Must Read – The Wall Street Examiner http://wallstreetexaminer.com Busting the myths Thu, 28 Jul 2016 18:47:44 +0000 en-US hourly 1 Over The Past 50 Years An Earnings Recession Of This Magnitude Has Never Failed To Trigger A Bear Market http://wallstreetexaminer.com/2016/07/past-50-years-earnings-recession-magnitude-never-failed-trigger-bear-market/ http://wallstreetexaminer.com/2016/07/past-50-years-earnings-recession-magnitude-never-failed-trigger-bear-market/#respond Thu, 28 Jul 2016 17:27:47 +0000 https://www.thefelderreport.com/?p=10801 It’s earnings season once again and it looks as if, as a group, corporate America still can’t find the end of its earnings decline

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It’s earnings season once again and it looks as if, as a group, corporate America still can’t find the end of its earnings decline since profits peaked over a year ago. What’s more analysts, renowned for their Pollyannish expectations, can’t seem to find it, either.

So I thought it might be interesting to look at what the stock market has done in the past during earnings recessions comparable to the current one. And it’s pretty eye-opening. Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market.

fredgraph

In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial wellbeing.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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Homeownership Rates Fall Again! http://wallstreetexaminer.com/2016/07/homeownership-rates-fall/ http://wallstreetexaminer.com/2016/07/homeownership-rates-fall/#respond Thu, 28 Jul 2016 16:15:57 +0000 http://loganmohtashami.com/?p=4739 Home ownership in the US peaked in 2004 at 69.2%. Since then we have seen a steady decline in ownership rates

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This is a syndicated repost courtesy of Logan Mohtashami. To view original, click here. Reposted with permission.

Home ownership in the US peaked in 2004 at 69.2%.  Since then we have seen a steady decline in ownership rates that began to flatten to the low 60s% around 2010.  Today in 2016 we have hit a cycle low of 62.9%

For years, I have said that the real home ownership rate (number of households that can afford the debt of a mortgage)  is between 62.2% – 62.7.  Because the US census counts homeowners who are delinquent on their mortgage payments as owners, until they officially lose the home, this number is artificially inflated. US demographics for the current economic cycle heavily favors renting over owning. This is because we have huge numbers in the age range of 17-29 (living at home or renting ages) and in the range of 49-65 years.  The US will remain demographically challenged for home ownership until around 2019 when today’s youngsters will enter the home purchasing  years of 28-42 years of age.

In my 2010 Housing Predictions for 2011  Article I outline the rationale for why we were going to be a renting nation for the next decade.

“The longer term consequences of an unstable residential real estate market may be more serious than just the destruction of individual wealth. The ideal of middle class home ownership may be at stake. The census bureau reported a 7% decline in national rental vacancy rates in 2010, along with an overall decline of 0.7% in home ownership rates compared to a year ago. There were fewer “organic” buyers, more renters and more investment buyers in the market in 2010 and I expect this trend to continue into 2011. Are we at the beginning of a sociological movement away from middle class home ownership and towards a cultural split between the investment property landlords and their renters both of whom may have less personal investment in neighborhood security, local schools and shared public facilities compared to primary homeowners.”

Mortgage purchase application demand is only back to 1998 levels today.

From Calculated Risk:
http://www.calculatedriskblog.com/2016/07/mba-mortgage-applications-decrease-in_27.html

MBAJuly272016 LOGAN 1

And  new home sales are only 0.2% above 1963 levels.  When adjusted to population, new home sales are down 41.8% from 1963 .

From Doug Short:
http://www.advisorperspectives.com/dshort/updates/New-Home-Sales

Home-Sales-New-population-adjusted (1) Logan 1

From Lance Roberts:

The “New Housing Crisis” – Not Enough Rental Homes?

NATION OF RENTERS

Census:
http://www.census.gov/housing/hvs/files/currenthvspress.pdf

CodR3PuUkAIsyLo

If you follow the housing pundits, you know that many of them over the last several years kept trying to call the bottom of home ownership rates – but it kept going down. Every year they said it was the bottom. [Hi Mark Zandi, how you doin’?].  This is because they only had wishful thinking instead of a data-based rationale for their calls. But if one follows an actual data based methodology, as I do, then we can project that the US is just 0.02% away from hitting the percentage of home-ownership that I predicted to be the real rate back in 2010 (just saying).

