Just over 4 hours ago we discussed the stunning collapse in 10Y Japanese bond yields. Since then - things have taken a very dramatic turn for the worse for bonds. 10Y JGB yields have exploded higher. The move from 32bps to 65bps triggered circuit breakers on the Tokyo Stock Exchange in JGB Futures trading as JGB prices plunged by their largest amount since September 2002. We can only imagine there is liquidations galore occurring given the massive outsize moves we are seeing in Japanese bonds, stocks, FX, swaps, and CDS. Did the BoJ just lose control?
Now that is a reversal!!
Biggest price drop in JGB Futures in over 10 years.
2 - Japan Debt Deflation Spiral
JAPAN - They Will Lose Control of Rates Due to Insolvency
"they will lose control of rates, since leaving the zone of insolvency is impossible now"
As the fast-money flabber-mouths stare admiringly at the rise in nominal prices of Japanese (and the rest of the world ex-China) stock prices amid soaring sales of wheelbarrows following Kuroda's 'shock-and-awe' last night, it is Kyle Bass who brings these surrealists back to earth with some cold-hard-facting. Out of the gate Bass explains the massive significance of what the Japanese are embarking on, "they are essentially doubling the monetary base by the end of 2104."
It is a "Giant Experiment," he warns, but when you are backed into a corner and your debts are north of 20 times your government tax revenue, "you're already insolvent." Simply put, Bass says they have to do something and they have to something big because they are "about to implode under the weight of their debt." For a sense of the scale of the BoJ's 'experimentation', Bass sums it up perfectly (and concerningly), "the BoJ is monetizing at a rate around 75% of the Fed on an economy that is one-third the size of the US!"
What they are trying to do is devalue the currency to attempt to become more competitive while holding their rates market flat - the economic zealots running the world's central banks believe they can live in that Nirvana - and Bass believes that is not the case, as they will lose control of rates, since leaving the zone of insolvency is impossible now. His advice, "if you're Japanese, spend! or take it out of your country. If you're not, borrow in JPY and invest in productive assets." Do not be long JPY or Japanese assets as he concludes with the reality of Japan's "hollowed out" manufacturing industry and why USDJPY is less important that KRWJPY.
WHAT YOU NEED TO KNOW
Debts are 23X your tax revenues = Insolvency
Doubling Monetary in 2 years is extremely experimental with these existing debt levels,
What they are trying to do is devalue the currency to attempt to become more competitive while holding their rates market flat.
they will lose control of rates, since leaving the zone of insolvency is impossible now.
A 1% increase in interest rates would cost 255 of tax revenue = Insolvency
"the BoJ is monetizing at a rate around 75% of the Fed on an economy that is one-third the size of the US!"
How could anyone expect that they will get their money back at the value it is presently being placed at??
2 - Japan Debt Deflation Spiral
JAPAN - Understanding the Japanese Problem in Less than 7 minutes
In just a few short minutes, inspired by Kyle Bass, Addogram presents a short visual explanation of Japan's debt problem. In the time it takes Ben Bernanke to print $13.7 million you'll have a deep understanding of Aso, Abe, and Kuroda's impending debt crisis.
2 - Japan Debt Deflation Spiral
Increase Monetary Base from Y135T ($1.43T) to Y270T ($2.86) by March 2015
Buying Long Term Bonds Government (JGB) increasing average Maturity from 3 to 6 Years,
Buying 7 trillion yen, or $75 billion, of bonds per month,
Balance Sheet expands by 1% of GDP PER MONTH IN 2013 AND 1.1% IN 2014,
US is increasing its Balance Sheet by 0.54% of GDP per month,
Now, the rubber meets the road for Kuroda, the monetary policy dove selected by recently-elected Japanese Prime Minister Shinzo Abe to lead the charge from the BoJ, which has to do a lot of the heavy lifting.
An increase in the size of the Bank of Japan's quantitative easing program,
A directive to start buying longer-dated bonds as part of those asset purchases,
A cut in the interest rate the central bank pays on excess reserves, and
Stepped-up purchases of risk assets like ETFs.
Below is what BAML analysts Shogo Fujita, Masayuki Kichikawa and Shuichi Ohsaki predict for Kuroda's meeting.
Announcement of early introduction of an open-ended framework (FY13).
A suggestion of a forward-guidance framework. (such as “easing to continue until a 2% inflation target is feasibly attainable”)
Announcement of elimination of the banknote rule and unification of JGB purchases through the APP and rinban operations. (We expect the APP will be maintained for risk assets, integration will depend on the construction of procedural systems i.e. will not be immediate)
Extension of the central JGB purchasing zone to longer maturities (with the shift to full rinban this is fully expected, extension to 10 years, plus small rinban increases in the 10- to 30-year range expected, the BoJ may defer announcement of details/technicalities for a later date).
After unification of JGB purchasing operations, an increase in the current monthly purchase amount from slightly under ¥5tn to ¥10tn (possibly with a move to net purchase targets like the FRB, implementations and details may come at a later date).
Announce gradual elimination of fixed-term funding operations. (A shift to JGB purchases likely. This would make it unnecessary to lower the IOER. Implementations and details may come at a later date.)
Announcement of the BoJ’s intention to increase purchases of risk assets such as such as ETF, J-REIT, corporate bonds, and CP. (Details to be provided at a later date, but the BoJ’s capital will have to be reinforced or BoJ will have to receive a government guarantee against losses if it is to increase risk asset purchases. We believe the most credible option is for the APP to handle only risk assets and for the government to provide a first-loss guarantee scheme for the APP up to a certain amount
Deutsche Bank analyst Makoto Yamashita says the market will "hinge on the details" of the meeting.
"We expect BoJ Governor Haruhiko Kuroda to emphasize a regime shift at the Bank, which is likely to become a catalyst for yen depreciation and a rise in stocks," says Yamashita.
That would be welcome news for investors betting against the yen, which is expected to continue falling as a result of Abenomics policy initiatives, but has found a bit of support in recent weeks, effectively stalling one of the most popular currency trades in the world.
However, most agree that the market is already expecting so much of Kuroda and the BoJ that the outcome of this press conference has probably already been discounted.
"The market is already positioned for boldness, with the largest speculative short JPY position since the heyday of the yen-funded carry trade in mid-2007, according to CFTC data," says Société Générale analyst Alvin Tan. "We remain on the sidelines in JPY for the short-term."
Deutsche Bank strategist Taisuke Tanaka agrees.
"The markets have largely discounted these possibilities," Tanaka writes in a note to clients today. "Thus, we believe the new regime's decision will not spark a second 'Abe market' (i.e., a repeat of the market upsurge following the election victory of Prime Minister Shinzo Abe) and may disappoint markets."
In Luxembourg, leaders are warning that applying the Cypriot bailout model -- a levy on bank deposits -- to other crisis-plagued countries could lead to a flight of investors from Europe. But the EU is considering the option anyway.
The debate over this week's "bail in" of bank account holders in Cyprus as part of the country's debt crisis bailout is continuing to simmer in Europe. In Luxembourg, Finance Minister Luc Frieden has warned that the example set in Cyprus by taxing people holding €100,000 ($129,000) or more in their accounts could drive investors out of Europe.
"This will lead to a situation in which investors invest their money outside the euro zone," he told SPIEGEL. "In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers."
Earlier this week, Euro Group President Jeroen Dijsselbloem sparked an enormous controversy after stating that the solution found in Cyprus could be applied throughout the euro zone in the future.
The remark triggered immediate criticism from his predecessor as head of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker. "It disturbs me when the way in which they tried to resolve the Cyprus problem is held up as a blueprint for future rescue plans," Juncker told German public broadcaster ZDF earlier this week. "It's no blueprint. We should not give the impression that future savings deposits in Europe might not be secure. We should not give the impression that investors should not keep their money in Europe. This harms Europe's entire financial center."
But in the European Parliament, politicians are considering ways to make banks bear greater responsibility for their own financial problems. Lawmakers are considering the European Commission's proposed banking resolution legislation for faltering financial institutions. The discussion includes the possibility of future compulsory levies on major depositors, although it is more focused on placing greater responsibility for risks on other investors in banks.
