The Wall Street Examiner » Must Read http://wallstreetexaminer.com Get the facts. Fri, 28 Nov 2014 01:55:42 +0000 en-US hourly 1 World Stock Markets Trading Discussion – Crazy choreography http://wallstreetexaminer.com/2014/11/world-stock-markets-trading-discussion-crazy-choreography/ http://wallstreetexaminer.com/2014/11/world-stock-markets-trading-discussion-crazy-choreography/#comments Fri, 28 Nov 2014 01:30:09 +0000 http://www.capitalstool.com/forums/index.php?showtopic=12344 This is a syndicated repost courtesy of The Daily Stool. To view original, click here.

Early openers behaving in a deranged fashion: Kiwis +0.3%, Aussies -1.3%, Nikkei +0.9% and Sth Korea -0.3%.

In Aussie sectors, Energy -6.7%, Gold -2.5%, Miners -2.2% with REITS +0.2% the only up sector.
 

 

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OPEC Refuses to Cut Production, Oil Plunges off the Chart http://wallstreetexaminer.com/2014/11/opec-refuses-to-cut-production-oil-plunges-off-the-chart/ http://wallstreetexaminer.com/2014/11/opec-refuses-to-cut-production-oil-plunges-off-the-chart/#comments Thu, 27 Nov 2014 16:47:11 +0000 http://wolfstreet.com/?p=9791 This is a syndicated repost courtesy of Wolf Street. To view original, click here.

The global oil glut, as some call it, is caused by the toxic mix of soaring production in the US and lackluster demand from struggling economies around the world. Since June, crude oil prices have plunged 30%. It drove oil producers in the US into bouts of handwringing behind the scenes, though they desperately tried to maintain brittle smiles and optimistic verbiage in public.

But everyone in the industry – particularly junk bondholders that have funded the shale revolution in the US – were hoping that OPEC, and not the US, would come to its senses and cut production.

So the oil ministers from OPEC members just got through with what must have been a tempestuous five-hour meeting in Vienna, and it was not pretty for high-cost US producers: the oil production target would remain unchanged at 30 million barrels per day.

“It was a great decision,” Saudi Oil Minister Ali al-Naimi said with a big smile after the meeting.

Saudi Arabia and other Gulf states were thus overriding the concerns from struggling countries such as Venezuela which, at these prices – and they’re plunging as I’m writing this – will head straight into default, or get bailed out by China, at a price, whatever the case may be.

Venezuelan Foreign Minister Rafael Ramirez emerged from the meeting, visibly steaming, and refused to comment.

The US benchmark crude oil grade, West Texas Intermediate, plunged instantly. Even before the decision, it was down 30% from its recent high in June. As I’m writing this, it crashed through the $70-mark without even hesitating. It currently trades for $68.51. Chopped down by a full third from the peak in June.

This is what that Thanksgiving plunge looks like:

US-WTI_2014-11-27

Nigerian Oil Minister said OPEC and Non-OPEC producers should share responsibility to stabilize the markets. I don’t know what he was thinking; maybe some intervention by central banks around the world, such as the coordinated announcement of “QE crude infinity” perhaps?

Ecuadorian Oil Minister called the decision a rollover. However, the Iranian Oil Minister, whose country must have a higher price, kept a positive face, saying, “I’m not angry.”

The next OPEC meeting will be held in June, 2015. So this is going to last a while. And there is no deus ex machina on the horizon.

READ THE REST of this post at WolfStreet.com

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How Bloomberg’s Algo-Writers Serve The Cult Of Keynesian Central Banking http://wallstreetexaminer.com/2014/11/how-bloombergs-algo-writers-serve-the-cult-of-keynesian-central-banking/ http://wallstreetexaminer.com/2014/11/how-bloombergs-algo-writers-serve-the-cult-of-keynesian-central-banking/#comments Thu, 27 Nov 2014 16:40:49 +0000 http://davidstockmanscontracorner.com/?p=30797 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

If you ever needed proof that the financial press has been completely indoctrinated in the cult of Keynesian central banking consider the attached Bloomberg note on the recent tiny decline in Chinese industrial company profits. Without breaking for anything more than a comma, its hapless Hong Kong stringer, one Malcolm Scott, conjoined the fact of less profits with the imperative for moar……money.

