Tag Archives: financial markets

“Nothing Else Matters”: Central Banks Have Bought A Record $1.5 Trillion Of Risk Assets YTD In 2017

One month ago, when observing the record low vol coupled with record high stock prices, we reported a stunning statistic: central banks have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record” according to Bank of America. Today BofA’s Michael Hartnett provides an update on this number: he writes that central bank balance sheets have now grown to a record $15.1 trillion, up from $14.6 trillion in late April, and says that “central banks have bought a record $1.5 trillion in assets YTD.”

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/06/04/CBs%201.5tn_0.jpg

The latest data means that contrary to previous calculations, central banks are now injecting a record $300 billion in liquidity per month, above the $200 billion which Deutsche Bank recently warned is a “red-line” indicator for risk assets.

This, as we said last month, is why “nothing else matters” in a market addicted to what is now record central bank generosity.

What is ironic is that this unprecedented central bank buying spree comes as a time when the global economy is supposedly in a “coordinated recovery” and when the Fed, and more recently, the ECB and BOJ have been warning about tighter monetary conditions, raising rates and tapering QE.

To this, Hartnett responds that “Fed hikes next week & “rhetorical tightening” by ECB & BoJ beginning, but we fear too late to prevent Icarus” by which he means that no matter what central banks do, a final blow-off top in the stock market is imminent.

He is probably correct, especially when looking at the “big 5” tech stocks, whose performance has an uncanny correlation with the size of the consolidated central bank balance sheet.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/06/04/Central%20banks%20vs%20tech%20stocks_0.jpg

Source, ZeroHedge

 

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The 90,000 Square Foot, 100 Million Dollar Home That Is A Metaphor For America

Just like “America’s time-share king”, America just keeps on making the same mistakes over and over again.  Prior to the financial collapse of 2008, time-share mogul David Siegel and his wife Jackie began construction on their “dream home” near Disney World in Orlando, Florida.  This dream home would be approximately 90,000 square feet in size, would be worth $100 million when completed, and would be named “Versailles” after the French palace that inspired it.  In fact, you may remember David and Jackie from an excellent 2012 documentary entitled “The Queen of Versailles”.  That film documented how the Siegels almost lost everything after the financial collapse of 2008 devastated the U.S. economy because they were over leveraged and drowning in debt.

Source: Zero Hedge – Author: Michael Snyder

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/05/20150509_vers1.jpg

But since that time, David’s time-share company has bounced back, and the Siegels now plan to finally finish construction on their dream home and make it bigger and better than ever before.


But before you pass judgment on the Siegels, it is important to keep in mind that we are behaving exactly the same way as a nation.  Instead of addressing our fundamental problems after the last financial crisis, we have just continued to make the exact same mistakes that we made before.  And ultimately, things are going to end very, very badly for us. As Americans, we like to think that we are somehow entitled to the biggest and best of everything.  We have been trained to believe that we are the wealthiest and most prosperous nation on the entire planet and that it will always be that way.  This generation was handed the keys to the greatest economic machine in world history, but instead of treating it with great care, we have wrecked it.  Our economic infrastructure is being systematically dismantled, Wall Street has been transformed into the biggest casino in the history of the planet, we have piled up a mountain of debt unlike anything the world has ever seen, and the reckless Federal Reserve is turning our currency into Monopoly money.  All of our decisions have been designed to make things better for ourselves in the short-term without any consideration about what we were doing to the future of this country.

That is why “Versailles” is such a perfect metaphor for America.  The Siegels always had to have the biggest and the best of everything, and they almost lost it all when the financial markets crashed

David Siegel (“They call me the time-share king”) and his wife, Jackie Siegel — titular star of the 2012 documentary “The Queen of Versailles” — began building their dream home near Disney World about a decade ago. Soon it became evident that the sheer size of the mansion was almost unprecedented in America; it’s thought that only Biltmore House and Oheka Castle are bigger and still standing, and both of those are now run as tourist attractions, not true single-family homes.