"We want to clearly strengthen the position of deposit customers," said Swedish European Parliament member Gunnar Hökmark. Under the proposal, deposits of up to €100,000 would be excluded from any loss participation at a bank. Any deposits over that amount would only get hit if the losses couldn't be fully covered through a bank's shareholders and other creditors.
'Societal and Political Acceptance Is Ending'
The EU currently guarantees all deposits under €100,000, but this policy was called into question two weeks ago after the finance ministers of the euro zone decided to make small-scale savers contribute to the bailout of the Cypriot banking sector. Ultimately, Cyprus issued a one-time levy only against depositors with €100,000 or more in their accounts, the first time that personal bank accounts have been hit in Europe as part of a formal bailout package.
Under current EU policy, private creditors will not be required to cover banking imbalances until 2018. But in Germany, Andreas Dombret, a board member of the Bundesbank, the country's central bank, would like to implement the new rules much sooner, by 2015. And Carsten Schneider, the budget policy expert for the opposition center-left Social Democrats, says he believes the rules for winding down banks should be implemented as soon as 2014.
"Societal and political acceptance is ending for the model of bank rescues in which the state protects bond holders and major investors," said Schneider.
4- EU Banking Crisis
THE CYPRUS IMPACT - Crumbling EU Foundation Principles
The euro’s core founding principles, based on the Maastricht Treaty’s:
1- “irrevocable” fixing of currency rates, and of
2- the free movement of capital, have been violated.
According to Barclays: From a European perspective, the list of broken taboos and assumptions continues to grow. It includes:
1. EU sovereign debt cannot be restructured: broken by the Greek PSI.
2. Senior bank debt-holders cannot be bailed in: broken several times with respect to banks in Denmark, Ireland and now two Cypriot banks.
3. Depositors are sacrosanct: broken by Cyprus – deposits greater than the formal guarantee (EUR100k) in the two biggest banks, with EUR4.2bn of uninsured deposits in Laiki Bank set for a large haircut of unknown size, and Bank of Cyprus deposits set for a haircut of around 35% according to several news reports (eg, Economist, Reuters).
4. Depositors should not be punitively taxed: broken by the Cypriot government and implicitly endorsed by the EU, but vetoed by the Cypriot parliament.
5. If capital controls are applied in the euro area, it is ‘game over’: broken by Cyprus – banks were shut for nearly two weeks; draconian controls of uncertain duration have been imposed.
6. Discussion of a euro exit is ‘off limits’: already it is apparent that euro exit was discussed with respect to Greece during H1 12; this topic again re-emerged last weekend with respect to Cyprus.
7. The EU can rely on the IMF to be sympathetic in providing financing without haircuts, even for countries with high public debt: from the Greek and now the Cypriot experience, the Fund is evidently evaluating new programmes more critically, particularly when debt/GDP ratios rise above 100%.
The euro will never be the same again; its preservation now depends urgently upon economic recovery. Without the delivery of economic growth, unemployment will rise to yet higher post-war record levels, and the widespread and growing disillusionment felt by EU citizens towards their economic regime will threaten to spill over into more explicit questioning of the euro’s suitability.
It would appear that between the historical revisions of over-optimistic initial prints in macro data in the last few months and the reality of the weakness in Europe; the global economy is in Slowdown. Goldman's Swirlogram has now seen its Global Leading Indicator in the 'slowdown' phase for two months as momentum fades rapidly and seven of the ten major factors in the index declining with Global (Aggregate) PMI, and Global New Orders-less-Inventories worsening. Quite comically, the three factors providing some positivity are the Baltic Dry Index (which we are told is irrelevant when it drops), Japanese Inventory/Sales (which improved but remains at depression-era levels), and US initial jobless claims (which have become a farce statistically from what we can tell). Of course, none of this macro reality matters for now - until it does that is.
The red arrows show the relative size of adjustments from the initial estimates...
and the last 3 days have seen the biggest drop in US macro data in 9 months...
Long-term growth conditions in Spain, Italy and France are as weak as they have been (other than during wartime) in over a century. The chart below tells the story. As JPMorgan's Michael Cembalest notes, while European sovereign debt spreads have rallied across the board, European bank lending to households and businesses is still declining, and the cost of small business loans in Italy and Spain is higher than both real and nominal growth. With ECB policy now clearly useless given Europe's fragmentation, and with Germany's forward expectations rolling over, it is hard to see how, absent wholesale devaluation and/or inflation (or as Cembalest notes destruction & rebuilding), Europe will recover from this.
11 - Shrinking Revenue Growth Rate
SENTIMENT - Small Investors Edging Into Market Afraid to Miss Rally
The market's record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.
When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.
This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.
"What really tipped our hand was to see our cash not doing anything while the S&P was going up," says Ms. White, a 39-year-old dermatologist in Houston. "We just didn't want to be left on the sidelines."
So far this year, U.S. stock-focused mutual funds—the traditional domain of mom-and-pop investors—have taken in a net of $33.6 billion, according to Lipper.
That is a small reversal compared with the $445 billion that they pulled from domestic stock mutual funds from 2007 through the end of 2012.
Many on Wall Street think that trend will likely accelerate in coming months, particularly if the stock rally continues.
So far, most of the gains have been powered by big institutions and professional traders, whose buying helped push the blue-chip Dow to a gain of 11% in the first quarter of the year, which ended last Thursday.
That rally, which also pushed up the S&P 500 to a record last Thursday, is the best start for the Dow since 1998.
Providing some comfort to small investors are fading concerns about the health of the U.S. economy. While growth is far from vibrant, unemployment is falling. Crucially for individual investors, the values of homes—the biggest single investment for most Americans—have started to inch higher. Corporate profits are at record levels, and confidence is rising among consumers and businesses.
But there is nothing like bad returns to scare away investors, and good ones to bring them back.
After the long bull market of the 1980s and 1990s, the first 10 years of this century have become known on Wall Street as the "lost decade." The S&P 500 finished 2009 down 24% from where it was a decade earlier, thanks to a pair of vicious bear markets.
First came the collapse of the technology stock bubble starting in March 2000, which saw the S&P 500 tumble 49% to its nadir in October 2002. Then from its peak just before the financial crisis in October 2007, the S&P 500 slid 57% to its March 2009 low.
22 - Public Sentiment & Confidence
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
With the markets breaking all-time highs last week, it begs the question of just how high they can go. At 1,569 points the bears would say at this point the S&P 500 is completely overdone. With a sluggish economy and a growing federal deficit, you might be prone to believe them.
But there is a little-known indicator that became very fashionable between 1982-2007 that says something else entirely. Noted for its accuracy over that period, it actually suggests that stocks should double.
It's called the "Fed Model."
Now, before you assume that I am attacking Mr. Hutchinson's view point, I want to clarify that even he suggests that "...the Fed Model is only right by accident. However, lots of people follow it..." This is the primary point that I want to address which is the fallacy of the Fed Model.
While there are certainly reasons to be bullish about the financial markets currently, as their hover near historic highs, one of the simplest, most overused and popular assertions is that claim that stocks must rise because interest rates are so low. In fact, you cannot get through an hour of financial television without hearing someone discuss the premise of the Fed Model which is earnings yield versus bond yields.
The idea here, once formalized as the "Fed Model," is that
stocks' "earnings yield" (reported or forecast operating earnings for the S&P 500, divided by the index level) should tend to track the Treasury yield in some fashion.
This simply doesn't hold up in theory or practice.
First, the Federal Reserve has been on an unprecedented mission to support the financial markets and the economy through outright manipulation of interest rates. The artificial suppression of interest rates through various interventions, such as Quantitative Easing, has distorted what bond yields would be in a more normal operating environment. Therefore, the yields do not reflect the inherent risk being undertaken by investors in terms of duration, credit or repayment.
