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5(+1) Things To Ponder This Weekend

Tyler Durden's picture




 

Submitted by Lance Roberts of STA Wealth Management,

This past week saw the initial public offering of the single most anticipated IPO of 2013 - Twitter.   If you tweeted about it then you are not alone as the news dominated the media headlines and the market.  With Twitter already sporting a 11x price-to-sales ratio, and no earnings, what could possibly go wrong?  However, it is that growing complacency among investors that should be the most concerning as the general sentiment has become that nothing can stop the markets as long as the Fed is in the game.  This week's issue of things to ponder over the weekend provides some thoughts in this regard.

1) Are We Heading Towards A Cliff?  

Andy Xie - Caixin Online

"The odds are that the world is experiencing a bigger bubble than the one that unleashed the 2008 Global Financial Crisis. The United States' household net wealth is much higher than at the peak in the last bubble. China's property rental yields are similar to what Japan experienced at the peak of its property bubble.

 

The biggest part of today's bubble is in government bonds valued at about 100 percent of global GDP. Such a vast amount of assets is priced at a negative real yield. Its low yield also benefits other borrowers. My guesstimate is that this bubble subsidizes debtors to the tune of 10 percent of GDP or US$ 7 trillion dollars per annum. The transfer of income from savers to debtors has never happened on such a vast scale, not even close. This is the reason that so many bubbles are forming around the world, because speculation is viewed as an escape route for savers.

 

The property market in emerging economies is the second-largest bubble. It is probably 100 percent overvalued. My guesstimate is that it is US$ 50 trillion overvalued.

 

Stocks, especially in the United States, are significantly overvalued too. The overvaluation could be one-third or about US$ 20 trillion.

 

There are other bubbles too. Credit risk, for example, is underpriced. The art market is bubbly again. These bubbles are not significant compared to the big three above.

 

When the Fed does normalize its policy, i.e., the real interest rate becomes positive again, this vast bubble will burst. Given its size, its bursting will likely bring another global recession worse than the one after the 2008 crisis."

2) Three Potential Headwinds For US Housing

A while back I wrote an article about the real underpinnings of the housing market which pointed out that, despite media headlines to the contrary, home ownership was at the lowest levels since the 1980's and was showing no real signs of recovery.  I stated then:

"As I stated previously the optimism over the housing recovery has gotten well ahead of the underlying fundamentals.  While the belief was that the Government, and Fed's, interventions would ignite the housing market creating a self-perpetuating recovery in the economy - it did not turn out that way.  Instead, it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression.  The risks to the housing story remain high due to the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts and a slowdown of speculative investment due to reduced profit margins.  While there are many hopes pinned on the housing recovery as a 'driver' of economic growth in 2013 and beyond - the data suggests that it might be quite a bit of wishful thinking."

That statement of "wishful thinking" was confirmed this past week by Trulia chief economist Jed Kolko: (via ZeroHedge)

  • Census 3Q homeownership, vacancy survey shows household formation “alarmingly slow,” vacancies “remain stubbornly high,” 
  • "Slow household formation number is one of the most alarming housing indicators to come out this year"
  • Share of millennials living with their parents rose to 31.6% vs 31.4% y/y
  • Household formation 380k in yr leading up to 3Q vs L-T “normal” increase of 1.1m
  • No increase over past yr in young adults moving out of parents homes or getting jobs is “most worrying”
  • Vacant homes still pose “problem” for recovery
  • 53% of vacant homes were held off mkt in 3Q, highest share since before bubble
  • 10.2% of all housing units are vacant, unchanged y/y, higher than pre-bubble level of 8.9% in 3Q 2001

 Furthermore, Sober Look also noted:

"While the US housing market remains relatively robust, it is likely to face a couple of headwinds going forward. One is the lower affordability index, which is declining due to higher prices and higher mortgage rates (see discussion). On a year-over-year basis the declines have been quite steep."

Housing-Affordability-110813

The Federal Reserve has consistently been noting the strength of the housing recovery as evidence of a recovering economy.  Those hopes are likely to fade in the months ahead as household formation lags, millennials remain on parent's couches and affordability declines.

3) Seeds Are Sown For The Next Financial Crisis

Represent Us Blog

After the crash in 2008, Congress leapt into action to pass legislation, which has yet to be fully written, to make sure the financial shenanigans of Wall Street were never repeated.  Unfortunately, that was then, and this is now. 

"A new law written by Citigroup lobbyists (we couldn’t make this stuff up if we tried) exempts derivatives trading from regulation, and was passed this week by the House of Representatives with broad bipartisan support.