But when the bottom fell out of the financial markets in 2008, their fortunes were upended too. By the time the documentary ended, their dream home had gone into default and they’d put it on the market. The listing asked for $100 million finished — “based on the royal palace of Louix XIV of the 17th century or to the buyer’s specifications — or $75 million “as is with all exterior finishings in crates in the 20-car garage on site.”

But just like the U.S. economy, the Siegels have seemingly recovered, at least for the moment.

Thanks to a rebound in the time-share business, the Siegels plan to finally complete their dream home and make it bigger and better than ever

The unfinished home sits on 10 acres of lakefront property and when completed will feature 11 kitchens, 30 bathrooms, 20-car garage, two-lane bowling alley, indoor rollerskating rink, three indoor pools, two outdoor pools, video arcade, ballroom, two-story movie theater modeled off the Paris Opera House, fitness center with 10,000-square-foot spa, yoga studios, 20,000-bottle wine cellar and an exotic fish aquarium.

Two tennis courts, a baseball diamond and formal garden will be included on the grounds.

The couple admitted that some of their plans for the house – such as children’s playrooms – will have to be modified now that their kids are older.

However, they are determined to see the project through.

‘I’m not at the ending to my story yet, but so far, it’s a happy ending, and I’m really looking forward to starting the next chapter of my life and moving into my palace, finishing it and throwing lots of parties – anxious for the world to see it,’ Mrs Siegel said.

It is easy to point fingers at the Siegels, but the truth is that they are just behaving like we have been behaving as an entire nation.

When our financial bubbles burst the last time, our leaders did not really do anything to address our fundamental economic problems.  Instead, they were bound and determined to reinflate those bubbles and make them even larger than before.

Now we stand at the precipice of the greatest financial crisis in our history, and we only have ourselves to blame.

Just consider what has happened to our national debt.  Just prior to the last recession, it was sitting at about 9 trillion dollars.  Today, it has just crossed the 18 trillion dollar mark…

Total Public DebtYou may not think that you are to blame for this, but most of the people that will read this article voted for politicians that fully supported all of this borrowing and spending.  And yes, that includes most Democrats and most Republicans.

We have stolen trillions of dollars from future generations of Americans in a desperate attempt to prop up our failing standard of living in the present.  What we have done is a horrific crime, and if we lived in a just society a whole lot of people would be going to prison over this.

A similar pattern emerges when we look at the spending habits of ordinary Americans.  This next chart shows one measure of consumer credit in America.  During the last recession, we actually had a brief period of deleveraging (which was good), but now we are back on the exact same trajectory as before…

Consumer Credit 2015Even though we had a higher standard of living than all previous generations of Americans, that was never good enough for us.  We always had to have more, and we have borrowed and spent ourselves into oblivion.

We have also shown absolutely no respect for our currency.  Having the primary reserve currency of the world has been an incredible advantage for the U.S. economy, but we are squandering that privilege.  Like I said at the top of the article, the Federal Reserve has been treating the U.S. dollar like Monopoly money in recent years in an attempt to prop up the financial system.  Just look at what “quantitative easing” has done to the Fed balance sheet since the last recession…

Fed Balance SheetMost of the new money that the Fed has created has been funneled into the financial markets.  This has created some financial bubbles which are absolutely insane.  For example, just look at how the NASDAQ has performed since the last financial crisis…

NASDAQThese Fed-created bubbles are inevitably going to implode, because they have no relation to economic reality whatsoever.  And when they implode, millions of Americans are going to be financially wiped out.

Just like David and Jackie Siegel, we simply can’t help ourselves.  We just keep on making the same old mistakes.

And in the end, we will all pay a great, great price for our utter foolishness.

Chart Of The Day: Recession Dead Ahead?

By Tyler Durden

The chart below showing the annual increase, or rather, decrease in US factory orders which have now declined for 6 months in a row (so no one can’t blame either the west coast port strike or the weather) pretty much speaks for itself, and also which way the US “recovery” (whose GDP is about to crash to the 1.2% where the Atlanta Fed is modeling it, or even lower is headed.

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/03/Factory%20Orders%20YY.jpg

As the St Louis Fed so kindly reminds us, the two previous times US manufacturing orders declined at this rate on an unadjusted (or adjusted) basis, the US economy was already in a recession.