The Fed's goal of suppressing interest rates was to ultimately boost employment and asset prices to spur economic growth. However, the problem for the Fed has been a failed transmission system which has left the "wealth effect" trapped at the upper end of the economic spectrum and has failed to do much more than keep the economy from slipping into a prolonged recession.
Therefore, with the yield curve artificially steep the effectiveness of the yield curve's recession predicting capability may be somewhat suspect this time around. This is something I can't prove at the moment - but I do think that time will tell that this time "may indeed be different." However, the reason I state this is that if we extract the influence of trillions of dollars of Federal stimulus though both the government (TARP, HAMP, HARP, etc.) and the Federal Reserve - the yield curve would likely look far different than it does today.
"Corporate profits have surged since the end of the last recession which has been touted as a definitive reason for higher stock prices. While I cannot argue the logic behind this case, as earnings per share are an important driver of markets over time, it is important to understand that the increase in profitability has not come strong increases in revenue at the top of the income statement. As the chart below shows while earnings per share has risen by over 200% since the beginning of 2009 - revenues have grown by less than 10%.
As expected, since the economy is 70% driven by personal consumption, GDP growth and revenues have grown at roughly equivalent rates. Therefore, the question as to where corporate profitability came from must be answered? That answer can be clearly seen in the chart below of corporate profits per worker which is at the highest level in history.
Suppressed wage growth,
accounting gimmickry and
have been the primary factors in surging profitability. However, these actions are finite in nature and inevitably it will come down to topline revenue growth. However, since consumer incomes have been cannibalized by suppressed wages and interest rates - there is nowhere left to generate further sales gains from in excess of population growth."
As the Fed's suppression of interest rates - given a more normal operating environment earnings yields would likely be less than they are today. The deflationary pressures on wages due to an excessively large labor pool, combined with accounting manipulation and record stock buybacks to boost earnings per share, have inflated the earnings yield to historically high levels. However, it is also within the context of these "record profits" that a warning bell should be sounding as "records" by any measure are usually more representative of a peak within the current trend rather than the start of one.
The Fed Model Is Broken
This bring us to the widely followed, overly espoused and internally flawed "Fed Model." The Fed Model basically states that when the earnings yield on stocks (earnings divided by price) is higher than the Treasury yield; you should be invested in stocks and vice-versa. That makes sense - until you actually think about it.
The problem here is twofold. First, you receive actual income from owning a Treasury bond, along with a return of principal function, whereas there is no tangible return from an earnings yield on stocks. Therefore, if I own a Treasury with a 5% yield and a stock with a 8% earnings yield, if the price of both assets do not move for one year - my net return on bond is 5% and on the stock it is 0%. Which one had the better return? This has been especially true over the last decade where stock performance has been significantly trounced by simply owning cash and bonds rather than equities. Yet, analysts keep trotting out this broken model to entice investors to chase the single worst performing asset class over the last decade.
It hasn't been just the last decade either with which the "Fed Model" has continually misled investors. An analysis of the previous history of the concept shows it to be a very flawed concept and one that should be sent out to pasture sooner rather than later. During the 50's and 60's the model actually worked pretty well as economic growth was strengthening. Interest rates steadily rose as a stronger economic growth allowed for higher rates which enticed higher personal savings rates. These higher savings rates were lent out by banks into projects that continued further stimulated economic growth.
However, as I have discussed in the past in "The End Of Keynesian Economics" as the expansion of debt, the shift to a financial and service economy and the decline in savings began to deteriorate economic growth the model no longer functioned. During the biggest bull market in the history of the United States you would have sat idly by in treasuries and watched stock skyrocket higher. However, not to despair, the Fed Model did turn in 2003 and signaled a move from bonds back into stocks. Unfortunately, the model also got you out just after you lost a large chunk of your principal after the crash of the markets in 2008.
Currently, you are back in again after missing most of the run up in the current bull cycle only most likely to be left with the four "B's" after the next recession ends - Beaten, Battered, Bruised and Broke.
The bottom line here is that earnings yields, P/E ratios, and other valuation measures are important things to consider when making any investment but they are horrible timing indicators. As a long term, fundamental value investor, these are the things I look for when trying to determine "WHAT" to buy. However, understanding market cycles, risk / reward measurements and investor psychology is crucial in determining "WHEN" to make an investment. In other words, I can buy fundamentally cheap stock all day long; however, if I am buying at the top of a market cycle then I will still lose money.
As with anything in life - half of the key to long term success is timing. Right now, with virtually all of the economic indicators weakening, rising geopolitical tensions, continued concerns from an ongoing recessionary environment in the Eurozone, valuations anything but cheap currently and an extremely overbought and extended market technically - timing right now could not be worse for long term investors to "jump in".
Could stocks double from here? Anything is possible, however, for investors the reality is that the current financial and economic environment is not extremely healthy because if it were the Fed would not need to be engaged in two simultaneous liquidity programs to keep it afloat. Without such support from the Fed, as we have seen after the conclusion of the previous Q.E. programs, the markets, and the economy, would quickly begin to contract.
It's time for the "Fed Model" to go the way of the "dodo." Of course, much like the "Mirror On The Wall" as long as it tells us that we are the "fairest of them all" what could possibly go wrong?
GOLD - The $210 Per Oz., Per $1T, of Central Bank Asset Expansion
Total gold supply can only grow marginally, while fiat money supply can grow exponentially through printing programs. This is why gold’s monetary value is so important – it’s the only “currency” in play that is immune to government devaluation.
Chart A illustrates the relationship between the growth of central bank balance sheets in the US, EU, UK and Japan and the price of gold. This relationship has an extremely high correlation with an R2 of about 95%. As central banks increase the size of their balance sheets through ‘open market operations’ to buy bonds, mortgage-backed securities (“MBS”) and the like, they inject more fiat dollars into their respective banking systems. As gold has a relatively stable supply, if there are more dollars available, the price of gold should rise in dollar terms. It’s really a very simple and intuitive relationship – as it should be.
This relationship between central bank printing and gold has existed since the beginning of the gold bull market in 2000. In fact, this relationship shows that for every US$1 trillion increase in the collective central banks’ balance sheets, the price of gold has generally appreciated by an average of US$210/oz.
Somewhat surprisingly, it turns out that the collective central bank balance sheets have actually shrunk over the past three months – by approximately US$415 billion. The biggest drop was seen in the ECB’s balance sheet, which shrunk by the equivalent of US$370 billion, while other central banks also experienced small declines. Based on our simple model above, a decrease of US$415 billion should produce a gold price decline of roughly US$87/oz. And as it turns out, gold fell by US$76/oz over the first quarter of 2013. Does this sound like a bubble to you? It certainly doesn’t appear to be. Gold is performing almost exactly as it should – by acting as a currency barometer for the amount of money being injected into or withdrawn from the economy... which leads us to Japan.
Japan’s recent QE announcement is a thing of wonder. It represents an absolutely massive injection of yen relative to the size of the Japanese economy. The Bank of Japan’s US$75 billion equivalent per month of yen printing, coupled with the US Federal Reserve’s $85 billion per month (through its current QE program) will addUS$1.97 trillionto the collective central bank balance sheets over the next 12 months. Given Japan’s considerable contribution, we seriously question how SocGen believes gold can drop to US$1,375/oz by the end of the year. For that to happen, we would need to see a collective balance sheet decline of roughly 15%. Does SocGen seriously believe the US Fed (or any other central bank for that matter) is going to reverse its QE accumulation and then start aggressively selling balance sheet assets over the next year?
If the Fed were to remove that flow of capital, the free market would once again dictate US bond yields and stock prices. There’s not a chance the Fed will take the risk of finding out what US bonds or stocks are worth to the market without a perpetual government-induced backstop. Why take the risk? Especially since the cumulative QE programs to date have not caused a drastic increase in inflation expectations.
Individual investors continued to show less enthusiasm for equities this week as bullish sentiment dropped for the third week in a row. According to the American Association of Individual Investors (AAII), bullish sentiment dropped from 38.4% down to 35.5%. Since hitting a high of 52.3% in January, bullish sentiment has now dropped by 32.2%. With readings like this, it is hard to argue that investors are overly optimistic.