 

It sounds bad… but don’t worry, it gets much, much worse:

 

The New York Times reports that 70 of the 85 lines in the new House bill were literally written by Citigroup lobbyists (Citigroup was one of the mega-banks that brought our economy to its knees in 2008 and received billions in taxpayer money.)

 

The same report also revealed “two crucial paragraphs…were copied nearly word for word.” You can even view the original documents and see how Citigroup’s lobbyists redrafted the House Bill, striking out ideas they didn’t like and replacing them with ones they did.

 

The bills are sponsored by Randy Hultgren (R – IL), and co-sponsored by Rep. Jim Himes (D-CT) and others. Himes is a former Goldman Sachs executive, and chief fundraiser for the Democratic Congressional Campaign Committee.

 

Maplight reports that the financial industry is the top source of campaign funding for 6 of the bills’ 8 cosponsors.

 

Maplight’s data shows that members of the House received $22,425,740 million from interest groups that support the bill — that’s 5.8 times more than it received from interest groups opposed.

 

“House aides, when asked why Democrats would vote for this proposal even though the Obama administration opposes it, offered a political explanation. Republicans have enough votes to pass it themselves, so vulnerable House Democrats might as well join them, and collect industry money for their campaigns.” — New York Times

4) Valuations And Future Returns

by Mebane Faber

I have discussed the importance of valuations on future returns many times in the past, however, Mebane Faber did an excellent job recently noting that if you are still heavy U.S. equities it may be a good time to reevaluate.

Mebane-Faber-Valuations-110813-3

5) Budget Deficit Reduction Only Temporary

In my post on Q3-2013 GDP, I pointed out that the reduction in the budget deficit was due to a temporary anomaly in tax receipts.  I stated:

"The reality is that the surge in tax revenues was a direct result of the "fiscal cliff" at the end of 2012 as companies rushed to pay out special dividends and bonuses ahead of what was perceived to a fiscal disaster.  The large surge in incomes was primarily generated at the upper end of the income brackets where individuals were impacted by higher tax rates.  Those taxes were then paid in April and October of 2013 and accounted for the bulk of the surge in tax revenue to date.  Also, it is important to remember that payroll taxes also increased due to the expiration of the payroll tax cut from 2010."

However, the Rockefeller Institute recently wrote a research report entitled "Temporary 'Bubble' in Income Tax Receipts" which points out a secondary anomaly created by just one state:

"Personal income tax collections had the strongest growth among the major taxes, at 20.3 percent.

 

However, the strong growth is attributable not only to the acceleration of income into calendar year 2012 and the 2012 stock market, but also to strong growth in a single state, California, where income tax collections grew by nearly $7.1 billion, or 40.7 percent, in the second quarter of 2013. The large growth in income tax collections in California reflects the acceleration, as well as recent increases in income tax rates that were only partially reflected in withholding. On November 6, 2012, California voters adopted Proposition 30, which increased the personal income tax rate on taxpayers making over $500,000 for a seven-year period that is retroactive to January 1, 2012, through December 31, 2018. If we exclude California, income tax collections in the remainder of the nation grew 14.9 percent in the second quarter of 2013..."

Plus 1)  The Boy Who Cried "Wolf"

Lakshman Achuthan, from the Economic Cycle Research Institute, has been chastised in the press over the last couple of years for calling for an economic recession that didn't occur.  However, he remains adamant that the U.S. has actually been in a recession for the last year and remains so accordingly to the underlying economic data.  Once again, he has been summarily dismissed by the media for his statements because with the stock market near all-time highs that surely means the economy is recovering, right?  Well, as he states, if that was indeed the case then "you wouldn't have four years of zero-interest rate policy and quantitative easing."

He also has a take on something that I have been questioning myself with regards to the ISM and PMI data which has come completely detached from the underlying fundamental data.

There is one important point to remember about the "boy who cried wolf;" eventually the wolf did come.

 

Have a great weekend.

 

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Fri, 11/08/2013 - 18:02 | 4136896 ciscokid
ciscokid's picture

May day,may day!!!!!!!

Fri, 11/08/2013 - 18:39 | 4137014 Ponzi Pontiff
Ponzi Pontiff's picture

In "markets" like these, partying like its 1999, the only winning move is not to play:

http://www.youtube.com/watch?v=uOoXwxqeVzg

On the plus side, at some point in the future there will be the mother of all dips to be bought.

When the reset comes, may ye fare well and emerge in at least roughly the same shape as you were beforehand.

Fri, 11/08/2013 - 19:50 | 4137184 max2205
max2205's picture

And this is supposed to make a saver feel better about not 2.5 'ng their money in 5 years?

Fri, 11/08/2013 - 19:44 | 4137164 The Heart
The Heart's picture

"May day,may day!!!!!!!"

Hey yo Cisco.

Liar...liar...liar.

