injection of new US dollar balances into the financial system has helped to reduce the euro currency basis swap. Since late 2016, however, it has started to venture again into negative territory — potentially signaling that euro banks are again heading for trouble.

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February 13, 2017

"It Was A Deer In Headlights Moment": Japan Dumps Most US Treasuries Since May 2013

With the December monthly TIC data due out this week, bond traders will be closely watching if the selling of US Treasuries by foreign accounts, and especially central banks, which as we have repeatedly shown for the past several months has hit record levels...

... will persist, with a focus on whether China's near record selling of US paper will persist.

However, this time the surprise may not be China, but its nemesis across the East China Sea, Japan.

As UBS notes, Japanese investor appetite for developed market overseas bonds, and especially US, was a big story during the first seven months of 2016. However, since then interest has waned. Weekly flow data underscores how Japanese investors sold ~¥4 trillion of overseas bonds from the time of the US presidential election to the end of Jan-17. Last week the Japanese government released more granular data for the month of December which highlights a number of notable developments.

Most importantly, while December saw the largest overall net selling flow of overseas bonds since Jun-15, this was entirely due to offloading of US Treasuries – other developed bond markets on aggregate actually saw modest net purchases. Indeed, while Japanese investors bought German and Australian paper, US Treasuries were sold to the tune of ~¥2.4 trillion (~$21bn) in December, the largest net selling flow since May-13.

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February 10, 2017

The Death Of The Petrodollar, And What Comes After

Whatever happens, opening that contract creates a market-wide arbitrage opportunity which affords anybody with oil to sell the ability to exchange said oil for gold and anybody wanting oil to acquire it cheaply by buying cheap gold in the West and shipping it to Shanghai or HK where it can be sold for yuan.

Already, places like Tokyo, Seoul and Dubai are opening physical gold markets and discussing linking their nascent markets for bullion to the Shanghai exchange which has rapidly become the largest physical delivery market in the world.

Now, were this arbitrage to begin happening in any meaningful size, with the market for oil far bigger than that for gold, it would immediately be evident in the ratio between the two commodities...

...which, interestingly, is precisely what has happened since the peak of global reserves in 2014 and the Sino-Russian agreement to essentially transact oil for gold. With those conditions in place, the gold/oil ratio has broken out to its highest level in 80 years (chart, next page):

...which brings us right back to the question mark on the second chart which we left hanging like a matzah ball earlier in this presentation.

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February 9, 2017

Recession 2017? Things Are Happening That Usually Never Happen Unless A New Recession Is Beginning

Is the U.S. economy about to get slammed by a major recession?  According to Gallup, U.S. economic confidence has soared to the highest level ever recorded, but meanwhile a whole host of key economic indicators are absolutely screaming that a new recession is beginning.  And if the U.S. economy does officially enter recession territory in 2017, it certainly won’t be a shock, because the truth is that we are well overdue for one.  Donald Trump has inherited quite an economic mess from Barack Obama, and it was probably inevitable that we were headed for a significant economic downturn no matter who won the election.

One of the key indicators to watch is average weekly hours.  When the economy shifts into recession mode, employers tend to start cutting back hours, and that is happening right now.  In fact, as Graham Summers has pointed out, we just witnessed the largest percentage decline in average weekly hours since the recession of 2008…

In addition to the decline in hours, Summers has suggested that there are a number of other reasons to believe that a new recession is here…

The fact is that the GDP growth of 4%-5% is not just around the corner. The US most likely slid into recession in the last three months. GDP growth collapsed in 4Q16, with a large portion of the “growth” coming from accounting gimmicks.

Consider the following:

Tax receipts indicate the US is in recession.
Gross private domestic investment indicates were are in a recession.
Retailers are showing that the US consumer is tapped out (see AMZN’s recent miss).
UPS, another economic bellweather, dramatically lowered 2017 forecasts.

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February 8, 2017

Goldman Stunned By Collapse In Gasoline Demand: "This Would Require A US Recession"

While energy traders remain focused on weekly changes in crude supply and demand, manifesting in shifts in inventory of which today's API  data, which showed the second biggest inventory build in history, was a breathtaking example of how OPEC's "production cut" is clearly not working, a much more troubling datapoint was revealed by the Energy Information Administration last week when it reported implied gasoline demand.

To be sure, surging gasoline supply and inventories are hardly surprising or new: they remain a byproduct of the unprecedented global crude inventories leftover from two years of failed OPEC policy which resulted in a historic glut. Last January, overall crude runs were up 500,000 bpd as refiners shifted away from diesel and other products to gasoline to chase more attractive margins amid a mild winter and sluggish diesel demand. The move led to an overbuild of gasoline stocks that lingered into the summer, punishing margins when they should have been at their strongest. This January, crude runs are at historic levels, up by roughly 300,000 bpd over last year.

So yes, both gasoline stocks and supply remains at extremely high levels, but what set off alarm bells is not supply, but demand: the EIA last week reported that the 4-week average of gasoline supplied - or implied gasoline demand - in the United States was 8.2 million barrels per day, the lowest since February 2012. And, as Reuters adds, U.S. refiners are now facing the prospects of weakening gasoline demand for the first time in five years.

Unlike excess supply, which may have numerous factors, when it comes to a plunge in end product demand the implication can be only one: the US consumer is very ill, especially when considering that gasoline use has grown every year since 2012, despite fears that demand has topped out amid the growth of fuel efficient cars, urbanization and a graying population.

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February 7, 2017

The Big Snapchat IPO Question: Will Investment Dollars Also Go Poof?