The key take away is that we are now near the end of the decline in home-ownership. If the rate goes below my 62.2% then I will admit to having missed something– but the demographic and economic data suggest that home-ownership rates will not fall below 62.2% before our demographic profile switches to favor ownership over renting.

Logan Mohtashami is a senior loan officer at AMC Lending Group,  which has been providing mortgage services for California residents since 1987.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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US Homeownership Rate Falls To Lowest Level Since President Jimmy Carter http://wallstreetexaminer.com/2016/07/us-homeownership-rate-falls-lowest-level-since-president-jimmy-carter/ http://wallstreetexaminer.com/2016/07/us-homeownership-rate-falls-lowest-level-since-president-jimmy-carter/#respond Thu, 28 Jul 2016 14:48:51 +0000 http://anthonybsanders.wordpress.com/?p=1162 The US homeownership rate keeps falling like a deranged energizer bunny.

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This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

The US homeownership rate keeps falling like a deranged energizer bunny.

Speaking of deranged bunnies, it is the lowest since President Jimmy Carter.

hownq216

Like the energizer bunny, the homeownership rate keeps going … down.

Energizer-Bunny-300x270

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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The Federal Reserve And The Incredible Disappearance Of Low Cost Housing Act http://wallstreetexaminer.com/2016/07/federal-reserve-incredible-disappearance-low-cost-housing-act/ http://wallstreetexaminer.com/2016/07/federal-reserve-incredible-disappearance-low-cost-housing-act/#respond Thu, 28 Jul 2016 13:48:29 +0000 http://anthonybsanders.wordpress.com/?p=1155 One of the problems with The Fed’s incredible quantitative easing (QE) and Zero Interest Rate Policies (ZIRP) is the correspondingly incredible disappearance of low cost housing

The post The Federal Reserve And The Incredible Disappearance Of Low Cost Housing Act was originally published at The Wall Street Examiner. Follow the money!

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As expected, The Federal Reserve Open Market Committee (FOMC) kept rates unchanged yesterday.

fednada

One of the problems with The Fed’s incredible quantitative easing (QE) and Zero Interest Rate Policies (ZIRP) is the correspondingly incredible disappearance of low cost housing in the United States.

Here is a chart of new homes sold under $150,000 in the USA. After home prices peaked in the mid 2000s, new home sales under $150,000 plummeted.  But rather than return with cheap interest rates courtesy of The Fed, low cost housing has all but disappeared.

nhssub150kfed

And for new home sales in the West under $200,000, they have all but disappeared. Like real median household income after 2007.

fednhs200

Federal Reserve policies under Alan Greenspan, Ben Bernanke and Janet Yellen have resulted in the incredible disappearing low cost housing act (similar to the disappearing audience act in the film The Incredible Burt Wonderstone).

The difference between reality and the disappearing audience act is that in reality low cost housing will not return.

220px-Incredible-Burt-Wonderstone-Poster

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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Athas Shrugged: The Return of Subprime (Nonprime) Residential Lending [Athas Capital] http://wallstreetexaminer.com/2016/07/athas-shrugged-return-subprime-nonprime-residential-lending-athas-capital/ http://wallstreetexaminer.com/2016/07/athas-shrugged-return-subprime-nonprime-residential-lending-athas-capital/#respond Wed, 27 Jul 2016 15:28:52 +0000 http://anthonybsanders.wordpress.com/?p=1150 I spoke at one of Washington DC’s larger economic think tanks several years ago where people were cheering the creation of the Consumer Financial Protection Bureau (CFPB) and the end of subprime lending. My remark was: “As soon as we forget the credit crisis and a new generation of Wall Street investment bankers takes hold, […]

The post Athas Shrugged: The Return of Subprime (Nonprime) Residential Lending [Athas Capital] was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

I spoke at one of Washington DC’s larger economic think tanks several years ago where people were cheering the creation of the Consumer Financial Protection Bureau (CFPB) and the end of subprime lending. My remark was: “As soon as we forget the credit crisis and a new generation of Wall Street investment bankers takes hold, we will see subprime lending again. There are thousands who will want credit and are shut out. The subprime lenders will rise again.” My remarks were not well received by those who believe that the Federal government should control all aspects of financial markets.

