Category: real economy

Peak profits, stock prices?

Recently a respected colleague said our strategy was rational but markets, and the world for that matter, were highly irrational.  After participating in financial markets for the last 25 years I thought my experiences allowed me to see it all-wrong!  So after reflecting on our irrational state of affairs the logical side compiled some of the glaring data sets signifying a massive market top. 

First, a chart created by John Hussman (www.hussmanfunds.com) indicates how much excess we’ve witnessed in corporate profitability vs GDP lately.  Keep in mind his data includes financials which to this day remain a subsidized black box.  (Click on image to enlarge).New Picture (1)

Of course this hasn’t stopped wall street from expecting further net margin expansion:

 

Profit margin growth

Before Wall Street follows Congress out the door for the holidays maybe they should scrutinize this:

profits vs labor

To derive this unprecedented profit picture both consumers and government went on a spending binge.  US national debt, through 5 years of record deficits, added almost $7.7 trillion to our balance sheet-can you say malinvestment?personal savings govt deficits profits

 

Now, if we remove the creators of financial alchemy we notice the real economy topped many quarters ago. 

 

Nonfinl corp profits

So if you care to break away from CNBS and look at the graphs above rational behavior would suggest profit taking and or short exposure.  In fact, it was just 7 years ago that many of these same signals were sent to the market yet we were labeled as the boys crying wolf.  If your timing is perfect the crowd labels you a genius but too early, a chump. 

 

 

Fred Hickey compares today’s central banks to 19th century patent medicine factories

Fred Hickey, editor of The High-Tech Strategist ($150/year, thehightechstrategist@yahoo.com), grew up in Lowell, Massachusetts, known as the “Birthplace of the American Industrial Revolution.”  In his latest HTS he discusses the genesis of the patent medicine industry in his hometown during the mid-1800s:

For a time, Lowell became America’s largest industrial center…  In addition to the textile factories, other industries grew up in the city around the same time, including patent medicine factories – Father John’s Medicine and J.C. Ayer & Co. among them.

Dr. J.C. Ayer founded J.C. Ayer & Co. in Lowell and his factory became one of the largest of its kind in the world.  Advertising was the key to success…, with the company distributing millions of copies of its free “almanac” (propaganda) annually around the world – in eight languages, including Chinese.  A sample from the almanac:

“The skillful pilot steers his ship through all dangers and guides her safely to port.  So the skillful physician pilots his patient through the perils of sickness to perfect health.  In cases of General Debility, so common at present day, he recommends the use of Ayer’s Sarsaparilla, because of its superior efficacy in aiding the formation of pure and vigorous blood, thereby restoring the normal condition to every fibre, organ, nerve, and muscle of the body.  It cures others and will cure you.  This standard remedy is compounded of the best tonics and alternatives known to science, and its superior qualities as blood-purifier and invigorator have stood the test of nearly half a century.”

Ayer became fabulously wealthy, amassing a fortune of some $20 million – quite a sum for the time.

Though Dr. Ayer never practiced medicine, the cover of each J.C. Ayer almanac was decorated with classical engravings such as one showing the Greek physician Hippocrates standing atop the earth declaring: “Heal the sick.”  What was not to believe with such evidence coming from a great doctor?

Hickey goes on the draw the parallel to central banking:

 Today, we look back and laugh – how could these people be so gullible?  Yet, the world is currently under the spell of its own modern-day quacks – known as central bankers.  Central bankers are touted as having the cure for all of our financial problems.  Their tonic, with the scientifically-sounding name of “quantitative easing,” or QE for short, is guaranteed to restore our financial health, to cleanse us from all our ills.  Whether the cause is spending beyond our means (perennial trillion dollar deficits and gigantic debts), making entitlement promises we cannot keep, building a gigantic welfare state of dependents, having a dysfunctional (and sometimes corrupt) government, constructing a byzantine tax system, tying up our businesses in a web of regulations, enabling “too-big-to-fail” banks to grow monstrously bigger – all can be cured with the magical elixir called QE.

Our skillful physician pilots (brandishing their doctorates from Princeton and M.I.T.) have discovered a miracle cure to be sure – at least that’s what one hears all day long from the talking heads on CNBC…  The media dissects Bernanke’s every utterance for clues as to whether he will supply more of the miracle or not.  The cameras are always on – even when he’s just laying out lame jokes at a Princeton commencement ceremony.

The QE medicine is seductive and addictive…

The best part yet – the QE medicine that he and other central bankers around the world are ladling out tastes so good… With QE, stocks will never fall on Tuesdays (20 straight up Tuesdays in a row), stock markets will never again have a 5% “correction,” (nearing 200 days without a 5% decline), investors can lever up with margin debt to record levels ($384 billion and counting – exceeding the 2007 pre-crash level)…  Investors have become so addicted to the QE wonder drug than even the merest hint of a lower dosage (tapering) sends up cries of anguish from the financial world.  Stock prices wobble; interest rates soar and CNBC anchors throw hissy-fits.

Other than the hallucinogenic effects, is the drug working?

