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Wall Street R.I.P. - The Bubble Is Dying At The Zero Bound
Submitted by David Stockman via Contra Corner blog,
If any evidence was needed that the market is dying at the zero bound, it came in this week’s violent 15-minute rip when the algos read the Fed’s release to mean there will be no rate hike in June. It put you in mind of monetary rigor mortis - the last spasm of something that’s already dead but doesn’t know it.
Certainly the sell-side talking heads are clueless in their utterly mendacious patter that there is no bubble in stocks. Why, valuations are are in-line with historic multiples, we are told, and, besides, the Fed will keep interest rates low for long.
That kind of assurance is at once fatuous and reckless. With the earliest possible “lift-off” date now moved to September, money market interest rates will have been pinned to the zero bound for 81 months running. Do these lemmings actually think this can go on much longer—-to say 90 or 100 months—- without signaling a complete capitulation of the Fed to the robo-traders?
Likewise, have they failed to note that the casino is saturated with trillions of carry-trades which will begin to unwind once interest rate normalization commences?
When have speculators ever retreated in an orderly manner, and, most especially, why is the current even greater financial bubble going to deflate any less violently than did the dotcom in 2000 and the housing/Wall Street bubble in 2008?
That is, after years of buying with borrowed money, repo or options, Wall Street gamblers will soon be forced to sell in order to liquidate positions that will become increasingly unprofitable as interest rates rise. Indeed, negative carry as far as the eye can see is now a virtual certainty.
Besides that, why would any rational investor roll the dice until the very last minute when valuations are already sky high, and therefore extremely vulnerable to a drastic downward re-rating? According to the Wall Street Journal’s latest calculations, the LTM reported earnings of the S&P 500 companies were $99/share.
That’s notable because: 1) its down 6% from the LTM peak of $106 reported in the September 2014 quarter; 2) unlike the “ex-items” hokum peddled by the street, it’s an honest measure of earnings because the GAAP accounting is certified to the SEC by corporate executives on penalty of jail; and 3) its means that the PE multiple on today closing price is about 21.5X, thereby occupying the nosebleed section of recorded history.
And that’s not the half of it. Just as you can drown in a river with an average depth of two feet, average PE multiples can also obscure the deep eddy currents hidden in the popular stock indices.
That’s why the chart below is dispositive. Unlike the usual sell-side fare, it examines the median PE multiple, not the weighted average, for the thousands of stocks listed on the NYSE. In a word, the valuation level has never been higher since 1950; and the 21X shown in the chart is actually nearly 23X based on 10% market gain since June 2014.
And this gets to the crux of the matter. Even if the argument that PE multiples are in line with history were true, which it most definitely is not, the point is still bogus. That’s because capitalization rates on corporate earnings should be going down, not up, in a world in which sustainable trend-line growth has virtually disappeared; where profit margins are at off-the charts historic highs and heading for a reversion to the mean; and where interest rates can only trend upward on a secular basis after an unprecedented, nay historically freakish, 35 years of deflation.
And notwithstanding all of the recent arm-waving about the need for double-pumping the seasonal adjustments of the punk GDP results for Q1, the trend performance of the macro fundamentals is just plain terrible. For instance, the growth rate of real final sales during the seven years since the pre-crisis peak has been an anemic 1.1%. That compares to 2.5% during the post-2000 seven-year cycle, and 3.5% during the half century after 1950.
Sooner or later you can’t squeeze more profits from a stone cold economy. So why should earnings be valued at an all time high when the US economy is now growing at just one-third of its historic rate?
Likewise, on the eve of the crisis in December 2007, the BLS reported 138.4 million payroll jobs. Last month the number was just 141.4 million, meaning that only 3 million net jobs have been created over the last 88 months. Again, that compares to 6 million new jobs in the comparable period after the 2000 peak and 13 million in the seven years after 1990.
Moreover, not only is the job growth rate deflating faster than Tom Brady’s football—–that is to 34,000 per month in the current so-called recovery cycle compared to 70,000 and 155,000 per month in the previous two cycles, respectively—-but the compositional quality has been heading south even faster.
To wit, the US economy has actually shed 2 million full-time, higher paying “breadwinner” since December 2007—-down from 72 million to just 70 million in the April report. Accordingly, the net 3 million gain in the total payroll count is entirely attributable to a 2 million pickup in the part time economy—restaurant’s, bars, retail and personal services—-and a 3 million gain in the fiscally dependent HES Complex (health, education and social services).
Breadwinner Economy Jobs – Click to enlarge
Nor are nosebleed PE multiples compatible with the feeble trend of investment in real plant and equipment. The gross rate of investment since the pre-crisis peak is less than 1% per annum; and the net rate, after depreciation, is still 20% below its 1999 level!
