An Increase in Phantom Wealth …
The Dow was down a little on Monday. But it was still above the 17,000 level. Gold was up a little. It’s still above the $1,200-an-ounce mark. We have been very wrong about US stocks. We did not expect them to go this high or stay this high for this long. So our opinion on what will happen next in the stock market is of doubtful value (at least to us).
(Photo via uschamberfoundation.org)
Still, our guess is that the stock market is now broadly rolling over in a vast topping-out exercise. Looking back, it seems obvious (as it always does) that QE did little to help the real economy. But it did wonders for stocks and real estate. Our friend and former World Bank economist Richard Duncan explains how it worked:
“Between 2009 and 2013, the government borrowed approximately $5.8 trillion to finance its budget deficits. During that time, the Fed acquired $1.9 trillion worth of government bonds. [...]
The Fed also bought $1.7 trillion worth of agency debt or, in other words, the mortgage-related debt issued and guaranteed by Fannie and Freddie. That pushed up the price of those bonds and drove down their yields.
Higher property prices helped reflate the economy by pushing up household sector net worth. If the Fed had not bought $1.7 trillion worth of mortgage-related debt, the yield on that debt would have remained high (or moved higher), the owners of that debt would have been stuck with impaired assets, and the property market would have weakened further instead of rebounding.
Between the rebound in property prices and the sharp rise in stock prices, household sector net worth increased by $25 trillion (or by 45%) from the low it reached in 2009. It is now 17% above its pre-crisis peak.
This increase in wealth was the result of QE. What else could possibly explain it? That surge in net worth clearly created a wealth effect that allowed much more consumption, and therefore economic growth, than would have been possible otherwise.
It was not a coincidence that net worth rose by $25 trillion at the same time that the central bank was creating unprecedented amounts of fiat money and using it to acquire financial assets. It is certain that QE reflated the US economy by pushing up asset prices.”
The Good and the Bad
Bloomberg, which is a major purveyor not only of useful economic and financial data, but also a major proponent of economic central planning as practiced by modern central banks, informs us that Fed chair Janet Yellen has actually found the holy grail. Finally, central planning will work! At last, the promise of the “scientific monetary policy” is about to be fulfilled. Nirvana has practically arrived.
In a once again slightly confusing Bloomberg headline we are told: “Yellen Takes the Good Greenspan, Leaves the Bad”. If that’s so, obviously nothing can go wrong. It does make us wonder though what she’ll do about the ugly Greenspan.
In a way, this is an almost prophetic poster, with its references to risk taking and someone “doing the cutting”…
So what is the promising secret sauce discovered by Ms. Yellen? After a string of abysmal failures over the past century, how is central economic planning by the Fed finally going to lead us to salvation? As the headline already indicates, tweaking Alan Greenspan’s playbook is believed to do the trick:
“Janet Yellen looks to be taking one page out of Alan Greenspan’s playbook while tearing up another as she plots monetary strategy for 2015 and beyond.
The Federal Reserve chair and her colleagues signaled this month they would be willing to push unemployment below its so-called natural rate — a feat Greenspan as chairman managed in the late 1990s without fanning much inflation. Yellen showed less desire to pursue her predecessor’s “measured” approach to raising interest rates in the mid-2000s, suggesting his strategy may have fostered complacency that made a small contribution to the financial crisis.
The late 1990s “was a very good period for the U.S. economy, and Greenspan made the correct call on monetary policy,” said Michael Gapen, a former Fed official who is now senior U.S. economist for Barclays Capital Inc. in New York. On the other hand, “there is a general consensus the way they did policy wasn’t right” in the run-up to the housing bust that preceded the 2007-2009 recession.”
H.W. Sinn Chides Ms. Merkel
A friend pointed a recent editorial by German economist Hans-Werner Sinn in the FT out to us, in which Mr. Sinn – one of the staunchest opponents of stealth bailouts via central bank policy in Europe – takes Germany’s chancellor Angela Merkel to task for not doing anything to stop the latest schemes instituted by the ECB.
Specifically, Sinn points to the many ways in which the ECB has already skirted its statutory limitations, and how this trend continues and is actually getting worse with the most recent monetary policy announcements. An excerpt:
“Despite the Bundesbank’s protests, the European Central Bank is giving Europe’s banks a leg-up. To make them fit enough for the proposed banking union, the ECB proposes to relieve them of some of the potentially toxic loans they have extended to the private sector, which will be bundled into asset-backed securities and taken on to the central bank’s balance sheet. The ECB’s preference is to purchase the better tranches of these securities and leave the junk for the European Investment Bank. But since politicians are not playing along, the ECB will have to hold its nose – and complete its conversion into a bailout agency.
