The Wall Street Examiner http://wallstreetexaminer.com Busting the myths Mon, 29 Aug 2016 19:23:37 +0000 en-US hourly 1 35992186 Ridiculous Headlines Say Surging Consumer Spending To Drive US Economic Growth http://wallstreetexaminer.com/2016/08/ridiculous-headlines-say-surging-consumer-spending-drive-us-economic-growth/ http://wallstreetexaminer.com/2016/08/ridiculous-headlines-say-surging-consumer-spending-drive-us-economic-growth/#respond Mon, 29 Aug 2016 19:19:50 +0000 http://wallstreetexaminer.com/?p=304907 The BEA reported today that Personal Income rose and Consumer spending rose in July. The headline numbers were +0.4% and +0.3% respectively. These are seasonally adjusted month to month % gains. The numbers were also revised up for May and June. Let’s party! The Wall Street Journal headlined: U.S. Consumer Spending Rose in July Domestic…

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The BEA reported today that Personal Income rose and Consumer spending rose in July. The headline numbers were +0.4% and +0.3% respectively. These are seasonally adjusted month to month % gains. The numbers were also revised up for May and June. Let’s party!

The Wall Street Journal headlined:

U.S. Consumer Spending Rose in July

Domestic consumption could continue to drive economic growth over the second half

WSJ reporters Anna Louie Sussman and Ben Leubsdorf clownishly regurgitated the Establishment line.

Consumer spending rose for the fourth straight month in July, a sign that domestic consumption could continue to drive U.S. economic growth over the second half of the year.

Four consecutive months of solid spending pointed to continued confidence on the part of the consumer, supported by steady job gains and low interest rates and gasoline prices.

The BEA estimates the data on the basis of throwing seasonally adjusted component data into a stewpot, where it mixes and cooks the numbers. The resulting stew is impossible to analyze on a not seasonally adjusted basis, as I like to do.

For most economic data, the actual, not seasonally adjusted data trend is easily visible with a few simple techniques of technical analysis. These include trendlines connecting the highs and the lows of the monthly data. These techniques enable us to easily see trend changes as they happen. We can also use the year to year rate of change as a basis for showing whether the trend is stable, accelerating, or decelerating.

Economists never use these simple techniques. Instead they rely on “sophisticated” econometric modeling of the numbers, like seasonal adjustment. The resulting forecasts are virtually always wrong at major inflection points. Economists never see major turns until months or even years after the fact. Perhaps their models are wrong, and they should stop manipulating data in ways that invariably leads them astray. Financial journalists then slavishly report their opinions, and the investing public is led down the garden path to destruction at least once every generation as a result.

Economists use seasonally adjusted data smoothing to produce an abstract impression of the actual trend. The seasonally adjusted data is revised multiple times, over several months and years, to fit the actual data. The SA number for the current month is typically only finalized after 5 years of additional data are available. That number often bears little resemblance to the initial release.

Because personal income and consumption estimates are built from such seasonally adjusted data components, we need to rely on a little common sense deductive reasoning to make an educated guess about whether this data is even minimally useful.

One way to do that is to compare the data with a similar series that might reveal the trend more clearly. In this case, the not seasonally adjusted retail sales data is a pretty good proxy for personal consumption. Monthly wage data is useful as a guide to personal income.

With all that in mind, here’s a look at the Personal Consumption headline number, which was +0.3% month to month. Meanwhile the 3 month average of the year to year change in actual, not seasonally adjusted real retail sales was a gain of around 1% or about +0.8% on average per month. That compared with a 3% gain in March. The momentum of retail sales has clearly slowed over the same time that the BEA data on personal spending was showing an uptick. That raises questions about their data.

Growth in Personal Spending vs. Retail Sales - Click to enlarge

Since the recovery began these two series have more or less tracked each other, with greater volatility in the changes in actual retail sales vs. the smoothed seasonally adjusted representation shown in the personal consumption data.  However, the personal spending data has persistently outperformed the retail sales data since early 2015. Something is fishy.

The year to year change in July real retail sales was a big fat zero while the personal spending data showed a big increase. I can only conclude that there’s something wrong with the seasonally manipulated data showing strength in personal spending.

Real Personal Spending and Real Retail Sales - Click to enlarge

Since the top of the housing bubble in 2006, real retail sales have rebounded to a gain of 6%, or roughly 0.6% per year. Real personal consumption has purportedly increased by 18% or 1.8% per year. The gap between the two yawned over the past year as retail sales stalled.

So we must be skeptical about today’s release. The question is, “Which do you believe?” Wall Street economists and their media PR repeaters would have you believe that the US economy is strengthening. But based on the retail sales data, that presumption is false.

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Trending http://wallstreetexaminer.com/2016/08/trending/ http://wallstreetexaminer.com/2016/08/trending/#respond Mon, 29 Aug 2016 13:17:02 +0000 http://kunstler.com/?p=6535 Would fate permit it, the election of Hillary Clinton will be the supreme and perhaps terminal act in an Anything-Goes-And-Nothing-Matters society.

The post Trending was originally published at The Wall Street Examiner. Follow the money!

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

Would fate permit it, the election of Hillary Clinton will be the supreme and perhaps terminal act in an Anything-Goes-And-Nothing-Matters society. Yet, even with the fabulous luck of running against a consummate political oaf, she struggles to get the upper hand, and she may land in the White House with the lowest voter turnout in modern history. And then her reward in office may be to dodge indictment for four years while the nation crumbles around her. This is the way the world ends: not with a bang or a whimper but with a cackle.

Imagine the scene following Hillary’s election. In order to salvage the last shred of its credibility, the Federal Reserve raises its overnight funds rate another quarter percent and crashes the last Potemkin semblance of a “recovering” economy, that is, the levitated stock markets. Tens of millions of retired individuals previously driven into them by zero interest rate policy are wiped out. Even more gravely, pension funds and insurance companies are destroyed, but not before their troubles trigger derivative contracts with big banks which then explode and expose the inability of counterparties to make good on their ends of the bet.

In a blind panic, the Federal Reserve reverses its policy in December, drops the Fed Funds interest rate back to 25 basis points and announces the grandest new round of “quantitative easing” (money printing) ever, while congress is coerced into voting for the greatest bailout of institutions the world has ever seen, along with a “one time” helicopter drop of a cool trillion dollars in the form of combined tax cuts and “shovel-ready infrastructure projects.” The media rejoices. The US Dollar tanks. Absolutely nobody wants US treasury bonds, bills, and notes. The pathetic remnant of the American middle class stares into the abyss. (If it looks hard enough, it sees the US government down there.)

We’re now living in the setup for this, treating the election shenanigans so far as just another sordid television entertainment. It’s more than that. It’s an engraved invitation to the worst crisis since the Civil War. The crisis may even feature events like a civil war with identity groups skirmishing around our already-ruined “flyover” cities just like the factions in Aleppo and Fallujah. Thank the “Progressive” Left for that. Believe me, history will blame them for chucking the idea of a unifying common culture onto the garbage barge.

And yes, for all our tribulations here in America, the rest of the world will be struggling with its own epic disorders. It remains to be seen whether they will lead to war as, say, the Chinese ruling party attempts to evade the crash of its own rickety banking system, and the inflamed millions of ruined “investors,” by starting a brawl with Japan over a few meaningless islands in the Pacific. Could happen. And, oh, is North Korea for real with its right out front nuclear bomb-and-missile program? What does the rest of the world plan to do about that?