Fast forward to today. The private markets have found a way to provide credit for home purchases for borrowers with poor credit. How do these lenders bypass the vaunted Qualified Mortgage (QM) rules decreed by the CFPB? Simple.

Firms such as Athas Capital offer consumers residential mortgage credit that are not available from QM-compliant lenders like Bank of America and Wells Fargo.  Athas Capital (which is NOT a depository institution), funds their lending with private capital (not deposits).

As you would imagine, lenders like Athas Capital offer mortgage rates that are higher than loans originated and sold to Fannie Mae and Freddie Mac or insured by the FHA). And to mitigate risk, Athas Capital requires higher down payments (or lower loan-to-value ratios) than the government guarantee entities.

Here is the Athas Capital rate sheet:

athassheet

Athas Capital even offers loans to “C” and “D” quality borrowers at rates approaching 10% and LTVs of 60%.

athasc

So, firms like Athas Capital are providing credit to those households who have been boxed out by Federal government programs. And again, bear in mind that most large US banks are retreating from the residential mortgage market.

Lenders like Athas Capital understand the risk of subprime (or nonprime) borrowers and attempt to price the risk accordingly. Large down payments mitigate the risk of default/foreclosure since the lender/investor can move to foreclosure after 90+ days of missed payments and usually have sufficient equity remaining after legal fees, etc.

Of course, this strategy is the polar opposite of the FHA where 3% down payment loans to high risk borrowers is their bread and butter (or stale bread and margarine).

This is a classic example of capitalism at work.

rand-Atlas-Shrugged-Cover

I was going to use “The Subprime Lenders Strike Back!!” but I am so sick of Star Wars.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come http://wallstreetexaminer.com/2016/07/brexit-hiking-uk-power-prices-worst-yet-come/ http://wallstreetexaminer.com/2016/07/brexit-hiking-uk-power-prices-worst-yet-come/#respond Wed, 27 Jul 2016 15:11:08 +0000 http://moneymorning.com/?p=233255 Post-Brexit, the pound has fallen to 30-year lows.

And this dramatic decline has prompted a major change in the UK energy sector that will have dire consequences for British consumers..

The post Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of Money Morning. To view original, click here. Reposted with permission.

 

History tells us that the winter of 1946-1947 was one of the worst experienced by the UK in a century – and the coldest in three.

Coming so soon after the end of World War II, an already crippled economy felt the full impact of freezing weather that killed both livestock and crops while jamming roads and railways with snow.

It got so bad that at one point, Winston Churchill observed that he couldn’t even get his favorite cigars.

But the main concern was the provision of electricity. Not a single power-generating station in all of England had escaped wartime destruction, and a return to “normalcy” in the power sector was still years away.

Read More: The Next European Brexit Crisis Is in Energy

So during the cold winter of 1946-1947, the entire British population had to hunker down.

Now, the current situation is hardly as dire. But ever since the UK voted to separate from the EU (the so-called “Brexit” referendum) on June 23, I’ve been waiting for the initial signals that this divorce will have consequences in the energy sector.

Now we have one, with dire consequences for British consumers…

Brits Should Expect (Much) Higher Power Prices

natural gas

The signal shows a coming double whammy for Britishnatural gas users, as a result of the post-Brexit decline of the British pound sterling to more than 30-year lows against the dollar.

This decline has prompted two energy moves in very different directions. Unfortunately, neither is good for anyone living in the UK as winter approaches and temperatures decline…

First, the descent of the pound sterling has prompted UK retail natural gas distributors to forego discounts moving forward. This is, of course, based on the same reasoning that will certainly result in another round of appreciable electricity price hikes by the major national utilities later in the year.

Maintaining profit margins will be impossible at current levels, given the forex pressure on the bottom line. Most observers also believe that increased taxes are now inevitable, as the unexpected currency (effective) devaluation has made revenue an important factor.

Even before Brexit, this was shaping up to be a hard fall and winter in the UK, placing additional pressure yet again on an already strained power sector.