Industrial profits in China fell the most in two years, underscoring the need for looser monetary conditions as the world’s second-largest economy slows.

Perhaps Bloomberg is no longer using carbon units to post its news stories and has gone straight to algo-writers designed to directly feed algo-readers without the bother or cost of human intercession. But regardless of whether “Malcolm Scott” is carbon or silicon based, the attached is clearly presented as a news story and the above excerpt as a declarative sentence. Accordingly, by the lights of Bloomberg and the rest of the mainstream financial press which it echoes, it is now the job of central banks to print money to ensure that at no point in time do profits—-and therefore their stock market capitalizations—-fall by even so much as 2.1% over prior year.

That’s right. In the land of red capitalism, where corporate accounting and reporting are so advanced that profit results are published on a monthly basis, the doctored number for all of China’s industrial companies in October came in at 2.1 percent less than last year’s fictional number.

Once upon a time, even journalists recognized that accounting profits are the swing residual after all fixed and variable costs have been accounted for and that in every capitalist economy known to history profits have been violently cyclical. But now, apparently, a 2% change in the bottom line results of China’s cooked corporate books is straight-away proof of the need for “looser monetary conditions”.

Well, here is the balance sheet trend for the People’s Printing Press of China. It has expanded by a stunning 9X since the year 2000, thereby fueling the greatest sustained explosion of new credit in recorded history. In fact, total credit owed by China’s household, business, financial and government sectors has risen from $1 trillion to $25 trillion over the same period. Exactly how can you get any “looser” than that?

Historical Data Chart

Needless to say, this immense explosion of credit did not disappear quietly in the night. Instead, it funded the greatest construction and investment boom ever recorded. That’s why China produced 2.2 billion tons of cement in 2013, for example, or 29X more than the 77 million tons produced in the US last year. Or, even more dramatically, why it produced more cement on an average day that year than did the UK during the entire year!

Likewise, that’s why China has 1.1 billion tons of steel production capacity, but hardly 600 million tons of sustainable “sell-through” requirements for consumer durables and capital replacement. The difference represents the monumentally bloated one-time production of plate steel for ships, rails for transit lines and structural steel and rebar for a vast building binge. The latter, in turn, has bequeathed China with 70 million empty apartments, scores of ghost cities and dramatically under-utilized office towers, shopping malls and other commercial real estate facilities throughout the length and breadth of the land——but most especially in the second and third tier cities where Beijing’s approach to GDP manufacturing reached its most absurd parody.

Stated simply, China allocates GDP targets from the center and cascades them down through the party and governmental apparatus (essentially the same thing) to regional, county and city units. The latter, in turn, dutifully achieve their GDP targets by building things. Anything. Everything.

Needless to say, of the many dubious gifts that the West has supplied to the Middle Kingdom, surely Keynesian GDP accounting is among the most unfortunate. How does building pyramids increase a society’s wealth, exactly?

The least that Simon Kuznets and his merry band of Keynesian pioneers might have done 80 years ago is to measure annual economic output based on the market value of buildings, machinery and tools actually consumed during the current year—not mere spending for fixed assets that might never be used.

In any event, China and much of its EM supplier base is inundated in excess capacity for everything—cement, steel, aluminum, silicon based solar panels, refrigerators, automobiles and every manner of industrial fabrications and machinery, such as backhoe loaders and construction cranes; and also, vast excess capacity to export goodies and trinkets to the rest of the world including toasters, sneakers and socks.

This means that unless the construction and fixed asset boom is fueled with ever greater amounts of freshly minted credit, the house of cards known as red capitalism will eventually collapse. And it doesn’t matter whether the latter occurs all at once with a thud, or more gradually in the manner of a tire going flat. The result will be the greatest deflationary swoon the world has ever known.

It will manifest itself first in falling industrial prices such as currently underway for iron ore, coal and crude oil.

The deflation from this crack-up boom will inexorably move upstream, of course, to the pricing of everything made from these commodities owing to both lower materials costs; and also due to the fact that artificially cheap credit resulted in vast excess capacity in these fabrication and manufacturing sectors, as well. And, yes, the bloated wage bill of this overbuilt supply chain will also shrink.

