This page has been archived and commenting is disabled.
Guest Post: There Is No Asset Bubble?
Submitted by Lance Roberts of Street Talk Live blog,
As I was researching, and writing, this past weekend's weekly newsletter entitled "The Bernanke Factor" what really struck me was the universal belief by the majority of analysts, economists and commentators, that there is currently "no evidence" of an asset bubble. This idea was further confirmed by Bernanke's testimony last week he explicitly stated:
"I don't see much evidence of an equity bubble"
His prepared statement also touched on the same:
"Another potential cost that the Committee takes very seriously is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may 'reach for yield' by taking on more credit risk, duration risk, or leverage...Although a long period of low rates could encourage excessive risk-taking, and continued close attention to such developments is certainly warranted, to this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation."
The common theme between Bernanke's comments, and the majority of analysts and economists, is corporate profitability. As Neil Irwin recently penned:
"But there's good evidence pointing to this [an equity bubble] not being the case. The key thing to know is that American businesses have spent the last four years becoming much more profitable."
However, looking at corporate profitability in a vacuum can be a bit misleading. Today, there are contributing factors to corporate profitability that did not exist previously such as the change to FASB Rule 157 which changed mark-to-market accounting, the excessive use of loan-loss reserves and other accounting gimmickry. Regardless, what is more important than the level of profits is the relative growth trend of those profits. The chart below shows top line sales versus reported and operating earnings. The last two major market peaks have coincided with earnings topping, and beginning to weaken, much like we are seeing currently.
While the level of corporate profitability is certainly important - corporate profits are more of a reflection of the issues that have historically led to asset bubbles. Increases in leverage, speculative investing and the push for yield, as identified in Bernanke's testimony, are more attributable to historic asset bubbles from the peak in 1929, the technology bubble in 2000 or the housing bubble in 2008. For example, the housing bubble that started in 2003, which was built around excess credit and leverage as homes were turned into ATM's - led to a surge in corporate profitability and economic growth. However, the growth of corporate profitability did little to deter what happened next.
Following The Sign Posts
So, instead of corporate profitability, which is already showing signs of stress, we should be focusing on the areas identified by Mr. Bernanke in his recent testimony: leverage, speculative risk taking, and the reach for yield. These data points could provide much needed clues as to where, as investors, we are in the current cycle and what the potential risks are that lie ahead.
Sign Post #1 - Leverage
The downfall of all investors is ultimately "greed." Greed can be measured not only emotionally by looking at bullish versus bearish sentiment indexes but, more importantly, how much leverage investors are taking on. The chart below is the amount of margin debt by investors overlaid against their relative positive or negative net credit balances.
With both margin debt and negative net credit balances reaching levels not seen since the peak of the last cyclical bull market cycle it should raise some concerns about sustainability currently. It is the unwinding of this leverage that is critically dangerous in the market as the acceleration of "margin calls" lead to a vicious downward spiral. While this chart does not mean that a massive market correction is imminent - it does suggest that leverage, and speculative risk taking, are likely much further along than currently recognized.
Sign Post #2 - High Yield Chase
When investors have little, or no, fear of losing money in the market they begin to seek the things with the greatest returns. Over the last few years the chase for yield, due to the Bernanke's consistent push to suppress interest rates, has driven investors into taking on additional credit risk to increase incomes. The chart below is the BofA Merrill High Yield (aka Junk Bond) Index.
The chart shows that, as opposed to Bernanke's statement, investors are rapidly taking on excessive credit risk which is driving down yields. With those yields now at historic lows there is little margin for error either in the credit markets or the economy.
Sign Post #3 - Reduced Translation Into Economic Growth
While Bernanke is hoping for stronger economic growth in the near future his real concern has been the effect of diminishing returns on each monetary program.
Since Q4 of 2008 the real economy has grown from $12,883.5 billion to $13,656.8 billion as of Q4 2012. This is a total of $773.3 billion in growth over the last four years or $193 billion per year or roughly about a 1.5% growth rate. During this same period, the Fed has injected roughly $5 for each dollars' worth of economic growth. This cold hardly be considered a great return on investment.
As opposed to Bernanke's statement that increased risk-taking are okay as long as such risks are outweighed by "the benefits of promoting a stronger economic recovery and more-rapid job creation," it appears that such a progression is not the case. As we have seen with virtually every indicator - economic activity peaked in 2010. Since then, even with the input of global stimulus, the rate of economic growth has weakened as shown in the chart below.
Risks Of Recession Have Increased
With Q4-2012 GDP running at statistically zero - the impact of the payroll tax hike (effectively about a $125 billion hit to consumers), higher gasoline and energy costs, and the impact of further cuts to government spending due to the sequester, put an already weakening economic growth trend at further risk.
Don’t misunderstand me. As we wrote last week - it is certainly conceivable that the markets could attain all-time highs. The speculative appetite combined with the Fed’s liquidity is a powerful combination in the short term. However, the increase in speculative risks combined with excess leverage leave the markets vulnerable to a sizable correction at some point in the future.