You don’t even want to look at the Middle East. The grisly conflicts there of recent decades are just a prelude to what happens when the House of Saud loses its grip on the government. That will happen, and then the big question is whether Aramco can continue to function, or whether the critical parts of it end up damaged beyond repair as competing tribes fight over it. In any case, the world will begin to notice the salient fact of life in that part of the world: namely, that the Arabian desert, and much of the great band of arid territory on either side of it, cannot support the populations that mushroomed in the nutrient bath of the 20th century oil economy. And they won’t all be able to self-export to Europe either.

Speaking of that interesting region, around the same time Hillary sets up for intensive care in the third floor of the White House, the old order will be swept away across Europe. Farewell Merkel and Monsieur Hollandaise. Farewell to the squishy Left all over the place. Enter the hard-asses. You’d think if anything might unite that continent it might be the wish to defend secular freedom under the rule of law, but even that remains to be seen.

Yes, the world following 3Q 2016 is looking like one hot mess. If you remember anything, let it be this: the primary mission of your cohort of the human race is managing contraction. The world is getting wider and poorer again and the outcome everywhere will be determined by the success of people to manage their lives locally. The big things of this world — governments, corporations, institutions — are losing their traction and whatever we manage to rebuild will get done locally. In victory, Hillary may utterly cease to matter.

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It’s Out !
World Made By Hand (Fourth and Final)

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New Interview with JHK about The Harrows of Spring

Praise for A History of the Future:
Kunstler skewers everything from kitsch to greed, prejudice, bloodshed, and brainwashing in this wily, funny, rip-roaring, and profoundly provocative page- turner, leaving no doubt that the prescriptive yet devilishly satiric A World Made by Hand series will continue.” — Booklist

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My local indie booksellers… Battenkill Books (Autographed by the Author) … or Northshire Books
or Amazon

Also: Published as an E-book for the first time!
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With an entertaining new introduction by the author

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Bargain Price $3.99

Amazon Kindle …or … Barnes & Noble Nook …or… Kobo

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The post Trending appeared first on KUNSTLER.

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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Cautionary Horizon for Gold Extends http://wallstreetexaminer.com/2016/08/cautionary-horizon-gold-extends/ http://wallstreetexaminer.com/2016/08/cautionary-horizon-gold-extends/#respond Mon, 29 Aug 2016 12:43:19 +0000 http://wallstreetexaminer.com/?p=304888 Long term indicators now give abundant reason for caution on the timing of the potential resumption of the uptrend. Here’s what to look for, and look out for. Click here to download complete report in pdf format (Professional Edition Subscribers). Try the Professional Edition Precious Metals Pro Report risk free for 90 days. Click here for…

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Long term indicators now give abundant reason for caution on the timing of the potential resumption of the uptrend. Here’s what to look for, and look out for.

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The Apotheosis Of Bubble Finance—–Folly Of The FANGs, Part 1 http://wallstreetexaminer.com/2016/08/apotheosis-bubble-finance-folly-fangs-part-1/ http://wallstreetexaminer.com/2016/08/apotheosis-bubble-finance-folly-fangs-part-1/#respond Mon, 29 Aug 2016 06:59:16 +0000 http://davidstockmanscontracorner.com/?p=117920 The inexorable effect of contemporary central banking is serial financial booms and busts. With that comes increasing levels of systemic financial instability and a growing dissipation of real economic resources in misallocations and malinvestment.

At length, the world becomes poorer.

The post The Apotheosis Of Bubble Finance—–Folly Of The FANGs, Part 1 was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here. Reposted with permission.

The inexorable effect of contemporary central banking is serial financial booms and busts. With that comes increasing levels of systemic financial instability and a growing dissipation of real economic resources in misallocations and malinvestment.

At length, the world becomes poorer.

Why? Because gains in real output and wealth depend upon efficient pricing of capital and savings, but the modus operandi of today’s central banking is to deliberately distort and relentlessly falsify financial prices.

As we have seen, the essence of ZIRP and NIRP is to drive interest rates below their natural market clearing levels so as to induce more borrowing and spending by business and consumers.

It’s also the inherent result of massive QE bond-buying where central banks finance their purchases with credits conjured from thin air. Consequently, the central banks’ Big Fat Thumb on the bond market’s supply/demand scale results in far higher bond prices (and lower yields) than real savers would accept in an honest free market.

The same is true of the hoary doctrine of “wealth effects” stimulus. After being initiated by Alan Greenspan 15 years ago, it has been embraced ever more eagerly by his successors at the Fed and elsewhere ever since.

Here, the monetary transmission channel is through the top 1% that own 40% of the financial assets and the top 10% that own upwards of 85%. To wit, stock prices are intentionally driven to artificially high levels by means of “financial easing”. The latter is a euphemism for cheap or even free finance for carry trade gamblers and implicitly subsidized hedging insurance for fast money speculators.

As the stock averages rise and their Fed-subsidized portfolios attain ever higher “marks”, the wealth effects operators supposedly feel, well, wealthier. They are thereby motivated to spend and invest more than otherwise, and to actually double-down on these paper wealth gains by using them as collateral to obtain even more cheap funding for even more speculations.

The trouble is, financial prices cannot be falsified indefinitely. At length, they become the subject of a pure confidence game and the risk of shocks and black swans that even the central banks are unable to off-set. Then the day of reckoning arrives in traumatic and violent aspect.

Exactly that kind of Lehman-scale crisis is now descending on global markets. In fact, it’s even worse. Speculative excesses that are even more fantastic than during the dotcom era mania have now infested the technology and social media stocks,.

So once again the end result of today’s massive central bank intrusion in financial markets will be yet another thundering crash of the high flyers and a resulting financial crisis of unprecedented extent.

The Folly Of The FANGs

Needless to say, there have been some spectacular rocket ships in the market’s melt-up during the last several years. But if history is any guide this is exactly the kind of action that always precedes a thundering bust.

To wit, the market has narrowed down to essentially four explosively rising stocks—–the FANG quartet of Facebook, Amazon, Netflix and Google—–which are sucking up most of the oxygen left in the casino.

At the beginning of 2015, the FANG stocks had a combined market cap of $740 billion and combined 2014 earnings of $17.5 billion. So a valuation multiple of 42X might not seem entirely outlandish for this team of race horses, but what has happened since then surely is.

At the end of August 2016, the FANG stocks were valued at $1.3 trillion, meaning they have gained $570 billion of market cap or nearly 80% during the previous 19 months. Not only has their combined PE multiple escalated further to 50X, but that’s almost entirely owing to Google’s far more sober PE at 30X.

By contrast, at the end of August 2016, Netflix was valued at 300X its meager net income of $140 million, while Amazon was valued at 190X and Facebook at 60X.

In a word, the gamblers are piling on to the last trains out of the station. And that means look out below!

An old Wall Street adage holds that market tops are a process, not an event. A peak under the hood of the S&P 500 index, in fact, reveals exactly that.

On the day after Christmas 2014, the total market cap of the S&P 500 including the FANG stocks was $18.4 trillion. By contrast, it closed at $19.0 trillion in August, reflecting a tepid 4% gain during a 19 month period when the stock averages were spurting to an all-time high.

Needless to say, if you subtract the FANGs from the S&P 500 market cap total, there had been virtually no gain in value at all; it was still $17.7 trillion.

So there you have it—-a classic blow-off market top in which 100% of the gain over the last 19 months was owing to just four companies.

Actually, there is growing deterioration down below and for good reason. Notwithstanding the FOMC’s stick save at nearly every meeting during the past two years, each near miss on a rate hike reminded even Wall Street’s most inveterate easy money crybabies that the jig is up on rates.

Sooner or later the Fed will just plain run out of excuses for ZIRP, and now, after 93 straight months on the zero bound, it clearly has.