Everybody knows this head-puppet is a liar and moar and moar and moar people are getting really really really angry.

http://www.youtube.com/watch?v=D1708gPkkus

 

Fri, 11/08/2013 - 18:02 | 4136898 pods
pods's picture

I will be planning my route to the grocery store in hopes that I may pick up supplies without being anal probed at gunpoint.

pods

Fri, 11/08/2013 - 18:09 | 4136923 CPL
CPL's picture

Hey, you do get options with the complimentry and freely given anal probe. 

 

1)  All at once 

or 

2)  Inch at a time.

Fri, 11/08/2013 - 19:33 | 4137150 Winston Churchill
Winston Churchill's picture

Sure its not :with barbs. or without.

Fri, 11/08/2013 - 18:10 | 4136924 knukles
knukles's picture

Can I come with you in case we get stopped?
My anal glands are in dire need of expressing.

for the want of a finger a gland was lost

Fri, 11/08/2013 - 18:13 | 4136927 knukles
knukles's picture

Mrs K just told me I wasn't supposed to share that with anybody.

Fri, 11/08/2013 - 19:16 | 4137093 Harbanger
Harbanger's picture

I started probing a new chick that works for DHS a few weeks ago, call me crazy, I keep my friends real close.

Fri, 11/08/2013 - 18:09 | 4136922 Devotional
Devotional's picture

I hope there is a taper in December, imagine having a crisis during Christmas? YEAH!!!

Afterwards ... the FED jacks up QE to 100 Billion a month.

So, taper on bitchez!!!

Fri, 11/08/2013 - 18:17 | 4136944 ReactionToClose...
ReactionToClosedMinds's picture

ask yourself when this famous line was first read in the context of it's historical setting: from " A Tale of Two Cities" by Charles Dickens per  Wikipedia .... nothing really ever changes when it comes to humanity.  Of course, nothing to worry about .... 1/6th of US economy with no clarity, a freaked out Israel/Saudis, Abenomics, 3rd PRC Plenum, QEwhatever#, ......

As the title suggests, the first chapter immediately establishes the era in which the novel takes place: England and France in 1775.

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way...

Fri, 11/08/2013 - 18:22 | 4136961 knukles
knukles's picture

Things have become much better with a New Messiah Leading Manklind to a Glorious Conclusion of Diversity, Love, Hope, Change, what else,    

uh,   

lemme see 

 

ummmm....

 

tolerance and understanding

 

 

equality, yeah, equality, and uh....

umm

free shit for everybody
ummm

Fri, 11/08/2013 - 18:25 | 4136972 ReactionToClose...
ReactionToClosedMinds's picture

1775-1815 was a huge transformational period ..... way more besides founding of a certain 13 colonies under a confederation ..... French Revolution then Napoleon which led to 'glorious' years on the continent and middle east ...basis for Paris Commune which led to .......... 1917 Russia .....

Fri, 11/08/2013 - 18:21 | 4136954 q99x2
q99x2's picture

An economic collapse won't effect the markets. Those are run by software and have zero correlation to anything less than an EMP or the strike of multiple nuclear warheads.

In other words the FEDs computer software that is running the markets has to fail.

That is all the market indexes can tell us at this point--how much money we've made or if we are under nuclear attack.

Fri, 11/08/2013 - 18:23 | 4136965 knukles
knukles's picture

 

 

            maybe DH&Hs can buld 'em a website?

 

           just mumblin' 'bout stuff

Fri, 11/08/2013 - 18:28 | 4136981 JP McManus
JP McManus's picture

Regarding real estate, does anyone here know anyone who's moving into a larger house, better neighborhood, simply because business is so good?

 

I don't. (Politicians and Central Bankers not included)

Fri, 11/08/2013 - 19:01 | 4137069 NOTaREALmerican
NOTaREALmerican's picture

Re:  (Politicians and Central Bankers not included)

Depends where you are.   If you are in Big-Ed that's doing great.   The bucolic college town I live in is doing great.   

Top 10 or 20% are really doing fine,  there's never been a recession for this social class.    If your running a scam, or participating in one things are fine.

Fri, 11/08/2013 - 18:35 | 4137000 Kirk2NCC1701
Kirk2NCC1701's picture

Ponder this:  http://rt.com/news/bitcoin-hacking-stolen-million-417/

That'll teach you. MORAL:  Pick a safe wallet!

In the future, proceed on Fundamental Principles of Math & Physics, NOT on "Trust".

Fri, 11/08/2013 - 18:45 | 4137030 Ponzi Pontiff
Ponzi Pontiff's picture

"specialists point to a lack of regulation as the main problem with the currency"

I mean, duh.  This is what happens without MOAR regulation.