The ECB began as a central bank that carried out monetary policy, providing liquidity for domestic uses. But when the financial crisis hit in 2008, banks in Ireland and southern Europe faced a dearth of foreign loans, on which they had come to depend. The ECB allowed national central banks in these countries to end the drought by lending even more money against ever-weaker collateral. This exercise in money creation went beyond what was needed to ensure domestic liquidity; €1tn in central bank credit was created out of thin air to settle foreign bills. The citizens of the six countries that were indulged in this way used the money to pay off their foreign debts and to purchase foreign goods.
The ECB went on to instruct national central banks to grant crisis-afflicted states credit totaling €223bn under the so-called Securities Markets Program. Mario Draghi, the ECB president, moreover offered unlimited protection for their government bonds, formalizing his vow to do “whatever it takes” to save the euro under the rubric of “outright monetary transactions”. This lowered the interest rates at which overstretched euro zone members could obtain credit and reversed the losses of their foreign creditors, triggering another borrowing binge.”
Sinn then goes on to explain that what is being considered now, is going well beyond even these past interventions. He then chides Ms. Merkel for failing to look after the interests of German citizens as instructed by the rulings of Germany’s constitutional court over recent years, which tended to be of the “yes, but” kind: they allowed all sorts of bailout schemes to go forward, but with certain strings attached.
Contrary to Sinn’s interpretation of these rulings, we do not believe that they constrained the ECB much – rather, by making parliamentary consultations and votes on bailout proposals such as the ESM rescue fund a sine qua non, they increased the propensity of Germany’s government to leave the heavy bailout lifting to the formally independent ECB, as no parliament exercises control over it. In fact, Sinn himself suspects as much when he says:
When Things Grow Old …
The Dow rose on Friday, after falling by more than 200 points the day before. This left us with little idea about where the stock market was going. Was it still going up? Or down? Mr. Market couldn’t seem to make up his mind.
And now we’re beginning a new week. The leaves are turning. October begins the day after tomorrow. The sun sinks lower and lower in the noonday sky. And day after day, all the Earth ages… drooping unto death.
The dollar is going up. For now. But the long-term trend for both the greenback and the empire it supports is probably down. The share of world GDP produced by the US is in decline. The share of world trade that goes to or from the US is also in decline.
America’s share of the world population is falling, too – though not as fast as Europe’s or Japan’s. The US is aging… with old people… old industries… old technologies… old government… old institutions.
The Interstate Highway System was built over 50 years ago. The train system is even older. And Social Security got its start nearly 80 years ago. Not that we have anything against old people or old things – we’re fast becoming old ourselves. But old things don’t grow; they shrink.
The Bonner Family château in France
Greek Government Worried About Its Survival
Antonis Samaras has a problem: just as the relatively tough austerity medicine Greece was forced to take seems to be beginning to bear some fruit (Greece is the one euro area country where nominal government spending has indeed declined significantly), his shaky coalition government may soon be stumbling over the country’s upcoming presidential election. The problem in a nutshell is that if Samaras fails to get his presidential candidate elected, new parliamentary elections would be triggered – and according to current polls, the coalition would lose against SYRIZA.
SYRIZA as readers may recall, once was a smallish coalition of tiny left-wing parties to the left of the social democrats that didn’t really have a lot of electoral support. After the financial crisis and the bankruptcy of the Greek government, it quickly became the country’s largest party. SYRIZA is anti-bailout, whereby we are not quite sure what this stance actually entails. Presumably, a SYRIZA victory would mean a Greek exit from the euro, as Greece’s creditors would have to accept the country’s bankruptcy, and its banking system would lose the ECB’s support (since it would be instantly bankrupt, and hence no longer eligible to receive ECB funding). Moreover, tearing up the agreements with the “troika” would definitely lead to Greece being made into a pariah, so as to discourage others from following suit.
Evil Companies Making Life Harder for the Snoops …
Apple and Google both recently announced that they would implement new measures designed to ensure the privacy of users of their hardware. This is a long overdue reaction to what has been revealed about blanket spying by the government on the citizenry and the legal sophistry the government has employed (successfully so far) to ward off constitutional challenges to its all-encompassing snooping.
In order to avoid having to comply with secret surveillance orders, first Apple, and a bit later Google as well, decided to simply make it impossible for themselves to crack the encryption of the hardware they sell to their customers. As a result, they will no longer be able to obey government orders to provide access to their phones. It would be akin to government ordering them to make it rain, or to make the sun come up an hour earlier. Sorry, boys, can’t be done.