While individual investor sentiment is often considered to be a contrary indicator for equities, over the last two years declines in bullish sentiment have preceded drops in the equity market.
Economic risk: SPX has lined up very well initial jobless claims for the past 5+ years but has recently overshot by quite a bit.
SPX versus INITIAL JOBS CLAIMS
"HIGH QUALITY" RISK
High quality risk: the BAML Global Financial Stress Index, which attempts to measure stress in areas such as solvency and liquidity, price momentum, and short term volatility. This is the first time it has broken significantly below equities in over two years.
SPX versus GLOBAL FINANCIAL STRESS INDEX
"LOW QUALITY" RISK
the Markit CDX North America High Yield Index tracks CDS for 100 non investment grade debt issuers. This has been an extremely tight relationship.
SPX versus Markit CDX North America High Yield Index
Today, lets look at another interesting data point from AAII: Cash allocations reached a 16-month high in March. Individual investors pulled money from both equities and bonds last month.
We have shown the flip side of this chart in the past — equity allocation — which is similarly moderate.
Equity allocations fell 3.0 percentage points to 59.5% in March. Surprisingly, the past 15 months have not seen much variation in equity allocations stuck in a range from 58.8% (June 2012) to 62.5% (February 2013). The historical average is 60%.
March AAII Asset Allocation Survey results:
• Stocks Total: 59.5%, down 3.0 percentage points
• Bonds Total: 17.7%, down 1.5 percentage points
• Cash: 22.8%, up 4.6 percentage points
We noted last night the 'six charts' that represent the sum total of the hopefulness of these markets with relation to fundamental earnings but it is the ratio of negative to positive earnings guidance - which stands at a record high - that should worry investors the most (and doesn't). As the WSJ notes, in the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007 - just as that bull market was ending (and troughed at 0.97 right as the bottom was in in stocks in Q1 2009). The current 3.55 ratio is the highest on record. But what is more representative of the market's absolutely sanguine nature is that just 2 days after guiding earnings down, stock prices are down just 0.3% (and half the stocks actually rose). As the WSJ concludes, and we tend to agree, watch out. There may be a nasty drop on the other side of this wall.
As the first quarter drew to a close, 86 companies in the S&P 500 issued negative guidance for what they expect to report in earnings for that period. Just 24 issued positive guidance. At 3.58 negative updates for every positive one, that is by far the highest ratio since FactSet began tracking such data in 2006.
A look at consensus earnings-per-share expectations for the companies with the 10 highest weightings in the S&P 500—making up close to a fifth of the total—shows a similar pattern. Relative to where forecasts stood at the start of the year, they have fallen for seven and risen for three.
Ignore corporate worrywarts at your peril. In the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007—just as that bull market was ending. Meanwhile, one of the lowest ratios of negative guidance, 0.97, came during the second quarter of 2009, when many analysts and investors still were very pessimistic and stocks hit a 13-year low.
Investors' reaction to recent guidance shows they may be too sanguine. FactSet notes that the average stock-price change from two days before to two days after the announcement of negative guidance has been a drop of just 0.3% this quarter. About half of the stocks involved actually rose.
Conversely, companies issuing positive guidance had larger-than-typical gains on average, although this figure was pulled higher by Netflix, which rallied by two-thirds
A rather skewed distribution in asset returns Year to Date (through March 31), with the winners so far i) the Nikkei, in both JPY and USD terms, on endless jawboning out of the Japanese political apparatus that it may do virtually anything - although in a few hours we will see just what the BOJ actually will do, the S&P on the $85 billion in monthly liquidity injections, and finally the FTSE on expectations the arrival of yet another Goldman central planner will unleash yet another epic episode of monetization in July, just as the Japan effect is fading.
The losers: pretty much everyone else. (BitCoin was not included in the sample).
Miller Tabak Chief Technical Market Analyst Jonathan Krinsky says "the cracks in the market appear to be growing, with the small-caps and transports severely underperforming."
Doug Kass says the same thing today, pointing to "subsurface weakness" in the market.
Here are a few points Kass highlights in his note:
The Russell 2000 underperformed on Monday (-1.3%) and was down (-0.5%) on an up day on Tuesday.
The advance/decline line is eroding as the market's rise narrows.
Breadth disappointed – yesterday, NYSE decliners eclipsed advancing issues by over 200, excluding ETFs and fixed-income closed-end funds.
The number of new 52-week highs is narrowing.
The bank stocks/brokerages are lagging.
Transports trailed, down 1.5% and 1.2% on the first two days of the week, respectively -- check out the chart of FedEx (FDX).
Semis got schmeissed (-2.0% on Monday and -0.8% on Tuesday).
The cyclical index dropped by -0.7% on Tuesday, following a 1.2% decline on Monday -- check out the chart of Caterpillar (CAT).
The yield on the 10-year U.S. note remains low (1.86%) and is signaling slowing domestic economic growth -- speaking of the bond market, this week brought a continued disconnect between Treasury note and bond yields (lower by 3 to 4 basis points) compared to the market averages (slightly higher in price).
"It is an unusual market feature when defensive stocks are among the leading groups in a market moving to new highs," says Kass.
On the other hand, Phoenix Partners Group Chief Equities Strategist Michael Block doesn't think these signals are necessarily anything to worry about.
"As for the argument that defensives have led, my advice is to think about what quant factors might be leading those stocks higher here," says Block. "There are style, size, and fundamental factors there that are likely the cause... and it has nothing to do with them being hiding places."
Block points out that Russell 2000 outperformance is still trending up despite recent weakness, and that he considers these technical factors "an early warning sign and nothing to jump in against with both feet."
ANALYTICS - Weakness Below the Headline Numbers - 2
Small-cap stocks have been lagging the market recently.
Miller Tabak's Jonathan Krinsky brings this to clients' attention today, writing, "Generally, when the small-caps show relative weakness vs. the large caps, it is a sign that investors are moving out of the riskier/high-beta names and into the 'relative safety' of the large/mega-caps."
Perhaps the best way to see this rotation out of small-caps and into large-caps is by charting the ratio of the Russell 2000 (a small-cap index) to the Dow Jones Industrial Average (an index of large-caps).
When the ratio goes down, investors are moving into bigger, safer names. That's what is happening right now.
Krinsky points out that this ratio peaked in February 2012, before the S&P 500 ultimately peaked in early April, as shown by the arrows in the chart below.
The chart also shows that the Russell 2000/DJIA ratio has peaked again and appears to be headed lower.
"This is by no means a guarantee of a market top of course," says Krinsky. "We saw this ratio plunge from July to August 2012, even as the S&P grinded higher."
This time, it might be saying something prescient, though, given the fact that the market rally hasn't really faced a major test yet.
"When put in context, however, and combined with many of the other factors we have been highlighting, it should certainly be given some consideration," says Krinsky.
In a new note, Gluskin Sheff's David Rosenberg that it is "exciting" to see the S&P 500 hit an all-time high, but that "beneath the veneer, some signs of 'nonratification' or at least 'overbought' readings are starting to take hold." He offers 10 reasons:
Too much exuberance - Many are repeating the mistakes seen during the highs of 2001 and 2007 and believe things are good, because of the way the stock market is currently performing. "One must wonder if this is a classic case of performance chasing at the highs. Those jumping in now after a give year period in which the major averages have soared 135% and without the major components of the economy having fully recovered could end up being a classic case of bad timing."
Volume - The average daily volume for March is about 12 percent lower than year ago levels.
50-day moving averages - "There has been a deteriorating share of NYSE-traded stocks trading above their 50-day averages in recent weeks… in other words, leadership is narrowing."
Insider selling - Corporate insiders have been some of the biggest sellers in the past few weeks.
Defensive sector are seeing highs, not cyclical stocks - "It is very rare to achieve new highs with defensive sectors that shield investors from recessionary pressures dominating the leadership board, like Healthcare and Consumer Staples, while economic sensitivities like Tech and Materials rise the rear."
