Thursday, October 1, 2015
Wednesday, September 30, 2015
Valuations Not Only Mean-Revert; They Mean-Invert
Sep. 28, 2015 11:51 AM ET by: John Hussman
“… Almost everyone believed that speculation could be now resumed in earnest. A common feature of all these earlier troubles was that having happened they were over. The worst was reasonably recognized as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. The bargains then suffered a ruinous fall."
J.K. Galbraith, The Great Crash
“Is our profession really so lazy that we would advise people to risk their financial security based on tinker-toy models and pretty pictures that we don't even have the rigor to test historically? Investors appear eager to ‘scoop up’ so-called ‘bargains’ on the belief that stocks are ‘cheap relative to bonds.’ All of this is predicated on the belief that profit margins will remain at record highs, that the Fed Model is correct, and that P/E ratios based on extremely elevated measures of earnings should be evaluated based on norms for much more restrained measures of earnings. Based on daily closing prices, the S&P 500 has not even experienced a 10% correction, yet the recent decline has been characterized as if investors are acting ‘like the world is about to end.’ This is not the pinnacle of human irrationality, but in fact, quite a shallow sell-off from a historical standpoint. The fact that Wall Street is branding it otherwise is evidence that investors have completely forgotten how deep the market's losses can periodically become.”
Hussman Weekly Market Comment, August 2007
“Given the damage already wrought on the Nasdaq, there is a natural inclination to buy the dip. We believe that there is little merit in doing so. The current market climate is characterized by extremely unfavorable valuations, unfavorable trend uniformity, and hostile yield trends. This combination is what we define as a Crash Warning, and this climate has historically occurred in less than 4% of market history. That 4% of market history includes the 1929 crash and the 1987 crash, as well as a number of less memorable crashes and panics. We prefer to hedge until there is a rational prospect for market gains. When valuations are favorable, stocks are attractive from the standpoint of ‘investment’ – meaning that stock prices are attractive compared to the conservatively discounted value of cash flows which will be thrown off in the future. When trend uniformity is favorable, stocks are attractive from the standpoint of ‘speculation’ – meaning that regardless of valuation, investors are displaying an increased tolerance for risk which favors a further advance in prices.”
If there is a single pertinent lesson from history at present, it is that once obscenely overvalued, overvalued, overbullish market conditions are followed by deterioration in market internals (what we used to call “trend uniformity”), the equity market becomes vulnerable to vertical air-pockets, panics and crashes that don’t limit themselves simply because short-term conditions appear “oversold.”
I should immediately add the most pertinent lesson that we’ve learned from our own challenges in the half-cycle advance since 2009. After correctly anticipating the global financial collapse, and even shifting to a constructive outlook after the market plunged by more than 40% in late-2008 (see Why Warren Buffett Is Right and Why Nobody Cares), the out-of-sample behavior of the economy and the financial markets – from the standpoint of post-war data – led me to insist on stress-testing our methods of estimating market return/risk profiles against Depression-era data. The methods that emerged from our stress-testing effort performed better across history, and in holdout data, better than anything we had previously developed. While they included our measures of “trend uniformity,” they also picked up an additional regularity. In prior market cycles across history, the emergence of an extreme overvalued, overbought, overbullish syndrome regularly accompanied or closely preceded deterioration in market internals. As a result, we took a negative market outlook as soon as those overvalued, overbought, overbullish syndromes emerged. If the Federal Reserve’s program of quantitative easing made one thing “different” in recent years, it was to intentionally encourage yield-seeking speculation despite those overbought extremes. That disrupted the historical tendency for “overextended” features of market action to closely precede deterioration in “trend-sensitive” features of market action. One had to wait until market internals had actually deteriorated explicitly before taking a hard-negative outlook. That’s the condition we imposed on our methods in mid-2014.
As I’ve noted previously, when market internals have been unfavorable, the market has lost ground, on average – even since 2009. The central lesson that investors should infer from history, and from the advancing half-cycle since 2009, is not that valuations are irrelevant, or that market risk should always be embraced, or even that Fed easing provides reliable support to the market (it certainly didn’t during the 2000-2002 and 2007-2009 collapses). Rather, market cycles across history, including the period since 2009, emphasize that valuations control long-term investment outcomes, while investor attitudes toward risk - as evidenced by the uniformity or divergence of market internals - control shorter-term outcomes.
With the S&P 500 still within about 9% of its record May peak, with historically reliable valuation measures still double their historical norms, and importantly, with market internals now clearly negative, present conditions classify the market outlook within the most hostile return/risk profile we identify. That will change as valuations and market internals do. Favorable market internals can significantly delay the tendency of extreme valuations to normalize. When favorable internals drop away, valuations can normalize in the blink of an eye. Keep that in mind here. Not only is the long-term outlook dismal on the basis of current valuations; the near-term outlook is also unusually perilous because recent overvalued, overbought, overbullish extremes have now given way to growing risk-aversion among investors.