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/03/fed%20recession%20NSA.jpg

And now, time for consensus to be shocked once again when the Fed yanks the rug from under the feet of the rite-hike-istas.

Housing Crash In China Steeper Than In Pre-Lehman America

China has long frustrated the hard-landing watchers – or any-landing watchers, for that matter – who’ve diligently put two and two together and rationally expected to be right. They see the supply glut in housing, after years of malinvestment. They see that unoccupied homes are considered a highly leveraged investment that speculators own like others own stocks, whose prices soar forever, as if by state mandate, but that regular people can’t afford to live in.

Hard-landing watchers know this can’t go on forever. Given that housing adds 15% to China’s GDP, when this housing bubble pops, the hard-landing watchers will finally be right.

Home-price inflation in China peaked 13 months ago. Since then, it has been a tough slog.

Earlier this month, the housing news from China’s National Bureau of Statistics gave observers the willies once again. New home prices in January had dropped in 69 of 70 cities by an average of 5.1% from prior year, the largest drop in the new data series going back to 2011, and beating the prior record, December’s year-over-year decline of 4.3%. It was the fifth month in a row of annual home price declines, and the ninth month in a row of monthly declines, the longest series on record.

Even in prime cities like Beijing and Shanghai, home prices dropped at an accelerating rate from December, 3.2% and 4.2% respectively.

For second-hand residential buildings, house prices fell in 67 of 70 cities over the past 12 months, topped by Mudanjiang, where they plunged nearly 14%.

True to form, the stimulus machinery has been cranked up, with the People’s Bank of China cutting reserve requirements for major banks in January, after cutting its interest rate in November. A sign that it thinks the situation is getting urgent.

So how bad is this housing bust – if this is what it turns out to be – compared to the housing bust in the US that was one of the triggers in the Global Financial Crisis?

Thomson Reuters overlaid the home price changes of the US housing bust with those of the Chinese housing bust, and found this:

The US entered recession around two years after house price inflation had peaked. After nine months of recession, Lehman Brothers collapsed. As our chart illustrates, house price inflation in China has slowed from its peak in January 2014 at least as rapidly as it did in the US.

Note the crashing orange line on the left: year-over-year home-price changes in China, out-crashing (declining at a steeper rate than) the home-price changes in the US at the time….

US-China-housing-crash

The hard-landing watchers are now wondering whether the Chinese stimulus machinery can actually accomplish anything at all, given that a tsunami of global stimulus – from negative interest rates to big bouts of QE – is already sloshing through the globalized system. And look what it is accomplishing: Stocks and bonds are soaring, commodities – a demand gauge – are crashing, and real economies are languishing.

Besides, they argue, propping up the value of unoccupied and often unfinished investment properties that most Chinese can’t even afford to live in might look good on paper, but it won’t solve the problem. And building even more of these units props up GDP nicely in the short term, and therefore it’s still being done on a massive scale, but it just makes the supply glut worse.

Sooner or later, the hard-landing watchers expect to be right. They know how to add two and two together. And they’re already smelling the sweet scent of being right this time, which, alas, they have smelled many times before.

But it does make you wonder what the China housing crash might trigger when it blooms into full maturity, considering the US housing crash helped trigger of the Global Financial Crisis. It might be a hard landing for more than just China. And ironically, it might occur during, despite, or because of the greatest stimulus wave the world has ever seen.

Stocks, of course, have been oblivious to all this and have been on a tear, not only in China, but just about everywhere except Greece. But what happens to highly valued stock markets when they collide with a recession? They crash.


What to Expect When This Stock Market Meets a Recession

Last week I had a fascinating conversation with Neile Wolfe, of Wells Fargo Advisors, LLC., about high equity valuations and what happens when they collide with a recession.

Here is my monthly update that shows the average of the four valuation indicators: Robert Shiller’s cyclically adjusted price-to-earnings ratio (CAPE), Ed Easterling’s Crestmont P/E, James Tobin’s Q Ratio, and my own monthly regression analysis of the S&P 500:

Click to View

Based on the underlying data in the chart above, Neile made some cogent observations about the historical relationships between equity valuations, recessions and market prices:

  • High valuations lead to large stock market declines during recessions.
  • During secular bull markets, modest overvaluation does not produce large stock market declines.
  • During secular bear markets, modest overvaluation still produces large stock market declines.