Stated differently, “fiat credit” fuels the generation of “fiat wages” and especially “fiat profits” during the boom phase of over-investment and runaway construction. Consequently, when the credit tsunami finally crests—as even the leaders in Beijing are now resigned to—- fiat wages and fiat profits are also liquidated.

Indeed, what gets hit first during the bust phase is the accounting residual. That is, net profits and apparently so, even under Chinese accounting.

In short, the global economy is cooling rapidly and profits are already falling sharply in the primary sectors of mining and energy extraction. And that is only a foretaste of things to come down the industrial food chain.

Yet contrary to the Bloomberg algo-writer, this nascent profits collapse is not a result of too little money now; it is a consequence of way too much money over the past decade or two—-and not only in China but in the entire central bank dominated world wide economy.

So Mises was right. “Moar” fiat credit always leads to a crack-up boom. Someone needs to reprogram the algos.

Read the rest of this post at David Stockman’s Contra Corner » Stockman’s Corner. View original post.

 

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Junk Bond Carnage, One Company at a Time http://wallstreetexaminer.com/2014/11/junk-bond-carnage-one-company-at-a-time/ http://wallstreetexaminer.com/2014/11/junk-bond-carnage-one-company-at-a-time/#comments Thu, 27 Nov 2014 07:01:21 +0000 http://wolfstreet.com/?p=9782 This is a syndicated repost courtesy of Wolf Street. To view original, click here.

Storied weapons maker, Colt Defense LLC, is in a pickle. But it’s not the only junk-rated company in a pickle. The money is drying up. Selling even more new debt to service and pay off old debt is suddenly harder and more expensive to pull off, and holders of the old debt – your conservative-sounding bond fund, for example – are starting to grapple with the sordid meaning of “junk”: Colt announced on Wednesday that it might not be able to make its bond payment in May.

Colt’s revenues plunged 25% to $150 million for the three quarters this year. It’s spilling liberal amounts of red ink. It has $246.5 million in assets, including $61.5 million in Goodwill and intangible assets. Without them, Colt’s $185 million in assets are weighed down by $416.8 million in liabilities, leaving it a negative “tangible” net worth of -$231.8 million. Cash and cash equivalent was down to $4 million. In its 10-Qreleased on Wednesday, Colt admitted that there was “substantial doubt about the Company’s ability to continue as a going concern.”

Moody’s rates the company a merciful Caa2, reflecting “its very high leverage and weak liquidity position,” with negative outlook. This babe is deep into junk territory – and headed for default.

As is to be expected after this much financial engineering, the company is largely owned by a private equity firm: Sciens Management holds “beneficial ownership” of 87% of Colt’s LLC interests.

Last week, it got some reprieve, if you can call it that: Morgan Stanley agreed to provide a $70 million senior term loan. This new money replaces Colt’s existing $42.1 million loan that the company said it would have defaulted on by the end of December. That’s how that original lender got bailed out: new debt to pay off old debt.

The new loan will also permit Colt to make a $10.9 million interest payment. Otherwise, the company would have been in default by December 15. That’s how those bondholders got bailed out (for the moment): more new debt to service old debt.

The loan would leave Colt with an additional $4.1 million in cash: new debt to pay for new losses.

It also disclosed that “notwithstanding the additional cash the Company obtained from the MS Term Loan, risk exists with respect to the Company achieving its internally forecasted results and projected cash flows for the remainder of 2014 and 2015.” And if a number of miracles fail to occur, “it is probable that the Company may not have sufficient cash and cash equivalents on-hand along with availability under its Credit Agreement, as amended, to be able to meet its obligations as they come due over the next 12 months….”

So management has a plan to deal with its “increased liquidity challenges”: in addition to a number of operational goals, it would be “seeking ways to restructure the Company’s unsecured debt.” Owners of that unsecured debt are going to squeal. And if that doesn’t work, well….

This scenario is starting to play out company by company, hitting the most fragile ones first, as investors are becoming at least somewhat reluctant to throw good money after bad. That reluctance has to be overcome with additional compensation in form of yield, thus a greater expense for the companies when they can least afford it.

The junk-debt-funded oil and gas shale revolution is particularly on the hot seat. Its ever-faster moving fracking treadmill of steep decline rates and costly drilling is now smacking into the plunging price of oil [read…  How Low Can the Price of Oil Plunge?].