Valuations not only mean-revert; they mean-invert
For decades now, I’ve regularly detailed the historical evidence linking equity valuations to actual subsequent long-term returns in stocks. An important feature of historically reliable measures of valuation is that they mute the impact of cyclical fluctuations in profit margins. Current earnings – or analyst estimates of expected “forward” earnings – should not be taken at face value, because profit margins are not permanent. The most reliable measures of broad market valuation are actually driven by revenues, not earnings. For a review, including the arithmetic linking valuations to actual subsequent market returns, see Ockham’s Razor and the Market Cycle and Margins, Multiples, and The Iron Law of Valuation.
It’s sometimes argued that the long-term expected return on stocks is simply the expected long-term growth rate of earnings, dividends and the like, plus the prevailing dividend yield. While this would be true if valuations were held constant for all of eternity, the fact is that elevated and depressed valuations tend to normalize over time, which investors know as “mean reversion.” As a result, higher valuations are systematically related to lower subsequent long-term market returns, and lower valuations are systematically related to higher subsequent long-term market returns.
Here are the correlations that we estimate in post-war data between various valuation ratios and actual subsequent 10-year total nominal returns of the S&P 500. A correlation of -1.00 would represent a perfect relationship. The correlations are negative, because higher valuations imply weaker subsequent returns. For a good primer on mean reversion, and to understand why using logarithms is the appropriate way to link valuations and subsequent returns, see my May 4, 2015 comment, Two Point Three Sigmas Above The Norm.
log(price/trailing 12-month earnings): -0.76
log(price/forward operating earnings – data prior to 1980 imputed): -0.79
log(Shiller P/E): -0.83
log(Tobin’s Q: market cap/net worth at current cost): -0.85
log(Shiller P/E with adjustment for embedded profit margin): -0.88
log(nonfinancial market capitalization/nominal GDP): -0.88
log(nonfinancial market capitalization/corporate Gross Value Added): -0.91
As a side note, the Fed Model (S&P 500 forward earnings yield – 10-year Treasury yield) is expressed as a “higher is better” figure, so that particular model is positively correlated with subsequent 10-year total returns in the S&P 500. Unfortunately, that correlation is only 0.49, which means that “correcting” the forward earnings yield for interest rates actually destroys information about future returns. Since subtracting the 10-year bond yield from two variables doesn’t change the correlation between them, the correlation between the Fed Model and subsequent 10-year S&P 500 total returns in excess of the 10-year bond yield is 0.79. That isn’t surprising, because it is the same as the correlation between the raw forward earnings yield and the raw 10-year S&P 500 total return. In our view, the best way to estimate the likely “excess” return of the S&P 500 over and above 10-year Treasury yield is simply to estimate the raw total return using MarketCap/GVA and then subtract out the 10-year yield. At present, that approach suggests that the S&P 500 is likely to underperform even the low 2.16% yield on Treasury bonds over the coming decade.
So here’s an interesting question: how quickly, historically, have valuations tended to mean-revert? The answer is a bit tricky, because it depends on the condition of market internals. If valuations are elevated and market internals are unfavorable, valuations can retreat vertically. In 2008, for example, the market went from steep overvaluation to slight undervaluation within the span of three months, losing over 40% of its value. On the other hand, rich valuations have periodically been sustained for long periods of time, as they were in the late-1990s and in recent years, because investors stayed in a risk-seeking mood, as evidenced by uniformly favorable market internals.
A more appropriate question is this: Over what horizons are valuations most reliably associated with actual subsequent market returns? Asking the question in this way recognizes that short-term factors can certainly accelerate or delay mean-reversion in any given market cycle, but also recognizes that because risk-seeking and risk-aversion tend to come and go, their effect on long-term returns washes out as the horizon increases.
The chart below uses the most reliable valuation ratio we identify in publicly available data since the 1940's; the ratio of nonfinancial market capitalization to corporate gross value added. The results are similar using other reasonably reliable measures such as the Shiller P/E. The chart shows the proportion of initial over- or undervaluation in the S&P 500 that has persisted, on average, as time progresses. The result should be intuitive. Over short horizons, of a few years, only a modest proportion of overvaluation or undervaluation tends to be eliminated. As a result, other factors – particularly the risk-seeking or risk-averse preferences of investors – can have more impact on returns than valuations do over those short horizons. In contrast, valuations demonstrate increasingly reliable mean reversion on horizons of 7 years and more. Within 12 years, any initial overvaluation or undervaluation of the market is entirely erased, on average.