If your head is still spinning made possible by last weeks news cycle? Congratulations – you’re normal. Trying to keep up with any news, even just one element (e.g., business) has been a near task in futility. Politics (understandably) in one form or another is currently dominating everything, even business. So with that said, it could be argued why the most anticipated, hailed, saving grace for all that is “The Valley”, IPO to save the IPO world Snap™ (aka Snapchat™) filed its former “confidential” papers on Thursday. And the reaction? (insert crickets here)

Sure there has been the usual high-fiving chorus throughout the tech world, and in particular “The Valley” world. That’s to be expected. However, with that said, I want to offer up the following headline as possibly the reasoning behind so little fanfare. It comes from none other than Vanity Fair™ and ask if you have the same reaction as I did. Ready?

“Silicon Valley, Rejoice: Snapchat Files For Huge $3 Billion I.P.O.”

My initial thoughts?: Silicon Valley dreams of working for “stock options” and IPO riches meets its WTF moment into reality.

Why you ask? Hint: “rejoice”, “huge”, “$3 Billion.” equals “It’s different this time.” And not in a good way.

Let me phrase it this way: All this waiting, all the hype, all those “dreams” placed squarely on the shoulders of this forthcoming IPO – and all they get is a lousy $3 Billion and the CEO gets to keep (and wears) the “lousy T-shirt.” Yep: “rejoice” just seems a little out-of-place after that, doesn’t it?

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February 6, 2017

Debt Apocalypse Beckons As U.S. Consumer Bankruptcies Do Something They Haven’t Done In Almost 7 Years

When debt grows much faster than GDP for an extended period of time, it is inevitable that a good portion of that debt will start to go bad at some point.  We witnessed a perfect example of this in 2008, and now it is starting to happen again.  Commercial bankruptcies have been rising on a year-over-year basis since late 2015, and this is something that I have written about previously, but now consumer bankruptcies are also increasing.  In fact, we have just witnessed U.S. consumer bankruptcies do something that they haven’t done in nearly 7 years.  The following comes from Wolf Richter

US bankruptcy filings by consumers rose 5.4% in January, compared to January last year, to 52,421 according to the American Bankruptcy Institute. In December, they’d already risen 4.5% from a year earlier. This was the first time that consumer bankruptcies increased back-to-back since 2010.

However, business bankruptcies began to surge in November 2015 and continued surging on a year-over-year basis in 2016, to reach a full-year total of 37,823 filings, up 26% from the prior year and the highest since 2014.

Of course consumer bankruptcies are still much lower than they were during the last financial crisis, but what this could mean is that we have reached a turning point.

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February 3, 2017

Japanese Bond Yields Surge, Yen Spikes As Kuroda Disappoints Market: "The Market Will Test The BOJ"

One week ago, yields on the Japanese 10Y JGB tumbled when the BOJ relented, and succumbed to market demands to expand its debt monetization, when it increased the size of its daily bond purchase operation, or POMO in NY Fed parlance, in the 5-10 year zone from JPY410BN to JPY450BN, which sent yields tumbling as market participants assumed the BOJ would chase every uptick in yields with progressively greater bond purchases. The day before, on January 25, the BOJ upset market expectations as it held off on the purchase of JGBs with maturities of more 1-3 three years and 3-5 years. Two days later, however, it increased the purchase of JGBs with maturities in the 5-10 year zone by 40 billion yen from the previously known amount, to 450 billion yen.

The unexpected moves aroused speculation as to whether the BOJ is preparing to taper its quantitative easing program. With market participants split in their views on the BOJ's stance on monetary easing, yields on JGBs fluctuated wildly.

Fast forward to Friday, when on the previous day the 10Y JGB blew out to 0.10%, the highest yield since the JGB unviled NIRP one year ago, and prompted a fresh round of speculation whether the BOJ would again increase the amount of debt it purchased.  It did not, and as a result Japan’s 10-year yield surged as traders judged the central bank’s expanded bond purchases Friday to be insufficient to cap borrowing costs as global rates continued rising and steepening around the globe.

The 10Y yield rose as much as 4 bps to 0.15%, the highest since January of 2016, while the yield on the 20-year bond also climbed three basis points to 0.720%.

What is surprising is that the BOJ did increase purchases for bonds due in 5-to-10 years to 450 billion yen ($4 billion), from 410 billion yen planned for the first operation this month. However, since 450 billion is what the BOJ did last week when 10Y yields were lower, the market was clearly hoping for even more.  Furthermore, instead of purchasing bonds in the longer duration 10Y+ bucket, the central bank instead picked shorter maturities at 1Y, hinting there may be a scarcity in long-dated supply, arguably the stuff of Kuroda's nightmares.

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February 2, 2017

60% Of US Metro Areas See More Businesses Close Than Open

It may come as a surprise that Americans are less likely to start a business, move to another region of the country, or switch jobs now than at any time in recent memory. But dynamism is in retreat nationwide and in nearly every measurable respect.

Conventional wisdom seems to accept the idea that too much churn and destruction now plague wide swaths of the American economy. The latest economic data, however, turns this conclusion on its head. The United States actually suffers from a problem of too little creation—not too much destruction—perhaps for the first time in its history. Our economic and job creation engine is rapidly slowing down.

America’s economic engine is losing steam.

Consider this: In spite of massive changes throughout the global economy, the rate at which businesses close has remained fairly steady in the United States over the past 40 years. In contrast, the rate of new business formation has plummeted, falling by half since the late 1970s—including a severe decline during the Great Recession. From small mom and pop storefronts to high tech startups, new businesses are simply scarcer than ever.

Why does this matter? New firms are the “creative” part of creative destruction. They help keep the economy in a constant state of rebirth, serving to replace dying industries, foster competition with incumbent companies, and produce new, higher wage jobs. When they disappear, the cycle of creative destruction falls out of balance. That is the core economic problem America faces today.

In short, we’ve lost the economic dynamism that powered U.S. prosperity for the past century.

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