Thursday, July 30, 2015

Can China save its market? sent by aaajoker

China is trying to save its market with failed policies

By Heather Long @byHeatherLong

China's stock market gets a reality check

If financial history repeats itself, that's not good for China.

China's stock market is in a meltdown. The main Shanghai Index has fallen about 30% since it's peak on June 12. The Chinese government is freaking out, and it's responding like a frightened momma bear lashing out at just about anything.

While China has undertaken numerous efforts to stop the plunge, the two main ones are the government actually buying up stocks and halting any more IPOs.

In theory, these moves sound great: buying stocks should keep prices from falling further. And preventing new companies from doing IPOs is supposed to keep investors focused on buying stocks already in the market.

Unfortunately, these policies have been tried before and they haven't worked out well in the United States and the United Kingdom.

Related: China is taking 10 huge actions to save its stock market

The 1929 fail: On October 24, 1929 -- sometimes called "Black Thursday" -- the U.S. market was tumbling sharply. Bankers were worried and some of the top ones got together and decided to pool a lot of money and start buying stocks in an effort to stem the panic.

The wealthy bankers sent Richard Whitney, then the acting head of the New York Stock Exchange, out onto the exchange floor as their front man.

"[Whitney] started issuing orders, and the markets did stabilize," says Richard Sylla, a professor of financial and market history at New York University's Stern School of Business.

But it didn't last long. The following Monday and Tuesday the market tanked, sparking a terrible bear market period that lasted for years.

We've seen something similar in China. Monday Chinese stocks slid 8.5%, the worst drop since 2007. Overall, Chinese stocks are still down sharply in July -- about 15% -- despite all the government efforts.

"Attempts to stabilize the market don't really work," says Sylla.

Related: China's stock market 2 minutes

'Plunge Protection Team': A more direct U.S. government response to stock market crashes was the Working Group on Financial Markets that President Ronald Reagan put together in 1988 in response to the 1987 market plunge.

It became known as the "Plunge Protection Team." The idea was to get some of the top economic minds in government together to figure out how to prevent future crises and if it would be possible to intervene.

There's debate about whether the team ever did any direct buying of stocks, especially during the 2008 financial crisis, but Sylla says one of the things they did promote was so-called "circuit breakers" where stocks would stop trading if they fell too much.

The circuit breakers are in place on some assets in the U.S. and appear to be in place in China now as well. It gives a short cool off period for traders.

But it's "of limited effectiveness," argues Sylla, "because what's going to happen overnight that would change people's attitudes?"

It's notable that since the Plunge Protection Team was put in place, the U.S. has suffered the Dot-com bubble and 2008 Financial Crisis.

"[China's] learning somewhat from our mistakes and others, but they'll make some of their own," says Jeff Hirsch, head of Stock Trader's Almanac.

The U.S. Federal Reserve has arguably been the most effective. Policymakers around the world credit the Fed for pumping massive amounts of liquidity back into the markets after the 2008 crisis and sparking a bull market that began in March 2009 and is still going today. China's Central Bank has slashed interest rates, although it has yet to go as far as the Fed's famous quantitative easing measures.

Related: Oil prices have plunged nearly 20% this month

Halting IPOs can backfire: As for IPOs, a widespread shutdown of the IPO market like what China has done occurred in Britain way back in the South Sea Bubble in the 1700s.

The plan was for the South Sea Company to take over some of Britain's national debt. The higher the company's share price was, the cheaper it would be for the company to take over some of the debt. So both the company and the government were motivated to push shares up.

A bubble ensued and many other companies wanted to issue shares to take advantage of soaring prices. So the South Sea Company got British Parliament to do an IPO ban in the hopes that people would keep buying the company's shares instead of all the new entrants in the market.

"It didn't work then. It backfired. It was meant to keep the bubble going, but actually deflated the bubble" as people got scared, says Sylla.

Related: China's economy is getting sick. Will it infect America?

The big problem: Part of the problem is that when there's a big intervention like what the bankers tried to do in 1929 or what China's government is doing now, it's akin to several fire engines showing up with their lights and sirens blaring. It looks bad to outsiders (or, in this case, to investors). After checking out what's going on, they typically want to get away.

"Statements by high officials are practically always misleading when they are designed to bolster a falling market," said Gerald Loeb, a prominent Wall Street trader in the early 20th Century and author of "The Battle For Investment Survival," a bestseller during the Great Depression.

Of course, China has to do something. The stock market plunge is a political crisis more so than an economic one for China, coming at a time when leader Xi Jinping is trying to craft a new five-year plan for the country.

You can't blame them for trying to intervene. If policymakers really knew how to turn markets around, more countries would try it.

