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Your comment "We believe that household sector debt service levels have reached their tipping points and that this will have major implications on future consumption growth. This doesn’t bode well for a consumer-driven economy wherein the consumer makes up 70% of US GDP."
I almost never hear a discussion about another topic closely related to the consumer debt factor, which is that so much stuff has been purchased with all the debt, that even if the consumer debt disappears, the consumer may be set for at least 5 years. How many computers, wide-screens, cars, etc, purchased during the boom need to be replaced? All that debt bought a lot of stuff that simply won't have to be replaced for a long time. The consumer debt met a great deal of long-term demand. Between the pay down on the debt and the lack of need to replace things, I think we are in for a very long haul.
Our view is that the private sector will continue moving away from profit maximization and toward debt minimization. Already the private sector has begun to deleverage even in the face 0% interest rates: The Fed has been rendered incapable of stimulating credit creation due to an absence of credit-worthy borrowers, rendering traditional monetary policy, based on fractional reserve banking, ineffective. While it has succeeded in alleviating the shortage in the supply of credit, it no longer has the ability to stimulate the demand for credit -- the private sector has tapped out.
Is very reminiscent of Richard Koo's modestly titled Holy Grail of Macroeconomics. Koo concludes forcefully that the Japanese extended their Great Recession by focusing on deficit reduction many years too early, rather than waiting for fiscal stimulus to help companies pay down their debt and move back to profit-maximization. By that logic, a second stimulus is all but required. Even if you buy that logic, the big question mark is this: the Japanese asset bubble may have been bigger than ours (I haven't seen a true comparison of these), but they were an net exporter in basically boom times. We are a net importer in bust times, so even if our bubble is smaller, Koo's logic would seem to suggest that we are in for a LONG period of stagnation.
"Capitalism is based on capital formation (i.e. lending and equity investing); the level of activity in capital formation has peaked and naturally reversed course. In this type of economic dynamic, we will not see self-sustaining growth until private sector balance sheets are repaired, thus re-paving the way for sustainable growth in capital formation."
Another threat to capital formation: the destruction of the value of USD. What good are savings if the currency you are saving becomes worthless? Will inflating away the debt makes saving pointless (asked and answered)? If so, does this mean a replacement currency is likely?
"Many investors, if represented by the financial media, have failed to adjust from the vanquished paradigm..."
Paradigm shifts are never broadly identified as they occur. Never; most people get run over by them. This one is no different.
"There is a record amount of cash sitting on the sidelines"
Didn't we just talk about this?
"We predict the pressure to mount on policy makers for a second round of stimulus in the coming months (and very likely further rounds over a multi-year time span)." Then later: "We expect Treasury yields to remain at depressed levels for the remainder of the economic restructuring."
Given current pressure in the Treasury market, these two statements are exclusive, unless the author takes the position of many dollar advocates: our fiat doesn't suck as bad as everyone else's. Which he appears to take, except for this: "Investors should protect themselves against the risk that US policymakers will not prevent erosion in the value of the dollar."
Which is it?
"If the government can prop this up by borrowing money that don't exist and can't be paid back, then there is no such thing as money today."
The "store of value" function of money is the one that is not enforced. As such, IMO there IS no such thing as money today, at least not that folds. The store of value function is what gets in the way of central bankers, like the Constutition gets in the way of the statists.
Not all fiat currencies are junk. The CAD$ continues to do well, even though the governor of the Bank of Canada has made noises recently about intervening to slow its rise. In general, the federal government for the last 14 years has been moving to get its financial health in order. The current bust has put an end to that, but the Prime Minister tells us he will go back into budget surplus once the economy recovers. Of course, it helps that the PM is an economist, not a community organizer.
where did you get this? Out of the old paper bin? The US has economic growth while China has taken all the production? Is paper shuffling to for paper shuffing growth? The statements about stocks is assinine, as if earnings were real or meant a damn thing. The dividend yield on the SPX is back to 2.2%, which is less than 75% of the old all time pre-bubble high. The banking system is being propped up by phony accounting and the truth is that the US system is in much better shape than the ballyhooed Chinese system. If the government can prop this up by borrowing money that don't exist and can't be paid back, then there is no such thing as money today. Maybe that is why the Japanese are chronically broke?