Hoping that the price of oil and gas would only go up, energy companies have drilled $1.5 trillion into the ground since 2000, and they’re now shouldering a huge pile of debt – much of it junk rated.

READ THE REST of this post at WolfStreet.com

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World Stock Markets Trading Discussion – Blotchy blithering http://wallstreetexaminer.com/2014/11/world-stock-markets-trading-discussion-blotchy-blithering/ http://wallstreetexaminer.com/2014/11/world-stock-markets-trading-discussion-blotchy-blithering/#comments Thu, 27 Nov 2014 01:04:21 +0000 http://www.capitalstool.com/forums/index.php?showtopic=12343 This is a syndicated repost courtesy of The Daily Stool. To view original, click here.

Early openers messing around: Kiwis -0.3%, Aussies +0.1%, Nikkei -0.4% and Sth Korea +0.3%.

Aussie sectors mixed: Telecomms +1% down to Energy -2.2%.

 

 

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(What’s Left of) Our Economy: Can Defense Give Manufacturing a Timely Lift? http://wallstreetexaminer.com/2014/11/whats-left-of-our-economy-can-defense-give-manufacturing-a-timely-lift/ http://wallstreetexaminer.com/2014/11/whats-left-of-our-economy-can-defense-give-manufacturing-a-timely-lift/#comments Wed, 26 Nov 2014 21:03:44 +0000 http://alantonelson.wordpress.com/?p=1786 This is a syndicated repost courtesy of RealityChek. To view original, click here.

Thanksgiving always puts me in a good mood, so I found myself looking for some un-ballyhooed and actually plausible reasons to be optimistic about American domestic manufacturing. (As readers know, there’s no shortage of ballyhooed, implausible reasons.) And I came up with a small one: defense spending, where a modest comeback appears to be heralded in today’s government data on durable goods orders.

Two solid reasons can be cited for this plausibility. First, defense spending helped prop up domestic industry during the recession, but this effect has faded notably during the recovery. Second, due largely to burgeoning international crises, pressures for more defense spending are likely to rise going forward, and bolster manufacturing output.

At the same time, the effects are likely to be pretty modest, since as of 2011, according to the Federal Reserve, defense goods production represented only a little over three percent of total inflation-adjusted manufacturing output.

But don’t forget – defense manufacturing could well be concentrated in advanced manufacturing, so the innovation effects, especially over time, could be considerable. Here’s what the numbers say so far:

After inflation, defense output (along with production in the space sector) fell during the recession. But it fell much less adjusting for inflation than manufacturing overall: 6.90 percent versus 20.48 percent. During the recovery, these trends have reversed sharply. Since its technical beginning, in mid-2009, real defense output has increased by 15.80 percent, but real overall manufacturing output is up by 27.55 percent.

Yet the recession was so punishing for American manufacturing in general, that overall real manufacturing is only up 1.42 percent since its technical onset (in December, 2007). Real defense production is 7.81 percent higher.

Defense’s relative slowdown is especially evident from the latest year-on-year inflation-adjusted production figures. For manufacturing overall, such real output has accelerated from 1.64 percent in January to 3.74 percent in October. For defense, this production has increased only from 0.28 percent in January to 0.79 percent in October. And even though year-on-year overall manufacturing production growth has slowed in real terms since July (when the automotive sector went bananas), so has output growth for defense.

But another, more forward-looking set of indicators may be painting a brighter picture for defense manufacturing. Its new orders and those of manufacturing overall have tracked each other quite closely since the recession began. Lately, however, defense new orders have been showing a bit more vigor.

On a year-on-year basis, between 2012 and 2013 total manufacturing orders (with defense) grew faster on a year-on-year basis than non-defense orders in only two of the nine months between January and September. (These figures are not adjusted for inflation.) Total orders grew faster only in September, and in August, they grew at the same rate.

Between 2013 and 2014, total manufacturing orders out-grew defense orders year-on-year for three of the nine months between January and September. Moreover, if we measure 2014 to date, overall manufacturing orders are up faster cumulatively (2.09 percent) than non-defense orders (1.63 percent). October data is only out in a preliminary form (and only for durable manufactures), but they reveal that, month-to-month, total orders rose by 0.4 percent, but non-defense orders fell by 0.6 percent. In fact, non-defense order change has trailed overall manufacturing order change for the past three months.