It was probably inevitable that the government’s law and order minions would complain about this. However, they wisely didn’t wheel out James Clapper (one of the few people in the world able to commit perjury in a Congress hearing without having to fear even the slightest negative consequences. We leave you to guess why this is so), but rather FBI chief James Comey. The Washington Post reports:
“FBI Director James B. Comey sharply criticized Apple and Google on Thursday for developing forms of smartphone encryption so secure that law enforcement officials cannot easily gain access to information stored on the devices — even when they have valid search warrants.
His comments were the most forceful yet from a top government official but echo a chorus of denunciation from law enforcement officials nationwide. Police have said that the ability to search photos, messages and Web histories on smartphones is essential to solving a range of serious crimes, including murder, child pornography and attempted terrorist attacks.
“There will come a day when it will matter a great deal to the lives of people . . . that we will be able to gain access” to such devices, Comey told reporters in a briefing. “I want to have that conversation [with companies responsible] before that day comes.”
Comey added that FBI officials already have made initial contact with the two companies, which announced their new smart phone encryption initiatives last week. He said he could not understand why companies would “market something expressly to allow people to place themselves beyond the law.”
Not all of the high-tech tools favored by police are in peril. They can still seek records of calls or texts from cellular carriers, eavesdrop on conversations and, based on the cell towers used, determine the general locations of suspects. Police can seek data backed up on remote cloud services, which increasingly keep copies of the data collected by smartphones. And the most sophisticated law enforcement agencies can deliver malicious software to phones capable of making them spy on users.
Yet the devices themselves are gradually moving beyond the reach of police in a range of circumstances, prompting ire from investigators. Frustration is running particularly high at Apple, which made the first announcement about new encryption and is moving much more swiftly than Google to get it into the hands of consumers.
“Apple will become the phone of choice for the pedophile,” said John J. Escalante, chief of detectives for Chicago’s police department. “The average pedophile at this point is probably thinking, I’ve got to get an Apple phone.”
The rising use of encryption is already taking a toll on the ability of law enforcement officials to collect evidence from smartphones. Apple in particular has been introducing tough new security measures for more than two years that have made it difficult for police armed with cracking software to break in. The new encryption is significantly tougher, experts say.
“There are some things you can do. There are some things the NSA can do. For the average mortal, I’d say they’re probably out of luck,” said Jonathan Zdziarski, a forensics researcher based in New Hampshire.
A Flawed Model
The home building model is flawed. Endless urban sprawl with little rectangular lots is simply not meeting the demands of the changes in demographics, job locations and life styles of a different generation of users.
Among the public builders, Toll Borthers (TOL) imo stands out as the worst of the lot.
- TOL’s so-called luxury homes are likely the wrong product for the future. There are too many of those on the market already and as baby boomers scale down, there will be even more.
- Just as TOL is forced to downgrade its products, all the other builders are trying to upgrade, so they can raise their ASPs (average sales price). Needless to say, a higher ASP on the same piece of land can result in higher margins.
- TOL has 7 years worth of land, plus a couple of years optioned. In other words, they are stuck with a huge inventory.
- For some reason, the market is willing to lend TOL money at a cheaper rate than the other builders. Their cost of funds is in the mid 5% range while Hovnanian’s (HOV) and Beazer Homes’ (BZH) is up around 8%.
- TOL is trading at a 22.7 trailing PE and a 14.7 forward P/E for FY ending October 2015. The forward PE is highly optimistic, depending strongly on growth that may not materialize.
- The merchant builders buy the land they need. Though they may not make as much money during the down cycles, they do not carry as much risk. Lennar (LEN) is probably the most creative of the public builders. For example, they are building apartments to meet market demand. TOL is committed to its business model with little flexibility.
In summary, it is unfortunate that the builders did not follow the same path as the S&P over the past 12 months. It is however, still an overvalued group that is well worth paying attention to.
$60 Million for a Blow-Up Dog?
Shatura Power Station. Russia has the largest peak power capacity in the world
(Photo via moskva-stroyka.ru)
Talk about ringing a bell!
This ring-a-ding-ding comes from the New York Observer:
“Sales of contemporary art at public auctions surpassed $2 billion for the first time last year, the Paris-based arts-data organization Artprice said.
The report tallied auction sales between July 2013 and July 2014, and it found that contemporary art sales grew 40% from the previous year. The number of big-ticket items that sold for over 10 million euro ($12.8 million) more than doubled in the period.
Those who follow the art market will remember the record-breaking Christie’s auction in November that saw buyers walk away with the most expensive publicly auctioned piece of art ever, Francis Bacon’s $142.4 million Three Studies of Lucian Freud (1969). That auction also minted Jeff Koons’ $58.4 million Balloon Dog (Orange) (1994-2000) as the most expensive piece by a living artist ever sold at auction.”