The chart above has an interesting implication. Normally, we use a 10-year horizon to relate market valuation to actual subsequent nominal total returns in the S&P 500. But as indicated above, the most appropriate horizon over which to expect full mean reversion is actually closer to 12 years. To demonstrate this, the following chart shows the ratio of MarketCap/GVA on an inverted log scale (left) versus the actual subsequent 12-year S&P 500 nominal total return. This result, to me, is striking, and indicates that from the May 2015 market peak, investors should expect a 12-year total return on the S&P 500 (out to May 2027) averaging only about 1% annually.
Notice something on the chart above. While valuations and actual subsequent market returns are extremely well-correlated over time, we should still expect the largest “errors” in the chart to be associated with points where valuations were furthest away from their historical norms at the end of a given 12-year horizon. In particular, we would expect actual market returns to have overshot the expected return in 1986-1988 (corresponding to the 1998-2000 bubble peak, 12 years later). That’s exactly what we see, and exactly why we see it.
Having detailed the systematic mean-reversion of reliable valuation measures over time, it turns out that we need to coin a new term: mean-inversion. The definition of “invert” is “to put upside down, or in the opposite position, order, or arrangement.” For valuations to mean-invert, then, is for extreme valuations to be followed some years later by a similar deviation, but entirely in the opposite direction.
The next chart, if you’re a long-term bull, may very well make you sick. It shows the proportion of initial over- or undervaluation in the S&P 500 that has persisted, on average, as time progresses. But in this chart, I’ve extended the time horizon beyond 12 years.
Risk-seeking among investors can often defer the immediate consequences of extreme valuations, while vertical losses can suddenly emerge when extreme overvaluation is joined by increasing risk-aversion among investors (as evidenced by deterioration in broad market internals). In any event, investors should expect market overvaluation or undervaluation to be reliably “worked off” within a period of about 12 years, on average. That’s mean-reversion, but that’s not where the process ends. Rather, the valuation extremes of the market tend to be fully inverted over a horizon of about 18-21 years; ending with extremes of the same degree but in the opposite direction. That’s what we’ll call “mean-inversion.” Statistically, a period of somewhere close to two decades has typically stood between the wildest exuberance and the deepest despair on Wall Street, and vice-versa. Valuations remain on the wildly exuberant side here.
Geek's Note: The chart above shows adjustment coefficients, so -1.0 represents a full inverson of the original deviation from the mean. The correlation between initial and terminal valuation, at various horizons, is: 88% at 1 year, 68% at 3 years, 49% at 7 years, zero at 12 years, drops to -30% at 16 years, and troughs at a -65% correlation at 21 years, before easing to -42% at 25 years.
While the concept of mean-inversion seems strange – almost preposterous – it actually aligns very well with what we know about so-called “secular” market phases. Specifically, we can describe a “secular bull market” as a period that comprises a number of individual bull-bear market cycles, typically reaching successively higher valuations at the peak of each bull market advance. Conversely, a “secular bear market” comprises a number of individual bull-bear market cycles, typically reaching successively lower valuations at the trough of each bear market decline. These “secular” bull and bear phases are each commonly recognized as lasting somewhere about two decades. The chart above is simply the statistical footprint of those long secular swings between extremes of fear and greed.
Following the panic of 1908, the stock market enjoyed total returns averaging 14% annually until the 1929 peak. The culmination of that advance was a 9-year period when stocks enjoyed total returns averaging nearly 26% annually. The most memorable secular bear period in U.S. history then began, running from 1929-1949. During those two decades, the stock market would turn in a nominal total return of less than 1% annually, including an interim loss approaching 90%, and a negative real return overall. That period was followed by a secular bull phase from 1950-1965, during which the S&P 500 turned in a nominal total return of about 17.5% annually. The secular bear period that followed from 1965-1982 again left investors with a negative real return after inflation. The 1982-2000 advance represented a classic secular bull market period, and produced a total return for the S&P 500 averaging 20% annually. By the 2000 peak, valuations were so extreme that reliable valuation measures accurately projected negative total returns on a 10-year horizon (as we estimated at the time). The nominal total return of the S&P 500 since the 2000 peak has averaged just 3.5% annually, but even that gain is entirely due to the fact that valuations have again been pushed to offensive extremes. We fully expect that entire total return to be wiped out over the completion of the current market cycle. Doing so would not even bring the most reliable valuation measures back to their historical norms.
The beginning and end of secular phases are generally identified on a valuation basis, not on a price basis, so we continue to view the most recent secular peak as being 2000, even though prices are higher today.
