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Guest Post: Cheap, Abundant Credit Creates A Low-Return, Bubble-Prone World

Tyler Durden's picture





 

Via Charles Hugh-Smith of OfTwoMinds blog,

By bailing out banks and targeting equity prices, the central banks are exacerbating the misallocation of savings/financial capital to historically overvalued corporate equity.

 
What happens when central banks make credit cheap and abundant? All that cheap money chases scarce productive assets. The yields on assets drop, and speculative "risk-on" assets are boosted into bubbles.
 
Even as corporate profits have skyrocketed, equity valuations have risen apace, keeping yields at historically low levels.
 
 
Just to state the obvious: does that trajectory strike you as sustainable? Up almost 300% in less than four years? In a debt-burdened global economy, where are the next $1.75 trillion in corporate profits going to come from?
 
Anyone who claims "stocks are cheap" would do well to study these charts, which are courtesy of longtime correspondent B.C.:
 
 
Another measure of the S&P 500 yield using corporate bond yields (Baa):
 
 
In response to my observation that this looked like too much cheap credit chasing too few productive assets, B.C. added these explanatory comments:
 

This is characteristic of the liquidation/hoarding of a debt-deflationary Long-Wave Trough depression. The financial media and economists want us to believe that the Fed printing is "stimulus" when in fact it is part of the "liquidation" of Fed member banks' balance sheets of bad assets. 

With the 10-yr. avg. P/E of 22-23, a 10-yr. earnings yield of 4.5%, a dividend of 2% (0% in real terms before fees and taxes), average reported earnings growth since '00 of 3-4%, the real yield on 10- and 30-year Treasuries of slightly negative to 1%, and real wage/salary growth of 0%, the imputed discount rate implies inferior returns to capital vs. continuing decline in returns to labor; these conditions are not conducive to private sector investment growth and employment. 

Historically, the only "solution" was debt deflation and consumption of financial capital to the point that debt and asset prices fell to a level at which the imputed discount rate rose to encourage investment at rising returns to labor's share of GDP, i.e., inflationary Long-Wave Upwave. 

By bailing out banks and targeting equity prices, the central banks are exacerbating the misallocation of savings/financial capital to historically overvalued corporate equity of the Fortune 25-300 firms, resulting in low-velocity hoarding and worsening wealth and income concentration, unproductive rentier speculation, further declines in labor's share of GDP, and contracting trend real GDP and gov't receipts per capita. 

Along with these conditions are the once-in-history effects of Peak Cheap Oil, falling oil exports per capita, deteriorating EROEI, population overshoot, and accelerating automation of labor and loss of income and purchasing power. 

Consider that market cap-to-GDP today is 110%, ~100% above the historical average and 230% above the average of secular bear market lows. The differential $8-$12 trillion in market cap, primarily held by the top 0.1-1% to 10% of households in form of the equity of the Fortune 25-300 firms, is effectively captive current and future savings/investment/business, household, and gov't consumption that otherwise would occur at the given ratio to wages, profits, and GDP. 

George Brockway made the case in his book, The End of Economic Man: Principles of Any Future Economics (1995), that a stock bull market is a disaster, because bull markets coincide historically with growing wealth and income concentration and gross misallocation of savings/financial capital that encourages unproductive gambling and speculating, bank leverage, and bubbles that burst and cause mayhem. 

However, we are conditioned by the dominant rentier zeitgeist that rising asset prices (debt-money proxy claims on wages, profits, and gov't receipts in perpetuity by the top 0.1-1%) are an unambiguous sign of widespread prosperity.

Thank you, B.C. for placing the charts in context. B.C. also passed along this investment-bank report on the same topic, The Low-Return World (Credit Suisse).
 


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Tue, 02/12/2013 - 14:47 | Link to Comment 1835jackson
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who cares? Kate Upton is on CNBC. Give a dog a bone!

Tue, 02/12/2013 - 15:01 | Link to Comment Super Marco
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CNBC Africa left out Kate Upton. Playing some South African stock show. Laaaaaame.