Related: Fears over China's market crash are overblown

Related: China's market meddling could do more harm than good

CNNMoney (New York) July 30, 2015: 1:40 PM ET

Wednesday, July 29, 2015

USA Economic Confidence Gets Mauled

Americans’ Economic Confidence Gets Mauled

by Wolf Richter • July 28, 2015

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This is one of those things that at first gets ascribed to sampling error or a statistical fluke or the weather or something, but then it wobbles lower month after month, in crass defiance of all rosy scenarios that had been so carefully laid out, and confirmations are hailing down from other directions, and suddenly it’s serious.

In early January, the economic confidence of Americans had reached the highest level in the Economic Confidence Index since Gallup started tracking the data in 2008. At +5 in January, the index wasn’t particularly high. But most Americans don’t live in the glorious Fed-goosed Wall-Street economy. They live in the real economy. And there, things have been tough.

Crummy as it was, January was practically glorious compared to the low of the Financial Crisis, when the Economic Confidence Index hit -65. That must have been at about the time when Treasury Secretary Hank Paulson told Congress that the world would end unless he got unlimited means and power to bail out certain big financial outfits, such as his former employer Goldman Sachs.

But in February, economic confidence began to zigzag lower. The index for the week ending July 26, released today, dropped another 2 points from last week, to -14, the worst level since September. This is what “gradually” (as Gallup called it) swooning economic confidence looks like:


The index is a composite of two sub-indices: one tracks how Americans perceive current economic conditions; the other tracks how Americans see future economic conditions.

Last week, I fretted over the deterioration of Americans’ economic outlook since January, which had plunged 25 points from +7 in January to -18 now, and I wondered what dark clouds Americans were seeing in the future that would impact their own lives, clouds that the ebullient stock market has remained blind to.

Today, the future conditions index remained at this dreary level, with 39% of Americans saying the economy is “getting better,” while 57% – that’s well over half – saying it is “getting worse.”

But in terms of current conditions, as of last week, Americans had not yet thrown in the towel: that index had been down “only” 8 points from +3 in January to -5 last week. But today, Americans’ view on current conditions caved, and the index plunged 4 points in one fell swoop to -9, with only 23% of Americans saying the economy is “excellent” or “good” and 32% saying it is “poor.”


The explanations get flimsier by the week. Gallup:

Though Americans’ confidence in the national economy has skewed negative for six months now, the recent drop of the current conditions component comes on the heels of a new path for solving the Greek debt crisis and amid a tumultuous period for Chinese stocks. The instability abroad could be fueling Americans’ doubts about the health of the U.S. economy, not to mention that the Dow closed lower several days in a row last week.

Alas, most Americans don’t pay attention to stock markets, and particularly not the markets in China. Besides, US stock markets remain near all-time highs, and there hasn’t been a real sell-off of any kind in a long time. Tiny Greece has never been a huge concern for Americans. Instead, Americans are worried about the economy as they see it around them. They don’t need Greece and China to start fretting.

So today, there was a sudden confirmation that the rosy scenario isn’t working out for many Americans. The Conference Board’s Consumer Confidence Index plunged – “unexpectedly,” as it was ironically called in the media – a steep 9 points to a 10-month low of 90.8, after having already revisited the over-100 mark earlier this year.

Even the elusive level of 100 isn’t all that great: the index peaked at over 180 before the dotcom crash and at 140 before the Financial Crisis.

While the present situation index, which measures current conditions, fell 2.9 points to 107.4, the future expectations index plummeted 12.9 points to 79.9 – suddenly, and beyond doubt “unexpectedly,” hitting the lowest level in a year and a half!

The report blamed the sharp deterioration on a “less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China….”

But forget Greece and China: In June, a measly 17.9% expected business conditions to improve over the next six months. In July, an even measlier 14.7% did so.

The labor market worried them too: the percentage of folks expecting more jobs in the near future dropped by 4 points to 13.1%, while those expecting fewer jobs rose nearly 5 points to 20%. This is going the wrong way.

And only 17% of the consumers expected their incomes to grow, while 11.1% expected their incomes to decline. Turns out, stagnant or declining incomes have been the mantra since the Financial Crisis, and a big part of the problem for people having to duke it out in the real economy.

For these folks, it boils down to jobs and income; and the expenses of a roof over their heads, education for their kids, healthcare, and so on. This is where the reality on the ground deviates from the rosy scenario that Fed & Co. have so carefully constructed for Wall Street.

But even in the Fed-nurtured financial markets, turmoil is beginning to spread, as the acrid smell of burned fingers wafts through the bond market. Read… How Much Worse Can the Junk-Bond Sell-Off Get?

Crash Coming?