And at the most inopportune time. As we demonstrated earlier, the world economy is visibly drifting into stall speed or worse, and corporate earnings are already in an undeniable downswing. As we have also indicated, reported EPS for the S&P 500 during the LTM ended in June 2016 came in at $87 per share or 18% below the $106 per share reported in September 2014.

So the truth is, the smart money has been lightening the load during much of the last two years, selling into the mini-rips while climbing on board the FANG momo train with trigger finger at the ready.

Chasing The Last Momo Stocks Standing—- An Old Wall Street Story

Needless to say, this narrowing process is an old story. It famously occurred in the bull market of 1972-1973 when the impending market collapse was obscured by the spectacular gains of the so-called “Nifty Fifty”. And it happened in spades in the spring of 2000 when the Four Horseman of Microsoft, Dell, Cisco and Intel obfuscated a cratering market under the banner of “this time is different”.

But it wasn’t. It was more like the same old delusion that trees grow to the sky. At its peak in late March 2000, for example, Cisco was valued at $540 billion, representing a $340 billion or 170% gain from prior year.

Since it had earned $2.6 billion of net income in the most recent 12 month period, its lofty market cap represented a valuation multiple of 210X. And Cisco was no rocket ship start-up at the point, either, having been public for a decade and posting $15 billion of revenue during the prior year.

Nevertheless, the bullish chorus at the time claimed that Cisco was the monster of the midway when it came to networking gear for the explosively growing internet, and that no one should be troubled by its absurdly high PE multiple.

The same story was told about the other three members of the group. During the previous 24 months, Microsoft’s market cap had exploded from $200 billion to $550 billion, where it traded at 62X reported earnings. In even less time, Intel’s market cap had soared from $200 billion to $440 billion, where it traded at 76X. Dell’s market cap had nearly tripled during this period, and it was trading at 70X.

Altogether, the Four Horseman had levitated the stock market by the stunning sum of $800 billion in the approximate 12 months before the 2000 peak.

That’s right. In a manner not dissimilar to the FANG quartet during the past year, the Four Horseman’s market cap had soared from $850 billion, where it was already generously valued, to $1.65 trillion or by 94% at the time of the bubble peak.

There was absolutely no reason for this market cap explosion except that in the final phases of the technology and dotcom bull market, speculators had piled onto the last momo trains leaving the station.

But it was a short and unpleasant ride. By September of 2002, the combined market cap of the Four Horseman had crashed to just $450 billion. Exactly $1.0 trillion of bottled air had come rushing out of the casino.

Needless to say, the absurdly inflated values of the Four Horseman in the spring of 2000 looked exactly like the FANG quartet today. The ridiculously bloated valuation multiples of Facebook, Amazon and Netflix speak for themselves, but even Google’s massive $550 billion market cap is a sign of the top.

Despite its overflowing creativity and competitive prowess, GOOG is not a technology company which has invented a rocket ship product with years yet to run. Nearly 90% of its $82 billion in LTM revenues came from advertising.

But the current $575 billion worldwide advertising spend is a 5% growth market in good times, and one which will slide back into negative territory when the next recession hits. Even the rapidly growing digital ad sub-sector is heading for single digit land; and that’s according to industry optimists whose projections assume that the business cycle and recessions have been outlawed.

The fact is, GOOG has more than half of this market already. Like the case of the Four Horseman at the turn of the century, there is no known math that will allow it to sustain double digit earnings growth for years into the future and therefore it 30X PE multiple.

Likewise, Amazon may well be effecting the greatest retail revolution in history, but its been around for 25 years and still has never posted more than pocket change in profits. More importantly, it is a monumental cash burn machine that one day will run-out of fuel.

During the LTM period ending in June 2016, for example, it generated just $6.3 billion of operating free cash flow on sales of $120 billion. So it was being valued at a preposterous 58X free cash flow.

So here’s the thing. The Four Horseman last time around were great companies that have continued to grow and thrive ever since the dotcom meltdown. But their peak valuations were never remotely justified by any plausible earnings growth scenario.

In this regard, Cisco is the poster child for this disconnect. During the last 15 years its revenues have grown from $15 billion to nearly $50 billion, and its net income has more than tripled to nearly $10 billion per year.

Yet it’s market cap today at $150 billion is just 25% of its dotcom bubble peak. In short, its market cap was driven to the absurd height recorded in March 2000 by the final spasm of a bull market, when the punters jumped on the last momo trains out of the station.

This time is surely no different. The FANG quartet may live on to dominate their respective spheres for years or even decades to come. But their absurdly inflated valuations will soon be deFANGed.

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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Slight Pullback in Stocks Leaves Sideways Trend Intact http://wallstreetexaminer.com/2016/08/slight-pullback-stocks-leaves-sideways-trend-intact/ http://wallstreetexaminer.com/2016/08/slight-pullback-stocks-leaves-sideways-trend-intact/#respond Sun, 28 Aug 2016 22:55:57 +0000 http://wallstreetexaminer.com/?p=304872 The numbers so far suggest only a drift, not a smash. But that could change. Here’s what to look for. Market Update Pro subscribers click here to download the complete market update, including the proprietary cycle screens report in pdf format. Get The Wall Street Examiner delivered to your inbox every day! Click to jump to…

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The numbers so far suggest only a drift, not a smash. But that could change. Here’s what to look for.

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Central Banks Are Willfully Destroying This Critical Market Function http://wallstreetexaminer.com/2016/08/central-banks-willfully-destroying-critical-market-function/ http://wallstreetexaminer.com/2016/08/central-banks-willfully-destroying-critical-market-function/#respond Sun, 28 Aug 2016 14:00:22 +0000 http://moneymorning.com/?p=236818 With central banks owning $25 trillion of financial assets and sovereign wealth funds owning countless trillions more, it is time to ask whether capitalism as we know it is a thing of the past.

The post Central Banks Are Willfully Destroying This Critical Market Function was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of Money Morning - We Make Investing Profitable. To view original, click here. Reposted with permission.

With central banks owning $25 trillion of financial assets and sovereign wealth funds owning countless trillions more, it is time to ask whether capitalism as we know it is a thing of the past.

These non-economic actors have different motivations than traditional investors who buy assets in order to earn a profit over a reasonable period of time.

Central banks are buying stocks and bonds in order to monetize government debt and keep afloat the endless Ponzi schemes required to finance massive entitlement promises to their constituents.

Sovereign wealth funds are looking for places to park their cash for extremely long periods of time and often focus on assets with trophy or strategic value.

But the most important thing these two types of buyers have in common is that they don’t have to sell, which means that their ownership can inflate the value of what they own for prolonged periods of time.

This destroys the price discovery mechanism that markets are supposed to provide. And without price discovery, markets cease to function properly.

Then the destruction starts in earnest…

Here’s Where We See This Effect in Action

Bond markets are ground zero for this phenomenon. Somewhere in the vicinity of $13 trillion dollars of global bonds carry negative interest rates, which produces the absurd and dangerous prospect of lenders paying borrowers for the dubious privilege of lending them money.

While some try to rationalize this monstrous arrangement as a sensible way to provide for the return of their money if not a return on their money, it is nothing more than government confiscation of capital.

It is a catastrophic undertaking destroying savings and eroding the capital bases of banks, insurance companies and pension funds. It speaks to a broken global financial system guided by corrupt and incompetent central bankers and politicians.

Quite a few of them were clustered together this week.

What We Heard from Jackson Hole

Last week, the Federal Reserve met in Jackson Hole, Wyoming for its annual confab and naturally investors were hanging on every word uttered by the former tenured economics professors comprising the committee to destroy the global economy.