So there is one thing alone which is keeping the market levitated at today’s egregiously inflated levels. Namely, the Fed induced spasms of the few remaining robo-machines in the casino that have not yet been unplugged. At the moment, they continue to chop away on life support each time the Fed cops out for still one more meeting.
At length, however, even the monetary politburo will run out of excuses and deceptions. When the juice stops and the last machines go quiet, of course, there will be pandemonium in the casino, and here’s why.
The Great Financial Bubble dying at the zero bound has been inflating with just three interruptions——1987, 2000 and 2008-09—for the last 33 years. As a result, the market value of stocks, bonds and other debts have simply become decoupled from national income.
Corporate Equities and GDP – Click to enlarge
Total Marketable Securities and GDP – Click to enlarge
At 2X GDP in 1981, the financial market was valued at its multi-decade trend level. Since then, the market value of corporate equities has risen 17X and debt outstanding is up by 20X.
Accordingly, financial markets today are capitalized at 5X national income. That’s an elephantine bubble by any other name. And that’s why market spasms like yesterday’s 15-minute rip do indeed signify that monetary rigor mortis is rapidly setting in.
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Death becomes it.
Wall Street has been a Feral Reserve zombie for years anyway.
It's like Weekend at Bernies, but more like a lifetime, and not quite as funny.
That’s why there is a huge push to ban cash and go negative with rates, that will have no problem re-stoking the bubbles with a vengeance. Won’t prevent the eventual crash though, just from a higher level.
http://www.debtcrash.report/entry/ban-on-cash-negative-rates-and-super-bubbles-1
Is this how hyperinflation starts?
SF housing, shake shack, college tuition?
They will keep printing, they just won't tell us about it anymore. .Gov will be telling us there is no inflation, but yet there will be dollar bills laying around like grains of sand.
Great article: refreshingly free of writing errors, hyperbole, and pop-jargon.
TFTL!
The smell gets pretty "bracing" after the second week or so.
They decided to play a game using the entire economic system, Not just the stock markets, but all the open markets. Look at any market ticker, and no matter where, you can see when the American markets open from the huge curve bending. They've pushed the system to the edge and we're going into a slump at the bottom will be a long way down....
Indeed.
I wonder if Yellen has the balls (metaphorically speaking!) to lay it on the line - David Stockman wrote another great piece the other day about the game of chicken that the big boyz are playing with the Fed.
DavidC
those last two charts, look like there's plenty of room for a parabolic blow off higher... buy buy buy....
No it ain't. What is ya, a Natzi?!
Then you get to give it the spongebath.
Oh come on DJ 20k any day now!
here's the way i see it going down. markets drift flat-to-higher into the eventual first rate hike. fed hikes rates 25 bps, market initially sells off, then we re-ramp to fresh highs. at this point fed & rest of planet earth realize we have a massive inflation problem. once she starts hiking, if the market keeps going up relentlessly (because 25 bps is not going to significantly change peoples psyche hiding in dividend stocks at the yield they are recieving, 25 bps wont shake them out). she is then forced to start hiking quicker than she wants. spreads widen and if she is forced to bring the fed funds rate anywhere close to or north of the dividend yield in the S&P500 (where everyone is hiding as a function of the mis-pricing of risk for the last 7 years in particular), thats when the real big shit hits the fan. there will be a "great rotation" alright. ironically, it will be OUT of stocks and INTO bonds (inverse to the CNBC call) as seniors and anyone else who is simply looking for a rational 4-5% rate of lo-risk return will flip the switch. simply can't print all this $$$ and coil rates at zero for 7+ years and think your gonna get out without any pain. if it were just this simple, there would have been no recessions, depressions, or stock market crashes EVER. fed is juggling a couple of sticks of dynamite and the first one blows with the first rate hike but thats not the big one. thats just the trigger/tripwire of whats to come next IMO.
Here's how I see it....
Markets are fucked royally ever since Nixon closed the gold window. The dollar has no backing except the faith and credit of the Federal Reserve Bank, a bank which is privately owned by the largest Wall Street banks and which is also very for profit at the behest of said banks. The Federal Reserve collapses under its own weight and the aforementioned banks try to jump ship to their World Bank and IMF at which point the AIIB - China's own cartel says, "WWIII now!" Then the world drifts into chaos as fresh water is hard to find around the equator and food is either worked for or bartered for with silver.
Such items as cars, land, and animals are bought with gold and all that starts to matter is how hard a person works or what skills one has.
This could happen any month but will happen in the next few years.
