“We are witnessing a surge in net global central bank asset purchases to their highest level since 2013.”
Current Global Run Rate is $155B/Month Compared to the QE3 Peek of $80B/Month
With the market breaking out to all-time highs, the media has started to once again reach for their party hats as headlines suggest clear sailing for investors ahead.
While I certainly do not disagree the breakout is indeed bullish, and signals a continuation of the long-term bullish trend, there are more than sufficient reasons to remain somewhat cautious. Earnings are still weak, there is little evidence of economic resurgence and inflationary pressures globally remain nascent. But, for now, a rash of global Central Banks continue to support asset prices by increasing accommodative policies either through additional reductions in interest rates or direct injections of liquidity. As Matt King from Citi recently noted:
With the ECB in full QE mode, the BOC now using $300 billion in Pension Funds to prop up prices, and the BOJ now moving towards an additional $130 billion in QE as well, the liquidity push continues.
Interestingly, despite the push by Central Banks to loft asset prices higher, individual market participants as measured by the Investment Company Institute (ICI) have a different idea.
As shown in the chart above, despite asset prices ringing all-time highs, net equity inflows have turned decisively negative. This was much the same case following the 2012 market rout and it wasn’t until the launch of QE3 in 2013 that investors began to once again chase the markets.
The same can be seen for the American Association of Individual Investors as shown below.
While the ICI chart above shows “net flows,” the AAII chart shows percentage allocated to stocks, bonds and cash. The recent decline in percentage of stock holdings confirms the recent net equity outflows from ICI.
However, despite the outflows from stocks, and increased allocation to bonds in recent months, the net exposure to equity risk by individuals remains at historically high levels with cash near historically low levels. Such suggests two things:
There is little buying left from individuals to push markets marginally higher, and;
The stock/cash ratio, shown below, is at levels normally coincident with more important market peaks.
Here is the point, despite ongoing commentary about mountains of “cash on the sidelines,” this is far from the case. This leaves the current advance in the markets almost solely in the realm of Central Bank activity.
Of course, there is nothing wrong with that…until there is.
The question that everyone should be asking themselves is this:
“If the markets are rising because of expectations of improving economic conditions and earnings, then why are Central Banks pumping liquidity like crazy?”
Someone is going to be very wrong.
TIPPING POINTS, STUDIES, THESIS, THEMES & SII
COVERAGE THIS WEEK PREVIOUSLY POSTED - (BELOW)
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - July 10th, 2016 to July 16th, 2016
TIPPING POINTS - This Week - Normally a Tuesday Focus
RISK REVERSAL - WOULD BE MARKED BY: Slowing Momentum, Weakening Earnings, Falling Estimates
Here we go again. China is primed for more bailouts as their corporations and State Owned Enterprises (SOE) continue burning through billions of yuan. At the turn of the month we learned Sinopec manipulated revenues. As Reuters reported at the time, some 12 subsidiaries of Sinopec had fake invoices among other faults. Chinese companies are loading up on debt and they are investing it terribly.
Reuters also said 10 state-owned firms had "huge losses" driven primarily from bad investment decisions. Sinopec subsidiaries blew cash on 14 unused chemical plants as well acquiring two dozen fuel stations illegally.
"China's national audit department reviewed the financials of the 10 largest state-owned companies including Aluminium Corporation of China (CHALCO), Sinopec and China National Offshore Oil Corporation (CNOOC),exposing huge losses in these firms as a result of low efficiency and bad investment decisions. The auditing office also pointed to wasted investments Sinopec's subsidiaries made, such as 14 unused chemical plants, and raised red flags on two dozen "illegally acquired" fuel stations."
Oh yeah, these guys are real winners when it comes to running business and making investments. As Citi pointed out, China's SOE's have Pre-tax Profit Margins and Liability-to-Asset ratios that do not appear to reflect wise decision making:
China's corporations are horrible with investment. We are not shocked by this. We expect many more Chinese bailouts to come as the country's money-gods lose total control of the monster they have unleashed through reckless monetary policy.