Please don’t get me wrong: I’m not necessarily advocating higher defense spending. But it does seem increasingly clear that, especially if the manufacturing slowdown that began in August continues, the defense sector is poised to provide a lift.

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Understanding the Key Threats to Google (GOOG) Stock http://wallstreetexaminer.com/2014/11/understanding-the-key-threats-to-google-goog-stock/ http://wallstreetexaminer.com/2014/11/understanding-the-key-threats-to-google-goog-stock/#comments Wed, 26 Nov 2014 10:00:40 +0000 http://moneymorning.com/?p=170849 This is a syndicated repost courtesy of Money Morning. To view original, click here.

Google Inc. (Nasdaq: GOOG) has grown to be the fourth most valuable U.S. company, with a market capitalization of $370 billion.

Only Apple Inc. (Nasdaq: AAPL), Exxon Mobil Corp. (NYSE: XOM), andMicrosoft Corp. (Nasdaq: MSFT) are larger. In 2015, the company will likely generate more than $60 billion in revenue and more than $17 billion in net income.

Analysts expect it to continue growing at 15% to 20% for the foreseeable future despite its increasing size, a growth rate rivaled only by Apple among mega-cap companies.

That rate of growth continues to get more tightly squeezed…

Asking Forgiveness Rather Than Permission Has Its Price

The company has come a long way since it began as a research project by Larry Page and Sergey Brin, two Stanford University PhD students in 1996. The company went public on Aug. 19, 2004, with the official mission statement: “To organize the world’s information and make it universally accessible and useful.”

Even more impressive than its economic might, however, is the enormous influence that Google exercises over the mind of the Internet.

Google’s search engine effectively functions as the Internet’s DNA. It provides the company with the ability to influence the flow of information and access to that information. Google Search is the dominant search engine in the U.S., with two-thirds of the market. Its search algorithms have been both praised and lamented for the combination of ingenuity and potential for misuse.

Google has followed the philosophy that it is better to ask forgiveness than permission in advancing its interests. It has expanded into the email business through Gmail, into the apps business through Google Apps, and into countless other businesses through both internal development and acquisition (YouTube as one of its most famous).

The company has also spent research dollars on futuristic projects like robotics and self-driving cars. Research projects such as Google Maps have changed the way we view the world. In short, Google exercises an enormous influence over the global mind.

The company’s unofficial motto is “Don’t be evil.” Some governments, however, are not so sure that the company is living its mantra.

European governments are now starting to push back. A proposal is circulating in the European Parliament to “unbundle” Internet search engines such as Google’s from “other commercial services” that they offer. This proposal effectively calls for a break-up of the company.

Google currently owns 90% of the European search market and has been under antitrust scrutiny in the region since 2010. This makes liberal European politicians very nervous.

Google will remain the dominant Internet search engine for years to come due to its deeply embedded position in the market.

But it faces two different types of challenges.

The Interwoven Challenges Google Is Facing Down

First, the same challenge facing Apple as well as Alibaba Group Holding Ltd. (NYSE: BABA) is the law of large numbers. It’s going to be difficult for Google to keep growing such a large business at a 15% to 20% rate without entering new markets or introducing new products.

As unimaginable as it seems today, the Internet will not keep growing in a straight line to infinity. Microsoft’s BING search engine has made some inroads into the company’s dominant search position in the U.S., and Yahoo! Inc. (Nasdaq: YHOO) is another active competitor, but neither poses a near-term threat to its dominant position.

The second challenge is political. Google needs to be careful not to get on the wrong side of governments around the world who are suspicious of powerful companies.

With its stated overwhelmingly dominant share of the European search market, the company effectively has a monopoly. In the U.S. its share of the search market is much lower but was a still-dominant 67% in October.

The company must be sure not to take overt steps in Europe to suppress competition, or it will attract the types of attention from regulators that are now threatening it. One has to wonder what the reaction, if any, of the U.S. authorities will be to any attempt by the European Commission to break up one of America’s great business success stories.

Such an attempt could trigger serious economic tensions at a time when the two regions should be working on common problems such as sluggish economic growth and the threat from Russia to the Ukraine and Eastern Europe.