Now, the new government, headed by Prime Minister Theresa May, is still Conservative. And while she will delay substantive Brexit negotiations with the EU, the party’s policies of cutting subsidies will remain intact.

That means some difficult times lie ahead, both for end users and domestic power distributors, with problems – some Brexit-related, some not – hitting all British energy sources…

The UK Is Cutting Its Winter Gas Reserves – Just in Time for Winter

These include renewed concerns about the profitability of North Sea production, a decimation of renewable alternatives (for example, over a third of all jobs in UK solar have vanished), and rising indication that French EDF SA (OTCMKTS ADR: ECIFY) may be having second thoughts about moving forward with a major nuclear power plant at Hinkley Point.

This last one is no surprise, as the project is way over budget and certain to be hit hard by currency fluctuations moving forward.

Don’t Miss: The Easiest Way to Profit from Range-Bound Oil

The British end user, however, is going to feel the pinch in an additional way…

You see, on July 15, utility giant Centrica Plc. (OTCMKTS ADR:CPYYY) announced it will not inject any additional gas into the offshore Rough field until spring of 2017. Rough accounts for about 70% of all British natural gas storage capacity.

Immediately, the news caused a spike of over 10% in winter-monthnatural gas futures prices, as everyone is now concerned that there might not be enough natural gas in storage to cover the increased demand for heating come winter.

But it gets worse…

Come Winter, Brits Will Have to Make Do with Just One-Third of Gas Reserves

Even the capacity issue at Rough doesn’t show how serious the situation is for British consumers. The field’s capacity is rated at 150 billion cubic feet of natural gas, but the present volume stored there is only 50 billion.

Unless Centrica Storage revises its plans – and there are no indications that’s likely to happen – that 50 billion cubic feet is now the maximum that will be available from Rough this winter.

And that’s creating a knock-on effect.

You see, in the summer, UK demand for natural gas comes primarily from gas being pumped into storage for winter heating. But Centrica has decided to shut Rough “for tests” at least into November.

And that has introduced the second major post-Brexit energy move…

British Gas Is Being Exported – Only to Be Reimported Again at a Premium

The dramatic change in cross-currency valuations has resulted in the UK exporting more natural gas to Belgium (and onward to the broader continental market) than at any point in more than two years.

The “spare fuel” being exported is actually coming primarily from volume that would have gone to Rough for storage…

Except that the weaker pound means that it’s now more profitable to instead send the gas along the east-west North Sea Interconnector pipeline to the terminal center at Zeebrugge on the Belgian coast.

Last week, Trevor Sikorski – the head of natural gas, coal, and carbon at Energy Aspects Ltd. in London – told Reuters as much. He thinks the spike in exports comprised gas “that would otherwise be going to Rough, now being incentivized to go and get injected into European storage.”

However, just about all analysts agree that the rising exports from Britain to Europe are more a result of the collapse in currency value than of any outage at Rough. A Brexit-induced “pounding of the pound” has provided some nice profits for European importers… and Centrica has obliged.

But for the average Brit back home, hoping to heat their house come winter, the short-term future may require a traditional British stiff upper lip. Given the decision to close injections of gas into Rough, Sikorski adds that he expects “higher UK imports of gas then to occur in the winter.”

Thanks to a much weaker currency, those imports will be far more expensive than drawing domestic gas from storage in Rough would’ve been (and has been in the past).

In other words, we’re looking at a nasty cycle: Today’s rising exports of British gas will go to European storage, with some of that returning as higher-priced imports when the weather gets colder.

Of course, this may attend to profit considerations along the Interconnector pipeline.

But it’s bad news for people living in Britain.

 

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The post Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come appeared first on Money Morning – We Make Investing Profitable.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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Sink The Bismarck! Deutsche Banks Suffers A -73% Earnings Surprise http://wallstreetexaminer.com/2016/07/sink-bismarck-deutsche-banks-suffers-73-earnings-surprise/ http://wallstreetexaminer.com/2016/07/sink-bismarck-deutsche-banks-suffers-73-earnings-surprise/#respond Wed, 27 Jul 2016 13:55:28 +0000 http://anthonybsanders.wordpress.com/?p=1141 Perhaps Deutsche Banks should adopt the German Battleship “Bismarck” as its corporate logo.