There were strong hints from Fed Chair Janet Yellen and Vice Chair Stanley Fischer that rates will soon rise, but we have heard such promises before only to see nothing happen.

Before the meeting, an economically illiterate activist group called “Fed Up” met with the Fed and demanded that interest rate hikes be further delayed lest they harm minority communities.  But the worst thing the Fed could do for anyone is keep interest rates low; instead, it should announce that it will start raising rates by 25 basis points each quarter until the Fed Funds rate reaches 2% and then urge Congress to act on meaningful tax reform and fiscal stimulus that are the only policies that will help minorities and the rest of the economy.

And then this nation should embark on meaningful civic and economic education for all of our children to insure that they understand how economies work – which is not by increasing entitlements and reducing the cost of money to the point where it has no value.

Markets Dipped Like Clockwork After the Meeting

The market didn’t much like what it heard from Jackson Hole last week because it lives in fear of another rate hike.

The Dow Jones Industrial Average lost 157 points or nearly 1% to close at 18,395.40 while the S&P 500 declined 15 points or 0.7% to 2169.04. The Nasdaq Composite Index fell 0.4% to 5218.92.

The last time the Fed hiked rates by 25 basis points in December, the market fell sharply before recovering after the Fed backtracked and promised it wouldn’t do it again for a very long time.

This pathetic appeasement of the stock market is another sign of just how far the Fed has wandered from its role as lender of last resort.

While August has become a volatile month since the financial crisis, this August has seen the lowest market volatility in 20 years.

That’s an upsetting development.

Why Too Little Volatility Is a Bad Thing

Central banks are not only suppressing interest rates and price discovery – they are suppressing volatility, too, which is extremely dangerous.

With the CBOE Volatility Index (VIX) trading at new lows, volatility could break out to the upside and seriously hurt those economic investors who actually care about their returns (which excludes, of course, investors like the Japanese Government Pension Fund that reportedly lost $130 billion  in the past year on its financial assets).

One of the things investors should be asking themselves is why they are paying advisers to manage assets that generate zero returns. This is particularly relevant with respect to their bond investments, an area I know a great deal about.

If you are paying someone to manage investment grade, municipal or Treasury bonds, you are throwing money out the window. In addition to the fact that managing such assets requires no special skill, these assets are generating negative real (i.e. inflation-adjusted) returns – and are likely to either keep doing so or generate large losses when interest rates rise.

You would be much better off exiting such investments entirely or moving your assets into a low-cost exchange-traded funds (ETFs) or mutual funds.

Of course your manager will tell you that you are making a big mistake in doing so, but that advice is as conflicted as Hillary Clinton’s relationship with the Clinton Foundation.

You are paying for nothing and getting nothing from these managers.

But that’s not to say there’s nothing to be learned, at least, from these Wall Street types.

Carl Icahn Just Made a (Bigger) Fool of Bill Ackman

Finally, last week saw a classic beat down of activist investor Bill Ackman by the more experienced and hardened activist Carl Icahn.

After a bogus press report on Friday morning that Icahn was shopping his $1 billion block of stock in Herbalife, Ltd, (NYSE: HLF) and that Mr. Ackman, who is famously (and wrongly) short the stock was a potential buyer, Mr. Ackman quickly ran on television to crow that Mr. Icahn was selling because he knows that the company “is toast.”

Several hours later, Icahn announced that he has bought another 2.3 million shares of HLF and then delivered a long statement on social media describing Mr. Ackman as “obsessed’ with Hebalife, leading him to exercise poor judgment that has resulted in massive losses on his short position.

Ackman, never one to walk past a microphone, spent part of the week explaining his even more egregiously poor judgment in riding down Valeant Pharmaceuticals International Inc. (NYSE: VRX) stock from $265 per share to its current $30.80 per share, the biggest factor in his second consecutive year of double-digit losses and his inability to make money for his investors since 2012 despite a spectacular 38% return in 2014.

This type of “hedge fund porn” is bad for the industry but remains instructive for those of us who try to learn from the mistakes of others.

 

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The post Central Banks Are Willfully Destroying This Critical Market Function 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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Doug Noland’s Credit Bubble Bulletin: Yellen Unveiling, Jackson Hole 2016 http://wallstreetexaminer.com/2016/08/doug-nolands-credit-bubble-bulletin-yellen-unveiling-jackson-hole-2016/ http://wallstreetexaminer.com/2016/08/doug-nolands-credit-bubble-bulletin-yellen-unveiling-jackson-hole-2016/#respond Sat, 27 Aug 2016 06:12:00 +0000 http://wallstreetexaminer.com/?guid=3e2fb30c01d221ef9b9d4f14d6ee5abd The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world. They have failed the test of understanding them.

The post Doug Noland’s Credit Bubble Bulletin: Yellen Unveiling, Jackson Hole 2016 was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of Credit Bubble Bulletin. To view original, click here. Reposted with permission.

The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy. With the U.S. economy now nearing the Federal Reserve’s statutory goals of maximum employment and price stability, this conference provides a timely opportunity to consider how the lessons we learned are likely to influence the conduct of monetary policy in the future. The theme of the conference, ‘Designing Resilient Monetary Policy Frameworks for the Future,’ encompasses many aspects of monetary policy, from the nitty-gritty details of implementing policy in financial markets to broader questions about how policy affects the economy.” The introduction to Janet Yellen’s speech, “The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future,” Jackson Hole, August 26, 2016

Bloomberg: “Yellen Says Rate-Hike Case ‘Strengthened in Recent Months.’” The FT was almost identical to Bloomberg. It was hardly different at the WSJ: “Fed Chairwoman Janet Yellen Sees Stronger Case for Interest-Rate Increase.” And from CNBC: “Yellen says a rate hike is coming—but markets say not now.” And this from Zerohedge: “Best Reaction Yet: ‘Yellen Speech A Whole Lot Of Nothing.’”

I have a different take: Yellen provided more content for history books. In today’s short-term focused world, analysts and pundits remain fixated on clues to the next policy move. And while Yellen included language unbecoming of ultra-dovishness for the near-term, the Fed chair’s presentation was zany-dovish for the intermediate- and longer-term.

The Yellen Fed has begun methodically laying the analytical foundation for a Federal Reserve (and global central banks) balance sheet of unthinkable dimensions. It’s right there in her writing, as explicit as it is astounding. Before it’s too late, the Fed’s power – and their runaway policy experiment – need to be reined in. Contemporary Central bankers have been operating with blank checkbooks only because it was never contemplated that they would actually exploit their capacity to print “money” with reckless abandon. Who cannot see that these central bankers need clear rules and well-defined restraints? Their judgment is not trustworthy.

The WSJ’s Jon Hilsenrath penned an interesting pre-Jackson Hole piece, “Years of Fed Missteps Fueled Disillusion With the Economy and Washington.” “Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions. In the past decade Federal Reserve officials have been flummoxed by a housing bubble that cratered the financial system, a long stretch of slow growth they failed to foresee and inflation persistently undershooting their goal. In response they engineered unpopular financial rescues, launched start-and-stop bond buying and delayed planned interest-rate boosts. ‘There are a lot of things that we thought we knew that haven’t turned out quite as we expected,’ said Eric Rosengren, president of the Federal Reserve Bank of Boston. ‘The economy and financial markets are not as stable as we previously assumed.’”

Yellen’s above speech introduction refers to “lessons we learned.” It is, however, rather obvious that the Federal Reserve has completely failed to recognize how a flawed monetary policy framework was fundamental to a financial Bubble that collapsed into the “worst financial crisis since the Great Depression.”