Obviously this was perpetrated by terrrists.  By a happy coincidence, MOAR regulation will take care of the terrrists and the bitcoin hacking too.

I feel safer already.

Fri, 11/08/2013 - 18:36 | 4137004 disabledvet
disabledvet's picture

Not that people care about crop reports either but the USA just set a record for "corn density" so even though we planted a million fewer acres it still wasn't enough to offset the genetic engineering. Same was true for wheat and soybeans as well. After last years drought debacle I'm sure many a 'merican (and starving world for that matter) can breathe at least some sigh of relief. Not that Big Oil isn't screaming bloody murder at the corn lobby of course. I still maintain my view that Taper Talk was a major (though not monumental) policy blunder "and the markets have responded by becoming completely divorced from reality." Revenues have all come in light and profits aren't even close to what was expected this quarter. Can you still get a year end rally? All the retail money is now flooding into equities while being drained from "the illiquid debt markets." I'm not an expert here but I've certainly heard this refrain before. So I guess that makes the answer "sure equities can go sky high from here"...but if debt isn't playing along I definitely would be ACTIVELY hedging my bets. In short "don't fight the Fed and it's debt monetizations." The dollar has busted a major league move higher this past week. Interest rates pop, gold rolls over and that euro still looks over-valued by 50% to me.

Fri, 11/08/2013 - 18:54 | 4137051 noless
noless's picture

I am optimistic and solidly bullish on everything, any and everything, it's all gonna go great and everyone's gonna have a good time getting there.

Not even sarcastic.

Fri, 11/08/2013 - 20:28 | 4137284 AurorusBorealus
AurorusBorealus's picture

How dare you bring up the production of real goods and services in a discussion about the economy.

Fri, 11/08/2013 - 18:51 | 4137045 moneybots
moneybots's picture

"This is the reason that so many bubbles are forming around the world, because speculation is viewed as an escape route for savers."

 

Financial fraud is not an escape route for savers, it is a trap for savers.

Fri, 11/08/2013 - 19:10 | 4137089 Kirk2NCC1701
Kirk2NCC1701's picture

The whole purpose of "Crying Wolf" is to do so JIT -- not every day, every week, every month for years in advance.

To use an analogy, Meteorological models are also incredibly complex** that use oodles of computing power, but the Weatherman would be in the Unemployment line, if (s)he could not make "timely" predictions. We call non-timely predictions "Seasons", which can be made by ALL of us. 

The same can be said for Market Corrections, Crashes, etc.  It's getting "old" to hear "Wolf!" day after day, when the Wolf is always weeks or months away.  Otherwise we can all log off, kill the account and "get a life".  Or a job.  As the case may be.

* Just in Time.

** With many variables, non-linearities, cross-coupled terms, and feedback loops.  The math makes your head spin, and the SW code is gigantic.  Unlike the BS and high school math that comes out of Economics Laureates.

Fri, 11/08/2013 - 19:22 | 4137127 youngman
youngman's picture

I was worried I might not have enough Rum...

Fri, 11/08/2013 - 19:47 | 4137172 digi
digi's picture

Are we approaching a cliff you ask? Of course not. We long left the edge of the cliff, it's just that our forward velocity is so great no one has noticed yet that we are losing altitude.

Sat, 11/09/2013 - 10:43 | 4138248 d edwards
d edwards's picture

Sum Ting Wong

 

Wee Tu Lo

 

Ho Lee Fuk

Fri, 11/08/2013 - 20:00 | 4137185 Kirk2NCC1701
Kirk2NCC1701's picture

IDEAL

MONEY             FIAT                              GOLD                         BTC

1. Finite Supply                    N                             Y                         Y

   (store of value)

2. Portable                          Y                             Y+N                     Y

3. Fungible                          Y                              Y                        Y

4. Unforgeable                     N                             Y                         Y

5. Divisible                          Y                              Y+N                     Y

6. Private                            N                               ?                        Y

7. Acceptance                     Y                              Y+N                   Limited but growing fast

8. Conf/Theft-resistant          N                             N                         Y

9. Durable                           N                              Y                        Y+N

Given this Table of Attributes, plus the endless violation of #1 in the case of fiat money, the days of fiat money "are numbered".

Suggest you not only mitigate 3rd party risk in your Stock holdings, but also in fiat currency holdings -- by having a mix of (a) fiat Cash, (b) Gold and (c) Cyber-currency (BTC).  Start out with an initial mix, then adjust as BTC experience level and other circumstances warrant.

If you just can't/won't stretch beyond your emotional comfort zone, don't come crying to me that I didn't warn you.

p.s. Compared to historical prices, BTC is over-priced (parabolic) right now. I'd wait for a dip (correction to trendline), then BTFD.  Good luck.

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