With every other bear throwing in the towel left and right these days, we fully expected that the latest letter by SocGen's Albert Edwards would have something about "how much he hates looking at himself in the mirror, but..." Luckily none of that happened. Instead we were greeted by the sharp insight and keen intellect that we have grown to expect from AE, and that have disappeared from the repertoire of so many other sellouts and lemming cheerleaders. Ironically, the topic of Edwards' latest piece is precisely the chart above - the explosion in future margins, or rather the complete lack thereof. But not only that. For everyone else who has dutifully thrown in the towel, very much as the Chairman expects, Edwards has a few words: 'The doomsayers who predicted that this recovery was on the verge of faltering have been proved wrong, and like the boy who cried wolf, can be safely ignored by the market. Yet that is exactly what happened in 2006 with the US consumer and housing boom, where the voices of caution had been so wrong, for so long, that their Cassandra-like utterances were ignored. Cassandra?s forecasts may have been ignored, but they proved to be correct. Investors demand a sign of when to get out and that trigger may have just arrived."
Albert Edwards: "Only the brave can react to what they see and leave the markets. The global macro looks an appalling mess and even more importantly, long-term equity investors can find nothing worth buying. For equity investors we are closer to 2007 than 2001 as the vast bulk of the equity market, as represented by the median PE, PB or Price/Sales, is expensive. The US median price/sales ratios is at a record high, indicating that there is practically nothing cheap in the equity market left to buy."
Today's Chart of the Day comes by way of SocGen's Albert Edwards who in one image shows why, with gross debt issuance needs between budget funding and rolling maturities at 60% of GDP, Japan has no choice but "to print and print and print"
When Bubbles Fail: Albert Edwards Explains What Happens When The Fed Can No Longer Contain The Fury Of The "99%"Submitted by Tyler Durden on 09/27/2013 10:49 -0500
"They’re at it again! US inequality is surging and the Fed has created another house price boom. Does this matter? Well I think so. But who cares what I think. Warren Buffet, Bill Gross and Stanley Druckenmiller think it matters. Clients marvel at how the US profits’ share of GDP remains so high and that labour remains so weak. Marc Faber said recently that in postponing the QE taper, we have merely climbed to a higher diving board. I go further. I see growing inequality draining the swimming pool dry. The crunch, when it comes, will be ugly"... Investors should make no mistake. The anger of the 99% will ultimately not be bought off by yet another central bank inspired housing bubble, engineered to pacify them and divert their attention as their real incomes fall and inequality continues to grow." - Albert Edwards
"I sometimes feel I am in a parallel universe. Maybe I am... It?s like they're on a train which they know to be heading for a crash, but it is accelerating so rapidly they?'re scared to jump off." - Albert Edwards
Albert Edwards Storms Out Of The Gate With Calls For 450 On The S&P, Sub-1% 10 Year, And $10,000 GOldSubmitted by Tyler Durden on 08/29/2013 10:07 -0500
"The emerging markets "story" has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $10,000."
For the first time since November, PBOC data indicated banks, including the central bank itself, sold a net CNY41.2 billion in June. This compares with the huge average CNY315.2 billion in net purchases by banks during the first five months of 2013. While some claim this outflow as 'transitory' due to Bernanke's 'Taper' talk in June (that has been walked back since), as MNI reports, China's ongoing economic slowdown has market participants continuing to brace for a return to capital outflows. With reform plans critical to China's transition, this 'outflow' adds to the leadership's concerns especially in light of what very few have reported, as SocGen's Albert Edwards notes, the fact that China is on the verge of outright deflation (GDP deflator lowest in over 4 years) as China's over-investment comes home to roost.
The bloodbath in the bond markets has led some 'greatly rotating' commentators to see this as the end of the long bull market (and the beginning of a lost decade for Treasuries); in fact, as SocGen's Albert Edwards notes, the financial wreckage left in the wake of Bernanke's taper talk has generated a lot of interesting commentary. But, he asks (and answers eloquently in this far-reaching anatomy of all-the-world's-views-on-what-the-Fed-is-doing) what if (as we have noted) tapering has nothing to do with the US economy having reached a sustainable take-off velocity? From Janjuah to Rosenberg, and from Wolf to Faber, Edwards explains how his Ice-Age thesis (lower lows and lower highs for nominal economic quantities in each cycle... with each recovery bringing a partial reversal to the process and each recessionary phase taking us to shocking new lows, both in bond yields and in equity multiples) is very much still in play (despite the risks that are evident) since governments will take the path of least resistance, which is to print their way out of this looming fiscal catastrophe. Marc Faber is right. QE99 here we come.