Google’s dominant role on the Internet does not appear to be in any immediate danger. But success attracts unwelcome attention from competitors and governments. Of which Google is receiving plenty.

The post Understanding the Key Threats to Google (GOOG) Stock appeared first on Money Morning

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California Housing Market Cracks in Two, Top End Goes Crazy http://wallstreetexaminer.com/2014/11/california-housing-market-cracks-in-two-top-end-goes-crazy/ http://wallstreetexaminer.com/2014/11/california-housing-market-cracks-in-two-top-end-goes-crazy/#comments Wed, 26 Nov 2014 07:07:57 +0000 http://wolfstreet.com/?p=9760 This is a syndicated repost courtesy of Wolf Street. To view original, click here.

That the housing market is seriously twisted is apparent by the mortgage conundrum: despite historically low mortgage rates of around 4% for a 30-year fixed rate mortgage, mortgage originations averaged only $357 billion per quarter so far this year, according to the New York Fed. Unless a miracle intervenes in the fourth quarter, 2014 will be the worst year since 2000.

But home prices have soared 74% since 2000, according to the S&P Case-Shiller index. Unit sales are higher as well. Mortgage originations soared with them during the boom, crashed with them during the bust, and re-soared with them. Now home prices have “recovered” beyond the bubble highs in many markets, pumped up by big Wall Street players with access to the Fed’s free money. They gobbled up vacant homes for their buy-to-rent scheme. And they’re now stuffing rent-backed structured securities into retirement portfolios via conservative-sounding bond funds. But even these firms are getting cold feet [The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out].

Yet purchase mortgages started fizzling last year and today remain below the level of a year ago. At the segment where first-time buyers enter the market and where regular folks are trying to cobble together their American dream, buyers have to get a mortgage to buy a home. And there, things have gotten tough. Incomes have stagnated, and prices have been shoved out of reach.

And at the upper end, in the rarefied air where the beneficiaries of the Fed’s “wealth effect” are buying?

“It’s pretty mind-blowing, to be honest,” Los Angeles real estate agent Cindy Ambuehl told the LA Times. “The luxury market has been completely on fire.”

In the third quarter, 1,431 homes worth over $2 million were sold in the six-county Southland, up 14% from a year ago. In the second quarter, 1,436 of such homes were sold, the highest number ever. Sales of homes worth over $10 million are on track this year to double the prior record set during the peak of the last housing bubble.

“It’s just a completely different story between the two segments of the market,” said Selma Hepp, senior economist for the California Assn. of Realtors. “Those who are doing well are doing really well.”

The Fed’s ingenious “wealth effect” gets a big part of the credit. And incomes at the upper end of the spectrum have been growing strongly. So these folks want to translate these gains into something nice and real.

The wealth effect has been a success in other countries too, and some of the cash pouring into the top California housing markets comes from China and elsewhere. These folks are buying second homes and investment properties in an effort to move their wealth beyond the tentacles of political purges, anti-corruption strategies, and other governmental or business calamities that might entangle them at home.

“Everything’s just more global now,” Drew Fenton, an agent who specializes in high-end homes at Hilton & Hyland in Beverly Hills, told the LA Times. A decade ago “it was much harder to reach those people, and they didn’t travel as much.” Now a whole system has been set up to entice them.

A similar scenario is playing out in San Francisco. But already, cracks are appearing. Today’s S&P Case-Shiller September home price index for San Francisco edged down to 194.21 – the third month in a row of declines from the June peak of 195.88, and the first declines after a two-and-a-half-year period of uninterrupted gains totaling a phenomenal 57%.

But the index doesn’t fully portray the craziness in San Francisco. It covers five Bay Area counties that include cities like Oakland, which has been anointed the second most dangerous city in the US though it now has its own Bay Area housing boom and the mind-bending gentrification that comes with it.

In San Francisco itself, according to CoreLogic DataQuick, sales volume in October stagnated at last year’s level, but prices jumped 6.5% from September and 18.3% from a year ago to $999,250! A tad shy of the perfect $1 million mark of June, and nearly23% above the prior record set in November 2007 that everyone afterwards acknowledged as totally crazy.