Bulls are investing cautiously - "Leadership has come from defensive sectors such as Consumer Staples and Healthcare, along with high dividend-paying stocks. If bulls are backing recovery, they are investing cautiously." In Q1, the Dow was up 11.3 percent, the S&P 500 was up 10 percent and the Nasdaq was up 8.2 percent.
Rising short positions - NYSE short positions went up 2.4 percent in the first half of March.
Historical trends - In each of the past three years, first quarter rallies are followed by "a stutter and sputter well into the summer months."
Buying power is nearly maxed out - "Portfolio managers only have an average of 3.7% of cash on hand relative to equity assets under management."
Dow Theory advocates are silent - At the start of the year, Dow Theorists were looking at transportation stocks and seeing 'buy' signals, but, these stocks have come off their highs. "I don't want to take this too far, but the weekend WSJ does quote the legend Richard Russell as saying that a move in the Down Transport index to 6,100 from the current 6,255 level would be a vivid signal that the overall market has topped out (so at least we have some time then in order to make a judgment call, at least based on this indicator).
The markets closed out the first quarter of 2013 with a big rally and the bulls seem to remain in charge. The Dow Jones Industrial Average (DJIA) is up more than 11% and the S&P 500 is up 10% so far in 2013, and they are both at all-time closing highs. We recently gave our synopsis showing the road map for the bull market to continue in April, but we also want to be open to the obvious and less obvious risks. Unfortunately for the market bulls, there are two sides to a coin.
24/7 Wall St. wants to cover the other side of the bull market coin. The saying goes, “Bull markets often crawl up a wall of worry.” Here are 10 serious considerations that those of us who remain bullish on stocks need to keep in the back of our minds. We have looked at the year-to-date changes for much of the analysis, and historical data or color has been added elsewhere.
1. The Ticker Tape and Market Internals: For starters, when markets hit all-time highs, the ticker tape and market internals come into focus. The S&P 500 took more than two weeks of challenging the all-time high before closing above it, even though the DJIA already had broken out. In fact, it looks like the S&P was within 10 points of the all-time closing high for almost three weeks before punching through. Some may question that the ticker tape is not as strong as you might expect. DJIA stocks are up year-to-date by a ratio of 14:1, but the S&P ratio is close to 7:1 year-to-date. Capital inflows into stocks have been monumental, but they seem to have slowed. Even with the normal bump at the end of a month and start of a month from 401K monies, what if that starts to peter out? It takes money to make money, and it actually does require inflows to keep driving up stock prices. What if the “sell in May and go away” theme comes early this year?
2. The European Follies: That darned European situation just refuses to go away. First it was all the woes of the PIIGS (Portugal, Italy, Ireland, Greece, Spain). But in 2013 suddenly Cyprus matters. This inconsequential island nation is just not very relative. Outside of being an offshore banking mecca and a tourist destination, and having a British naval base, this nation should have no importance at all. Unfortunately, that is now the world we live in. Imagine if Spain, Italy, Portugal or Greece were suddenly back in the soup. They at least matter compared to Cyprus. A Dow Jones headline caught our attention: Greek Retail Sales Plunge 15.7% as Country Enters Sixth Year of Recession. Any new spike higher in interest rates around the PIIGS, or any other unwelcome growing anti-austerity measures, could tip Europe again. If Europe unexpectedly gets far worse again all of a sudden, kiss our great U.S. bull market bye-bye.
3. Employment and Economic Reversals: What if the employment data really does get wrecked by the spending sequestration? This is a low probability because sequestration was really just cutting the growth of spending rather than cutting actual spending. But what if employment just reverses again? The validity of the 7.7% unemployment rate from February can be debated, but that was still the best reading in four years. What if companies just start laying workers off or have furloughs for, say, the entire slow summer period? It seems unlikely, but it is possible. The equity markets would not respond positively if the official unemployment rate gets back up around 8%.
4. QE-Exhaustion: Ben Bernanke and friends are printing up more money than you can fathom. The bond buying alone is $85 billion or so per month in the United States. Throw in whatever the Japanese are doing now to end their two-decade period of no inflation and no growth. What if the funny-money stimulus measures start to end or taper off? This is not expected, but you cannot imagine that the central bankers really will live up to their promise of signaling when the end or tapering will come about. Bernanke likely will not say, “Soon, soon, getting closer, getting much closer, almost there, really almost there, OK NOW!” The market has many theories about how global quantitative easing will end. No one really knows, but if not handled properly it could be shocking.
5. International Bad Boys: The United States and the developed world have two serious bona fide financial enemies. A nuclear Iran is something that no one wants. What happens when the world wakes up to the headline “Iran Successfully Tests First Nuclear Bomb” one day? Then there is North Korea. The new leader, Kim Jong Un, has just stepped up his saber-rattling with more nuclear threats. They cannot afford to give their citizens enough food, but they can still threaten to use their nukes. Iran and North Korea remain risks, and they are likely secular risks. And what about America’s other nemesis? Al Qaeda and other offshoot terrorist groups are still a threat. We will no given them any ideas to consider, but neither will we ever forget them as a risk.
6. Bank and Financial Regulation: Investors still want to talk up bank stocks. Meredith Whitney says Bank of America Corp. (NYSE: BAC) will hit $15 and Dick Bove says it will hit $30. But what about the Dodd-Frank implementation and the Volcker Rule? What if the banks really do have to stop trading in the financial markets? There are trillions upon trillions of dollars of over-the-counter derivatives still outstanding that would have to be unwound. Maybe the regulation is more ruse and threat than real, but this remains a risk. Congressman Peter Defazio is out with yet another trading tax as well. What if that socialist effort takes on more steam this time around because Defazio became less stupid by proposing a watered down tax effort this time? It seems unlikely, but that is another risk to the banks.
7. Earnings Season: What if earnings season starts out poorly? Alcoa Inc. (NYSE: AA) kicks off earnings season, and it may be very short of “with a bang” this April. Alcoa is down 1.5% so far in 2013, while the S&P 500 is up 10%. How great are its earnings expected to be? Many other companies may report what are very choppy earnings in the first quarter. All of those preparations for the fiscal cliff had some lingering effect in the business world, even if the stock market discounted it. Then there was sequestration of the federal budget, which may still have some impact even if it is the cutting of spending growth versus actual spending cuts. See below about the dollar, but currencies could alter guidance negatively as well. Many companies could have very choppy earnings. Oracle Corp. (NASDAQ: ORCL) was a disappointment that the market was not braced for. What if there are more of the major DJIA and S&P 500 stocks that have unexpected negative news lurking?
8. King Dollar: U.S. companies hate when the U.S. dollar strengthens too much. Japan decided that Johannes Gutenberg’s Bible-printing efforts could be applied to the yen. The demise of the yen has taken it from about 78 yen/dollar in October up to 96 before settling in at about 94 for the end of March. The Europeans just cannot keep things marching smoothly for more than a month or two at a time it seems. In January the euro rose to above $1.36, but now it is closer to $1.28, and the chart still points as though $1.25 or even $1.20 are possible. A strong dollar hurts American companies wanting to export goods and services because it makes our goods more expensive. That ties into earnings above, but watch for companies to start complaining about currency again.
9. Buzzkill of Apple and Facebook: Apple Inc. (NASDAQ: AAPL) has gone from the darling of Wall St. to the ugliest pig in a prom dress. After the monumental rise that led it to be the largest company by market cap, Apple is now down 37% from its peak and is about 16% lower year-to-date. The Facebook Inc. (NASDAQ: FB) IPO also was a total disaster, and the stock is down 45% from the peak of the IPO. After an initial trick into thinking that Facebook’s stock was back, its guile and charm quickly turned into deceit. Facebook shares are down more than 21% from the highs in January, and the stock’s recent weakness has it close to a 2013 low, and shares are now down almost 4% so far this year. Both of these investments could keep pushing the so-called millennials even further away from ever wanting to buy stocks. These may seem like outliers, but psychological damage can take many years to recover from.