Here is a table that highlights some of the key points. The rows are sorted by the valuation column.

Beginning with the market peak before the epic Crash of 1929, there have been fourteen recessions as defined by the National Bureau of Economic Research (NBER). The table above l ists the recessions, the recession lengths, the valuation (as documented in the chart illustration above), the peak-to-trough changes in market price and GDP. The market price is based on the S&P Composite, an academic splicing of the S&P 500, which dates from 1957 and the S&P 90 for the earlier years (more on that splice here).

I’ve included a row for our current valuation, through the end of January, to assist us in making an assessment of potential risk of a near-term recession. The valuation that preceded the Tech Bubble tops the list and was associated with a 49.1% decline in the S&P 500. The largest decline, of course, was associated with the 43-month recession that began in 1929.

Note: Our current market valuation puts us between the two.

Here’s an interesting calculation not included in the table: Of the nine market declines associated with recessions that started with valuations above the mean, the average decline was -42.8%. Of the four declines that began with valuations below the mean, the average was -19.9% (and that doesn’t factor in the 1945 outlier recession associated with a market gain).

What are the Implications of Overvaluation for Portfolio Management?

Neile and I discussed his thoughts on the data in this table with respect to portfolio management. I came away with some key implications:

  • The S&P 500 is likely to decline severely during the next recession, and future index returns over the next 7 to 10 years are likely to be low.
  • Given this scenario, over the next 7 to 10 years a buy and hold strategy may not meet the return assumptions that many investors have for their portfolio.
  • Asset allocation in general and tactical asset allocation specifically are going to be THE important determinant of portfolio return during this time frame. Just buying and holding the S&P 500 is likely be disappointing.
  • Some market commentators argue that high long-term valuations (e.g., Shiller’s CAPE) no longer matter because accounting standards have changed and the stock market is still going up. However, the impact of elevated valuations — when it really matters — is expressed when the business cycle peaks and the next recession rolls around. Elevated valuations do not take a toll on portfolios so long as the economy is in expansion.

How Long Can Periods of Overvaluations Last?

Equity markets can stay at lofty valuation levels for a very long time. Consider the chart posted above. There are 1369 months in the series with only 58 months of valuations more than two Standard Deviations (STD) above the mean. They are:

  • September 1929 (i.e., only one month above 2 STDs prior to the Crash of 1929)
  • Fifty-one months during the Tech bubble (that’s over FOUR YEARS)
  • Six of the last seven months have been above 2 STDs

Stay tuned.

How The Baltic Dry Index Predicted 3 Market Crashes: Will It Do It Again?

Summary

  • The BDI as a precursor to three different stock market corrections.
  • Is it really causation or is it correlation?
  • A look at the current level of the index as it hits new lows.
 by Jonathan Fishman

The Baltic Dry Index, usually referred to as the BDI, is making historical lows in recent weeks, almost every week.

The index is a composition of four sub-indexes that follow shipping freight rates. Each of the four sub-indexes follows a different ship size category and the BDI mixes them all together to get a sense of global shipping freight rates.

The index follows dry bulk shipping rates, which represent the trade of various raw materials: iron, cement, copper, etc.

The main argument for looking at the Baltic Dry Index as an economic indicator is that end demand for those raw materials is tightly tied to economic activity. If demand for those raw materials is weak, one of the first places that will be evident is in shipping prices.

The supply of ships is not very flexible, so changes to the index are more likely to be caused by changes in demand.

Let’s first look at the three cases where the Baltic Dry Index predicted a stock market crash, as well as a recession.

1986 – The Baltic Dry Index Hits Its first All-time Low.

In late 1986, the newly formed BDI (which replaced an older index) hit its first all-time low.

Other than predicting the late 80s-early 90s recession itself, the index was a precursor to the 1987 stock market crash.

(click to enlarge)

1999 – The Baltic Dry Index Takes a Dive

In 1999, the BDI hit a 12-year low. After a short recovery, it almost hit that low point again two years later. The index was predicting the recession of the early 2000s and the dot-com market crash.