READ THE REST of this post at WolfStreet.com

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World Stock Markets Trading Discussion – Amiable ambiguity http://wallstreetexaminer.com/2014/11/world-stock-markets-trading-discussion-amiable-ambiguity/ http://wallstreetexaminer.com/2014/11/world-stock-markets-trading-discussion-amiable-ambiguity/#comments Wed, 26 Nov 2014 01:22:49 +0000 http://www.capitalstool.com/forums/index.php?showtopic=12342 This is a syndicated repost courtesy of The Daily Stool. To view original, click here.

Early openers going in different directions: Kiwis +0.4%, Aussies +0.9%, Nikkei -0.3% and Sth Korea -0.2%.

Aussie sectors looking quite bullish: Gold +1.9%, Miners +1.3%, IT, REITS and Materials all +1.2%.

 

 

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Central Bank “Wealth Effects” Doctrine At Work: Meet The $500K “Crap Shack” In Culver City CA http://wallstreetexaminer.com/2014/11/central-bank-wealth-effects-doctrine-at-work-meet-the-500k-crap-shack-in-culver-city-ca/ http://wallstreetexaminer.com/2014/11/central-bank-wealth-effects-doctrine-at-work-meet-the-500k-crap-shack-in-culver-city-ca/#comments Tue, 25 Nov 2014 20:31:30 +0000 http://davidstockmanscontracorner.com/?p=30411 This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here.

The purpose of central bank financial repression and ZIRP is to distort and inflate asset prices. Our monetary politburo even admits that it is in the monetary scam business via its self-serving doctrine called “wealth effects”.

The game here is to drive the stock market averages ever higher through massive liquidity injections into the Wall Street dealer markets. This purportedly causes people to feel richer and to spend and invest more, creating a virtuous circle of prosperity, world without end.

We know by now, however, that “wealth effects” money printing does not help the main street economy. And while it does produce awesome financial market gains—–these turn out to be unsustainable bubbles that inexorably crash. Since the turn of the century, most central banks have participated in this scam—either because they have embraced the Keynesian gospel or have joined the money printing party out of defensive necessity to protect against inflation of their own exchange rates. So the resulting financial bubbles have been global in scope.

During the last global boom cycle, central banks led by the Fed and the US housing bubble drove the aggregate capitalization of world stock markets from $30 trillion to $60 trillion in less than 48 months. Needless to say, the world’s sustainable wealth did not grow by even a fraction of that amount during this brief interval between 2004 and 2008.

Indeed, in much of Europe and the US real wealth was being destroyed by vast malinvestments in housing, real estate and public infrastructure; and in EM economies like China’s, similar wealth destruction was manifested in monumental, uneconomic investments in resource extraction and industrial production and transportation. Nevertheless, this central bank fueled financial bubble reached a tipping point in 2008, and then plunged violently.

As shown below, within a 15 month period, nearly $35 trillion of global equity market cap evaporated, taking global market cap to below its pre-2004 level.

It didn’t take central banks long to double down, of course. During the period since the Lehman failure in September 2008, the aggregate balance sheet of global central banks has exploded from approximately $6 trillion to $16 trillion, thereby inciting the recrudescence of an even more fantastic global financial bubble.

As shown above, global equity market cap has soared by $40 trillion since the March 2009 bottom to new all-times highs. But do not be troubled. The Wall Street stock peddlers who moonlight as “economists” and “strategists” assure us that the 2008-2009 plunge was all a vast mistake——a temporary panic in the financial markets caused by a lapse of faith in the capacity of the state through its central banking and fiscal branches to keep the GDP “print” expanding, profits growing and the stock averages rising.

Lets see. If we just forget the 2008-2009 “mistake” and wind back to the 2004 starting point in the above graph, we see that the global equity market cap has grown by about 120% over the 10 year period. That computes to a compound annual growth rate of 8%.

Yet why in the world would the paper wealth of the world’s stock markets grow at such a robust rate when the entire global economy has been foundering since 2004 in most of the DM world; or simply printing higher but unsustainable GDP stats through the foolish expedient of massive, state subsidized spending on infrastructure and real estate development in much of the EM world. Think the ghost cities, empty malls and unutilized airports, bridges and highways in China.