10. The Wild Card(s): The last thing that can come up and wreck the great bull market is simply the unknown. We have argued for quite some time now that the markets have lost their ability to predict and price in events. So whatever the next trouble is, the market may not even know about it. Financier and billionaire George Soros once wrote, “Contrary to the tenets of market fundamentalism, financial markets do not tend towards equilibrium; they are crisis prone.”
OK, so now you have 10 real-life issues or risks that are threats to the bull market to consider. The charts are signaling that the bull market likely is not dead. The fundamentals look better than they did a quarter ago as well. But history has taught us over and over that the tide can change suddenly. There are probably 20 other serious risks that investors have to consider on top of this. We just wanted to offer some of our top concerns as you try to navigate the current bull market.
There are two sides to a coin, and we wouldn’t want you thinking we only have pom-poms for cheering those bulls three months before the festival in Pamplona begins.
Chances are you have seen a long-term chart of the Dow annotated as the chart below has been. The red hash marks designate secular bull and bear markets. But if you look closely, you may notice one significant difference from similar charts; the first secular market begins in 1921 and not in 1932 as is often shown.
Why the low in 1921? Why is the secondary low of March 2003 used and not the nominal low in October 2002? The dates shown on this chart are the lows of, what George Lindsay called, the Long Cycle and were found using very specific, rules-based methods devised by him. These rules are explained in the book An Aid to Timing. I recently took a moment to count the exact length of these long-cycles. Although Lindsay devised these methods using data he had collected back to 1798, he wrote the original An Aid to Timing in 1950 so he wasn't able to do perform this exercise for our "modern" market. Review the table below and notice how similar the four cycles are in duration.
Regardless of the time period chosen, the long cycle which began in 2003 is not expected to bottom until 2023. This should eliminate any question of whether the Dow began a new secular bull market at the low in March 2009.
For all those calling for multiple expansion to save us from dismal earnings - take a look at this...
GOLD-DOW RATIO - A Secular Trend
In the chart below, courtesy of Cambridge House, we ask readers: in which period was there a more stable relationship between tangible and intangible values, and a less exuberant irrationality vis-a-vis that which is purely based on confidence, if not so much reality.
A second logical follow up question is: where is this ratio of intangible to tangible value going next? The chart below attempts to provide some log-based perspective on precisely this.
FALLING BEHIND - Here is Why
US INDICATORS CATALYSTS
COMMODITY CORNER - HARD ASSETS
2013 - STATISM
INSIDEOUS INVOLVEMENT - Stealth Capture of Controlling Financial Repression Information
U.S. to let spy agencies scour Americans’ finances
The Obama administration is drawing up plans to give all U.S. spy agencies full access to a massive database that contains financial data on American citizens and others who bank in the country, according to a Treasury Department document seen by Reuters.
Financial institutions that operate in the United States are required by law to file reports of “suspicious customer activity,” such as large money transfers or unusually structured bank accounts, to Treasury’s Financial Crimes Enforcement Network (FinCEN).
The Federal Bureau of Investigation already has full access to the database. However, intelligence agencies, such as the Central Intelligence Agency and the National Security Agency, currently have to make case-by-case requests for information to FinCEN.
The Treasury plan would give spy agencies the ability to analyze more raw financial data than they have ever had before ….
The planning document, dated March 4, shows that the proposal is still in its early stages of development, and it is not known when implementation might begin.
The plan calls for the Office of the Director of National Intelligence – set up after 9/11 to foster greater collaboration among intelligence agencies – to work with Treasury. The Director of National Intelligence declined to comment.
It has been well and often said that only two types of “paper” money have ever existed in history - those that are already worthless and those that are going to be. Eventually, the physical pieces of paper or plastic which have been given a function as a medium of exchange by government order may remain - but their purchasing power on the market does not. The transition point always comes when the “promises to pay” on which the fiat money depends are exposed beyond the possibility of denial to be the LIES which they always were. History is replete with examples, yet very few ask the obvious question: “Pay? - WITH WHAT??” One of the great wonders of the twentieth century was the lengths to which the economics “profession” proved willing to go to avoid even facing that question let alone trying to answer it.
For hundreds if not thousands of years of human history, the vast majority were all too well aware that the government “lives” on the backs of the people. Today, that long-held knowledge has been astonishingly successfully reversed. Today, the perceived “wisdom” is that the people live on the back of the government. In the realm of the history of ideas, it took many centuries to bring forward the idea that a life might be lived without constant kowtowing to government. It has only taken one century - the time since WW I - to all but totally submerge that legacy in a new wave of government dependency.
The old and tired phrase - “I’m from the government and I’m here to help you” - is met by as much derision as it has ever been when people bemoan the impositions of their rulers. But those same people rely on the government to insulate them from the consequences of any action they may choose to undertake.
There are people who love government, people who hate it, and people who fear it. But when the chips are down, the majority of those same people profess to have “confidence” in the government’s power to protect their “welfare”. Governments count on that confidence” above all other things.
Short On Credit And Long On Faith
The ignorance over the mechanisms and procedures which power the modern global financial and monetary system is fiercely held. When it comes to the general public, we have seen demonstrations of that on numerous occasions over the past few years, the latest being in Cyprus. As was the case in all previous like instances in other nations in Europe and elsewhere, very few of those demonstrating in the street have ever thought about the TRUE nature of the banks, central banks and governments in which they place their “trust”. Many reports on the anger of the Cypriots have talked about the end of the “age of innocence”.
Unfortunately, the term innocence is not defined as the fierce refusal to see what is right in front of one’s face. At the end of his great work, Human Action, Ludwig von Mises dealt with the real problem like this:
“There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a selfappointed elite of supermen. In such vital matters blind reliance upon ‘experts’ and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny are at stake.”
“Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.”
Human Action was published in 1949. The problems which von Mises so brilliantly dissected then are incomparably worse now. But the main failing remains the same. Those who refuse to gain the knowledge necessary to stand for something will fall for anything. The result in Cyprus is the latest in a long line of similar cases. To give one example, how many of the “Occupy Wall Street” crowd could give a cogent explanation of what they were protesting against? The specific instances may differ, but the reaction remains the same: “But ... BUT ... YOU TOLD US IT WAS ‘SAFE’!!”
What makes it worse is that most knew that it was NOT ‘safe’ - but they refused to admit it to themselves.
2012 - FINANCIAL REPRESSION
2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS
2010 - EXTEN D & PRETEND
CORPORATOCRACY - CRONY CAPITALSIM
TAX AVOIDANCE -- Gaming the 'Nation State' Concept through Offshore Tax Havens
Since 1966, inflation-adjusted annual income for the bottom 90% of Americans increased just $59, while the 1% increased income average by $625,000, and the 1% of the 1% increased average incomes by $18,700,000 per year.
Pulitzer Prize-winning tax journalist David Kay Johnston reports IRS tax data since Mr. Obama’s 2009 inauguration shows “change” for 90% of Americans: they lost income. The 1% increased income; taking 81% of gains (the top 1% of the 1% took 39% of this total).
This follows a pattern that between 1980 and 2005, the 1% also took over 80% of all income gains.
Since 1966, inflation-adjusted annual income for the bottom 90% of Americans increased just $59, while the 1% increased income average by $625,000, and the 1% of the 1% increased average incomes by $18,700,000 per year.
If you’re ready for solutions rather than death to millions, harm to billions, and looting of trillions: now’s the time to take all the lawful action previous generations have given you under the US Constitution.
GLOBAL FINANCIAL IMBALANCE
STANDARD OF LIVING
DISPOSABLE INCOME: The Death Blow to a 70 Precent Consumption Economy
If the economy is getting better, then why does poverty in America continue to grow so rapidly? Yes, the stock market has been hitting all-time highs recently, but also the number of Americans living in poverty has now reached a level not seen since the 1960s. Yes, corporate profits are at levels never seen before, but so is the number of Americans on food stamps. Yes, housing prices have started to rebound a little bit (especially in wealthy areas), but there are also more than a million public school students in America that are homeless. That is the first time that has ever happened in U.S. history.