Tue, 02/12/2013 - 15:27 | Link to Comment SamAdams
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The "pop" is still a year or more out judging by the progress of the state.  Note there is some in-fighting (resign please), which I believe is Aristocracy Vs Tyranny, with the International bankers largely indifferent so long as they create the money.

Prepping the police state for the big "pop":  http://theallegiant.com/invasion-dhs-source-tells-why-military-exercises-in-u-s-cities/ .  They don't have the guns, but with the coming legislation, all guns are to be registered.  Otherwise, you will not be able to transfer in the future, even to your relation.  So, if the bubble pops before the Fascists are ready, at least they will know which homes to visit first.

China is the villian since it has gold and resources (and some rumored claims against US bankers), yet placated by exchanging bonds for US real estate and energy.  Don't underestimate Russia's lack of debt and new found taste for shiny metals.  How is a bankrupt, fascist tyranny like the coming USSA going to cope?  Nuke 'em Danno....

It is an interesting time we live in.

Tue, 02/12/2013 - 14:50 | Link to Comment blindman
blindman's picture

John Trudell: Introducing Coherency Into The Reality of Energy
http://www.youtube.com/watch?v=DSct9DcV1hY

Tue, 02/12/2013 - 14:50 | Link to Comment disabledvet
disabledvet's picture

Really? "targeting equity prices" is a misallocation of capital? If you're the GOVERNMENT it sure is! But nay...Larry Kudlow doth protest against against Big Government too much. It has become nothing more than a debt vehicle for a HIGHLY inefficient form of "wealth transference." why not simply put "all Government programs on an EBT card"? Sure would reduce the workforce of...what are they doing again? Oh, yeah..."working for Wall Street" and the dividend crowd. He'll can they even hire a lifeguard this summer? I doubt it...

Tue, 02/12/2013 - 15:05 | Link to Comment michael_engineer
michael_engineer's picture

It's quite possible that the real underlying cause of many of these bubbles we have seen is the natural transition that is experienced as the resource inputs to our economy follow Hubbert like curves. Credit may be more of a symptom than a root cause. Riding the ramp up on the curves or waves will have different economic characteristics than the plateau or ramp down will have. Note that the curves are similar to a pulse or "one shot" and are not cyclical in any way.

Tue, 02/12/2013 - 15:36 | Link to Comment dracos_ghost
dracos_ghost's picture

Credit is the root cause -- everything else is noise. Credit extended to governments (aka non-productive entities) is flat out stupid -- the forward payment system is taxpayer money period. No creation of wealth. Not even a zero-sum game of wealth creation. The problem is the Bureaucrats who suckle off the Government tit need this flow to survive and are now in charge of all monies. Even credit extended to publicly traded companies that have market caps several magnitudes larger than their revenue streams are stupid(500 of the S&P 500 for example). The forward payment system is what? "Money" derived from their bloated stock prices + phoney earnings from NIRP. The old snake eating it's own tail. The Debt/Wealth creation ratio will always be >1. Pretty much the definition of slavery no?

The problem is that they are pissing in the wind trying to avoid normal expansion/contraction(including defaults) cycles with Credit as their only weapon which makes it a root cause -- quite different from other historical blocks. And let's not forget the leaders in charge aren't exactly the sharpest tools in the shed or honorable all around the globe.

These dangerous people have left themselves only the last Keynesian pillar:

"In Keynes' view, when main pillars of the economy are failing - consumer spending, investment and net exports - the only pillar that is left to support the economy is the government." -- http://www.pbs.org/newshour/updates/business/jan-june09/keynes_02-23.htm...

By far the dumbest example of logic in human history. Why Keynes is revered is baffling. The sad thing is they forgot what happened last time. World War. Yippee.


Tue, 02/12/2013 - 15:04 | Link to Comment yogibear
yogibear's picture

Bubble Bernanke, William Dudley and Goldman Sachs are laughing at the muppets.  Their gonna get robbed again.