The post Sink The Bismarck! Deutsche Banks Suffers A -73% Earnings Surprise was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

Perhaps Deutsche Banks should adopt the German Battleship “Bismarck” as its corporate logo.

Deutsche Bank released their Q2 earnings and generated a -73% earnings surprise.

dbes

At least it was better than the -200% earnings surprise in Q4 2015.

And like the Bismarck, Deutsche Bank’s earning per share estimate keeps sinking.

dbepsdata

If Deutsche Bank is the Bismarck, then the Royal Bank of Scotland is the HMS Hood (sunk by the Bismarck). And the Italian banks are the Conte di Cavour (sunk by the British attack on the Italian fleet at Taranto).

dbrbs

Wow. the EU bank fleet seems to be sinking everywhere.

eurobanksssss

Cheers!

 

1296754136-sinkthebismarck

 

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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Behind The New Home Sales Data — A Darker Backdrop http://wallstreetexaminer.com/2016/07/behind-new-home-sales-data-darker-backdrop/ http://wallstreetexaminer.com/2016/07/behind-new-home-sales-data-darker-backdrop/#respond Wed, 27 Jul 2016 12:51:07 +0000 http://wallstreetexaminer.com/?p=302168 There’s so much great data in the Commerce Department’s monthly new home sales report. It’s always useful to parse it for all the tasty morsels that the mainstream media ignores. We’ll take a look at some of it here, with more to come in the days ahead. First let’s look at the usual positive spin…

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There’s so much great data in the Commerce Department’s monthly new home sales report. It’s always useful to parse it for all the tasty morsels that the mainstream media ignores. We’ll take a look at some of it here, with more to come in the days ahead.

First let’s look at the usual positive spin given the report in the mainstream media which is usually devoid of historical perspective whatsoever. It’s always about the short run. The Wall Street Journal’s headline said it all.

U.S. New-Home Sales Posted Solid Gain in First Half of 2016

Solid pace offers fresh evidence of healthy momentum in the U.S. housing market as home-buyers enjoy low interest rates

All of that is true, but it doesn’t tell the whole story. To his credit, the Journal’s Ben Leubsdorf noted in the body of the article that “the pace of home construction and purchases of new homes remain depressed compared with levels seen during past economic expansions” but he never addressed just how weak those sales are.

Here’s some perspective.

Sales have nearly doubled from the June 2010 and June 2011 lows of 28,000 to this June’s 54,000. But this is still down sharply from the June 2005 peak of 115,000 units. At the same time, it barely exceeds the low of 47,000 reached in June 1991 and 53,000 in June 1992 during that recession.

New Home Sales Long Term- Click to enlarge

Read the rest of this post at David Stockman’s Contra Corner, where first published.

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Kyōki (Insanity) http://wallstreetexaminer.com/2016/07/kyoki-insanity/ http://wallstreetexaminer.com/2016/07/kyoki-insanity/#respond Wed, 27 Jul 2016 12:14:15 +0000 http://720global.wordpress.com/?p=328 Pondering the state of the global economy can elicit manic-depressive-obsessive-compulsive emotions.

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Pondering the state of the global economy can elicit manic-depressive-obsessive-compulsive emotions.  The volatility of global markets – equities, bonds, commodities, currencies, etc. – are challenging enough without consideration of Brexit, the U.S. Presidential election, radical Islamic terrorism and so on.  Yet no discussion of economic and market environments is complete without giving hefty consideration to what may be a major shift in the way economic policy is conducted in Japan.

The Japanese economy has been the poster child for economic malaise and bad fortune for so long that even the most radical policy responses no longer garner much attention. In fact, recent policy actions intended to weaken the Yen have resulted in significant appreciation of the yen against the currencies of Japan’s major trade partners, further crippling economic activity. The frustration of an appreciating currency coupled with deflation and zero economic growth has produced signs that what Japan has in store for the world falls squarely in to the category of “you ain’t seen nothin’ yet.”  Assuming new fiscal and monetary policies will be similar to those enacted in the past is a big risk that should be contemplated by investors.