So should we measure our economic progress by the false stock market bubble that has been inflated by Ben Bernanke's reckless money printing, or should we measure our economic progress by how the poor and the middle class are doing? Because if we look at how average Americans are doing these days, then there is not much to be excited about. In fact, poverty continues to experience explosive growth in the United States and the middle class continues to shrink. Sadly, the truth is that things are not getting better for most Americans. With each passing year the level of economic suffering in this country continues to go up, and we haven't even reached the next major wave of the economic collapse yet. When that strikes, the level of economic pain in this nation is going to be off the charts.
The following are 21 statistics about the explosive growth of poverty in America that everyone should know...
1 - According to the U.S. Census Bureau, approximately one out of every six Americans is now living in poverty. The number of Americans living in poverty is now at a level not seen since the 1960s.
2 - When you add in the number of low income Americans it is even more sobering. According to the U.S. Census Bureau, more than 146 million Americans are either "poor" or "low income".
3 - Today, approximately 20 percent of all children in the United States are living in poverty. Incredibly, a higher percentage of children is living in poverty in America today than was the case back in 1975.
4 - It may be hard to believe, but approximately 57 percent of all children in the United States are currently living in homes that are either considered to be either "low income" or impoverished.
5 - Poverty is the worst in our inner cities. At this point, 29.2 percent of all African-American households with children are dealing with food insecurity.
6 - According to a recently released report, 60 percent of all children in the city of Detroit are living in poverty.
7 - The number of children living on $2.00 a day or less in the United States has grown to 2.8 million. That number has increased by 130 percent since 1996.
8 - For the first time ever, more than a million public school students in the United States are homeless. That number has risen by 57 percent since the 2006-2007 school year.
9 - Family homelessness in the Washington D.C. region (one of the wealthiest regions in the entire country) has risen 23 percent since the last recession began.
10 - One university study estimates that child poverty costs the U.S. economy 500 billion dollars each year.
16 - There has been an explosion in the number of "working poor" Americans in recent years. Today, about one out of every four workers in the United States brings home wages that are at or below the poverty level.
17 - Right now, more than 100 million Americans are enrolled in at least one welfare program run by the federal government. And that does not even include Social Security or Medicare.
18 - An all-time record 47.79 million Americans are now on food stamps. Back when Barack Obama first took office, that number was only sitting at about 32 million.
20 - According to one calculation, the number of Americans on food stamps now exceeds the combined populations of "Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Utah, Vermont, West Virginia, and Wyoming."
Unfortunately, all of these problems are a result of our long-term economic decline. In a recent article for the New York Times, David Stockman, the former director of the Office of Management and Budget under President Ronald Reagan, did a brilliant job of describing how things have degenerated over the last decade...
ince the S&P 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.
For the last couple of years, the U.S. economy has experienced a bubble of false hope that has been produced by unprecedented amounts of government debt and unprecedented money printing by the Federal Reserve.
Unfortunately, that bubble of false hope is not going to last much longer. In fact, we are already seeing signs that it is getting ready to burst.
For example, initial claims for unemployment benefits shot up to 385,000 for the week ending March 30th.
That is perilously close to the 400,000 "danger level" that I keep warning about. Once we cross the 400,000 level and stay there, it will be time to go into crisis mode.
In the years ahead, it is going to become increasingly difficult to find a job. Just the other day I saw an article about an advertisement for a recent job opening at a McDonald's in Massachusetts that required applicants to have "one to two years experience and a bachelor's degree".
If you need a bachelor's degree for a job at McDonald's, then what in the world are blue collar workers going to do when the competition for jobs becomes really intense once the economy experiences another major downturn?
One of the federal government’s biggest social welfare programs, which expanded when the economy convulsed, isn’t shrinking back alongside the recovery, the Journal reported last month.
Food stamp rolls increased on a year-over-year basis, but were 1.1% lower from the prior month, the U.S. Department of Agriculture reported. Though annual growth continues, the pace has slowed since the depths of the recession.
The number of recipients in the food stamp program, formally known as the Supplemental Nutrition Assistance Program (SNAP), reached 47.3 million, or nearly one in seven Americans.
Illinois was the only state to see a double-digit year-over-year jumps in use, while Oregon, Maine, Missouri, Texas, Arizona, Pennsylvania, Michigan, Idaho, North Dakota, Utah and North Carolina all posted annual drops.
Mississippi was the state with the largest share of its population relying on food stamps — 22% — though Washington, DC was a bit higher overall at 23%. One in five residents in Louisiana, Tennessee and George also were food-stamp recipients. Wyoming had the smallest share of its population on food stamps — 7%.
According to a report by the non-partisan Congressional Research Service late last year, “U.S. income distribution appears to be among the most unequal of all major industrialized countries and the United States appears to be among the nations experiencing the greatest increases in measures of income.”
Now David Stockman – Director of the Office of Management and Budget under Ronald Reagan – hammers on this theme in a new book:
Even the tepid post-2008 recovery has not been what it was cracked up to be, especially with respect to the Wall Street presumption that the American consumer would once again function as the engine of GDP growth. It goes without saying, in fact, that the precarious plight of the Main Street consumer has been obfuscated by the manner in which the state’s unprecedented fiscal and monetary medications have distorted the incoming data and economic narrative.
These distortions implicate all rungs of the economic ladder, but are especially egregious with respect to the prosperous classes. In fact, a wealth-effects driven mini-boom in upper-end consumption has contributed immensely to the impression that average consumers are clawing their way back to pre-crisis spending habits. This is not remotely true.
Five years after the top of the second Greenspan bubble (2007), inflation-adjusted retail sales were still down by about 2 percent. This fact alone is unprecedented. By comparison, five years after the 1981 cycle top real retail sales (excluding restaurants) had risen by 20 percent. Likewise, by early 1996 real retail sales were 17 percent higher than they had been five years earlier. And with a fair amount of help from the great MEW (measurable economic welfare) raid, constant dollar retail sales in mid-2005 where 13 percent higher than they had been five years earlier at the top of the first Greenspan bubble.
So this cycle is very different, and even then the reported five years’ stagnation in real retail sales does not capture the full story of consumer impairment. The divergent performance of Wal-Mart’s domestic stores over the last five years compared to Whole Foods points to another crucial dimension; namely, that the averages are being materially inflated by the upbeat trends among the prosperous classes.
For all practical purposes Wal-Mart is a proxy for Main Street America, so it is not surprising that its sales have stagnated since the end of the Greenspan bubble. Thus, its domestic sales of $226 billion in fiscal 2007 had risen to an inflation-adjusted level of only $235 billion by fiscal 2012, implying real growth of less than 1 percent annually.
By contrast, Whole Foods most surely reflects the prosperous classes given that its customers have an average household income of $80,000, or more than twice the Wal-Mart average. During the same five years, its inflation-adjusted sales rose from $6.5 billion to $10.5 billion, or at a 10 percent annual real rate. Not surprisingly, Whole Foods’ stock price has doubled since the second Greenspan bubble, contributing to the Wall Street mantra about consumer resilience.
To be sure, the 10-to-1 growth difference between the two companies involves factors such as the healthy food fad, that go beyond where their respective customers reside on the income ladder. Yet this same sharply contrasting pattern is also evident in the official data on retail sales.
That the consumption party is highly skewed to the top is born out even more dramatically in the sales trends of publicly traded retailers. Their results make it crystal clear that Wall Street’s myopic view of the so-called consumer recovery is based on the Fed’s gifts to the prosperous classes, not any spending resurgence by the Main Street masses.
The latter do their shopping overwhelmingly at the six remaining discounters and mid-market department store chains—Wal-Mart, Target, Sears, J. C. Penney, Kohl’s, and Macy’s. This group posted $405 billion in sales in 2007, but by 2012 inflation-adjusted sales had declined by nearly 3 percent to $392 billion. The abrupt change of direction here is remarkable: during the twenty-five years ending in 2007 most of these chains had grown at double-digit rates year in and year out.