Tue, 02/12/2013 - 15:05 | Link to Comment Racer
Tue, 02/12/2013 - 15:09 | Link to Comment CheapBastard
CheapBastard's picture

Moar 'recovery' in action:

 

MADRID (AP) — Spanish airline Iberia has presented a plan to cut almost a fifth of its workforce nearly a week ahead of a first round of strikes by labor unions opposing the plan.

Iberia, Lineas Aereas de Espana S.A., said Tuesday its losses totaled €850 million between 2008 and September 2012 and this obliged it to take drastic action.

 

http://news.yahoo.com/spains-iberia-presents-major-layoff-plan-125247330...

Tue, 02/12/2013 - 15:13 | Link to Comment A Lunatic
A Lunatic's picture

Malinvestment of free money is what has sunk our boat, not necessarily abundant credit. Credit could have properly been used for much wiser investments that could have had great benefits to the future of this country.

Tue, 02/12/2013 - 15:15 | Link to Comment Mountainview
Mountainview's picture

At the slightest sign of higher rates, there will be panic at the exit gates!

Tue, 02/12/2013 - 15:27 | Link to Comment michael_engineer
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The reference by CHS to :

"Along with these conditions are the once-in-history effects of Peak Cheap Oil, falling oil exports per capita, deteriorating EROEI, population overshoot, and accelerating automation of labor and loss of income and purchasing power. "

does provide a strong underpinning to his analysis and gives it true "structural" support.

Tue, 02/12/2013 - 15:26 | Link to Comment Sach Mahoney
Sach Mahoney's picture

Rotation schmotation! How the fuck does the FED exit its corrupt interest rate and market manipulation policy aka QEternity, without forcing rates wildly higher?  Answer: They cannot.  Either Funky Fed keeps printing and buying bonds or they watch rates go significantly higher and its bond porfolio value significantly lower  Once the markets believe the FED is done, this entire 4 year trade is done rather quickly I might add...pop goes the bubble.  

Tue, 02/12/2013 - 15:29 | Link to Comment buzzsaw99
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By bailing out banks and targeting equity prices, the central banks are exacerbating the misallocation of savings/financial capital to historically overvalued corporate equity...

 

Does this mean FB isn't worth 1800X earnings? Heresy!

Tue, 02/12/2013 - 16:44 | Link to Comment blindman
blindman's picture

The Federal Reserve's Cargo Cult Magic: Housing Will Lift the Economy (Again) (September 11, 2012)

The Federal Reserve is ultimately a Cargo Cult, founded on fantasy and a boundless faith that management perception will bring back the cargo ships of debt-based "growth."
http://www.oftwominds.com/blogsept12/Fed-Cargo-Cult9-12.html
...
"I have often identified Keynesian economists and the Federal Reserve as cargo cults. After the U.S. won World War II in the Pacific Theater, its forces left huge stockpiles of goods behind on remote South Pacific islands because it wasn’t worth taking it all back to America. After the Americans left, some islanders, nostalgic for the seemingly endless fleet of ships loaded with technological goodies, started Cargo Cults that believed magical rituals and incantations would bring the ships of “free” wealth back. Some mimicked technology by painting radio dials on rocks and using the phantom radio to “call back” the “free wealth” ships.

The Keynesians are like deluded members of a Cargo Cult. They ignore the reality of debt, rising interest payments and the resulting debt-serfdom in their belief that money spent indiscriminately on friction, fraud, speculation and malinvestment will magically call back the fleet of rapid growth.

To the Keynesian, a Bridge to Nowhere is equally worthy of borrowed money as a high-tech factory. They are unable to distinguish between sterile sand and fertilizer, and unable to grasp the fact that ever-rising debt leaves America a nation of wealthy banks and increasingly impoverished debt-serfs.

The Keynsian Cargo Cult relies on an essentially magical belief that government give-aways will raise "aggregate demand," the "animal spirits" demand for more of everything, which will magically increase productivity, wealth, etc.