Despite an additional $6 trillion of deficit spending, 0% interest rates and trillions of dollars of newly-created high-powered monetary reserves by the Federal Reserve (QE) that has driven asset inflation sharply higher (stocks, bonds, farmland, art and gold); over the past 4+ years we have experienced the slowest economic recovery in post-war history…  Last month investors celebrated a pathetic 165,000 jobs created, when 278,000 of those jobs were part-time.  In other words, we lost another 113,000 full-time jobs.  The U-6 unemployment rate (including part-time workers unable to find full-time work) ticked UP to 13.9%… With jobs hard to get and real inflation-adjusted incomes falling, the average American consumer is under pressure.  Witness the fairly miserable first quarter sales results from America’s largest retailers reported last month.  Same-store sales fell year-over-year at Wal-Mart, Target, Kohl’s and Sears…  Yesterday we received the Institute for Supply Management’s (ISM) report for May which, at a reading of 49.0, showed the biggest contraction in American manufacturing activity in four years – since the “Great Recession” of 2009…  I’ve been going through scores of first quarter earnings reports and conference calls from the largest technology companies.  The numbers and commentary were consistently gloomy – it was the worst batch of results I’ve seen since the end of the Great Recession.

At this stage of recovery something is terribly wrong.  Let me clue you in on a little secret – money printing doesn’t work.

The Japanese chugged plenty of this medicine…

Japan was the first to try “QE” to resolve its problems (though it was certainly not the first to try money printing).  They’ve been attempting to lift their economy out of a decades-long recession for many years.  The Bank of Japan (BOJ) tripled its balance sheet but did nothing to address the real underlying causes of the disease.  They did not address their lifetime employment system that hobbles business flexibility.  They did little to correct the ridiculous rules and regulations that suffocate the agricultural, medical and retail industries.  They raised taxes.  They massively increased government spending, wasting trillions of dollars and causing a debt pileup (235% of GDP and still rising) – the likes of which the world has never seen from a developed country.  As one would expect, the attempt failed spectacularly.

Yet the American snake oil salesmen claimed they didn’t drink enough!

Dr. Bernanke, and other high priests of central planning (including Paul Krugman) lectured the Japanese that their problem was they weren’t swilling enough of the QE tonic fast enough.  For a decade the BOJ resisted, always citing concerns over inflation.  Finally, Shinzo Abe was swept into power on the campaign promise of more licorice for everyone! After eliminating the key inflation-phobes (Masaaki Shirakawa) from the BOJ and replacing them with Bernanke-like clones (Haruhiko Kuroda), the new era of “Abenomics” was on…  The BOJ announced a plan to double its monetary base (high-powered money) within two years.  In other words, they opted to chug the whole bottle of medicine at once.

After discussing the post-WWI German experiment in money printing gone awry (Weimar hyperinflation), Hickey sees the American experiment ending badly:

Despite this horrific central banker record, U.S. investors still want to believe that Father Ben’s QE medicine will eventually work.  But just because the crowd believes this fantasy, doesn’t mean I have to.  As long as the Fed continues to print tens of billions of dollars a month, stocks can continue to climb higher, but the gap between the economic reality (poor) and the stock valuations (euphoric) widens to ever more dangerous levels.  Another crash is coming and I intend to avoid it – once again.

In conclusion, Fred Hickey offers an antidote to the QE drug:

Throughout history, the antidote to money debasement has always been gold.

A gold bull explains the disconnect between asset prices, economic statistics and the real economy

In the May 2, 2013 issue of The Goldenbar Report (gold@goldenbar.com), editor Edmond Bugos gave this succinct account of the ongoing economic Three-card Monte:

In the end, the bears are going to be wrong about the end of the bull market because these policies cannot actually strengthen the economy as Goldman and others naively predict.  They can only create the boom-bust cycle, and continue to divert wealth into uneconomic activities for as long as it is tolerated…as long as savers and wealth creators don’t push back, or as long as the Fed doesn’t try to take away the punch bowl in a delusion of over-confidence.

Despite what macroeconomic texts teach, rising stock prices and GDP do not indicate anything about real economic growth regardless of how many times the media suggests the opposite.  Neither does a falling unemployment rate indicate that the economy is producing any lasting work.  If the policy is diverting scarce capital into wealth destroying activities those jobs will disappear when the supporting policy does (capital is always scarce in that it is finite relative to our infinite wants –if there is unemployment or excess capacity it is because it was previously employed poorly to ends that were obviously overestimated, and is not easy to re-mobilize towards the production of goods that people value higher).  The trend in GDP and asset prices is an illusion to support the growth lie…they are metrics that belong to a faulty economic framework.

Further, Bugos distinguishes between the real economies of the euro zone, Japan, and the U.S.:

Additionally: because the Bank of Japan and ECB have not been as easy as the Fed, although there is a high relative degree of over-regulation and public sector bureaucracy in the former (regions), their economies have had a better chance to adjust to reality…while the Fed, by keeping its pedal to the metal meanwhile, has continued to divert resources towards bubble (wasteful) activities…i.e. the US economy hasn’t been given the same chance to heal. The boom is where the damage is being done, and the bust is where the markets are trying to correct the imbalances caused by the boom. The Fed didn’t allow this latter healing in the US. The ECB and BOJ did. My point being: there could be some real growth in Japan and Europe whereas in the US it is mostly ephemeral and unsustainable.

Ironically, U.S. assets prices have benefitted from their perceived safe haven status as capital flees the euro zone’s troubles.  Is such confidence completely unwarranted?

 

Speculative economy distances itself from real economy

According to a report released 2 weeks ago by the Pew Research Center, the wealthiest 7% of Americans – those most likely to own stocks – saw their net worth rise 28% in 2009-2011, while the lower 93% witnessed a 4% decline.

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