The 2009 low is often discussed as a “secular” valuation trough. It didn’t even come close. While I did emphasize after the 2008 plunge that stocks had become undervalued relative to historical norms, remember that valuations similar to the 2009 trough were followed, in the Depression, by a further two-thirds loss in the value of the stock market. The market would have had to decline by an additional 50% to match the valuations observed at prior secular lows. I’ve regularly detailed the challenges that followed from my insistence on stress-testing our methods against Depression-era data, and how we fully addressed them in mid-2014. We don’t require anything near valuation levels of 2009, much less 1974 or 1982, in order to encourage a constructive position – provided that we observe an improvement in market internals. But investors shouldn’t kid themselves into thinking that some 18-20 year “count” began in 2009 from which many more years of advancing prices should follow, despite obscene valuations that already eclipse those of 1907, 1929, 1937, 1965, 1972, 1987, and 2007.
If there’s any 18-20 year “count” to be considered, investors might consider the one that began at the 2000 peak. They might also consider that the market peak in May of this year reached valuations more extreme than we observed at the beginning of every secular bear phase except 2000. The good news here is not only that secular bear markets contain a series of individual cyclical bull market advances, but also that the low of a secular bear, from a price perspective, has typically occurred earlier than the low from a valuation perspective (for example, the lowest price of the 1965-1982 secular bear was actually in late-1974).
So even if we’ve got a full-fledged secular bear phase in our future, the likelihood is that there will be more than enough conditions under which a constructive or even aggressive investment stance is appropriate. My expectation is that disciplines capable of responding to changing valuations and investor risk-preferences should do just fine. The real problem is for passive investors, where the period of depressed overall returns that began in 2000 appears likely to continue, and probably worsen, until much more durable support from valuations is established.
Monday, September 28, 2015
Dying Petrodollar Ripples Through Markets As Asset Managers Bemoan Loss Of Saudi Bid
Submitted by Tyler Durden on 09/28/2015 08:11 -0400
One of the key things to understand about China’s liquidation of hundreds of billions in US paper is that far from being a country-specific phenomenon, it actually marks the continuation of something that’s been taking place in other emerging markets for some time.
As we outlined in “Why It Really All Comes Down To The Death Of The Petrodollar,” the forced sale of Beijing’s UST reserves is simply the most dramatic example of what Deutsche Bank has called “quantitative tightening.” For years, reserve managers in the world’s emerging economies worked to accumulate war chests of USD-denominated paper in an effort to ensure that in a crisis, they would have sufficient firepower to guard against speculative attacks on their currencies and/or accelerating capital outflows. Slumping commodity prices and the threat of a supposedly imminent Fed hike have conspired to put pressure on these reserves and outside of China, nowhere is this dynamic more apparent than in Saudi Arabia. Indeed it was the Saudis who dealt the deathblow to the great EM reserve accumulation.
By intentionally killing the petrodollar, Riyadh effectively ensured that the pressure on commodity currencies would continue unabated, but as we’ve documented exhaustively, that was and still is considered an acceptable outcome if it means bankrupting the US shale complex and securing market share. But for Saudi Arabia, this is all complicated by three things: 1) the necessity of preserving the lifestyle of everyday citizens, 2) spending associated with the proxy war in Yemen, and 3) defense of the riyal’s dollar peg. All of those factors have served to weigh heavily on the county’s already depleted petrodollar reserves, and if the “lower for longer” crude thesis plays out, Riyadh may see further pressure on its current and fiscal accounts which are now both squarely in the red.
Of course all of the above is a drag on global liquidity and as we warned nearly a year ago, the death of the petrodollar means oil exporters are set to become net sellers of assets for the first time in decades.
As FT reports, markets are beginning to feel the effects. Here’s more:
Saudi Arabia has withdrawn tens of billions of dollars from global asset managers as the oil-rich kingdom seeks to cut its widening deficit and reduce exposure to volatile equities markets amid the sustained slump in oil prices.
The Saudi Arabian Monetary Agency’s foreign reserves have slumped by nearly $73bn since oil prices started to decline last year as the kingdom keeps spending to sustain the economy and fund its military campaign in Yemen.
The central bank is also turning to domestic banks to finance a bond programme to offset the rapid decline in reserves.
This month, several managers were hit by a new wave of redemptions, which came on top of an initial round of withdrawals this year, people aware of the matter said.
“It was our Black Monday,” said one fund manager, referring to the large number of assets withdrawn by Saudi Arabia last week.
Institutions benefited from years of rising assets under management from oil-rich Gulf states, but are now feeling the pinch after oil prices collapsed last year.
Nigel Sillitoe, chief executive of financial services market intelligence company Insight Discovery, said fund managers estimate that Sama has pulled out $50bn-$70bn over the past six months.