This year’s Jackson Hole summit is to consider “broader questions about how policy affects the economy.” What’s conspicuously absent from Yellen’s (and others’) analytical framework is the extraordinary impact policy continues to have in the securities and derivatives markets – and over time through the markets to the overall economic structure.

Over the years I’ve detailed how the GSEs, acting as quasi-central banks, in the early nineties began backstopping market liquidity. Having ended 1993 at $1.9 TN, GSE securities (debt and MBS) in just ten years more than tripled to $6.0 TN. Revelations of serious accounting fraud at Fannie and Freddie ended their capacity for “buyer of first and last resort” liquidity support.

I argued at the time that going forward only the Fed would retain the wherewithal to engineer market liquidity backstop operations to counter a serious de-risking/de-leveraging episode, though this would require a major expansion of Fed’s holdings. The mortgage finance Bubble inflated much longer and to far greater excess than I had expected, which ensured that its bursting triggered a historic Trillion plus doubling of Fed holdings. Later, in 2011 the Fed detailed its “exit strategy”, yet proceeded to again double assets to $4.5 TN.

I have posited that the Fed’s balance sheet is likely on course to reach $10 Trillion. This rough guesstimate stems from the view that there is no alternative to the Fed’s balance sheet for future liquidity backstop operations. Moreover, the unprecedented inflation of Bubble excess (securities and asset markets, economic maladjustment) ensures that only another doubling of the Fed’s balance sheet could possibly hold financial collapse at bay.

In the simulations reported by Reifschneider, ‘Gauging the Ability of the FOMC to Respond to Future Recessions,’ in note 8, overcoming the effects of the zero lower bound during a severe recession would require about $4 trillion in asset purchases and pledging to stay low for even longer if the average future level of the federal funds rate is only 2 percent.

The above zinger is footnote #24 embedded in Yellen’s speech. The Fed chair’s inflationist reasoning culminates with her focus on Fed staffer David Reifschneider’s recent paper (cited above). The gist of the analysis is that if the Fed lacks the typical capacity to slash interest rates, policy can compensate with more aggressive asset purchases and forward rate guidance. Undoubtedly, the Fed will face minimal rate flexibility the next time it employs further monetary stimulus. So get ready. Bonds seem ready.

From Yellen: “A recent paper takes a different approach to assessing the FOMC’s ability to respond to future recessions by using simulations of the FRB/US model. This analysis begins by asking how the economy would respond to a set of highly adverse shocks if policymakers followed a fairly aggressive policy rule, hypothetically assuming that they can cut the federal funds rate without limit. It then imposes the zero lower bound and asks whether some combination of forward guidance and asset purchases would be sufficient to generate economic conditions at least as good as those that occur under the hypothetical unconstrained policy.

Figure 2 in your handout illustrates this point. It shows simulated paths for interest rates, the unemployment rate, and inflation under three different monetary policy responses–the aggressive rule in the absence of the zero lower bound constraint, the constrained aggressive rule, and the constrained aggressive rule combined with $2 trillion in asset purchases and guidance that the federal funds rate will depart from the rule by staying lower for longer…

But despite the lower bound, asset purchases and forward guidance can push long-term interest rates even lower on average than in the unconstrained case (especially when adjusted for inflation) by reducing term premiums and increasing the downward pressure on the expected average value of future short-term interest rates. Thus, the use of such tools could result in even better outcomes for unemployment and inflation on average.

Of course, this analysis could be too optimistic. For one, the FRB/US simulations may overstate the effectiveness of forward guidance and asset purchases, particularly in an environment where long-term interest rates are also likely to be unusually low. In addition, policymakers could have less ability to cut short-term interest rates in the future than the simulations assume. By some calculations, the real neutral rate is currently close to zero, and it could remain at this low level if we were to continue to see slow productivity growth and high global saving. If so, then the average level of the nominal federal funds rate down the road might turn out to be only 2 percent, implying that asset purchases and forward guidance might have to be pushed to extremes to compensate… (footnote 24)”

If a 2% Fed funds rate equates to $4.0 TN of Fed purchases, what about 1%? How about 50 bps? Using the Fed’s own framework, a $10 TN Federal Reserve balance sheet no longer seems all that “lunatic fringe.”

Of course, chair Yellen is not about to espouse the stunningly audacious without the obligatory tinge of caution: “Moreover, relying too heavily on these nontraditional tools could have unintended consequences. For example, if future policymakers responded to a severe recession by announcing their intention to keep the federal funds rate near zero for a very long time after the economy had substantially recovered and followed through on that guidance, then they might inadvertently encourage excessive risk-taking and so undermine financial stability.”

My comment: “…Future policymakers… might inadvertently encourage excessive risk-taking and so undermine financial stability.” You think?? Might it be worthwhile contemplating the past and present?

Finally, the simulation analysis certainly overstates the FOMC’s current ability to respond to a recession, given that there is little scope to cut the federal funds rate at the moment. But that does not mean that the Federal Reserve would be unable to provide appreciable accommodation should the ongoing expansion falter in the near term. In addition to taking the federal funds rate back down to nearly zero, the FOMC could resume asset purchases and announce its intention to keep the federal funds rate at this level until conditions had improved markedly–although with long-term interest rates already quite low, the net stimulus that would result might be somewhat reduced.”

If markets are willing to cooperate, the Fed may bump up rates 25 bps in September. Friday evening from the WSJ’s Heard on the Street column: “Janet Yellen Cries Wolf – Fed chairwoman tries to convince market that a rate rise is coming, but investors aren’t listening.” Could it be instead that they listened intently and came away even more persuaded? Perhaps the WSJ (and others) is missing the point: it’s not about crying wolf or a lack of credibility with respect to rate hikes. After all, a second little baby-step would be trivial in the context of rising odds of a Fed balance sheet on its way to $10 TN. Global bond markets continue to trade as if there’s a very credible threat of monstrous QE/central bank purchases to eternity. And the greater the scope of the world’s most spectacular asset Bubble, the higher the odds that central bankers will be forced into even more preposterous desperate measures – aka ever larger QE purchases of a widening variety of securities.

Somehow the Fed completely disregards the prominent role loose monetary policy has played in inflating serial financial and economic Bubbles. It gets worse. Revisionism somehow has Yellen expounding analysis that policy was “tight” heading into the 2008 crisis period. Mortgage debt doubled in less than seven years, for heaven’s sake. Unprecedented leverage, speculative excess and financial shenanigans…

From Yellen: “…The federal funds rate at the start of the past seven recessions was appreciably above the level consistent with the economy operating at potential in the longer run. In most cases, this tighter-than-normal stance of policy before the recession appears to have reflected some combination of initially higher-than-normal labor utilization and elevated inflation pressures. As a result, a large portion of the rate cuts that subsequently occurred during these recessions represented the undoing of the earlier tight stance of monetary policy.”

We’re now eight years into history’s greatest monetary stimulus. Global markets have deteriorated to Desolate Bizarro World. After a respite, some volatility has begun to creep back into the markets. It appeared to be another tough week for the leveraged speculator crowd. Some favored shorts significantly outperformed. Periphery Europe was a lovefest. Spanish equities jumped 2.5%. Italian stocks surged 3.3%, led by the banking sector’s almost 10% melt-up. European banks stocks jumped 4.9%. Financials outperformed in the U.S. as well, with the banks up 1.1% and the broker/dealers gaining 1.3%. Utilities and dividend stocks underperformed.