IMO anyway
I think all these are plausible - perhaps even probable. Negative rates, WWIII, etc. I think the fabrication of data will continue. We will print some crazy GDP number like 4%, and off the stock market goes. FED will keep buying on dips to keep the market passified. A skirmish will later erupt - just like always - a distraction for disappointing sales measures 5, 6, quarters from now, then a miraculous GDP print of 4% and the entire shit show repeats. Eventually DOW hits 20,000, the DAQ 5,000, the S&P 2500.
You're probably right, 20 years out. Between now and then however we have a completely different animal on our hands, this new animal throws D. Stockman's historical calculations (and everybody else's) completely out the window. We've replaced central banks, those lenders of last resort who "provide liquidity to good credits at high rates in times of need" with self-funding hedge funds that can "never" get a margin call. BOJ is on track to own 100% of Japanese stock ETFs by 2017. We used to call them "stocks", and they more or less represented the health of an underlying business, but now they're...something else.
The Fed has capital of $60B and liabilities of $4.5 trillion...and a printing press in the basement. So QE 4, 5, 6...until the crowds with torches and pitchforks show up at all of the gated communities.
Disagree that it's the Chinese who will start WW III...it will be the "Murkans. If they sow enough chaos, fighting the last war they think everybody will want to crawl back to the USD sphere like Bretton Woods. When it's clear you'll lose the game, first thing you do is cheat. Second thing you do is try and mess the game up, toss the football onto the train tracks so the other guy can't win either. Hence we get Pepe Escobar's "Empire of Chaos".
i saw no mention of this bullshit...
wha up with that...?
http://www.kitco.com/charts/livesilver.html
"Likewise, have they failed to note that the casino is saturated with trillions of carry-trades which will begin to unwind once interest rate normalization commences?"
Which is precisely why any 'interest rate normalization' is a pipe dream at this late stage of disease. Stockman - as knowledgeable as he is, seems to be missing something - purposely so? I don't know. He has to understand the Fed is painted into a corner. Raise rates and risk social unrest (that's how fragile the entire house-of-cards is right now). Don't raise rates and risk a currency crisis (which is going to happen anyway once the first shot is fired in the South China Sea). If this wasn't the case, rates would have been raised a long time ago.
"Raise rates and risk social unrest"
What ?! Are Lloyd Blankfein and Jamie Dimon going to bang their tin cups on the sidewalk at the NYSE?
It is only members of the club that benefit from the free money from the Fed.
There would be no greater boon to the U.S. economy than closing shipping in the south China sea. Oh, yeah, and pulling out of the Middle east.
I've said since 2011 that the Fed should have MANAGED the recovery in the Dow 10,000 to 12,000 area (equivalents for S&P and NASDAQ) and allowed an organic recovery, instead of which it doubled up to get back to 'normalcy' (aka tech bubble in 2000 and sub prime bubble in 2007). They're not smart, they're academics and don't understand the real world.
DavidC
Yellen indicated today that it will be YEARS before interest rates are normalized. YEARS! Her speech today was a piece of shit and a fucking joke. Like anything related to the Fed.
lever up birchez
If rates were to rise, then David could be correct. However, who actually thinks the Fed will really raise rates? They can't! They can talk about it, but the second they do, they tank the market. I think we are more likely to see negative rates. If that happens, maybe stocks don't look so high - not that I would buy them, but I could understand if someone thinks their bank deposits are going to be taxed, maybe the stock market, art, real estate, etc are possible stores of value.
I am so freakin tired of hearing how QE1, QE2, operation twist are working great with green shoots and almost record low unemployment despite that fact that we are in a depression!
Go ahead Janet raise rates - not going to happen.
All US Treasuries out to 7 years are currently yielding Negative in real terms based on a reasonable value of inflation.
"When rates normalize".... Lol, David I'm surprised a smart guy like you doesn't get it yet.
There will be NO rate normalization in my life time.
~The Bernank
So if Janet has to normailze she must kill the Bernanke. Sounds like an episode of Game of Thrones.
:)
Game of Loans
and bernank seems proud of no rate normalization in his lifetime. that is a badge of shame and his banker buddies (that hate him privately) have him believing its an accomplishment. the fucker is truly insane.
Because idiots are more likely to hold the bag for you if they think it's Hermes.
This madness will continue until the foreigners stop buying American debt. As long as they buy even a portion of it, the FED+TSY can fake the rest. But when they stop altogether, the game will be over.
Then the Treasury will have to scrounge for revenues to cover expenses, while the FED will have to raise interest rates in the hope that it can bring back enough foreigners to the Treasury market.
Stock prices will inversely reflect the changes in bond yields and tax rates.
Isn't the BOJ monetizing 100% of new bond issuance this year?