The investment decisions have become so bad that a source told Bloomberg that up to 10 SOE's may require a bail out:
China is considering providing about 10 of its state-owned enterprises with an aid package, people familiar with the matter said. Sinosteel Corp. is among those that may receive help, one of the people said
In an effort to throw the kitchen sink plus more at the equity market, China will now be deferring a portion of a $300 billion pension fund into the Chinese market. A wise choice? Perhaps not, especially since the Chinese have painted themselves into another bailout corner.
With malinvestment as we saw re: Sinopec, to China's need to backstop at least 10 failing state-owned enterprises, and now the clear desperation of getting pension money exposed to the equity market, presumably ahead of more central bank stimulus, it's becoming evident that the Chinese are running out of options.Once the entire nation is invested in stocks and the central bank is buying hand over fist, the Chinese market manipulation will have jumped the shark, because their explosive Debt-to-GDP didn't seem to mark a turning point in the Chinese economic story as of yet:
But don't worry, the National Council for Social Security Fund in China that will manage the pension fund investments has an appreciation from the Chinese people akin to what some believe American's have for Warren Buffett, reportedly:
The NCSSF has "such a good reputation in being a value investor that if they take the lead, the signaling effect is actually quite strong," said Hong, who had predicted the start and peak of China’s equity boom last year. "It’s almost like Warren Buffett saying he is buying a stock."
On Thursday, we learn that yet another high profile businessman has apparently vanished and this time, it’s none other than “China’s Warren Buffett,” Guo Guangchang (worth some $7 billion at last count) whose conglomerate Fosun International is morphing into an insurance-focused investment group. Fosun spent more than $6 billion buying stakes in 18 overseas companies between February and July.
China just burning cash and it is amazing they have lasted this long. How much longer will the cash pile burn? Maybe MOAR cash infusions is the answer...
EU BANKING CRISIS
JAPAN - DEBT DEFLATION
US STOCK MARKET VALUATIONS
SHRINKING REVENUE GROWTH RATE
CREDIT CONTRACTION II
US DOLLAR STRENGTH
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
Market Analytics - WEDNESDAY STUDIES
STUDIES - MACRO pdf
TECHNICALS & MARKET ANALYTICS
Earnings Expectations Edition
Fool me once, shame on you. Fool me twice, shame on me. Fool me for the sixth year in a row - I must be a bloody idiot!!
And it is that 'idiocy' that makes the following chart somehow acceptable to investors...
Bonus Humor... US GDP growth expectations seasonal tendency to be revised dramatically lower...
COMMODITY CORNER - AGRI-COMPLEX
THESIS - Mondays Posts on Financial Repression & Posts on Thursday as Key Updates Occur
The Financial Repression Authority is joined by Ellen Brown, a well renown author and advocate of financial reforms. FRA Co-founder, Gordon T. Long sits with Ellen to discuss a myriad of topics including the TTIP, Monsanto, Blockchain Technology, and bank bail-in’s. Ellen Brown is an American author, political candidate, attorney, public speaker, and advocate of alternative medicine and financial reform, most prominently public banking. Brown is the founder and president of the Public Banking Institute, a nonpartisan think tank devoted to the creation of publicly run banks. She is also the president of Third Millennium Press, and is the author of twelve books, including Web of Debt and The Public Bank Solution, as well as over 200 published articles. She has appeared on cable and network television, radio, and internet podcasts, including a discussion on the Fox Business Network concerning student loan debt with the Cato Institute’s Neil McCluskey, a feature story on derivatives and debt on the Russian network RT, and the Thom Hartmann Show’s “Conversations with Great Minds.” Ellen Brown ran for California Treasurer in the California June 2014 Statewide Primary election.