“The big question is when will they come back, because managers have been really quite reliant on Sama for business in recent years,” he said.
BlackRock, which bankers describe as the manager handling the largest amount of Gulf funds, has already reported net outflows from Europe, the Middle East and Africa.
Its second-quarter financial results reported a net outflow of $24.1bn from Emea, as opposed to an inflow of $17.7bn in the first quarter.
Market participants say the outflow is in part explained by redemptions from Saudi Arabia and other Gulf sovereign funds, such as Abu Dhabi.
Of course, as indicated above, this isn't an isolated incident (i.e. it's not confined to the Gulf states and China). The worse things get for EM, the more likely it is that countries will continue to draw down their reserves and indeed, if the situation continues to deteriorate in Brazil, it looks increasingly likely that Copom will become a seller as well.
Make no mistake, this is now a key factor in the FOMC's decision making process, as EM reserve levels essentially serve as a proxy for trends in global liquidity and thus are one way of measuring the degree to which market conditions are poised to amplify a potential rate hike. We close with the following quote from Goldman, commenting on the above earlier this year:
We estimate that the new (lower) oil price equilibrium will reduce the supply of petrodollars by up to US$24 bn per month in the coming years, corresponding to around US$860 bn over the next three years. The ultimate impact, however, will depend on a number of key current account buffers (goods imports, net factor income and service imports
Friday, September 25, 2015
More Keynesian Tommyrot——-Today’s Punk Durables Report Showed CapEx Is Heading Down, Not Up
by David Stockman • September 24, 2015
Thursday’s durable goods report for August brought more evidence that the US economy is stumbling toward recession, and that the Fed’s massive money printing campaign has been an abysmal failure. To wit, shipments of so-called core CapEx (nondefense capital goods less aircraft) were down 2.5% from prior year, confirming that last summer’s spurt of shipments is rolling-over on pace with the even larger 5.7% drop in orders.
This dramatic southward turn puts the lie to the “escape velocity” meme of Wall Street pitchmen who claim to be “economists”. They had been insisting for months now that there was nothing wrong with the US economy except some cold and snow last winter, and that with the arrival of flip-flops and shorts the growth genie would finally come leaping out of the bottle. That acceleration, in turn, would be accompanied by surging business CapEx because an economy bounding toward full employment will need more investment in machinery and equipment.
The funny thing is that these same Wall Street shills have not changed their tune, even as the data has once again foiled their endless hopium about the purported economic recovery and unseemly cheerleading for higher stock prices. As we have pointed out repeatedly, Wall Street gets away with this tommyrot in part because the mainstream financial press is just plain lazy, and possibly stupid, too.
Not surprisingly, therefore, Dow-Jones’ MarketWatch was johnny-on-the-spots after the August release helping the Keynesian chorus try to turn lemons into lemonade:
Although business investment is weaker compared to 2014, core capital spending has jumped an annualized 8.5% from June through August compared to the same three months of 2014.
“In short, investment in equipment appears to be recovering in the third quarter,” asserted Paul Ashworth, chief U.S. economist of Capital Economics.
What’s unclear is whether the upsurge will persist through the end of the year.
Say again. The chart above shows that there has been no “upsurge” in 2015 whatsoever, either in orders or shipments of capital goods. In fact, shipments during the three month period of June through August were down by $630 million from the comparable period last year, not up 8.5%.
The reporter was either too lazy to even double check his math, or to note that the increase he mis-identified was actually for the eight months year-to-date, which, in turn, was statistical noise. That’s because the latter reflected an obvious timing aberration arising out of last year’s sharp climb from the early months of 2014, not any acceleration in shipments this year.
So the question recurs. Why can’t Keynesian pitchmen like Paul Ashworth, chief economists for Capital Economics, even acknowledge the difference between up and down?
Well, the simple answer is they don’t dare; it would invalidate their entire delusional economic model which supposes that the US economy is some kind of giant economic bathtub surrounded by high walls; and that it can be pumped to the brim of full-employment by Fed stimulation of an invisible economic ether called “aggregate demand”.
More specifically, after the Fed has reflated household demand through low interest rates, domestic production is supposed to be pushed toward high levels of capacity utilization, thereby causing capital spending to kick in and the recovery cycle to be extended.
In fact, the Wall Street Keynesians couldn’t be more wrong. The 1960s neo-Keynesian business cycle essayed by the likes of Paul Samuelson and James Tobin has long been dead and gone. The era of rampant sustained money printing inaugurated by Alan Greenspan in the 1990s, and subsequently exported to the entire world, has supplanted it with what amounts to a sequences of serial financial bubbles.
