Debunking Five Popular Myths

Here are the top five myths the bullish pundits would love you to swallow without question:

• “European sovereign debt auctions are going well”
• “The S&P 500 is trading at an 11.5x price/earnings multiple on 2011 earnings, which is extremely cheap”
• “The Chinese RMB revaluation is a very important marker in the rebalancing of the global economy”
• “The low return on cash will continue to drive money into risky assets”
• “A return to more affordable housing will result in a housing market recovery”

Here is the refutation to each and every one.

Five Preconceptions

Comments

[VK]

Credit dollars are disappearing, M3 is contracting. Credit evaporates thus cheap becomes cheaper, cheaper becomes cheapest and cheapest becomes worthless. I'll be long Apocalypse DOW.

[russki standart]

A rather astute analysis. Perhaps I am a perma bear but i find little to quibble with your conclusions. My only suggestion would be to develop point number 4 a bit further, but you still get an A.

To pose the counter argument, our friend Leo would likely disagree, but then, he is always bogering the joint so I never get to feel optimistic.

[Robslob]

To fi along with Bernanke's soon to be "negative interest policy"
(you heard it here first a.k.a. NIP)

Dow -36,000 bitches....

[buzzsaw99]

They don't need our money, they have infinite bernanke bucks!

[Thunder Dome]

China is toast.

[KevinB]

China is toast.

No, China is crockery. What type of kitchen do you have?!

[Hacker]

The kind of kitchen that, like most of us will soon be experiencing, is bare, except for the dishes, so might as well pretend they are toast and eat them up, yum.

Dishes, Dishes

Crunchy Munchy Dishes

Dishes Dishes

Eat them up, yum.

[Anarchist]

If the true number of homes in the shadow inventory were known, sales would crash. Those gobbling up homes with abandon are gonna take a hit once the floodgates open.

[Monkey Craig]

People ....wake up. This economy only works for those who:

1) run hedge funds backed by borrowings at Libor + 50 from a TBTF

2) supply military hardware to the NSA , DOD, Israel

3) own gold

4) own potash reserves in Canada or oil reserves in Qatar/UAE/ Saudi Arabia

5) develop real estate financed by a loan that should be bad (thanks "extend and pretend" at Citi, JPM, Fortress, etc.)

For everyone else, you get screwed by the inflation, taxes, Big Business, Big Labor and corporatism.

I work 50 hours a week and I still struggle to provide for my family. They call it the American dream, because you have to be asleep to believe it.

[Oracle of Kypseli]

1 & 5 will not apply after a while.

For those who can scrape some savings, get into Physical Gold and Silver.

Buy only the essentials and prepare your family.  

[repete]

You forgot big medicine, big law, and big religion.  Maybe not today...Maybe not tomorrow ...but soon and for the rest of your life! Bogart

[M.B. Drapier]

At first glance, 43 bn EUR of sovereign debt issuance in May and June went better than expected, with no country forcing the new bilateral borrowing mechanism into action. However, consider the support these auctions received from the ECB, either through increased ECB lending to banks in each country (much of which we believe is used to finance government bonds), or 51 bn in ECB debt purchases[1].

Nota bene: the ECB is very likely going to sell on its sovereign debt purchases to the EFSF, alias the Eurozone SPV - the selfsame new bilateral purchasing mechanism. So you could say that the bilateral purchasing has already begun, by stealth. (Crude, but apparently effective, stealth.)

[CBTeas]

Bullish pundits also believe state governments when they are told "the check is in the mail."

[equity_momo]

ps: go fk yourself bulls.  You head in the sand burrying mopes.

[pigpen]

Cheeky, for those of us math challenged. Will you explain if RMB is valued up .05% daily that the appreciation of the RMB annually is a bit over 3%?

(1.0005)^365=1.20016.

Any math folk want to help a poor dirty cartoon character with some math?

[Wheatman]

Tyler, WTF happened to copper today? How the fuck can copper rally when the ES and every other index is going to hell?

[CashCowEquity]

Down here in San Antonio, i see these jackasses hiding inventory and trying to sell homes OVER THEIR TAX ASSESSED VALUES !!! WHich are 99.9% overvalued in the 1st place !!!

My rule of thumb for buying a house here is subtract 16% off the asking price (At the minimum and never pay over $80.00 per sq foot)

$65.00 is my happy zone.

[DosZap]

Cash,

Ah So..............but, since you live in one of the TOP 10 cities in America,which is prefered for moving to, living in, and lack of traffic, beautiful scenery........I can see this happening, and I can see them selling.

[Vampyroteuthis ...]

Cash,

    I live north of you in Austin. My coworker is trying to sell her house in bumf*ck town south of here for well over 10 % of assessed value! It will be fun to laugh when zero bids appear.

[Lux Fiat]

Myth 1 comments:

 - "Italy is doing fine...".  Not so fast.  Saw an article a while back showing EU member debt rollover amounts and dates, and total debt.  Italy may not be up on deck just yet, but it certainly isn't sitting pretty.  Actually, IIRC, it is in worse shape debt wise, but has longer to wait until the piper must be paid.  If I can remember/find link, will edit/post later.

 - Banking system short-term funding gap chart was a thing of beauty.  USD has lots of problems, but the Euro is in much more dire straits.

