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Van Hoisington And The Fed's Bubble: "Overtrading" And "Discredit" Always End In "Revulsion"
Excerpted from Hoisington Investment Management's Quarterly Outlook,
via Van Hoisington and Lacy Hunt:
The U.S. economy continues to lose momentum despite the Federal Reserve’s use of conventional techniques and numerous experimental measures to spur growth. In the first half of the year, real GDP grew at only a 1.2% annual rate while real per capita GDP increased by a minimal 0.3% annual rate. Such increases are insufficient to raise the standard of living, which, as measured by real median household income, stands at the same level as it did seventeen years ago.
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Asset Bubbles
Historically, in our judgment, the most important authority on the subject of asset bubbles was the late MIT professor Charles Kindleberger, author of 20 books including the one of the greatest books on capital markets Manias, Panics and Crashes (1978). He found that asset price bubbles depend on the growth of credit. Atif Mian (Princeton) and Amir Sufi (University of Chicago) provided confirmation for Kindleberger’s pioneering work and expanded on it in their 2014 book House of Debt. Chapter 8, entitled “Debt and Bubbles,” contains the heart of their insights. Mian and Sufi demonstrate that increasing the flow of credit is extremely counterproductive when the fundamental problem is too much debt, and excessive debt can fuel asset bubbles.
Based on our reading of these two books we would define an asset bubble as a rise in prices that is caused by excess central bank liquidity rather than economic fundamentals. As Kindleberger clearly stated, the process of excess liquidity fueling higher prices in the face of faltering fundamentals can run for a long time, a phase Kindleberger called “overtrading”. But eventually, this gives way to “discredit”, when the discerning few see the discrepancy between prices and fundamentals. Eventually, discredit yields to “revulsion”, when the crowd understands the imbalance, and markets correct.
Economists have commented on the high correlation between the S&P 500 and the Fed’s balance sheet since 2009. From 2009 to the latest available month, the monetary base (MB) surged from $1.7 trillion to $4.1 trillion. We ran the MB increase against the S&P 500 and found a very high correlation of 0.69. While correlation does not prove causality, the high correlation is certainly not inconsistent with the idea that the Fed liquidity played a major role in boosting stock prices. However, even as the MB has exploded since 2009 and stock prices have soared, the U.S. economy has experienced the worst economic expansion on record. In spite of a further large rise in the base this year, the GDP growth has subsided noticeably and corporate profits after taxes and adjusted for inventory gains/losses (IVA) and over/under depreciation (CCA) has declined 10% in the latest four quarters. Such discrepancy between the liquidity implied by the base and measures of economic performance could indicate the process of bubble formation. Kindleberger’s axiom that asset price bubbles depend on excess liquidity may yet face another test.
Still Bullish on Treasury Bonds
With the nominal growth trajectory extremely soft, U.S. Treasury bond yields are likely to continue working lower as similar circumstances have created declines in government bond yields in Europe and Japan. Viewing the yields overseas, it is evident that ample downside still exists for long U.S. Treasury bond yields, as the higher U.S. yields offer global investors an incentive to continue to move funds into the United States.
Another factor suggesting lower longterm U.S. Treasury yields is the strength of the U.S. dollar. In many industries, the price leader for certain goods in the U.S. is a foreign producer. A rising dollar leads to what economists sometimes call the “collapsing umbrella”. As the dollar lifts, the foreign producer cuts U.S. selling prices, forcing domestic producers to match the lower prices. This reinforces the prospect for lower inflation as nominal GDP wanes. This creates a favorable environment for falling U.S. Treasury bond yields.
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Van knows his shit.
These guys have been the rightest, the mostest, the longest.
Also, Antal Fekete.
ZH published one of Hoisington’s quarterly reports about this time last year. In it, Lacy predicted that "the downward trend in long-term Treasury bond yields would soon resurface". Most of those commenting here scoffed, but the guy has been proven absolutely correct.
Short the living shit out of equities and short them hard.
Equity market bubbles break hard, not slowly & gently.
The Fed, BOE, ECB, BOJ, PBOC and other CBS have been pulling out all the stops, measures and tricks to inflate equity markets and re-liquidate banks,more 6 years now, but much of that electronic, unrealized fiat credit "wealth" that's illusory is about to be vaporized.