Under this new regime, the monetary policy transmission mechanism is no longer the main street credit markets, whereby low interest rates induce households and business firms to supplement spending from current income flows with outlays extracted from balance sheets in the form of incremental leverage.
That parlor trick doesn’t work anymore. Households reached a condition of peak debt back in 2007-2008 and have been reducing their leverage relative to income ever since. And that trend is unlikely to abate any time soon—–since the household debt-to-income ratio remains dramatically higher than it was before the Greenspan era of money printing incepted.
Household Leverage Ratio – Click to enlarge
Likewise, the wrong-headed post-crisis effort by central banks to flood the market with easy money to induce debt shackled households to borrow and spend has backfired. What it actually did was transform the C-suites of corporate America into stock trading rooms, thereby insuring that the Fed’s massive emission of fiat credit never leaves the canyons of Wall Street.
Consequently, the $2 trillion increase in business debt since late 2007 has not stimulated CapEx but, instead, has been diverted into the stock market via buybacks and M&A deals. That is, it has not funded an increase in the stock of productive business assets, but has merely inflated the financial market value of existing claims on business income.
The proof of the pudding is neatly crystalized by today’s punk report on core CapEx orders. The $69.8 billion for August was less than 1% higher than the prior peak of $69.2 billion in July 2008; and, even more significantly, is flat with the post-recession rebound level achieved way back in February 2012.
Moreover, these are all nominal numbers, meaning that orders for core capital goods have actually been shrinking in inflation-adjusted terms for the past three years.
Nor is this the full extent to which the escape velocity myth has been invalidated. Since the turn of the century when Fed money printing commenced in earnest, even the Keynesians’ favorite but misleading metric on capital spending has faltered. To wit, gross real fixed investment in business assets has expanded at only a 1.9% annual rate for the last 15 years.
That’s less than half of the historic 4-5% long-term rate, but even that comparison does not fully comprehend the shortfall. The problem is that the preoccupation with “gross” investment spending is another typical Keynesian fallacy that confuses short-term “spending” with sustainable advances in real output and wealth.
The latter cannot happen without increases in net investment, which is to say outlays for capital goods after current period consumption (i.e. wear and tear) has been replaced. As shown below, net business invest has actually dropped by 17% in real terms since the year 2000.
Stated differently, real investment spending has been declining at a 1.3% annual rate for 15 years, not expanding by even the anemic 1.9% rate embodied in the misleading Keynesian metric.
The long and the short of it is that while the Fed is financing giant windfalls for the gamblers on Wall Street, the main street economy is actually eating it seed corn.
And the deterioration is about to get worse. That’s because there is no such thing as capital spending and corresponding capacity utilization rates in one country; now its strictly global, and not just in tradeable goods industries, either.
Central bank falsification of the price of debt and other financial asset prices is instantly transmitted around the global economy. Accordingly, the scramble for yield in a world of central bank financial repression can lead to over-investment and malinvestment in strictly domestic sectors such as malls, office buildings and warehouses, as readily as among internationally competitive facilities like mines, factories and containerships.
Needless to say, the gathering global deflation attendant upon the fracturing of the world’s 20-year credit bubble is a battering ram aimed at capital spending in both the tradeable goods and domestic sectors of the US economy. Today’s drastic retrenchment announcements by Caterpillar, the on-going collapse of capital spending in the shale patch and sharp cutbacks in material processing and other export oriented US industries is only the tip of the iceberg. As corporate credit spreads blow-out, new domestic commercial construction will be curtailed, as well.
What the Wall Street stock peddlers have completely ignored is that net domestic investment was already badly faltering during the greatest global CapEx boom in recorded history. Needless to say, after erupting by 5X during the last two decades, the already evident sinking spell in worldwide CapEx depicted in the chart below is just getting started, meaning that domestic capital investment will be body-slammed as the global contraction gathers force.
Global Capex- Click to enlarge
But never mind. Wall Street’s economic pimp shops like Capital Economics will always find some misleading noise in the incoming data to tout, and the lazy shills of the financial press will post it lickety-split.
The Stock Markets Of The 10 Largest Global Economies Are All Crashing
By Michael Snyder, on September 24th, 2015
You would think that the simultaneous crashing of all of the largest stock markets around the world would be very big news. But so far the mainstream media in the United States is treating it like it isn’t really a big deal. Over the last sixty days, we have witnessed the most significant global stock market decline since the fall of 2008, and yet most people still seem to think that this is just a temporary “bump in the road” and that the bull market will soon resume. Hopefully they are right. When the Dow Jones Industrial Average plummeted 777 points on September 29th, 2008 everyone freaked out and rightly so. But a stock market crash doesn’t have to be limited to a single day. Since the peak of the market earlier this year, the Dow is down almost three times as much as that 777 point crash back in 2008. Over the last sixty days, we have seen the 8th largest single day stock market crash in U.S. history on a point basis and the 10th largest single day stock market crash in U.S. history on a point basis. You would think that this would be enough to wake people up, but most Americans still don’t seem very alarmed. And of course what has happened to U.S. stocks so far is quite mild compared to what has been going on in the rest of the world.