TRANS-ATLANTIC TRADE AND INVESTMENT PARTNERSHIP (TTIP)
The Transatlantic Trade and Investment Partnership (TTIP) is a proposed trade agreement between the European Union and the United States, with the aim of promoting trade and multilateral economic growth. The American government considers the TTIP a companion agreement to the Trans-Pacific Partnership (TPP). The agreement is under ongoing negotiations and its main three broad areas are: market access; specific regulation; and broader rules and principles and modes of co-operation
The controversial agreement has been criticized and opposed by unions, charities, NGOs and environmentalists, particularly in Europe. The Independent describes the range of negative impacts as “reducing the regulatory barriers to trade for big business, things like food safety law, environmental legislation, banking regulations and the sovereign powers of individual nations”, or more critically as an “assault on European and US societies by transnational corporations”; and The Guardian noted the criticism of TTIP’s “undemocratic nature of the closed-door talks”, “influence of powerful lobbyists”, and TTIP’s potential ability to “undermine the democratic authority of local government”
A weaker element of this trade agreement is the ISDS, an investor dispute which is a ‘guaranteed kangaroo court.’ Corporations whose profits have been hurt by some actions of government can take these local governments to court. But it is not a true court; moreover it’s a panel of 3 lawyers who are paid by the corporations. The issue is that these corporations can sue the government but the government cannot sue the corporations. It is a one way street, in which these corporations do not have to pay attention to legal authorities. It is a court set up for the betterment of the corporations. Furthermore they can not only sue for their lost profits, but they can also sue for lost projected future profits.
“This is not government by the people for the people; rather it is government by the corporations and for the corporations.”
MONSANTO AND THE TTIP
“Monsanto can now start a factory in Europe, which goes completely against what Europeans have been fighting for years. This agreement squanders everything Europeans have achieved in this sort of protection.”
One of the goals of these agreements is to enforce the world to use our rules rather than the rules of the BRICS. As soon as Gaddafi started talking about his gold backed banking system for northern Africa he became a target. Saddam Hussein did the same thing that was going to take euros for oil which is counter to the whole petro dollar. History shows that anybody who steers away from this system becomes a target. If you go through the banking, the ones that control their own creation, Venezuela, Brazil, and Russia etc. are facing high waters. Furthermore there is not enough money in the system because of the nature of the system, where banks create the money and charge interest. But ideally you need a central authority that can put some money out there. I think the national dividend is a great idea, the Swiss just had a referendum but it didn’t pass. Nonetheless it’s great for them to consider this at all.
“The money shouldn’t be coming from us, from our elected representatives, or from our central banks which should be representing us, but they don’t; they only represent themselves. The Federal Reserve isn’t there to serve our interest; they are there to serve the banks.”
The blockchain is seen as the main technological innovation of Bitcoin, since it stands as proof of all the transactions on the network. A block is the ‘current’ part of a blockchain which records some or all of the recent transactions, and once completed goes into the blockchain as permanent database. Each time a block gets completed, a new block is generated. There is a countless number of such blocks in the blockchain. Blocks are linked to each other in proper linear, chronological order with every block containing a hash of the previous block. To use conventional banking as an analogy, the blockchain is like a full history of banking transactions. Bitcoin transactions are entered chronologically in a blockchain just the way bank transactions are. Blocks, meanwhile, are like individual bank statements. Based on the Bitcoin protocol, the blockchain database is shared by all nodes participating in a system. The full copy of the blockchain has records of every Bitcoin transaction ever executed. It can thus provide insight about facts like how much value belonged a particular address at any point in the past.
Block chain technology can definitely revolutionize the banking system. It is important to understand that at this point, nearly all alternatives are better than what we currently have in place. The banks haven’t been able to come up with a valid plan because they don’t have the money; they are creating lots of money only to give off the appearance.
“Banks create money on their books in response to our request for a loan.”
We now know that we basically create the money. When we take out a loan, the bank takes your IOU and turns it into money, and that’s where money comes from. We, the borrower are the ones monetizing our own IOU; the bank merely just makes it official.
“We are moving towards a cashless society.”
The argument for going cashless is this whole monetarist theory that there is specific amount of money in the system, and the central banks control the money that’s out there by playing with interest rates. They lowered the interest rate to zero and still we have deflation, and now the theory is to lower it below zero which clearly makes it worse. That means you’re paying money to keep your own money in the bank.
The reason people are waking up now is because they have been screwed. The balance is tipping; the people who are suffering are beginning to wake up to the reasons why.
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. 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.
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