The Cargo Cult faithful do not understand diminishing returns: at some point, the interest on skyrocketing debt drains income and capital from potentially productive investments to pay for previous unproductive spending on fraud, friction and malinvestments. "Free money" creates moral hazard, which means that those who can borrow money for almost nothing and never have to pay it back act entirely differently from those paying market rates for money and backing their loan with real collateral that is at risk." ... chs

Tue, 02/12/2013 - 17:56 | Link to Comment Clowns on Acid
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The Bernank and his smirking pack of jackals (Yellen, Bullard, etc.,,) know all of this...the worrying question is what their plan going forward is.
I know...print...but their grandiose plan must also include some sort of "debt retirement" as they already "own" 50% of the debt that they originally issued. Thus they are essentially paying themselves the interest, and awaiting principle.
I know it is just a different take on the platinum coin idea, but I do believe that the Fed's exit plan will contain some Rube Goldberg, Neo - Keynesian "debt retirement" scheme.

I think the Tyler's should begin investigating this angle, as the inflationary print genie is already out of the bottle.

Tue, 02/12/2013 - 18:03 | Link to Comment LawsofPhysics
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That which cannot be sustained, won't be.  That which cannot be "paid" won't be either.  War is the only outcome, period.

Tue, 02/12/2013 - 18:17 | Link to Comment Clowns on Acid
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LoP - Longer term...I agree, however I think it is the right time for the Tylers to focus on that "debt retirement" Fed issue. Gotta stay ahead of the curve!

The North Korea practice blast has been largely ignored by LSM. Y'know a boilerplate response from the Obama Admin...etc..,
The Dorner shoot out has made for better copy.
I see it as China showing its hand, particularly toward the Japanese. China is saying "we want the Islands, or we will let loose our insane midget to go gangnam style on you. So figure out how to save face, and we will play along nicely."
The Abenomics bullshit is just a desperate side show.
The G7 side show won't even mention N. Korea and its impact on Japan.

Tue, 02/12/2013 - 19:14 | Link to Comment LawsofPhysics
LawsofPhysics's picture

debt retirement is irrelevant given the size of the current liquidity trap we are now in and the fact that growth is impossible given humanity's current ability to deliver energy and resources.  Sure, lots of things may be a "game changer", such as real honest to god fusion reactors.  But even this is going to require a completely new paradigm shift and massive capital and resource investment.  The debt-is-money world has scarred the earth.  Before we can recover we must heal, this will take lifetimes now.  We have had numerous chances since the discover/exploitation of the oil age (oil remains THE primary driver of all eCONomies).  The oil we have burnt so far took several hundred million years to accumulate, horrible waste of capital and resources (money is not capital, most don't understand this).  Simply put, the earth does not have the capital and resources to maintain the current american standard of living, much less "extend" it to everyone.  To think that people who have benefitted from the fraud will go slowly into that goodnight is simply foolish.

Tue, 02/12/2013 - 18:54 | Link to Comment NoWayJose
NoWayJose's picture

This chart looks exactly like Martian equities did a couple million years ago - right before the Martian scientists misjudged the trajectory of an asteroid...

Tue, 02/12/2013 - 18:56 | Link to Comment nightshiftsucks
nightshiftsucks's picture

I read stuff about the military and DHS but if the economy did collapse then what's in it for them ? Why wouldn't they go home and protect their families ? What could the govt give them unless they house their families in Fema camps ?

Tue, 02/12/2013 - 19:06 | Link to Comment trendybull459
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http://trendybull777.blog.com/2013/02/12/world-new-orderin-russianwhat-t... injoy your last freedoms,read why in the near future you all will be leaving under much worth leader that Stalin was,Elite should prepare testoments,your last days counted FED,prepare for changes,working for change!Because most of you worthening midlle class conditions,you are blind in your greedy habits to leave some change to poor and middle,then you will loose all like it was many times in hystory under the New Order which not you,others will do very soon!

Tue, 02/12/2013 - 19:39 | Link to Comment blindman
blindman's picture

retiring debt is to modern accounting and economics
as terrorism is to community organising.

Do NOT follow this link or you will be banned from the site!