After a brief stumble in late 2008 and early 2009, sales at the luxury and high-end retailers continued to power upward, tracking almost perfectly the Bernanke Fed’s reflation of the stock market and risk assets. Accordingly, sales at Tiffany, Saks, Ralph Lauren, Coach, lululemon, Michael Kors, and Nordstrom grew by 30 percent after inflation during the five-year period.
This tale of two retailer groups is laden with implications. It not only shows that the so-called recovery is tenuous and highly skewed to a small slice of the population at the top of the economic ladder, but also that statist economic intervention has now become wildly dysfunctional. Largely based on opulence at the top, Wall Street brays that economic recovery is under way even as the Main Street economy flounders.
The Horrible Economic Effects of Runaway Inequality
Renowned behavioral economist Dan Ariely (Duke University) and Michael I. Norton (Harvard Business School) recently demonstrated that everyone – including conservatives – thinks there should be more equality.
Their study found:
Respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: all demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo.
Taken as a whole, the results suggest to us that there is much more agreement than disagreement about wealth inequality. Across differences in wealth, income, education, political affiliation and fiscal conservatism, the vast majority of people (89%) preferred distributions of wealth significantly more equal than the current wealth spread in the United States. In fact, only 12 people out of 849 favored the US distribution. The media portrays huge policy divisions about redistribution and inequality – no doubt differences in ideology exist, but we think there may be more of a consensus on what’s fair than people realize.
Why Do We Have So Much Inequality?
If runaway inequality is so harmful to our economy – and if most people don’t want so much inequality – why is inequality becoming more and more extreme?
The short answer is because the super-elite want it. The rest of this post sets forth the details. (By pointing out that inequality is skyrocketing, we’re not calling for a redistribution of wealth downward. We’re calling for an end to policies which allow wealth to be concentrated in a few hands.)
“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.
Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.
And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.
David Stockman notes that the Federal Reserve’s policies have helped the rich get richer at everyone else’s expense:
The central banking branch of the state remains hostage to Wall Street speculators who threaten a hissy fit sell-off unless they are juiced again and again. Monetary policy has thus become an engine of reverse Robin Hood redistribution; it flails about implementing quasi-Keynesian demand–pumping theories that punish Main Street savers, workers, and businessmen while creating endless opportunities, as shown below, for speculative gain in the Wall Street casino.
These futile stimulus actions are demanded and promoted by the crony capitalist lobbies which slipstream on whatever dispensations as can be mustered. At the end of the day, the state labors mightily, yet only produces recovery for the 1 percent.
Nobel prize winning economist Joseph Stiglitz says that inequality is caused by the use of money to shape government policies to benefit those with money. As Wikipedia notes:
A better explainer of growing inequality, according to Stiglitz, is the use of political power generated by wealth by certain groups to shape government policies financially beneficial to them. This process, known to economists as rent-seeking, brings income not from creation of wealth but from “grabbing a larger share of the wealth that would otherwise have been produced without their effort”
Rent seeking is often thought to be the province of societies with weak institutions and weak rule of law, but Stiglitz believes there is no shortage of it in developed societies such as the United States. Examples of rent seeking leading to inequality include
One big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy …. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.
Wealth begets power, which begets more wealth …. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.
The financial industry spends hundreds of millions of dollars every election cycle on campaign donations and lobbying, much of which is aimed at maintaining the subsidy [to the banks by the public]. The result is a bloated financial sector and recurring credit gluts.
Another reason why the super-rich are becoming much richer and everyone else poorer is that Obama is prosecuting virtually no financial criminals.
Some cheerleaders say rising stock prices make consumers feel wealthier and therefore readier to spend. But to the extent most Americans have any assets at all their net worth is mostly in their homes, and those homes are still worth less than they were in 2007. The “wealth effect” is relevant mainly to the richest 10 percent of Americans, most of whose net worth is in stocks and bonds.
The recovery has been the weakest and most lopsided of any since the 1930s.After previous recessions, people in all income groups tended to benefit. This time, ordinary Americans are struggling with job insecurity, too much debt and pay raises that haven’t kept up with prices at the grocery store and gas station. The economy’s meager gains are going mostly to the wealthiest.
Workers’ wages and benefits make up 57.5 percent of the economy, an all-time low. Until the mid-2000s, that figure had been remarkably stable — about 64 percent through boom and bust alike.
The “labor share of national income has fallen to its lower level in modern history … some recovery it has been – a recovery in which labor’s share of the spoils has declined to unprecedented levels.”
The above-quoted AP article further notes:
Stock market gains go disproportionately to the wealthiest 10 percent of Americans, who own more than 80 percent of outstanding stock, according to an analysis by Edward Wolff, an economist at Bard College.
As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.***
(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)
Professor G. William Domhoff demonstrated that the richest 10% own 98.5% of all financial securities, and that:
The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.
Economists at Northeastern University have found that the current economic recovery in the United States has been unusually skewed in favor of corporate profits and against increased wages for workers.
In their newly released study, the Northeastern economists found that since the recovery began in June 2009 following a deep 18-month recession, “corporate profits captured 88 percent of the growth in real national income while aggregate wages and salaries accounted for only slightly more than 1 percent” of that growth.
The median pay for top executives at 200 big companies last year was $10.8 million. That works out to a 23 percent gain from 2009.
Most ordinary Americans aren’t getting raises anywhere close to those of these chief executives. Many aren’t getting raises at all — or even regular paychecks. Unemployment is still stuck at more than 9 percent.
“What is of more concern to shareholders is that it looks like C.E.O. pay is recovering faster than company fortunes,” says Paul Hodgson, chief communications officer for GovernanceMetrics International, a ratings and research firm.
According to a report released by GovernanceMetrics in June, the good times for chief executives just keep getting better. Many executives received stock options that were granted in 2008 and 2009, when the stock market was sinking.
Now that the market has recovered from its lows of the financial crisis, many executives are sitting on windfall profits, at least on paper. In addition, cash bonuses for the highest-paid C.E.O.’s are at three times prerecession levels, the report said.
The average American worker was taking home $752 a week in late 2010, up a mere 0.5 percent from a year earlier. After inflation, workers were actually making less.
AP pointed out that the average worker is not doing so well:
Unemployment has never been so high — 9.1 percent — this long after any recession since World War II. At the same point after the previous three recessions, unemployment averaged just 6.8 percent.
– The average worker’s hourly wages, after accounting for inflation, were 1.6 percent lower in May than a year earlier. Rising gasoline and food prices have devoured any pay raises for most Americans.
– The jobs that are being created pay less than the ones that vanished in the recession. Higher-paying jobs in the private sector, the ones that pay roughly $19 to $31 an hour, made up 40 percent of the jobs lost from January 2008 to February 2010 but only 27 percent of the jobs created since then.
Large banks, who are doing much better and large corporations, whom you point out and everyone is pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labour force, which is in tragic unemployment, long-term unemployment – that is pulling the economy apart.
Money Being Sucked Out of the U.S. Economy … But Big Bucks Are Being Made Abroad
Corporate profits are up. Stock prices are up. So why isn’t anyone hiring?
Actually, many American companies are — just maybe not in your town. They’re hiring overseas, where sales are surging and the pipeline of orders is fat.
The trend helps explain why unemployment remains high in the United States, edging up to 9.8% last month, even though companies are performing well: All but 4% of the top 500 U.S. corporations reported profits this year, and the stock market is close to its highest point since the 2008 financial meltdown.
But the jobs are going elsewhere. The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year, compared with less than 1 million in the U.S. The additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9%, says Robert Scott, the institute’s senior international economist.
“There’s a huge difference between what is good for American companies versus what is good for the American economy,” says Scott.
Many of the products being made overseas aren’t coming back to the United States. Demand has grown dramatically this year in emerging markets like India, China and Brazil.
We noted above that inequality in America today is worse than in modern Egypt, Tunisia or Yemen, many banana republics in Latin America, worse than experienced by slaves in 1774 colonial America, and much worse than in ancient Rome – which was built on slave labor.
FAIR USE NOTICEThis site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.
If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.
DISCLOSURE Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.