Right now, stock market wealth is being wiped out all over the planet, and none of the largest global economies have been exempt from this. The following is a summary of what we have seen in recent days…
#1 The United States – The Dow Jones Industrial Average is down more than 2000 points since the peak of the market. Last month we saw stocks decline by more than 500 points on consecutive trading days for the first time ever, and there has not been this much turmoil in U.S. markets since the fall of 2008.
#2 China – The Shanghai Composite Index has plummeted nearly 40 percent since hitting a peak earlier this year. The Chinese economy is steadily slowing down, and we just learned that China’s manufacturing index has hit a 78 month low.
#3 Japan – The Nikkei has experienced extremely violent moves recently, and it is now down more than 3000 points from the peak that was hit earlier in 2015. The Japanese economy and the Japanese financial system are both basket cases at this point, and it isn’t going to take much to push Japan into a full-blown financial collapse.
#4 Germany – Almost one-fourth of the value of German stocks has already been wiped out, and this crash threatens to get much worse. The Volkswagen emissions scandal is making headlines all over the globe, and don’t forget to watch for massive trouble at Germany’s biggest bank.
#5 The United Kingdom – British stocks are down about 16 percent from the peak of the market, and the UK economy is definitely on shaky ground.
#6 France – French stocks have declined nearly 18 percent, and it has become exceedingly apparent that France is on the exact same path that Greece has already gone down.
#7 Brazil – Brazil is the epicenter of the South American financial crisis of 2015. Stocks in Brazil have plunged more than 12,000 points since the peak, and the nation has already officially entered a new recession.
#8 Italy – Watch Italy. Italian stocks are already down 15 percent, and look for the Italian economy to make very big headlines in the months ahead.
#9 India – Stocks in India have now dropped close to 4000 points, and analysts are deeply concerned about this major exporting nation as global trade continues to contract.
#10 Russia – Even though the price of oil has crashed, Russia is actually doing better than almost everyone else on this list. Russian stocks have fallen by about 10 percent so far, and if the price of oil stays this low the Russian financial system will continue to suffer.
What we are witnessing now is the continuation of a cycle of financial downturns that has happened every seven years. The following is a summary of how this cycle has played out over the past 50 years…
- It started in 1966 with a 20 percent stock market crash.
- Seven years later, the market lost another 45 percent (1973-74).
- Seven years later was the beginning of the “hard recession” (1980).
- Seven years later was the Black Monday crash of 1987.
- Seven years later was the bond market crash of 1994.
- Seven years later was 9/11 and the 2001 tech bubble collapse.
- Seven years later was the 2008 global financial collapse.
- 2015: What’s next?
A lot of people were expecting something “big” to happen on September 14th and were disappointed when nothing happened.
But the truth is that it has never been about looking at any one particular day. Over the past sixty days we have seen absolutely extraordinary things happen all over the planet, and yet some people are not even paying attention because they did not meet their preconceived notions of how events should play out.
And this is just the beginning. We haven’t even gotten to the great derivatives crisis that is coming yet. All of these things are going to take time to fully unfold.
A lot of people that write about “economic collapse” talk about it like it will be some type of “event” that will happen on a day or a week and then we will recover.
Well, that is not what it is going to be like.
You need to be ready to endure a very, very long crisis. The suffering that is coming to this nation is beyond what most of us could even imagine.
Even now we are seeing early signs of it. For instance, the mayor of Los Angeles says that the growth of homelessness in his city has gotten so bad that it is now “an emergency”…
On Tuesday, Los Angeles officials announced the city’s homelessness problem has become an emergency, and proposed allotting $100 million to help shelter the city’s massive and growing indigent population.
LA Mayor Eric Garcetti also issued a directive on Monday evening for the city to free up $13 million to help house the estimated 26,000 people who are living on the city’s streets.
According to the Los Angeles Homeless Services Authority, the number of encampments and people living in vehicles has increased by 85% over the last two years alone.
And in recent years we have seen poverty absolutely explode all over the nation. The “bread lines” of the Great Depression have been replaced with EBT cards, and there is a possibility that a government shutdown in October could “suspend or delay food stamp payments”…
A government shutdown Oct. 1 could immediately suspend or delay food stamp payments to some of the 46 million Americans who receive the food aid.