Two of the most sensible suggestions I've heard the last 10 months have been calling a force majeure and anullment of all derivative contracts and the cancellation of all private debt.
It seems to me, in Willy Coyote terms, everything else are just ponderings when all that's left to do is to hit the ground - will a head or arse landing work best?
On the TSG weekly newsletter (http://tradesystemguru.com/content/blogcategory/34/68/), Matt Blackman quotes David Rosenberg, Chief Economist Gluskin, Sheff in a note to clients July...
“It is amazing that anyone would go long an equity market with a reported P/E multiple of 700x but that is indeed what we have on our hands. The end of the recession and the onset of a sustainable recovery, as we saw in 2002, are not the same thing. So this could still end badly but we will await confirmation signs that this is more than a very flashy bear market rally before shifting gears.”
I am not sure how he calculates 700x earnings. However, we know that stock prices are increasing faster than earnings. And this cannot be sustained before a major correction. Perhaps in October?
I do not profess to be expert in financial matters, and I find myself quite disconcerted with the apparent eventuality of a cataclysmic release of the forces that attempt to oppose and balance each other in the equity, forex, and bond markets. The succinct logic of your analysis is extremely helpful to a foundering amateur like myself. please keep up the good work.
Bullish on Treasurys - and the fact that its the contrarian view makes me more certain im right!
For many people there is No Other Good Choice.
They have looked into the abyss.
If Green Shoots are not real, then life as they
have known it is over.
They are fighting very hard.
"And more current data shows the Chinese economy making new highs in terms of economic activity and, in its new role as global locomotive, driving sharp rebounds in Emerging Asia economic growth." WRONG. The Chinks have their own bad lending bubble going, not real economic activity.
Your "cash on the sidelines" point. WRONG. See ZH article from a day or two ago.
Otherwise, pretty reasonable article.
straight from the cnbs school of journalism and the valley girl school of logic.....
although this is an opinion piece to which everyone is allowed at least one, i think that the author went back for seconds and thirds....
how can one say that stocks are fairly valued when the majority of evidence and fears so expressed do not support future earnings growth of any consequence? on the one hand the author argues for a contraction of the consumer led economy which i would think implies lower earnings for at least 2 more quarters while consumer companies restructure along with a contracting banking sector which has recently fueled 40% of sp500 earnings but on the other thinks that 16x earnings is reasonable??...and if you leave behind the last two near normal quarters from 2008 to look at 6 month trailing earnings, it would appear that we have much higher p/e ratio than 16x.
i don't get how stocks can be fairly valued at 16x earnings in such a market....
i would like to see evidence that future earnings growth justifies a high p/e of 16x....one does not turn from -32% earnings to 10-15% earnings growth which under the best of circumstances is an impressive feat.....
What is going to cause the growth contribution of stimulus to become negative in 2010?
Debt service on the 780 billion.
Interest at 3.5% on the $780B stimulus would only be $27B. That is less than a 0.2% drag on a $14T economy. The graph shows ten times that amount.
"The evidence suggests that government intervention is just one factor among many affecting stock returns, and that an above-average degree of intervention is not necessarily associated with below-average returns." – Weston Wellington
“The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.” – Warren Buffett; August 6, 1979 when the S&P 500 closed at 104
Deal with it.
the operative phrase is "not necessarily"
unfortunately we have negative mpd which correlates
with continued economic decay and demand
destruction engineered by government "intervention"
weston is a man of impaired visual acuity...
but i do agree that under normal circumstances
fear and uncertainty create magnificent buying
opportunities if indeed the economy is structurally
sound.....with great structural changes in
store, i am not sure that is a fair assumption.
I'm afraid your analysis is faulty. At that time the fed wasn't pumping money into goldman via the NY fed and having them buy stocks to prop up the market. The authors point is that based upon his understanding of history the market should in fact be much lower.
therfore, on a risk reward baisis, stock aren't the place to be. But one can never underestimate the power of the fed
say ffffing what!
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