Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.
As SocGen's Albert Edwards conveniently points out, during the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis's (BEA) favored measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA's calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below. In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!
Most of the market tends to focus on profits on a pro-forma basis. We have never been big fans of this. These are the earnings numbers companies like to publish that steer attention away from the ?bad stuff?. James Montier used to be highly scathing, describing them as “undefined, unregulated and untrue”. But because of their ready availability most in the market tend to quote pro-forma earnings numbers from the likes of Bloomberg and I/B/E/S and many base their equity valuations on this dodgy earnings metric. Yet even on this artificially inflated measure, trailing EPS grew only a paltry 5½% yoy in 2013, and 3% on a non-financial basis Andrew Lapthorne published an update on the US profits situation in the wake of the Q4 reporting season. He writes "?At first look, growth in US net income last year looks remarkably good. With nearly all S&P 500 names having reported year-end figures, net income grew 14% last year, or 12.8% on an ex-financial basis. This is fairly impressive growth given the lacklustre economic backdrop. So should we be celebrating? Well we?re not so sure, as the source of this growth is not a robust improvement in operating cash flow, but is to be found in the large goodwill write-downs of 2012?." Andrew then shows that the vast majority of this 14% growth in profits was driven by company-specific write-downs made back in 2012 ? with Hewlett Packard, AT&T and Verizon Communications leading the way.
"Take a long, hard look, Janet," warns Grant Williams, "the landscape over which you cast your eyes when you accepted the poisoned chalice prestigious role of Fed Chair changed last week." Just two days before you were confirmed in a rather lovely ceremony, in an interview in Mumbai, Raghuram Rajan (one-time Chief Economist at the IMF and current Governor of the Reserve Bank of India) rather UNceremoniously dropped something of a bombshell that went largely unreported (perish the thought, in this era of dogged journalism). The standout feature of central bank policy over the last five years has been the spirit of cooperation... then came the taper. It is every man for himself now, and the Fed will screw them all. The splintering of central bank policy is just the beginning. This is the end of the innocence.
"The slump in the recent ISM data may be the ?straw in the wind? of what is to come. Certainly the three-month change of the leading indicator has now turned down sharply ? even before the recent ISM data has been incorporated. We watch the unfolding EM crisis with increasing trepidation because we know how this story ends. We have been here before. And even if the Fed resumes massive QE at some point as the world melts down, and markets desperately attempt their return to the dream trance, they will instead find themselves locked into a Freddie Kruger-like nightmare in which phase 3 of this secular bear market takes equity valuations down to levels not seen for a generation." - Albert Edwards
SocGen's Albert Edwards, who refuses to pull a Hugh Hendry and to "stop looking at himself in the mirror", remains one of the few coherent realists in a world where soaring nominal asset prices have managed to confuse virtually every pundit into believing central bank balance sheet and stock market expansion means an economic recovery. Today he shares the one chart which as he says "the importance of which we cannot emphasise enough", and which he believes highlights the biggest risk equity investors - hypnotized by the Fed's H.4.1 weekly statement and its weekly record high balance sheet - take when they put all their faith in the Bernanke/Yellen grand behavioral experiment.
It's been one of the worst years for gold in a generation. A flood of outflows from gold ETFs, endless tax increases on gold imports in India, and the mirage (albeit a convincing one in the eyes of many) of a supposedly improving economy in the US have all contributed to the constant hammering gold took in 2013. Perhaps worse has been the onslaught of negative press our favorite metal has suffered. It's felt overwhelming at times and has pushed even some die-hard goldbugs to question their beliefs... not a bad thing, by the way. To us, a lot of it felt like piling on, especially as the negative rhetoric ratcheted up. This is why it's important to balance the one-sided message typically heard in the mainstream media with other views. Here are some of those contrarian voices, all of which have put their money where their mouth is...
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 11:49 -0400
"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 11:07 -0400
"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.