No soft landing. It's never different this time. The CBs literally laid a minefield.
Janet Yellen and her fellow criminal CB cohorts will not get to blame externalities for absolute market carnage now (not just Ebola, but watch and witness what "suddenly" important causes/incidents are blamed for markets puking their guts out and bleeding from their ass in the days, weeks and months ahead).
In reality, these events have nothing to do with the falling of the yourself cards that the CBs have constructed - Ponzi markets built on foundations of pillars of salt.
I did eine kleines rant below, knuks.
My question, to those who actually do this, is how can an institution lighten up on exposure in a meaningful way?
Derivatives are a bad joke, unless you know something I don't. Is there any protection anywhere?
Whatever. I just look at the pimples on the bubbles. Right now, I'm getting paid for being short the 30 year, ie; long it's yield, and if it trades back up again I'll get a zero loss stop order exercised; so I could care less, frankly. Also, if I wanted to waste a lot time I could make just as good an argument for yields to rise. The author of the Black Swan tried to warn you against people who made a lucky prediction; that you shouldn't confuse it with "knowing something"; but everybody is looking for a daddy who "knows" what's going to happen next. Except me. I know better.
Say in your best Beavis & Butt Head voices: "He just said 'market'. Heh heh. Heh. Heh heh."
I think he's right about TSYs, though. Everything heading to the zero-bound threshold. Then it snaps. Watch Japan. They go first.
Yeah I believe it's rolling over at the Main Street level , what there was. This is the worst week I've had in yrs .
Did anyone actually read all of that? Sure you did.
Knuks has forgottem more about bonds than I will ever know, but here's what I think is happening.
There is a flight to safety, which means volk are finally scared shitless by corporates and sovereigns, and running to US treasuries, regardless of duration. In any case corporates, and the rest are illiquid. You can't sell that crap. All you can do is quit buying.
So, if institutions are buying US Treasuries up the wazoo, which they are, the rate goes down, which it has. Here's where it gets hinky. The Gubbermint rate sets the base for everything else, which can't be sold and is worth next to nothing but no one has to mark to market, because the Accountants got ass raped when we tried to do our jobs.
SO, almost all interest rates are falling, which makes all bonds more valuable, at a time when we all know, THEY ARE WORTH NOTHING because there is NO BID. Got that? Hope so, because I could never repeat it;)
This is the bond bubble martin Armstrong has been warning about the last few days
Armstrong is a as big a dumbass as Gartman and a convicted fraud on top. I don't want to hear him pointing out the obvious as if it is some great discovery. His track record of predictions sucks.
...."His track record of predictions sucks."
'Nuff Said'.....
and gold can't seem to drop below 1200 for more than a day or 2. One has to wonder when the average Joe decides to stash some savings into the yellow shiney, not because he loves gold but because it simply looks like the most stable asset out there.
...at least you can eat it if the price drops...
You sir, are touched in the head. Takes one to know one:)
I have come to the conclusion that if my filthy rich neighbors have gold, and I have lead...
Chances are that if your neighbor has gold and you have only lead that he will also have much more lead than you. Likely someone ELSE to toss it atcha as well...
There;'s always a bid. what are you hyper-ventilating about? Obviously, if you want to unload something that's less popular than it was six months ago, you do it slowly and carefully and keep your mouth shut. This isn't nuclear physics.
There's always a bid for you and me, but not at the institutional level.
If Pimpco needs to sell, and I'm sure they do, they are fucked.
Actually I posted it as soon as they published it and a relevent article was presented. You would all do well to read the remaining quarterlies at their site. You can on occasion catch one or the other in a public speaking engagement.
So..let me get this straight. When you make it easy for people to borrow lots of money, prices go up?
Revolutionary.
Good thing someone wrote a book explaining that deep mystery to us.
Contrary to popular belief, you really do need a weatherman to know which way the wind blows.
As long as you keep a clean nose and watch for plainclothes.
You will never make VPOTUS.
CREDIT (debt) adds to GDP, no?
S&P 666 true valuation.
Take away FED QE and low rates along with EBT and it's 333.