Myth 3 comment:

 - Would love to see US reserve accumulation data from the post-WWI era through the Great Depression added to this chart.  Per Michael Pettis, only two comparables to current Chinese reserve accummulation situation exist - US in 1929/1930 and Japan in 1989.  http://mpettis.com/2010/02/never-short-a-country-with-2-trillion-in-reserves/

Myth 5 comment:

 - Not sure I would include a chart from the NAR with NAR supplied data in any serious analysis.  NAR makes CNBC jokesters look like Woodward and Bernstein in early 1970s.

[Thisson]

I think they get 2 things wrong:

1) Gold - could go lower on either of a) rising interest rates; b) liquidation of gold to meet redemptions as other asset prices decline

2) Homes - they fail to acknowledge that decreased housing costs mean workers can accept lower nominal wages, which would increase employment and spur consumption.

[Implicit simplicit]

I would think that $85 earnings on the S&P would even be too high.

I keep hearing how the big international companies will do the best, but the best will not be good in a world slowdown.

The only saving grace for local restaurants and some retailers, besides the top 20% earners, are the large number of cosumers defaulting on credit cards, mortgages and loans. However, I suspect much of the income generated will avoid the tax man. Bursts feed on themselves in the same algorithmic way that bubbles do.

Any way you look at it liquidity is being drained from the system Mutual fund withdrawals to strategic and regular defaults. Looks to be at least short to mid term deflationary.

[DosZap]

Implicit,

Mutual Fund withdrawals, are in (I think) large part due to the talk of Congress taking control over them, and 401k's/Trad IRA's..........for your Retirement(like SS?MC) was sposed to remember?..after seeing them selves lied to every other breath, folks are wising up.

A lot of this money is likely being used for PM's,ETF's,overseas investments,property,hard assets,etc.

Being drained from the system, means they can't use it w/impunity.......if YOU have control of it.

[Implicit simplicit]

DZ- The boyz are starting to realize that they can't hand out money with impunity as shown over at Automatic Earth:

http://theautomaticearth.blogspot.com/

"Democratic leaders in the Senate have apparently failed to win enough support to overcome a Republican filibuster of a bill to help the poor, the old and the jobless, despite making a series of cuts to the measure over the past several weeks to appease deficit hawks.

 The legislation, known as the "tax extenders" bill, would reauthorize extended unemployment benefits for people out of work for six months or longer, would protect doctors from a 21% pay cut for seeing Medicare patients, and would provide billions in aid to state Medicaid programs. Come Friday, 1.2 million people will lose access to the extended unemployment benefits, a number that will grow by several hundred thousand every week after that. Fifty million Medicare claims from June are currently in process at the reduced rate, which the AARP says has already caused some of its members to have trouble finding a doctor.[..]
That is the most accurate portrait of the real America you will find. The country is deliberately creating un underclass below its underclass. And that will have severe consequences."

Personally, I think the boyz in politics should take a big pay cut to help the economy.

[RockyRacoon]

About those earnings....  Take a look at the chart in this piece at Bloomberg:

Profit-Margin Outlook for U.S. Is ‘Extremely Bad’: Chart of Day Bloomberg

Profit margins for U.S. companies are likely to tumble from last quarter’s record, a decline that will lead to much lower earnings than analysts expect, according to economist Andrew Smithers.

“The corporate sector’s outlook is extremely bad,” Smithers, founder and chairman of the investment-advisory firm of Smithers & Co., said last week in an interview. “I can’t see any way out of it.”

As the CHART OF THE DAY shows, profit before interest, taxes and depreciation -- accounting adjustments for wear and tear on buildings and equipment -- amounted to 36.4 percent of U.S. corporate output in the first quarter. The calculation was based on data compiled by the Commerce Department.

The percentage was the highest since the department’s quarterly data started in 1947, as the chart depicts. Smithers, whose firm counsels more than 100 clients on international asset allocation, included a similar illustration in a June 18 report.

Margins “are likely to fall a lot” as governments restrain deficit spending next year, reducing cash flow elsewhere in the economy, the report said. Companies will bear the brunt of the shift as opposed to households, which are heavily in debt and save relatively little, in his view.

The decline in margins will lead to profits falling “well short of expectations,” he wrote. Analysts foresee earnings at companies in the Standard & Poor’s 500 Index rising 34 percent this year and 18 percent next year, according to data compiled by Bloomberg.

[Carl Marks]

Why so blue Buttercup?

[The Franchise]

Yes, the world is ending for the middle and lower classes... people, companies, cities, states, and entire countries are insolvent and becoming so at a faster rate... but we will have S&P earnings as high as they have ever been. You have to be a child to believe this shit. F'ing fantasy land.

[All_Is_Well]

No way! AAPL is going to save us all!

[RockyRacoon]

A good piece from Antal Fekete, in keeping with the topic:

The tragedy is that the captains of the world economy refuse to realize that runaway debt is the logical consequence of their having exiled gold from the international monetary system in 1971. They try to cure the bad effects of too much debt, or the presence of toxic debt in the system by introducing more of it. They have no idea how total debt could be decisively reduced and toxic debt safely eliminated.

They are playing a very dangerous game with the welfare of the people. When credit collapse finally comes, production disappears, employment shrinks, law and order break down. We are running into an unprecedented crisis with our eyes blindfolded. Wishful thinking will not coax out "green shoots".

http://thedailybell.com/1157/Antal-Fekete-Architecture-for-a-New-World-F...

[jwalker46]

With apologies if I missed this, but ... who wrote this piece, and when was it published?