A negative tone is gaining momentum in Asia. Intrigue is returning to China, with policymakers gearing up for yet another shot at curbing Bubbles (bonds, real estate, shadow banking, etc.) and general financial excess. The Shanghai Composite dropped 1.2% this week. The Nikkei 225 index dropped 1.1%, with Japanese banks losing 1.7%. Stocks were down 1.0% in India and 1.3% in Turkey. Generally, instability reemerged in EM and commodities. The South African rand was slammed for 6.3%. The Brazilian real and Mexican peso dropped about 2%, while a list of EM currencies declined around 1% (Russia, Turkey, Singapore, Colombia, Chile). Brazil’s equities were slammed 2.5% and Mexico’s stocks dropped 1.9%. In commodities, copper sank 4.3% and silver fell 3.5%. The soft commodities were under heavy selling pressure as well.

The U.S. dollar index rallied 1% this week. It was as if Fed officials were determined to don hawkish-like garb hoping to draw attention away from Yellen’s QE Eternity Unveiling. I’ve expected currency market stability to be a leading (observable) casualty of heightened global monetary disorder. Over recent months a short squeeze in EM currencies morphed into a dysfunctional trend-following and performance-chasing fracas. This type of dynamic tends to reverse abruptly and, often, dramatically.

Meanwhile, developed currencies oscillate sporadically, as perceptions swing between perpetual king dollar and the prospect of permanent Fed-induced dollar devaluation. A similar dynamic is behind the return of wild commodities trading. Natural gas surged 11% this week. Everyone’s favorite currency short, the British pound, was the only major currency this week to appreciate versus the dollar. Going forward, it will be interesting to see how Bubble markets attempt to reconcile a short-term Fed rate increase versus the Federal Reserve committing itself to boundless QE.

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 Doug Noland’s Credit Bubble Bulletin: Yellen Unveiling, Jackson Hole 2016 was originally published at The Wall Street Examiner. Follow the money!

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The Global Real Estate Bubble Is OFFICIALY Bursting http://wallstreetexaminer.com/2016/08/global-real-estate-bubble-officialy-bursting/ http://wallstreetexaminer.com/2016/08/global-real-estate-bubble-officialy-bursting/#respond Fri, 26 Aug 2016 20:00:13 +0000 http://economyandmarkets.com/?p=40539 It’s official. The global real estate bubble is bursting.

The post The Global Real Estate Bubble Is OFFICIALY Bursting was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of Economy and Markets. To view original, click here. Reposted with permission.

Harry_headshot-150x150It’s official.

The global real estate bubble is bursting.

After imposing a hefty 26% tax on foreign buyers, and a 12% to 16% surcharge for buyers who flipped their house between one and two years, Singapore real estate has declined 21.5%.

Vancouver has taken similar measures, and – surprise, surprise – its real estate is down 24% in just five months!

That’s what I mean when I say that when bubbles burst, they do so dramatically and rapidly.

But this is likely just the beginning…

I put Singapore into razor-sharp focus in February of last year when I noted it had some of the most expensive real estate in the world. It has the highest standard of living of any country in Asia – even higher than in the U.S.!

The problem is that the country is 100% urban and has limited land – making it incredibly susceptible to the kind of bubble that’s formed there.

And boy, has one ever.

Prior to this recent crash, real estate prices there had risen 68% since early 2009 following the global financial crisis…

And 110% since the 1999 low after the financial crisis across Southeast Asia.

Now, they’re down 21.5%:

1

Clearly, it was a bubble waiting to burst!

Eventually, there was public backlash against foreign buyers who were bidding up prices. After a certain point, the everyday, $60,000-a-year household couldn’t afford to live in its own city!

And now that the government has slapped a bunch of fines on those buyers, those foreigners aren’t buying like they used to – and Singapore’s prices are crashing down to earth!

Just like I said they would a year and a half ago.

I also covered Vancouver about a year ago prior to heading there for our third annual Irrational Economic Summit. (We’re hosting our fourth in less than two months in West Palm Beach, FL. (Click here for details.)

As I said at the time, Vancouver is my favorite city in North America… and is also one of the single bubbliest cities on the planet.

Like Singapore, its residents were getting fed up with foreign buyers – mostly Chinese in their case – jacking up prices across the city.

From the beginning of 2002 to when I reported last year, home prices had gone up 290%!

A bubble, plain and simple.

I warned they would likely start punishing foreign investors as well – and they did. The city slapped a 15% tax on them. And given that Vancouver was a prime location for Chinese investors laundering their money out of China, the city got hit hard – again, down 24% in just five months.

2

What did I say? Bubbles. Always. Burst. There are no exceptions in history.

In greater Vancouver, sales have fallen from 597 in the first half of August last year to a mere fraction of that – 87 over the same timeframe. That’s an 85% crash, for crying out loud!

It gets worse. The most high-end part of the city, West Vancouver, dropped from 67 to seven – 90%.

And Vancouver West, the area across the bay with mostly upscale suburbs, which the Chinese love the most, is down from 52 to three, or a whopping 94%. The Richmond area got hit the hardest, falling from 84 to three, or 96%.

For now, buyers in Vancouver are staying put until they see how this shakes out.

But is this a crash in the making or what?

3

The question now is… who’s next?

My bet’s on London. I could see the highest-end falling off more rapidly after Brexit. Then San Francisco. And finally – the coup d’etat – Shanghai and China.

Let me make myself clear. This is the beginning of the greatest and most global real estate bust in all of modern history.

So I’ll ask again…

How much do you love your real estate?

 

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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Burying Our Future at Jackson Hole http://wallstreetexaminer.com/2016/08/burying-future-jackson-hole/ http://wallstreetexaminer.com/2016/08/burying-future-jackson-hole/#respond Fri, 26 Aug 2016 18:46:33 +0000 http://moneymorning.com/?p=236700 Fed Chair Janet Yellen spoke in Jackson Hole, Wyoming. Shah Gilani guessed what she might say. Here's why that's important.

The post Burying Our Future at Jackson Hole 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.

This exercise, “guessing” what Yellen is going to say, before she speaks, is important.

Trending: How to Thrive into Retirement… Despite the Fed

It’s important because if I’m right, you’ll know I wasn’t guessing, and you’ll know exactly how the actors in Jackson Hole are burying us alive.

And you’ll know what’s going to happen with financial markets.

Here’s what she’s going to say…

You Can’t Fight the Fed’s Future

Jackson Hole

The title of the meeting this year in Jackson Hole, which is usually attended by theFederal Reserve chair, the world’s central bankers, and economists, is “Designing Resilient Monetary Policy Frameworks for the Future.”

The title of Janet Yellen’s speech, according to the symposium’s agenda, is “The Federal Reserve’s Monetary Policy Toolkit.”

So, first of all, I’ll tell you the symposium is about covering central bankers’ failed tracks and offering up a witch’s brew of monetary concoctions that, if necessary, will be implemented in the future, just so the world knows these gods of monetary manipulation have our backs and will make everything alright, no matter what fears we have.

Excuse me while I laugh my head off.

Yellen’s speech, and she’s wearing the tallest, most pointed black hat at the barn-raising event, will be about how the Fed hasn’t failed, how unemployment is better because of the Fed’s policies, how the United States is leading the world out of global recession, and how, no matter how it looks, there are other tools the Fed can drill and thrill us with, just in case we’re worried that what’s not really been working stops working or implodes us.

All this is necessary because the Fed’s credibility is in a ditch somewhere in Detroit.

On Aug. 25, The Wall Street Journal‘s Jon Hilsenrath penned a fantastic piece titled “The Great Unraveling: Years of Fed Missteps Fueled Disillusion with Economy and Washington.” The subtitle was: “Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions.”