The only missing ingredient for such a correction currently is simply a catalyst to put "fear" into an overly complacent marketplace. There is currently no shortage of catalysts to pick from whether it is further fiscal policy missteps stemming from the upcoming "Debt Ceiling" debate, a resurgence of the Eurozone crisis, or an unexpected shock from an area yet to be on our radar.
In the long term it will ultimately be the fundamentals that drive the markets. Currently, the deterioration in the growth rate of earnings, and economic strength, are not supportive of the speculative rise in asset prices or leverage. The idea of whether, or not, the Federal Reserve, along with virtually every other central bank in the world, are inflating the next asset bubble is of significant importance to investors who can ill afford to once again lose a large chunk of their net worth.
It is all reminiscent of the market peak of 1929 when Dr. Irving Fisher uttered his now famous words: "Stocks have now reached a permanently high plateau." The clamoring of voices that the bull market is just beginning is telling much the same story. History is repleat with market crashes that occurred just as the mainstream belief made heretics out of anyone who dared to contradict the bullish bias.
Does an asset bubble currently exist? Ask anyone and they will tell you "NO." However, maybe it is exactly that tacit denial which might just be an indication of its existence.
»
- 14214 reads
- Printer-friendly version
- Send to friend
- advertisements -
Keep calling "bubbles everywhere." I could give a rat's ass...
"I don't see much evidence of an equity bubble"
That's exactly how bubbles get to be bubbles. The last I saw of that rat's ass was him abandoning ship.
Never short a bubble.....but do stand well clear.
"Be a contrarian or a victim." - Rick Rule
It only took trillions in direct and indirect central bank fiat conjured from The Bernank's eletronic printer, put on the debt tab of present and future taxpayers, and literally breaking almost every market mechanism as well as the fundamental economy, to get the Dow back to its nominal 2007 price, the S&P back to somewhere near its 1999 nominal price, & the Naz to about 65% of its nominal high back in 1999 (that all happen to be FAR LOWER in REAL TERMS; price these markets in food, fuel or by just about any commodity).
And it's all going to be transitory, on top of that; even injecting trillions of conjured, borrow "dollars" and breaking the fundamental economy in order to pull this off is going lead to this new accumulation of "wealth" being "blowtorched" into ashes over a very short timeline, during the next down leg of what is a secular angry bear, which will be a traumatic event leading to PTBTFDS (post traumatic buy the fucking dip syndrome) for those few who are actually "investing" in these "markets" with their own "money," as they witness their unrealized and transitory paper gains first get wiped out, then go deeply into the red.
Unless one is too-big-to-fail and playing with OPM (without any semblance of a conscience), any investment into this totally & completely rigged Ponzi proof that "fools and their money are easily parted."
BTFnonD.
30 Ben Bernanke Quotes: Are You Smarter Than A Federal Reserve Chairman Effusively Praised by Paul Krugman?
The establishment and their parrots keep talking about asset bubbles... to avoid discussing the obvious credit bubble (2nd chart):
http://market-ticker.org/akcs-www?post=218297
Oh, and anyone thinking we will grow our way out of this... doesn't know that we went 112 straight quarters with debt growing faster than GDP beginning in 1980 (1st chart):
http://market-ticker.org/akcs-www?post=218297
The establishment knows this - this is their data. They are sophists preying upon the ignorance of the population that deems the sophists to be stupid.
The jokes on us as they mop up society.
These people are ciminals in nice suits.
They hate you, they hate your family, they hate your community and they hate your freedom.
Thet get off on hurting you and yours - or at least getting paid by Big Finance Capital to do it.
Those quotes aren't stupid, they are deceptive.
Bernanke is conning in buyers in order to allow his controllers better selling opportunities.
or vice versa - back in 2008 Bernanke actually reduced liquidity in order to crash the market even faster to force CONgress to "step and fetch" a little faster than they desired.
Not only that, but to condition the people that the gravely to be regarded power of money (Eisenhower Fairwell Address) controlled their financial futures so they better start accepting whatever falls off the Big Finance Capital table.
It isn't stupidity, though - and that's the key point.
It is a psy-op script engineered to bone as many people out of their futures as possible and enrich the power structure whose pleasure it is that Bernanke serves.
That puppet punk says what he's told to say.
It's a financial coup d'état - these jackals make the cashola on the way up then burst that sucker on purpose, pocketing huge Jack on the way down then use the profits to buy up real assets.
So of course they say "I see no bubble" shortly before they burst said bubble.
The Shock Doctrine comes home to America's shores now that the process has been perfected in the 3rd world playgrounds.
Absolutely correct. They may well try to stretch this process out a bit, but the 2 billion bullets and DHS "no hesitation" targets that include pregnant women, grandpa and children belie the fact they aren't sure they can keep it together as along as they might like.
Also, deflation isn't some kind of even lowerinig of prices.
Deflation is when SS and medicare get eliminated - or nearly so. It is when your bank account is said to have been cyber attacked and jacked by Chinese nationals - so sorry, your money is gone.
Deflation is when your pension gets Corzined.
Deflation is when the 100 claims on the solitary asset gets re-unified... so that 99 are wiped the f* out and only 1 gets to lay claim to the singular assets.