Starting here at home, therefore, the last decade does not provide much support for the $35 trillion equity gain since 2004. In fact, US real GDP in the US has expanded by a paltry 1.5% annually during that period—–which is by far the lowest rate for any ten year period in modern US history.

And in the rest of the DM world, there results have been even more meager. Real GDP in the EC, for example, has grown at a 0.5% annual rate during the last decade. In Japan, the results have been equally dismal—with GDP growth clocking at a hardly recordable 0.4% per annum.

So when upwards of 60% of the global economy is in “creeper gear” and shows no signs of breaking out of this trend, why would the market cap of publicly traded companies, which rely on these DM economies for an overwhelming share of their profits, soar by $35 trillion or 8% per annum?

The answer, of course, is that PE multiples have risen sharply—from about 10X to 20X reported earnings—and the profit share of these faltering GDP levels have also soared to historic peaks. Stated differently, much of this $35 trillion paper gain over the last decade is a product of central bank driven financialization, not sustainable growth in world output and real wealth.

The former has produced a dangerously expanding gap between rising PE multiples and stagnating real growth; and has also incentivized global corporations to shed investments in labor, fixed assets and R&D in order to fund financial engineering schemes such as stock buybacks and M&A which goose accounting profits in the short-run, but liquidate the ingredients of long-term growth and innovation. Currently, IPM, Hewlett-Packard, Cisco Systems and Proctor & Gamble are among the obvious poster boys.

To be sure, the Wall Street pitch men counter with the “BRICS” story—the notion that the growth baton has been handed off to the EM world and that soaring growth and corporate profits in China, Korea, Brazil and even Africa will take up the slack. In a word, that’s just unadulterated nonsense.

The reported GDPs of the EM economies are vastly bloated by a one-time parlor trick. Namely, the fantastic money printing campaigns of their own central banks, which have resulted in drastic mispricing of capital and out-of-this-world growth in fixed assets. Needless to say, however, the law of  supply and demand has not yet been repealed–even in Beijing and Brasilia—-and therefore it is only a matter of time before the EM economies experience their own day of reckoning.

Thus, during the decade through 2014, the People’s Printing Press of China expanded its balance sheet by 7X. Not only has that never been done before, but why in the world would the Wall Street pitch men believe that a command economy which is entirely controlled from the center and which has expanded its debt from $1 trillion to $25 trillion during the  brief course of this century, is even remotely capable of the moderately stable performance history of the DM economies which comprise their data bases and charts.

Historical Data Chart

The fact is, China is a colossal house of cards, and so are the satellite economies which have fed raw materials into the maws of its overheated industrial furnaces.

Take Brazil, for example. It has been run by crony capitalists and labor-socialists for the past decade, who, like their Chinese counterparts, have had no difficulty cranking up the printing presses at their central bank. But with the China boom now rapidly cooling and iron ore prices, for example, rapidly collapsing, the accumulated waste, inefficiency and corruption of the past ten years of global central bank money printing has begun to catch-up. In fact, Brazil is tumbling into recession and political crisis, and is likely to remain there for years to come.  There has been no EM miracle there; just a red hot printing press and a statist simulacrum of prosperity.

Historical Data Chart

So that takes us to the true nature of Keynesian central banking. The actual impact of the current “wealth effects” regime is not economic growth and rising profits, but, instead, a vast inflation of financial assets. Yet with the passage of time and serial attempts to reflate each busted bubble, the degree to watch valuations have become distorted is completely lost in the recency bias of Wall Street and its financial media echo boxes.

Perhaps, then, it takes a picture to correct the endless bogus words of the mainstream narrative. The thing about central bank driven bubble finance is that it infects all asset valuations because it enables carry trade speculators to ply their trades with zero cost money and radically depresses the “cap rates” which underlie valuations of all financial assets and real estate.

To make a long story short, here is your $500k “crap shack” in one of southern California’s most distorted and over-heated housing markets. As Dr. Housing Bubble well explains, we have now reached the point where central bank financial repression has brought casino finance to every nook and cranny of the main street economy.

Stated differently, the world’s central banks have not created $35 trillion of new wealth since 2004.  But they have fueled the rise of “crap shack” valuations nearly everywhere on the planet.

Read the rest of this post at David Stockman’s Contra Corner. View original post.

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