Hilsenrath cites how steeply confidence in the Fed has fallen, saying,

An April Gallup poll found 38% of Americans had a great deal or fair amount of confidence in Ms. Yellen, while 35% had little or none. In the early 2000s, confidence in Chairman Alan Greenspan often exceeded 70%.

Back when the cryptic Alan Greenspan spoke in tongues when he spoke at all, most Americans, and a good part of the world, thought he was some kind of monetary god. The economy was humming along and his mostly low-interest-rate policies seemed to be doing the trick. Of course, in hindsight, we know the original modern central bank cranks set us up for the financial crisis and Great Recession.

So much for black magic.

Don’t Miss: How Near-Zero Interest Rates Are Killing the Economy

One reason the Fed gets it so wrong, so often, is their economic “models” are like trash trucks – garbage in, garbage out. They’re consistently wrong in their predictions and prognostications. Still, people believe they have some black box that predicts economic futures. They don’t, and they’ve proved that for decades.

According to Hilsenrath’s article (which is impossible to argue with), the Fed:

…missed signs that a more complex financial system had become vulnerable to financial bubbles, and bubbles had become a growing threat in a low-interest-rate world; were blinded to a long-running slowdown in the growth of worker productivity, or output per hour of labor, which has limited how fast the economy could grow since 2004; and had no idea inflation wouldn’t respond “to the ups and downs of the job market in the way the Fed expected.

What’s Actually Being Said in Jackson Hole

So with all that in mind, and knowing the symposium is about “Monetary Policy Frameworks for the Future,” and that Chair Yellen is going to talk up her toolkit, here’s what she’s going to say:

  1. What the Fed’s done has worked, look at unemployment at 4.9%
  2. Look at the U.S. economy; it’s not good, but the Fed expects it to get better
  3. Global markets still need help, but other central banks are doing God’s work
  4. If there’s any slippage in the United States, the Fed’s got the fixes
  5. They can always do more quantitative easing (QE) since they have an unlimited balance sheet
  6. They can buy other assets
  7. They can take rates negative if they absolutely have to
  8. They have other tricks in their bag that they don’t want to trot out unless they’re needed

Here’s what she really means, and what she’s not saying:

  1. The only thing the Fed has to point to is lower unemployment, and if you’ll notice, financial assets are enjoying bubblicious highs, but let’s not talk about the bubble-making aspect of that.
  2. The economy is crawling along at a 1.2% growth rate and that has to change because our models, which show inventories are depleted and will get restocked, say better growth’s coming. Only, it may not happen, on account of the fact that our models are almost always wrong.
  3. Global markets are in a death spiral and central banks are doing everything they can to save the world. Negative rates aren’t helping, and God help us all if any of these big economies slip back into recession or some black swan sinks some big financial market somewhere.
  4. The Fed’s done all this before; it knows where its tools are and how to use them. More is always better if something’s not working.
  5. The Fed’s done a couple rounds of QE, so it’s ready and willing to go the full 15 rounds if it has to. QE has never been an effective trickle-down policy, but it helps the banks stay profitable.
  6. The Fed’s willing to buy more assets like more mortgage-backed securities and other government-backed assets, not just Treasuries. Hell, we’ll buy corporate bonds and stocks if we have to, because you know we can.
  7. Negative rates are on the table. If the Fed goes negative, they’ve lost all control.
  8. There’s nothing the Fed can be stopped from doing. If it comes down to black magic, they’ll try it because it’s about saving the Fed and its constituent big bank shareholders more than the economy.

Sure, the markets are flat, waiting with baited breath to whatever the witchy woman says.

There’ll be some reaction.

If Yellen is perceived to be dovish, meaning she’s leaning towards more easing, more stimulus, if necessary, markets will rally for a while. Maybe a few hours, days, or weeks.

If Yellen is hawkish, meaning she indicates things are so rosy a rate hike isn’t off the table (she won’t give a timeframe), markets will drop. Maybe a lot.

In the end, Janet Yellen’s job now is to not spook markets. It’s not about the economy, stupid. It’s about the markets holding up long enough for the economy to prove they’re not in bubble territory and that their lofty levels are justified.

Folks, there isn’t enough time on any economic clock for that to happen.

Janet Yellen and the Fed, like all the world’s central banks, believe they’re gods and can corral the free market and manipulate the world spinning on its axis to their beat.

Words will never be enough to control markets when they decide they’ve heard enough.

That’s what we have to look forward to, no matter what Janet Yellen says today.

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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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Red Ponzi Ticking—-China And The Dark Side Of The Global Bubble, Part 3 http://wallstreetexaminer.com/2016/08/red-ponzi-ticking-china-dark-side-global-bubble-part-3/ http://wallstreetexaminer.com/2016/08/red-ponzi-ticking-china-dark-side-global-bubble-part-3/#respond Fri, 26 Aug 2016 17:54:23 +0000 http://davidstockmanscontracorner.com/?p=117819 No wonder the Red Ponzi consumed more cement during three years (2011-2013) than did the US during the entire twentieth century.

The post Red Ponzi Ticking—-China And The Dark Side Of The Global Bubble, Part 3 was originally published at The Wall Street Examiner. Follow the money!

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This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here. Reposted with permission.

No wonder the Red Ponzi consumed more cement during three years (2011-2013) than did the US during the entire twentieth century. Enabled by an endless flow of credit from its state controlled banking apparatus and its shadow banking affiliates, China went berserk building factories, warehouses, ports, office towers, malls, apartments, roads, airports, train stations, high speed railways, stadiums, monumental public buildings and much more.

If you want an analogy, the 6.6 gigatons of cement consumed by China during 2011-2013 was the equivalent of 14.5 trillion pounds. By comparison, the Hoover dam used about 1.8 billion pounds of cement.

So in 3 years China consumed enough cement to build the Hoover dam 8,000 times over—-160 of them for every state in the union!

ChineseCementDemand2011-2013

Having spent recent time in China,  we can well and truly say that the Middle Kingdom is back. But its leitmotif is the very opposite to the splendor of the Forbidden City.

The Middle Kingdom has been reborn in towers of preformed concrete. They rise in their tens of thousands in every direction on the horizon. They are connected with ribbons of highways which are scalloped and molded to wind through the endless forest of concrete verticals. Some of them are occupied. Alot, not.

The “before” and “after” contrast of Shanghai’s famous Pudong waterfront is illustrative of the illusion.

The top picture below is from about 1990 at a time before Mr. Deng discovered the printing press in the basement of the People’s Bank of China and proclaimed that it is glorious to be rich; and that if you were 18 and still in full possession of your digital dexterity and visual acuity it was even more glorious to work 12 hours per day 6 days per week in an export factory for 35 cents per hour.

Whether or not this image is precisely accurate as to vintage, by all accounts the glitzy skyscrapers of today’s Pudong waterfront did ascend during the last 25 years from a rundown, dimly lit area of muddy streets on the east side of Huangpu River. The pictured area was apparently shunned by all except the most destitute of Mao’s proletariat.

But the second picture we can vouch for. It’s exactly what you see from the Peninsula Hotel on the Bund, which lies directly across on the west side of the Huangpu River.

Today’s Pudong district does look spectacular—–presumably a 21st century rendition of the glory of the Qing, the Ming, the Soong, the Tang and the Han—all rolled into one.

But to conclude that would be to be deceived. The apparent prosperity is not that of a sustainable economic miracle; it’s the front street of the greatest Potemkin village in world history.

The heart of the matter is that output measured by Keynesian GDP accounting—-especially China’s blatantly massaged variety— isn’t sustainable wealth if it is not rooted in real savings, efficient capital allocation and future productivity growth. Nor does construction and investment which does not earn back its cost of capital over time contribute to the accumulation of real wealth.