The Last 25 Years

The Japanese economy has been fighting weak growth and deflationary forces for over 25 years.  Japan’s equity market and real estate bubbles burst in the first week of 1990, presaging deflation and stagnant economic growth ever since.  Despite countless monetary and fiscal efforts to combat these economic ailments, nothing seems to work.

Any economist worth his salt has multiple reasons for the depth and breadth of these issues but very few get to the heart of the problem.  The typical analysis suggests that weak growth in Japan is primarily being caused by weak demand.  Over the last 25 years, insufficient demand, or a lack of consumption, has been addressed by increasingly incentivizing the population and the government to consume more by taking on additional debt.  That incentive is produced via lower interest rates.  If demand really is the problem, however, then some version of these policies should have worked, but to date they have not.

If the real problem, however, is too much debt, which at 255% of Japan’s GDP seems a reasonable assumption to us, then the misdiagnosis and resulting ill-designed policy response leads to even slower growth, more persistent deflationary pressures and exacerbates the original problem.  The graphs below shows that economic activity is currently at levels last seen in 1993, yet the level of debt has risen 360% since 1996.  The charts provide evidence that Japan’s crippling level of debt is not helping the economy recover and in fact is creating massive headwinds.

Japan GDP 1990-2015

 

 gdp 1
Data Courtesy: World Bank

 

Japan Government Debt to GDP ratio

 

 debt gdp 2
Data Courtesy: Japan Ministry of Finance (MoF)

 

What is so confounding about this situation is that after 25 years, one would expect Japanese leadership to eventually recognize that they are following Einstein’s definition of insanity – doing the same thing over and over again and expecting different results.  Equally insane, leaders in the rest of the developed world are following Japan over the same economic cliff.

Throughout this period of economic stagnation and deflation, Japan has increasingly emphasized its desire to generate inflation. The ulterior motive behind such a strategy is hidden in plain sight. If the value of a currency, in this case the Yen, is eroded by rising inflation debtors are able to pay back that debt with Yen that is worth less than it used to be.  For example, if Japan were somehow able to generate 4% inflation for 5 years, the compounded effect of that inflation would serve to devalue the currency by roughly 22%.  Therefore, debtors (the Japanese government) could repay outstanding debt in five years at what is a 22% discount to its current value. Said more bluntly, they can essentially default on 22% of their debt.

What we know about Japan is that their debt load has long since surpassed the country’s ability to repay it in conventional terms. Given that it would allow them to erase some percentage of the value of the debt outstanding, their desperation to generate inflation should not be underestimated. One way or another, this is the reality Japan hopes to achieve.

QE

Quantitative easing (QE) is one of the primary monetary policy approaches central banks have taken since the 2008 financial crisis.  With short term interest rates pegged at zero, and thus the traditional level of monetary policy at its effective limit, the U.S. Federal Reserve and many other central banks conjured new money from the printing presses and began buying sovereign debt and, in some cases mortgages, corporate bonds and even equities. This approach to increasing the money supply achieved central bank objectives of levitating stocks and other asset markets, in the hope that newly created “wealth” would trickle down.  The mission has yet to produce the promised “escape velocity” for economic growth or higher inflation. The wealthy, who own most of the world’s financial assets, have seen their wealth expand rapidly. However, for most of the working population, the outcome has been economic struggle, further widening of the wealth gap and a deepening sense of discontentment.

The Nuclear Option

In 2014, as the verdict on the efficacy of QE became increasingly clear, European and Japanese central bankers went back to the drawing board. They decided that if the wealth effect of boosting financial markets would not deliver the desired consumption to drive economic growth then surely negative interest rates would do the trick.  Unfortunately, the central bankers appear to have forgotten that there are both borrowers and lenders who are affected by the level of interest rates.  Not only have negative interest rates failed to advance economic growth, the strategy appears to have eroded public confidence in the institution of central banking and financially damaging the balance sheets of many banks.

In recent weeks, former Federal Reserve (Fed) chairman Ben Bernanke paid a visit to Tokyo and met with a variety of Japanese leaders including Bank of Japan chairman Haruhiko Kuroda. In those meetings, Bernanke supposedly offered counsel to the Japanese about how they might, once and for all, break the deflationary shackles that enslave their economy using “helicopter money” (the termed was coined by Milton Freidman and made popular in 2002 by Ben Bernanke).  What Bernanke proposes, is for Japan to effectively take one of the few remaining steps toward “all-in” or the economic policy equivalent of a “nuclear option”.