Deflation is a b*, but it is the bankster's b* when they can protect their trillions in asset money and hold trillions in debt paper and can convert both to OWNERSHIP OF THE PHYSICAL WORLD - INCLUDING YOU AND I IF THEY PULL IT OFF.
BITCHEZZZZZ!
People REALLY need to wake up to the criminal Art of War operation that is being waged against the world.
"I don't see much evidence of an equity bubble"
Are you shittin me? He said the same thing about housing...c'mon!
It just goes to show how short of an attention span the sheeple have, especially considering people pay jack-squat attention to history.
When the next bubble pops we're going to see the same dumbass deer in the headlights derp action from the fools.
JCP getting Ackmann-ed this morning down more than 10%. When does Bill make another CNBC appearance with Rorschach floor-plans and ROn JOhnson litotes?
These aren't the "bubbles" you're looking for.
QE4EVA
Nothing else matters.
Maybe, maybe not. But there certainly is an A$$-HAT bubble. Everywhere I look I see people with their heads up their A$$.
How is "bond super God" Gundlach doing today on his T holdings?
Helicopter Ben, 2005: There is no housing bubble.
http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR200510...
The Fed will re-flate AAPL to get ES above 1600 and Robo-trader will be buying his third Maserati in April--just before it all ends.
hey Robo, wouldn't drive your 'rati down the Vegas strip if I was you, just in case you had the urge
With 53% of the population earning $30K or less per year, there is no question there is a bubble. There will be more and more attempts at redistribution until the whole thing pops. Enjoy the ride (up and down)
They will always everyday lie thru their collective teeth to maintain their empire. The bond market is the #1 controlled item. The 0 rate will be in effect until the hyperinflationary blowout, because if it does rise it will hasten the hyperinflationary death spiral event, immediate game-over for the global elitist central-controller-banker establishment. TPTB will force it to 0 with their collective iron-fists for their survival then run like hell to their hiding places once the hyperinflation is beyond their ability to suppress. Gauranteed that’s how this plays out.
What's the membrane composed of?
How much air do they have?
"House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."
- Bernanke, October 20, 2005
"Could the neighborhood kids be right?" - Al Bundy
Did we miss the boat on this upswing? I am wondering if I should have bought into this charade. Sure, it's all bull# but I hate being on the sidelines.
"We" as in whom?
Plenty of boats on these waters floating very happily. Just like 2007. I sometimes - in weak moments - felt like the dumbest guy in the room. I felt completely the opposite in 2012, but all the time.
Perhaps when the tides recede you on the sidelines will be happy to not be mired, or beached, or sunk, or capsized.
Or, play the market, take on "risk", be "bold", and all that nonsense.
No debt bubble either...
http://cnsnews.com/news/article/2535b-obama-borrowed-nearly-6x-much-febr...
$253.5B—Obama Borrowed Nearly 6x as Much in February as Sequester Cuts All Yearlet me see...Boeing is at a 52 week high facing a grounded new plane that Boeing has bet its future, lithium battery investigation that may NOT have a real solution for the plane Boeing has bet its future and cuts in pentagon spending. QE4ever fixed USA, so Abe will fix Japan. May God help us all!
What God wants...
1st cause and hell may be a cold dark place if the universe is expanding at an accelerating rate. God wants nothing, but he gave us a chance. The founding fathers understood the role of our creator.
Yes, I they think they did.
The Fed is deaf dumb and blind
No. They are perfectly competent and working as planned. Make no mistake to accuse them of ignorance. They have goals and they are meeting them.
...Sergeant Schultz must be Daddy Bernanke's HERO
Hey ... there may be something happening this month, but there is no guarantee. The markets are very well controlled by the computers and the computeres are all tied together.
Howeverm September of 2015 is another thing entirely ... God's judgment.... and those really in control, ride on God's coattails and then claim to be geniuses and God's gift to the world.
IT'S PRICED IN CASH AND CASH IS CRASHING.
There is no bubble, the stock market is not soaring against other assets, it is the value of money that is falling.
It is called inflation.
Obamao to The Bernank: "You didn't make that!"
This Viral Video Will Change How You Think About Wealth Distribution and ASSET BUBBLES in the U.S. http://www.fastcoexist.com/node/1681517 via @FastCoExist
This is a really good synopsis. Compensation for productive labor is totally fucked in this country.
Oh you are SO COOL!! You CALLED THE BUBBLE!! OMG!!! What do you want? A cookie? Get in line prepper and join the other million people who called it before you.
"I don't see much evidence of an equity bubble"
Slick Benny is not saying there is no equity bubble...he is merely saying he doesn't see evidence of a bubble. Maybe because he is not necessarily looking for evidence of an equity bubble.
Bernanke, you dumb motherfucker, the reason you can't see a bubble is because of the bubble that's between your ears, you lying sack of detritus from a maggot outhouse.
You're blowing so many fucking bubbles those federal reserve notes should be coming off the printer with bubbles in place of the presidents, you stupid asshole.
Berflunky of OZ: http://youtu.be/NZR64EF3OpA
theres no inflation for stocks, theres no recession, theres no Depression subprime will buy cars, buy a house its an investment
http://youtu.be/zJ6VT7ciR1o