(click to enlarge)

2008 – The Sharpest Decline in The History of the BDI

In 2008, the BDI almost hit its all-time low from 1986 in a free fall from around 11,000 points to around 780.

(click to enlarge)

You already know what happened next. The 2008 stock market crash and a long recession that many parts of the global economy is still trying to get out of.

Is It Real Causation?

One of the pitfalls that affects many investors is to confuse correlation and causation. Just because two metrics seem to behave in a certain relationship, doesn’t tell us if A caused B or vice versa.

When trying to navigate your portfolio ahead, correctly making the distinction between causation and correlation is crucial.

Without doing so, you can find yourself selling when there is no reason to, or buying when you should be selling.

So let’s think critically about the BDI.

Is it the BDI itself that predicts stock market crashes? Is it a magical omen of things to come?

My view is that no. The BDI is not sufficient to determine if a stock market crash is coming or not. That said, the index does tells us many important things about the global economy.

Each and every time the BDI hit its lows, it predicted a real-world recession. That is no surprise as the index follows a fundamental precursor, which is shipping rates. It’s very intuitive; as manufacturers see demand for end products start to slow down, they start to wind-down production and inventory, which immediately affects their orders for raw materials.

Manufacturers are the ultimate indicator to follow, because they are the ones that see end demand most closely and have the best sense of where it’s going.

But does an economic slowdown necessarily bring about a full-blown market crash?

Only if the stock market valuation is not reflecting that coming economic downturn. When these two conditions align, chances are a sharp market correction is around the corner.

2010-2015 – The BDI Hits All-time Low, Again

In recent weeks, the BDI has hit an all-time low that is even lower than the 1986 low point. That comes after a few years of depressed prices.

(click to enlarge)

Source: Bloomberg

What does that tell us?

  1. The global economy, excluding the U.S., is still struggling. Numerous signs for that are the strengthening dollar, the crisis in Russia and Eastern Europe, a slowdown in China, and new uncertainties concerning Greece.
  2. The U.S. is almost the sole bright spot in the landscape of the global economy, although it’s starting to be affected by the global turmoil. A strong dollar hits exporters and lower oil prices hit the American oil industry hard.

Looking at stock prices, we are at the peak of a 6-year long bull market, although earnings seem to be at all-time highs as well.

(click to enlarge)

Source: Yardeni

What the BDI might tell us is that the disconnect between the global economy’s struggle and great American business performance across the board might be coming to an end.

More than that, China could be a significant reason for why the index has taken such a dive, as serious slowdowns on the real-estate market in China and tremendous real estate inventory accumulation are disrupting the imports of steel, cement and other raw materials.

Conclusion

The BDI tells us that a global economic slowdown is well underway. The source of that downturn seems to be outside of the U.S., and is more concentrated in China and the E.U.

The performance of the U.S. economy can’t be disconnected from the global economy for too long.

The BDI is a precursor for recessions, not stock market crashes. It’s not a sufficient condition to base a decision upon, but it’s one you can’t afford to ignore.

Going forward, this is a time to make sure you know the companies you invest in inside and out, and make sure end demand for their products is bound for continued growth and success despite overall headwinds.

We Live In An Era Of Dangerous Imbalances

by Tyler Durden

The intervention by the world’s central banks has resulted in today’s bizarro financial markets, where “bad news is good” because it may lead to more (sorry, moar) thin-air stimulus to goose asset prices even higher.

The result is a world addicted to debt and the phony stimulus now essential to sustaining it. In the process, a tremendous wealth gap has been created, one still expanding at an exponential rate.

History is very clear what happens with dangerous imbalances like this. They correct painfully. Through class warfare. Through currency crises. Through wealth destruction.

Is that really the path we want? Because we’re for sure headed for it.

The Next Housing Crisis May Be Sooner Than You Think

How we could fall into another housing crisis before we’ve fully pulled out of the 2008 one.

https://i0.wp.com/cdn.citylab.com/media/img/citylab/2014/11/RTR2LDPC/lead_large.jpgby Richard Florida

When it comes to housing, sometimes it seems we never learn. Just when America appeared to be recovering from the last housing crisis—the trigger, in many ways, for 2008’s grand financial meltdown and the beginning of a three-year recession—another one may be looming on the horizon.