"Wall Street gamblers will soon be forced to sell in order to liquidate positions that will become increasingly unprofitable as interest rates rise."
I like Stockman, and for sure, he knows a lot more about this than I, but the above quote shows his blind spot, I think. Interest rates are going to go negative, IMO, just like in Europe. Interest rates will never rise. That would mean paying old guys (old savers) like me to borrow my money....ain't NEVER gonna' happen. Quite the opposite, every attempt possible will be made to steal every last penny I own.
I may not know anywhere near as much as Stockman, but I understand this point very clearly indeed. The giant banks and their handmaiden, the government are broke.....and I'm NOT......yet. They will go where the remaining solvency is. They have NO choice.
Hmmm... I'd like to see David take up this point also. From reading him I had figured he was sure the United States wasn't European enough to go to negative rates.
Timing is everything.
Like 2008-09 many of the Wall Street hustlers will manage to exit this bubble intact or richer as they will pickup cheap assets while being able to dump their toxic CDS on the Fed.
The real hurt will occur in the small and mid size business area as all that mal-investment in infrastructure and productive capacity deflates to 50% of what was paid for it. Toll Brothers is starting a housing development in our area for 150 houses priced near $1M. How would you like to be the guy buying one of these so close to the market top?
Yellen has two choices, blow up the system like 2008 by raising rates or stay the course and watch the bubbles grow.
Like Mises said: There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
When? Who knows. If? For sure.
sschu
ZH said it here : 33 years; when Reaganomics became the blue print in 1982 after the Volcker led depression cleaned out the inflation slate.
The WS rip is a direct steroid fed son of Reaganomics.
And WHO confirms that analysis ? : Dave Stockman himself!
reagan, stockman, and volcker "got it". the government's job is not to create an economy rather it is the government's job to create a landscape for private enterprise to create an economy. they did gut-out inflation and set-up a huge bounce in the economy & set the stage for clinton's boom. unfortunately, the clinton fair family act of 1992 planted the seeds for the housing bust when they started instilling quotas on the bottom-end of the market. toss in greenspan leaving rates too-lo for too-long & we got internet companies that created no earnings.
this government doesn't "get it"; bernanke claims to be a "student of the depression" but what he doesn't realize is that we were able to come out of the depression and have a chance. he has let congress off the hook and not force them to make difficult fiscal decisions (why would they, stocks are at an all-time high and they only act when markets are crashing). so thanks alot bernanke: between our unsustainable debts & growing deficits due to your monetizing of the debt, you've turned us into a quasi japan/greece. mission accomplished.
...
You don't read what ZH/Stockman POSTED.
This is a 33 year run that had the ARCHITECTURAL blessing of the Reagan-Thatcher administrations who DEREGULATED finance expressedly to make life EASY for WS BIG hitters; both in WS as concomitantly in City.
Don't spout theory at me; look at the facts. This Bubble-o-nomics age is a COLLUSION between State and Private Capital to scam the nation and its spread since NWO (another Repug neo-con invention) to the WHOLE world.
As for Greece it was a scam concocted by the same cabal organised by the Squid with crony politicians and banks cutting and pasting Reaganomics to Greece.
Only difference : Greece does not have the print to infinity FED RESERVE currency.
At that is what makes Reaganomics hubristic Mindset and tools unique (petrodollar reserve along with MIC big stick).
Damn gosod read. No drama, just the cold numbers. The "minutes to midnight" theme of it definitely helps explain a lot of recent moves by TPTB.
You can't fight quicksand.
The largest credit bubble in history is bursting and there is nothing left to do except wait for the resulting deflationary vortex to suck the life out of the global economy....
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
Well, this is kind of a bullshit post. First and foremost, GDP is the value of finished goods and services within the country. The markets (be they debt or equity) price in the expectations for future earnings. You're comparing two entirely different numbers. Even if you were to make the argument that this represents the amount of leverage on GDP, you're only talking ~3x with a 2.5x equity multiple. These aren't shocking numbers, guys.
https://en.wikipedia.org/wiki/Financialization
Michael Hudson:
Another great rant, Dave. So what happens next week?
Everyone will die, that is a fact. How many will die reconciled to Christ; only a few who were awake enough and set aside the time to see if what Scripture said was true or not.
--------------------------------------------------
Most were too busy criticizing others faults and never looking into the mirror of their own souls. If they had done that self examination, they would have seen they are not much different than the ones they often enjoyed criticizing and now find themselves in the same sinking Titanic as those which they enjoyed criticizing...no one wins in that game. - commentary on the "damned" which are the many, the proud and the self-deceived
Sorry to be so cynical, but I don't see what could compel the Fed to raise interest rates. The Fed answers to no one. The rules are whatever they make them. Am I wrong?