Needless to say, China’s construction and “investment” binge manifestly does not meet these criteria in the slightest. It was funded with credit manufactured by state controlled banks and their shadow affiliates, not real savings.

It was driven by state initiated growth plans and GDP targets. These were cascaded from the top down to the province, county and local government levels—–an economic process which is the opposite of entrepreneurial at-risk assessments of future market based demand and profits.

China’s own GDP statistics are the smoking gun. During the last 15 years fixed asset investment—–in private business, state companies, households and the “public sector” combined—–has averaged 50% of GDP. That’s per se crazy.

Even in the heyday of its 1960s and 1970s boom, Japan’s fixed asset investment never reached more than 30% of GDP. Moreover, even that was not sustained year in and year out (they had three recessions), and Japan had at least a semblance of market pricing and capital allocation—unlike China’s virtual command and control economy.

A Credit Driven Madhouse

The reason that Wall Street analysts and fellow-traveling Keynesian economists miss the latter point entirely is because China’s state-driven economy works through credit allocation rather than by tonnage toting commissars.

The gosplan is implemented by the banking system and, increasingly, through China’s mushrooming and metastasizing shadow banking sector. The latter amounts to trillions of credit potted in entities which have sprung up to evade the belated growth controls that the regulators have imposed on the formal banking system.

For example, Beijing tried to cool down the residential real estate boom by requiring 30% down payments on first mortgages and by virtually eliminating mortgage finance on second homes and investment properties. So between 2013 and the present more than 2,500 on-line peer-to-peer lending outfits (P2P) materialized—-mostly funded or sponsored by the banking system—– and these entities have advanced more than $2 trillion of new credit.

That’s right. A new $2 trillion credit channel erected virtually overnight.

The overwhelming share went into meeting “downpayments” and other real estate speculations. On the one hand, that reignited the real estate bubble——especially in the Tier I cities were prices have risen by 20% to 60% during the last year.

At the same time, this P2P credit eruption in the shadow banking system has encouraged the construction of even more excess housing stock in an economy that already has upwards of 65 million empty units.

In short, China has become a credit-driven economic madhouse. The 50% of GDP attributable to fixed asset investment actually constitutes the most spectacular spree of malinvestment and waste in recorded history. It is the footprint of a future depression, not evidence of sustainable growth and prosperity.

Consider a boundary case analogy. With enough fiat credit during the last three years, the US could have duplicated China’s cement consumption spree and built 160 Hoover dams on dry land in each and every state.

That would have elicited one hellacious boom in the jobs market, gravel pits, cement truck assembly plants, pipe and tube mills, architectural and engineering offices and so on. The profits and wages from that dam building boom, in turn, would have generated a secondary cascade of even more phony “growth”.

But at some point, the credit expansion would stop. The demand for construction materials, labor, machinery and support services would dry-up; the negative multiplier on incomes, spending and investment would kick-in; and the depression phase of a crack-up boom would exact its drastic revenge.

In fact, that’s exactly the kind of crack-up boom that has been underway in China for the last two decades. Accordingly, it is not simply a little over-done, and it’s not in some Keynesian transition from exports and investment to domestic services and consumption. Instead, China’s fantastically over-built industry and public infrastructure embodies monumental economic waste equivalent to the construction of pyramids with shovels and spoons and giant dams on dry land.

Accordingly, when the credit pyramid finally collapses or simply stops growing, the pace of construction will decline dramatically. In turn, as we suggested above, the collapse of its construction boom will leave the Red Ponzi riddled with economic air pockets and negative spending multipliers.

The Mother Of All Malinvestments

Take the simple case of the abandoned cement mixer plant pictured below. The high wages paid in that abandoned plant are now gone; the owners have undoubtedly fled and their high living extravagance is no more. Nor is this factory’s demand still extant for steel sheets and plates, freight services, electric power, waste hauling, equipment replacement parts and on down the food chain.

And, no, a wise autocracy in Beijing will not be able to off-set the giant deflationary forces now assailing the construction and industrial heartland of China’s hothouse economy with massive amounts of new credit to jump start green industries and neighborhood recreation facilities. That’s because China has already shot is its credit wad, meaning that every new surge in its banking system will trigger even more capital outflow and expectations of FX depreciation.

Moreover, any increase in fiscal spending not funded by credit expansion will only rearrange the deck chairs on the titanic.

Indeed, whatever borrowing headroom Beijing has left will be needed to fund the bailouts of its banking and credit system. Without massive outlays for the purpose of propping-up and stabilizing China’s vast credit Ponzi, there will be economic and social chaos as the tide of defaults and abandonments swells.

Empty factories like the above—–and China is crawling with them—–are a screaming marker of an economic doomsday machine. They bespeak an inherently unsustainable and unstable simulacrum of capitalism where the purpose of credit has been to fund state mandated GDP quota’s, not finance efficient investments with calculable risks and returns.

The relentless growth of China’s aluminum production is just one more example. When China’s construction and investment binge finally stops, there will be a huge decline in industry wages, profits and supply chain activity.

But the mother of all malinvestments sprang up in China’s steel industry, as we outlined above.

And that’s where the pyramid building nature of China’s insane fixed investment spree comes in. China’s humungous iron and steel industry is not remotely capable of “rationalization” as practiced historically in the DM economies. Even Beijing’s much ballyhooed 100-150 million ton plant closure target is a drop in the bucket—-and it’s not scheduled to be completed until 2020 anyway.

To wit, China will be lucky to have 400 million tons of true sell-through demand—-that is, on-going domestic demand for sheet steel to go into cars and appliances and for rebar and structural steel to be used in replacement construction once the current one-time building binge finally expires.

For instance, China’s construction and shipbuilding industries consumed about 500 million tons per year at the crest of the building boom. But shipyards are already going radio silent and the end of China’s manic eruption of concrete, rebar and I-beams is not far behind. Use of steel for these purposes could easily drop to 200 million tons on a steady state basis.

Bu contrast, China’s vaunted auto industry uses only 45 million tons of steel per year, and consumer appliances consume less than 12 million tons. In most developed economies autos and white goods demand accounts for about 20% of total steel use.

Likewise, much of the current 200 million tons of steel which goes into machinery and equipment including massive production of mining and construction machines, rails cars and the like is of a one-time nature and could easily drop to 100 million tons on a steady state replacement basis.

So it’s difficult to see how China will ever have recurring demand for even 400 million tons annually, yet as we indicated above that’s less than one-third of its massive capacity investment.

In short, we are talking about wholesale abandonment of a half billion tons of steel capacity or more. That is, the destruction of steel industry capacity greater than that of Japan, the EC and the US combined.

Needless to say, that thunderous liquidation will generate a massive loss of labor income and profits and devastating contraction of the Chinese steel industry’s massive and lengthy supply chain. And that’s to say nothing of the labor market disorder and social dislocations which will occur when China is hit by the equivalent of dozens of burned-out Youngstown’s and Pittsburg’s.

And it is also evident that it will not be in a position to dump its massive surplus on the rest of the world. Already trade barriers against last year’s 110 million tons of exports are being thrown up in Europe, North America, Japan and nearly everywhere else.

This not only means that China has upwards of a half-billion tons of excess capacity that will crush prices and profits, but, more importantly,that the one-time steel demand for steel industry CapEx is over and done. And that means shipyards and mining equipment, too.

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 Red Ponzi Ticking—-China And The Dark Side Of The Global Bubble, Part 3 was originally published at The Wall Street Examiner. Follow the money!

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