The Japanese government appears to be leading the charge in the next chapter of stranger than fiction economic policy through some form of “helicopter money”.  As opposed to the prior methods of QE, this new approach marries monetary policy with fiscal policy by putting printed currency into the hands of the Ministry of Finance (MOF or Japan’s Treasury department) for direct distribution through a fiscal policy program.  Such a program may be infrastructure spending or it may simply be a direct deposit into the bank accounts of public citizens.  Regardless of its use, the public debt would rise further.

According to the meeting notes shared with the media Bernanke recommended that the MoF issue “perpetual bonds”, or bonds which have no maturity date.  The Bank of Japan (BOJ or the Japan’s Central Bank) would essentially print Yen to buy the perpetual bonds and further expand their already bloated balance sheet. The new money for those bonds would go to the MoF for distribution in some form through a fiscal policy measure.  The BoJ receives the bonds, the MoF gets the newly printed money and the citizens of Japan would receive a stimulus package that will deliver inflation and a real economic recovery.  Sounds like a win-win, huh?

Temporarily, yes.  Economic activity will increase and inflation may rise.

Let us suppose that the decision is to distribute the newly printed currency from the sale of the perpetual bonds directly into the hands of the Japanese people.  Further let us suppose every dollar of that money is spent.  In such a circumstance, economic activity will pick up sharply.  However, eventually the money will run out, spending falters and economic stagnation and decline will resume.

At this point, Japan has the original accumulated debt plus the new debt created through perpetual bonds and an economy that did not respond organically to this new policy measure.  Naturally the familiar response from policymakers is likely to be “we just didn’t do enough”. It is then highly probable another round of helicopter money will be issued producing another short lived spurt of economic activity.  As with previous policy efforts, this pattern likely repeats over and over again.  Each time, however, the amount of money printed and perpetual bonds issued must be greater than the prior attempts. Otherwise, economic growth will not occur, it will, at best, only match that of the prior experience.

Eventually, due to the mountain of money going directly in to the economy, inflation will emerge.  However, the greater likelihood is not that inflation emerges, but that it actually explodes resulting in a complete annihilation of the currency and the Japanese economy.  In hypothetical terms as described here, the outcome would be devastating.  Unlike prior methods of QE which can be halted and even reversed, helicopter money demands ever increasing amounts to achieve the desired growth and inflation. Once started, it will be very difficult to stop as economic activity would stumble.

The following paragraph came from “Part Deux – Shorting the Federal Reserve”. In the article we described how the French resorted to a helicopter money to help jump start a stagnant economy.

“With each new issue came increased trade and a stronger economy. The problem was the activity wasn’t based on anything but new money. As such, it had very little staying power and the positive benefits quickly eroded. Businesses were handcuffed. They found it hard to make any decisions in fear the currency would continue to drop in value. Prices continued to rise. Speculation and hoarding were becoming the primary drivers of the economy. “Commerce was dead; betting took its place”. With higher prices, employees were laid off as merchants struggled to cover increasing costs”.  

The French money printing exercise ultimately led to economic ruin and was a leading factor fueling the French revolution.

Summary

Is it possible that Bernanke’s helicopter money approach could work and finally help Japan escape deflation in conjunction with a healthy, organically growing economy?  It has a probability that is certainly greater than zero, but given the continual misdiagnosis of the core problem, namely too much debt, that probability is not much above zero.  There is a far greater likelihood of a multitude of other undesirable unintended consequences.

Of all the developed countries, Japan is in the worst condition economically.  Most others, including the United States, are following the same path to insanity though.  Unlike Japan, other countries may have time to implement policy changes that will allow them to avoid Japan’s desperate circumstances.

To gain a more complete understanding of 720 Global’s economic thesis and the policy changes required, we recommend our prior articles “The Death of the Virtuous Cycle” and “The Fifteenth of August”.

 

 

 

 

720 Global is an investment consultant, specializing in macroeconomic research, valuations, asset allocation, and risk management.  Our objective is to provide professional investment managers with unique and relevant information that can be incorporated into their investment process to enhance performance and marketing. We assist our clients in differentiating themselves from the crowd with a focus on value, performance and a clear, lucid assessment of global market and economic dynamics.