A Comprehensive Interview with the ECB Dissenter
Jens Weidmann, president of the German Bundesbank, is well-known for his disdain of the ECB’s unconventional policy measures. He continues to believe that the way forward does not require ever looser monetary policy, but economic reform. On these points we tend to agree with him; however, just as other central bankers, he of course supports the nonsensical ECB “price stability target”.
Needless to say, if the money issued by the central bank were to lose 2% of its purchasing power every year as planned, we would say that this would not represent price stability by any stretch of the imagination. However, we are actually not really critical of the precise “target” of the policy, but of the entire concept as such. It is a dangerous concept even if it were to target 0% price inflation. It has produced untold mischief over the past century, mainly in the form of major booms and busts (we have detailed the problems in “The Errors and Dangers of the Price Stability Policy”).
Anyway, Weidmann has recently given an interview to German news magazine Der Spiegel, which is well worth reading in its entirety. Weidmann evidently does not trust the calm in the financial markets and definitely does not believe that the euro area crisis is over and done with just because sovereign bond yields have declined a lot. Below are excerpts containing the parts we found most interesting:
“SPIEGEL: Mr. Weidmann, you are notorious for being a tough critic of European Central Bank President Mario Draghi. But the euro crisis seems to be over, largely thanks to ECB intervention. Has he not been proven right?
Weidmann: It’s not about being right or a personal confrontation. When it comes to extremely important monetary policy decisions, the ECB Governing Council does its utmost to find the correct path. And the decisions are so difficult because the crisis is not yet behind us, even if the current calm on the financial markets might suggest as much.
SPIEGEL: Yet Spain, once wracked by the euro-zone crisis, can today borrow money more cheaply than ever before in the history of the monetary union. Do you not think that is a consequence of Mario Draghi’s 2012 pledge to save the euro “whatever it takes”?
Weidmann:You shouldn’t mistake the thermometer for the illness. I have never disputed that the ECB could impress and move the markets with the announcement that it would make massive purchases of sovereign bonds if necessary. But such measures focus on the symptoms and don’t cure the causes of the crisis. As such, the current calm is misleading and even dangerous, because it takes pressure off of the governments to implement badly needed reforms. If they are not undertaken, investors could quickly change their risk evaluations.
SPIEGEL: But if the ECB hadn’t intervened, the euro zone patient may well have died from its 2012 fever.
Weidmann: I don’t believe that is the case. In reaction to the crisis, policymakers established a multibillion euro bailout fund to assist the crisis countries in exchange for their adherence to certain stipulations. That was the correct, democratically legitimate path. Even more so given that the bailout fund can also purchase sovereign bonds. The central bank in the euro zone, by contrast, is forbidden from providing credit to countries and from purchasing sovereign bonds on the primary market. By making targeted bond purchases on the secondary market, the ECB opened itself to accusations of skirting this ban.
SPIEGEL: Since the beginning of the financial crisis, the European Central Bank has injected liquidity into the markets at decreasing intervals. It is a bit reminiscent of a junkie who has to continually up the dosage to have the desired effect.
Weidmann:It is certainly true that after each loosening of monetary policy, the public immediately begins speculating about what might come next.
Downturn in High Yield Bonds Continues
On Thursday the stock market had a down day that was actually not very remarkable in terms of its extent – it was only remarkable because even such relatively middling down days have become rare these days. Another thing that made it remarkable is that there was no “obvious” trigger for the selling, which started right out of the gate.
However, as we have previously discussed, market internals have weakened all year long (see “Market Internals Are Weakening” for a recent update) and most recently we have pointed out a number of divergences that have occurred, including the long term downshift in the ratio of HYG to the SPX (see this chart). High yield debt has recently continued to weaken, after a rebound rally that appears to have failed at a lower high. Along with this event, an attempt by treasury yields to break higher seems to have failed as well:
HYG (a high yield bond ETF) suffers its biggest correction in a long time, and treasury note yields turn lower again (admittedly this may turn out to be just a brief pullback in t-note yields) – click to enlarge.
Money’s Declining Marginal Utility
Let us continue our series on “How to Get Rich” with a warning: It may not be such a good idea. This is why we’ve titled this first part “Homage to Poverty.” In it, we try to show you that: (1) you will find it hard to get rich at all if you are afraid of poverty, and (2) poverty isn’t really so bad, after all.