The Agriculture Department said Tuesday that it will stop providing benefits at the beginning of October if Congress does not pass legislation to keep government agencies open.
“If Congress does not act to avert a lapse in appropriations, then USDA will not have the funding necessary for SNAP benefits in October and will be forced to stop providing benefits within the first several days of October,” said Catherine Cochran, a spokeswoman for USDA. “Once that occurs, families won’t be able to use these benefits at grocery stores to buy the food their families need.”
In the U.S. alone, there are tens of millions of people that could not survive without the help of the federal government, and more people are falling out of the middle class every single day.
Our economy is already falling apart all around us, and now another great financial crisis has begun.
When will the “nothing is happening” crowd finally wake up?
Hopefully it will be before they are sitting out on the street begging for spare change to feed their family.
All Politics is now Global
Deutsche Bank – the New Lehman Brothers?
As Mr. Armstrong points out, DB is part of the Euro crisis. It’s exposed to a time bomb of over $70 trillion in derivatives and it’s not surprising that it’s been said to be the next Lehman Brothers. It should be interesting to see how much more it’s exposed to in regards to the Volkswagen ‘scandal’, which is more of a political hit for quick cash. If the global economy is going to collapse, it is going to start in Germany.
The rumor mill has been nonstop. The crushing blow to Europe will be the failure of Germany’s biggest bank: Deutsche Bank. Just about every circle is quietly discussing how the bank is facing bankruptcy. The rumors have flown since March when Deutsche Bank failed the U.S. regulatory stress test, which was followed by the resignation of its head in June. A collapse of the Deutsche Bank is profound and very likely to impact Europe to the point that everyone behind the curtain is now calling for a new Lehman moment. Sources tied with the Fed’s decision not to raise rates fear that they will be seen as the cause of its failure. Germany clearly faces a major shock; if this combines with Volkswagen for the turning point next week, well, here we go again.
The potential financial chaos to the other side of 2015.75 is just mind numbing. Since Germany has been regarded as the primary driving force holding the euro and Europe together, one can only close their eyes to vision what comes in the aftermath. So pay attention here. These are critical indications within the core economy of Europe. We are not talking about Greece here. The structure of the euro undermined the entire banking system of Europe far more profoundly than in the United States, where reserves are only in U.S. federal debt, not the debt of all member 50 states. This is the major difference between European banking and U.S. banking.
Full article: Deutsche Bank – the New Lehman Brothers? (Armstrong Economics)
Thursday, September 24, 2015
Currency Carnage: The Global FX Heatmap Is A Bloodbath
Submitted by Tyler Durden on 09/24/2015 10:22 -0400
If it was Janet Yellen's intention when deciding not to hike rates to stop the surge of the USD against emerging market currencies in hopes of halting the relentless global capital outflows and the resulting Quantitative Tightning, to avoid a new global currency crisis... she failed.
As of this moment, at least four EM currencies had crashed to record lows against the dollar:
- the Brazilian Real
- the Turkish Lira
- the Mexican Peso
- the South African Rand
Expect many more to follow.
Here is the carnage for the key pairs:
And the heatmap for today:
And over the past 52 weeks:
The biggest embarrassment for the Fed: the global FX carnage is only accelerating and the USD is surging since Yellen "chickened out"
Wednesday, September 23, 2015
Posted by Chris Kimble on 09/23/2015 at 5:40 am.
Today’s post comes from my good friend Ryan Detrick. Thanks for the great piece Ryan!
There’s an old saying on Wall Street that the dumb money trades early in the day and the smart money trades late in the day. If you see buyers (or sellers) late in the day, that could be the footprints of what big institutions are doing. In other words, it could give a clue as to how confident the big boys are.
Taking this a step further, I’ve always thought Friday was a very important day. Think back to the Financial Crisis (if you want to). What did we see nearly every Friday afternoon? Huge selling across the board, as no one was confident enough to hold over the weekend. Fast forward to what we are seeing today and wouldn’t you know it, Friday has been seeing some big drops the past few weeks. In fact, looking at all the days of the week in 2015, Friday is far and away the worst day of the week. Is this a bigger picture sign there is no confidence in stocks here and now?
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Breaking it down more, Friday in 2015 is down 0.21% a day on average so far in 2015. Going back five years, this is the worst day of the week for any year! This is the worst day since minus 0.63% on Wednesdays back in 2008.
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Now the big question, does Friday weakness matter? I’m going to say yes and here’s why. Going back to 1928, there were just seven other years that saw weakness like we are seeing so far in 2015. The S&P 500 was higher for the full year just twice and the average return during those seven years was minus 10.9%.
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If you are bullish, you want to see more strength late in the day, but you’d probably also love to see some buying on Friday as well.