 

720 Global research is available for re-branding and customization for distribution to your clients.

 

For more information about our services please contact us at 301.466.1204 or email info@720global.com

 

©720 Global 2016 All Rights Reserved

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

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A Psychiatric Diagnosis of the U.S. Market: Schizophrenic Disconnect From Reality, Bipolar Mania, Psychotic Delusions of Wealth http://wallstreetexaminer.com/2016/07/psychiatric-diagnosis-u-s-market-schizophrenic-disconnect-reality-bipolar-mania-psychotic-delusions-wealth/ http://wallstreetexaminer.com/2016/07/psychiatric-diagnosis-u-s-market-schizophrenic-disconnect-reality-bipolar-mania-psychotic-delusions-wealth/#respond Wed, 27 Jul 2016 05:46:00 +0000 http://wallstreetexaminer.com/?guid=311051534a390b1a12f3c72f0cb0e4e6 If you think a delusional market is healthy, it's time for a psychiatric exam.What diagnosis would an experienced psychiatrist offer when presented with the bizarre behavior of the U.S. stock market?

The post A Psychiatric Diagnosis of the U.S. Market: Schizophrenic Disconnect From Reality, Bipolar Mania, Psychotic Delusions of Wealth was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here. Reposted with permission.

If you think a delusional market is healthy, it’s time for a psychiatric exam.
What diagnosis would an experienced psychiatrist offer when presented with the bizarre behavior of the U.S. stock market? We assume that the wild mood swings of greed and fear are “normal” for markets devoted to short-term profit and speculation, but the stock market’s disconnect from reality is far beyond mere mood swings.
The stock market thinks it’s solidly on pavement, but in reality it’s like a car flying off a cliff: the Wiley E. Coyote moment is just ahead. There’s nothing but air beneath the stock market.
Consider the reality of PE expansion from a price-earnings (PE) of 10 at the bottom in 2009 to 18+ today, while profits are stagnant. And what is driving this expansion other than a delusional belief that profits will magically reverse and log massive gains in the second half of 2016?
If we strip out “one-time expenses” and other accounting flim-flam, profits are plummeting. How else can we characterize this disconnect between stagnant sales (look at Apple, CAT, etc.) and “profits” that are one step away from outright fraud as anything other than delusional?
As global trade, U.S. rail traffic and other non-gameable measures of economic activity stagnate or decline, how can anyone connected to reality expect sales and profits to rise sharply?
The stock market is hitting new highs for what reason? The typical answer is: more central bank stimulus is on the way, the Fed/ BoJ /Bank of China/ European Central Bank have our back, etc. etc. etc.
But the reality is obvious to all: the returns on central bank stimulus have declined to near-zero. Trillions in additional stimulus are needed to just keep the delusional markets from experiencing gravity (see car photo above).
And how about the manic mood swings from panic in February (i.e. a whiff of reality) and the euphoria of new highs in summer? If this isn’t the acme of bipolar delusion, then what is?
Perhaps the greatest delusion is the confidence that this ephemeral bubble “wealth” is actual wealth that can be counted on to fund pensions and insurance claims in the future. Pity the deranged souls who actually believe that stock gains based on fraudulent claims of “profit” and delusional expectations of rising profits as the dollar strengthens and the global economy implodes are “wealth” that can be considered permanent.
The only possible diagnosis of this stock market behavior:
1. Patient (the U.S. stock market) is suffering a schizophrenic disconnect from reality.
2. Patient (the U.S. stock market) is suffering from bipolar mania that leads to delusional beliefs in delusional profits and delusional central bank omnipotence.
3. Patient is suffering from psychotic delusions of wealth, akin to the delusion that the patient is ruler of the world, galaxy, universe, central banks are all-powerful, etc.

If you think a delusional market is healthy, it’s time for a psychiatric exam.

My new book is #3 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post A Psychiatric Diagnosis of the U.S. Market: Schizophrenic Disconnect From Reality, Bipolar Mania, Psychotic Delusions of Wealth was originally published at The Wall Street Examiner. Follow the money!

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