Just hours earlier, De Margerie had met Russian Prime Minister Dmitry Medvedev at his country residence outside Moscow to discuss foreign investment in Russia. In his speech hours before the plane crash that took his life, de Margerie said U.S. and European Union sanctions on the country were “unfair and unproductive,” and that he opposed efforts to render it “isolated from the major global economic and political process.”
De Margerie was a keynote speaker last spring at Putin’s annual economic summit in St. Petersburg—an event that many Western executives decided to skip—where he signed a deal with Russian oil group Lukoil (LUKOY) to develop shale oil in Western Siberia. De Margerie also pressed ahead with major Russian investment, including the $27 billion Yamal natural gas venture in the Arctic led by Russian gas group Novatek (NVTK:LI), even as sanctions against Novatek and one of its owners, Gennady Timchenko, have complicated financing.
De Margerie told Bloomberg News recently that he was “doing everything” to move the Yamal project forward, in keeping with his belief that politics and business should be kept separate. Total, the world’s No. 4 non-state-owned energy group, has said that Russia could become its largest supplier of oil and gas by the end of this decade, up from its fourth-biggest supplier in 2013.
De Margerie’s death removes from the scene a businessman who rarely shied away from geopolitical debates and became one of Russia’s most outspoken allies in its efforts to avoid economic quarantine, willing to say what others only dared think. Although European corporate giants from Siemens AG to Renault SA (RNO) have built close relationships with Russia, most business leaders have preferred to keep their lobbying private to avoid offending governments committed to punishing Putin.
PetroDollar War – French Energy Giant Total CEO AssassinatedAnd if he was, So What ?
If the "PetroDollar" were to fall:
Watch how quickly the Starving will beg for US Military Power to Crush and Kill anyone and anything to get those Calories in their Mouths......
...."De Margerie’s death removes from the scene a businessman who rarely shied away from geopolitical debates and became one of Russia’s most outspoken allies......."
Apparently he never read or forgot Machiavelli.......
Play the Great Game at your Own Risk......
And Choose your "Allies" Wisely.......
Things are not all that great in my area regardless of the message from Yellen and the media. In fact it has gotten so bad that I did not sleep well last night. I was haunted by fear and all the reassurances by Janet Yellen and the Federal Reserve are not helping.
Like the young boy in the movie years ago the spirits of those who once filled the world with life will not let me rest, in this case I'm haunted by dead businesses and not people. The article below concerns the cost and problems of buildings sitting vacant because of business failures. I have my finger on the pulse of small business and it is far from healthy.
http://brucewilds.blogspot.com/2014/10/i-see-dead-businesses.html
huge bubble in Asia, Thailand where I live. Big bang coming soon!
The euro-zone is in a far bigger mess than recent headlines and figures suggest. Most of the growth in the Euro-zone over recent years has been in Germany and that bright spot is now under pressure. Italy has been in recession for two years; France’s economy has been stagnant for months. Now that Germany is in trouble, many economist think the chances of a Japan-style deflationary spiral have risen sharply.
What it all boils down to is Germany can’t keep buying Greek bonds and other bad debt with German taxpayer money until the end of time. The article below looks at the corner Central banks have painted economies into by attempting to paper over reality and how these polices will hinders growth for as long as the eye can see.
http://brucewilds.blogspot.com/2014/10/global-economic-malaise-due-to-debt.html
Valuations? Pshaw! "It ain't the meat, its the motion."
NOTHING about the cost to savers in lost (ROBBED )interest to the economy??
....."provided confirmation for Kindleberger’s pioneering work and expanded on it in their 2014 book House of Debt. Chapter 8, entitled “Debt and Bubbles,” contains the heart of their insights. Mian and Sufi demonstrate that increasing the flow of credit is extremely counterproductive when the fundamental problem is too much debt, and excessive debt can fuel asset bubbles."
"Pioneering Work" ?
Not.
"Demonstrate" a "Qualified" ?
Heckle and Jeckle in their Pioneering Work demonstrate that throwing Gasoline on a Raging Fire leads to a Bigger Fire.....
The true 'pioneering' Classic is "Extraordinary Popular Delusion and the Madness of Crowds" by Charles Mackay in 1841.
The follow on to the true Pioneer in 2014 is here......at No Cost....
Pseudo Guru Book Peddlers.........