There are at several big red flags.

For one, the housing market never truly recovered from the recession. Trulia Chief Economist Jed Kolko points out that, while the third quarter of 2014 saw improvement in a number of housing key barometers, none have returned to normal, pre-recession levels. Existing home sales are now 80 percent of the way back to normal, while home prices are stuck at 75 percent back, remaining undervalued by 3.4 percent. More troubling, new construction is less than halfway (49 percent) back to normal. Kolko also notes that the fundamental building blocks of the economy, including employment levels, income and household formation, have also been slow to improve. “In this recovery, jobs and housing can’t get what they need from each other,” he writes.

Americans are spending more than 33 percent of their income on housing.

Second, Americans continue to overspend on housing. Even as the economy drags itself out of its recession, a spate of reports show that families are having a harder and harder time paying for housing. Part of the problem is that Americans continue to want more space in bigger homes, and not just in the suburbs but in urban areas, as well. Americans more than 33 percent of their income on housing in 2013, up nearly 13 percent from two decades ago, according to newly released data from the Bureau of Labor Statistics (BLS). The graph below plots the trend by age.

Over-spending on housing is far worse in some places than others; the housing market and its recovery remain highly uneven. Another BLS report released last month showed that households in Washington, D.C., spent nearly twice as much on housing ($17,603) as those in Cleveland, Ohio ($9,061). The chart below, from the BLS report, shows average annual expenses on housing related items:

(Bureau of Labor Statistics)

The result, of course, is that more and more American households, especially middle- and working-class people, are having a harder time affording housing. This is particularly the case in reviving urban centers, as more affluent, highly educated and creative-class workers snap up the best spaces, particularly those along convenient transit, pushing the service and working class further out.

Last but certainly not least, the rate of home ownership continues to fall, and dramatically. Home ownership has reached its lowest level in two decades—64.4 percent (as of the third quarter of 2014). Here’s the data, from the U.S. Census Bureau:

(Data from U.S. Census Bureau)

Home ownership currently hovers from the mid-50 to low-60 percent range in some of the most highly productive and innovative metros in this country—places like San Francisco, New York, and Los Angeles. This range seems “to provide the flexibility of rental and ownership options required for a fast-paced, rapidly changing knowledge economy. Widespread home ownership is no longer the key to a thriving economy,” I’ve written.

What we are going through is much more than a generational shift or simple lifestyle change. It’s a deep economic shift—I’ve called it the Great Reset. It entails a shift away from the economic system, population patterns and geographic layout of the old suburban growth model, which was deeply connected to old industrial economy, toward a new kind of denser, more urban growth more in line with today’s knowledge economy. We remain in the early stages of this reset. If history is any guide, the complete shift will take a generation or so.

It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

The upshot, as the Nobel Prize winner Edmund Phelps has written, is that it is time for Americans to get over their house passion. The new knowledge economy requires we spend less on housing and cars, and more on education, human capital and innovation—exactly those inputs that fuel the new economic and social system.

But we’re not moving in that direction; in fact, we appear to be going the other way. This past weekend, Peter J. Wallison pointed out in a New York Times op-ed that federal regulators moved back off tougher mortgage-underwriting standards brought on by 2010’s Dodd-Frank Act and instead relaxed them. Regulators are hoping to encourage more home ownership, but they’re essentially recreating the conditions that led to 2008’s crash.

Wallison notes that this amounts to “underwriting the next housing crisis.” He’s right: It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

During the depression and after World War II, this country’s leaders pioneered a series of purposeful and ultimately game-changing polices that set in motion the old suburban growth model, helping propel the industrial economy and creating a middle class of workers and owners. Now that our economy has changed again, we need to do the same for the denser urban growth model, creating more flexible housing system that can help bolster today’s economy.

https://i0.wp.com/www.thefifthestate.com.au/wp-content/uploads/2012/10/High_Density_Housing_____20120101_800x600.jpg
Dream housing for new economy workers
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