The simple explanation for why you may prefer poverty to wealth is that it allows you to appreciate money! Yes, dear reader, if there is one thing for which the principle of declining marginal utility seems to have been invented, it is for money. Like shots of Irish whiskey, each additional dollar you get is worth less than the dollar that preceded it.
If you are down to your last nickel, finding a $5 bill on the street is a godsend. You pick it up immediately and head for the liquor store. But if you have $1 million in the bank, you might graciously leave the fiver for someone who needs it more than you.
This explains why rich people so often and so readily give away money. It just isn’t worth very much to them. If you have $10 million in the bank, another million is just an accounting detail. It doesn’t change your life one bit. If you have no money in the bank, on the other hand, $50,000 could make you feel rich. Your first million could change everything.
In short, money is especially important when you don’t have any. When you have gotten rich, money doesn’t mean much to you. And as we pointed out yesterday, this could leave you feeling empty. After all, if money doesn’t mean anything… what does?
Buybacks Soar While Insiders Sell
Dow down 116 points on Tuesday. Why? Airstrikes against ISIS… Ebola… inversion crackdown… housing slowdown… record stock high prices… Alibaba? The smart money knows what to do.
“American companies have seldom spent more money than they are now buying back shares. The same can’t be said for their executives. A total of 7,181 insiders bought their own stock this year through Sept. 12 and 23,323 sold shares, according to data compiled by Bloomberg and Washington Service. The ratio of buys to sells is near the lowest since 2000.
At the same time, corporate repurchases reached $275 billion in the first half of the year, the second busiest since S&P Dow Jones Indices began tracking the data in 1998. Share purchases by executives are becoming rarer after seven straight quarters of advances pushed valuations in the Standard & Poor’s 500 Index to a four-year high.
While companies are pouring money into their own stock because they have nothing better to do with it, officers and directors aren’t – and that’s a bearish signal for share prices, said Brad McMillan, chief investment officer at Commonwealth Financial Network.
“It doesn’t say anything very good about the growth prospect for the business,” McMillan, whose firm oversees $86 billion, said in a phone interview on Sept. 18 from Waltham, Massachusetts. “Who would know the business better than an executive in the middle of it? Even though executives are buying on the corporate level, their hearts are not in it personally.”
Insiders buying stock have dropped 8% from a year ago, poised for the fewest in more than a decade, according to data compiled by Bloomberg and Bethesda, Maryland-based Washington Service. Monsanto Co. and Cisco Systems Inc. are among companies whose executives have done less buying even as corporate repurchases increased.”
They say they don’t ring a bell at the top of a market. But we hear alarms going off all over the place. Corporations are buying back shares with borrowed money… pumping up prices. Then the pumped-up shares are awarded to managers as performance bonuses. What do the managers do with them? They dump them.
Pump the market with zero-cost credit … Push up share prices, shifting trillions of dollars in wealth to the richest people in the country … Draw more naïve Mom and Pop into the stock market …
(Photo credit: Tomas Castelazo)
Leftists on the March
The crazies are evidently everywhere. After 18 years of zero global warming, global climate hysterians have decided that we should no longer debate the finer points of all those climate models that have so completely failed to predict any of this. While scientists have by now forwarded altogether 52 different “explanations” (read: guesses, or rather excuses) about where the “missing heat has disappeared to”, a great many people seem to have made up their minds already and don’t want to wait for any progress in what appears to be a science that produces an ample amount of papers, but seems to actually not really certain about a great many things just yet.
Instead they are demanding action, and they want it now. What action? That is not 100% clear, but most of the organizations taking part in worldwide demonstrations over the weekend had the term “justice” in their name, as Byron York points out in the Washington Examiner. That is usually not a good sign – your wallet and your liberty are likely to suffer in order for others to be able to properly provide all this justice in your name.
Supported by a cast of usual suspects – various deluded Hollywood celebrities, Al Gore (usually the guarantor of cold weather wherever he shows up, in spite of his giant carbon footprint), socialist NY mayor Bill de Blasio, and a platitudes-spouting Ban Ki-Moon (who apparently heads the UN at present), every leftist issue one can think of was apparently promoted. The “climate change” banner, which they say is the defining issue of our times, apparently manages to unite quite a disparate group of would-be planners.
As York writes:
Articles that might be of interest for you:
- Total Capitulation of the Bears
- The “Inconvenient Pause”
- Final Remarks Ahead of Scotland's Referendum
- Draghi's War on Savers and the Euro
- Gold Gets Whacked – What Happens Next?
- The War Against ISIS – Mission Gallop
- Are US Consumers Evil Hoarders?
- Central Bank Induced Market Distortion Goes Bananas
- Another Sort - Of Bear Keels Over
- The Trials and Tribulations of “Abenomics”