China continues to be stuck between an external hot money flows rock and a contracting economy and unstable banking sector hard place... Thanks to the G-0 central planners, the PBOC's hands are now tied: if it injects more hot money or lowers the interest rate the inflation on the margins, which it has so far been able to mask will spill over into the streets in a repeat of 2011, and force an even more epic scramble for inflation protection than the one seen two years ago, and which led to gold rising to just shy of $2000. Naturally, at a time when the central planners have gone all in on precipitating the Great Rotation out of bonds and into stocks at all costs, a re-exodus into gold might just end the Keynesian experiment. So the China central bank has that to contend with as well.Which means one thing: in reality Chinese credit and liquidity is in far worse shape than reported. And sure enough, over the past 24 hours we got news courtesy of Bloomberg that the "China Liquidity Squeeze Risks Companies’ Debt Rollover" leading to what may be the first harbinger of a Chinese bank failure which may subsequently lead to a whole lot of dominoes falling.
Some are surprised that inflation has failed to take off despite massive amounts of quantitative easing. The explanation, ECRI explains, is simple: recession kills inflation. For all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009. The 'r' word is seldom heard on the lips of the mainstream media - "how absurd" - but as SocGen's Albert Edwards notes, if anyone is waiting for the ISM to tell them that a recession has started in the US, they are looking at the wrong data. Much more importantly, Edwards explains, we may well be in for a double dose of bad news - both falling revenues and falling margins. History suggests this as good a leading indicator as any other for whether the US economy will endogenously fall back into recession. Unfortunately at the height of a recovery most commentators forget profit margins mean-revert as they become intoxicated by the equity market's prior stellar performance and tend to continue to price the market off analysts' forward earnings - which inevitably always forecast further healthy gains ahead.
House prices - with respect to both levels and changes - differ widely across OECD countries. As a simple measure of relative rich or cheapness, the OECD calculates if the price-to-rent ratio (a measure of the profitability of owning a house) and the price-to-income ratio (a measure of affordability) are above their long-term averages, house prices are said to be overvalued, and vice-versa. There are clearly some nations that are extremely over-valued and others that are cheap but as SocGen's Albert Edwards notes, it is the UK that stands out as authorities have gone out of their way to prop up house prices - still extremely over-valued (20-30%) - despite being at the epicenter of the global credit bust. Summing up the central bankers anthem, Edwards exclaims: "what makes me genuinely really angry is that burdening our children with more debt to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing." It's not different this time.
Some of my first memories of television are of a series called The Rocky and Bullwinkle Show, which was a witty combination of animated cartoons about the exploits of the title characters, Rocket "Rocky" J. Squirrel and Bullwinkle J. Moose and their nemeses, two Pottsylvanian nogoodniks spies, Boris Badenov and Natasha Fatale. The show was filled with current event commentary, political and social satire. The show was also filled with commentary on economic and market conditions that resonated with the parents watching the show while the kids focused on the cartoons. Each show ended with the narrator describing the current cliffhanger with a pair of related titles, usually with a bad pun intended. So let's adapt some of my favorite Rocky and Bullwinkle episode titles to modern day; we might see that there are some political and economic challenges that are timeless, as it appears we have been doing the same thing over and over for decades and expecting different results.
There has been much speculation in the recent past over what the bottom-line impact of surging stock buyback activity has been on the overall S&P earnings: after all, by removing shares from circulation, the denominator in "per share" calculation gets smaller and smaller with every incremental buyback. Courtesy of JPM we finally have a definitive answer to this long-running question. Of the change in S&P TTM operating earnings between Q3 2011 and the just completed Q1 2013, a stunning 60% or $2.20, of all "gains" of $3.70 have been the result of buybacks. The remainder: a tiny $1.50 is due to actual organic growth. This means that nearly 60% of the bridge between the LTM operating earnings of $94.60 as of Q3 2011 to $98.30 at Q1 2013 has come from corporate management teams engaging in shareholder friendly activity.
There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession. The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story. If historical patterns hold up, the economy is heading for a very rocky stretch. But most average Americans are not that concerned with the performance of the stock market. They just want to be able to go to work, pay the bills and provide for their families. During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes. If we have another major recession, that will happen again. Sadly, it appears that another major recession is quickly approaching. The following are 12 recession indicators that are flashing red...
With any and every asset-gatherer capable of forming a sentence being trotted out on business media to proclaim victory and elucidate on why "there is no where else to invest but stocks" and "the US is the cleanest dirty shirt," we thought it might be useful to reflect on just how clean that shirt can remain as the rest of the world's growth slows down significantly. In the last decade, there has been particular growth in inter-regional trade, with a dramatic expansion in trade vis-à-vis Asia, reflecting globalization. At the same time, the deepening in global trade relationships means that the potential for a sudden shift in demand in one region can have a more significant impact on the rest of the world. This has been seen particularly in recent years, with the sharp retrenchment in domestic demand in southern Europe affecting the economy of Asia, particularly Japan. Looking at the rate of increase in regional imports (which we assume is what the 'heads' believe will power the US 'clean' shirt) and the picture is ugly. And while copper is enough of a tell for most, even the IMF (usually extraordinarily optimistic) sees World Trade slowing dramatically - and given these interconnections, perhaps being the cleanest shirt merely shows the stains even more clearly when they finally hit.