An Expert That Correctly Called The Last Two Stock Market Crashes Is Now Predicting Another One

By Michael Snyder, on July 28th, 2015

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Hussman ChartWhat I am about to share with you is quite stunning.  A well-respected financial expert that correctly predicted the last two stock market crashes is now warning that we are right on the verge of the next one.  John Hussman is a former professor of economics and international finance at the University of Michigan, and the information in his latest weekly market comment is staggering.  Since 1970, there have only been a handful of times when a combination of market signals that Hussman uses have indicated that a major market peak has been reached.  In 1972, 2000 and 2007 each of those peaks was followed by a dramatic stock market crash.  Now, for the first time since the last financial crisis, all four of those signals appeared once again during the week of July 17th.  If Hussman’s analysis is correct, this could very well mean that the next great stock market crash in the United States is imminent.

It was an excellent article by Jim Quinn of the Burning Platform that first alerted me to Hussman’s latest warning.  If you don’t follow Quinn’s work already, you should, because it is excellent.

When someone is repeatedly correct about the financial markets, we should all start paying attention.  Back in late 2007, Hussman warned us about what was coming in 2008, but most people did not listen.

Now he is sounding the alarm again.  According to Hussman, when there is a confluence of four key market indicators, that tells us that the market has peaked and is in danger of crashing.  The following comes from Newsmax

He cited the metric among the indicators that foreshadowed declines after peaks in 1972, 2000 and 2007:

*Less than 27 percent of investment advisers polled by Investors Intelligence who say they are bearish.

*Valuations measured by the Shiller price-to-earnings ratio are greater than 18 times.

*Less than 60 percent of S&P 500 stocks above their 200-day moving averages.

*Record high on a weekly closing basis.

The most recent warning was the week ended July 17, 2015,” Hussman said. “It’s often said that they don’t ring a bell at the top, and that’s true in many cycles. But it’s interesting that the same ‘ding’ has been heard at the most extreme peaks among them.”

It is quite rare for the market to set a new record high on a weekly closing basis and have more than 40 percent of stocks below their 200-day moving averages at the same time.  That is why a confluence of all these factors is fairly uncommon.  Hussman elaborated on this in his recent report

The remaining signals (record high on a weekly closing basis, fewer than 27% bears, Shiller P/E greater than 18, fewer than 60% of S&P 500 stocks above their 200-day average), are shown below. What’s interesting about these warnings is how closely they identified the precise market peak of each cycle. Internal divergences have to be fairly extensive for the S&P 500 to register a fresh overvalued, overbullish new high with more than 40% of its component stocks already falling – it’s evidently a rare indication of a last hurrah. The 1972 warning occurred on November 17, 1972, only 7 weeks and less than 4% from the final high before the market lost half its value. The 2000 warning occurred the week of March 24, 2000, marking the exact weekly high of that bull run. The 2007 instance spanned two consecutive weekly closing highs: October 5 and October 12. The final daily high of the S&P 500 was October 9 – right in between. The most recent warning was the week ended July 17, 2015.

The following is the chart that immediately followed the paragraph in his report that you just read…

Hussman Chart

When I first took a look at that chart I could hardly believe it.

It appears that Hussman’s signals are able to indicate major stock market crashes with stunning precision.

And considering the fact that we just hit a new “ding” for the first time since the last financial crisis, what Hussman is saying is more than just a little bit ominous.

According to Hussman this is not just a recent phenomenon either.  Even though advisory sentiment figures were not available back in 1929, he believes that his indicators would have given a signal that a market crash was imminent in August of that year as well

Though advisory sentiment figures aren’t available prior to the mid-1960’s, imputed data suggest that additional instances likely include the two consecutive weeks of August 19, 1929 and August 26, 1929. We can infer unfavorable market internals in that instance because we know that cumulative NYSE breadth was declining for months before the 1929 high. The week of the exact market peak would also be included except that stocks closed down that week after registering a final high on September 3, 1929. Another likely instance, based on imputed sentiment data, is the week of November 10, 1961, which was immediately followed by a market swoon into June 1962.

Of course the past is the past, and what has happened in the past will not necessarily happen in the future.

So is Hussman wrong this time?  With all of the other things that are happening in the financial world right now, I certainly would not bet against him.

Other financial professionals are concerned that a market crash could be imminent as well.  The following comes from a piece authored by Andrew Adams

More than 13% of stocks on the New York Stock Exchange are at 52-week lows, which is about 6 standard deviations above the average over the last three years (1.62%) and an extreme only seen one other time during said period (last October when the S&P 500 was percentage points away from a 10% correction).

This dichotomy has created what I believe to be the biggest question about the stock market right now – have we already experienced a stealth correction in the majority of stocks that will soon come to an end or will the market leaders finally succumb to the weight of the laggards and join in on the sell-off? The answer to this could end up being worth at least $2.2 trillion, which is how much money would essentially be wiped out of the stock market if we finally get the much-discussed 10% correction in the overall market (the total U.S. stock market capitalization was $22.5 trillion as of June 30, according to the Center for Research in Security Prices).

Sometimes, a picture is worth more than a thousand words.  I could share many more quotes from the “experts” about why they are concerned about a potential stock market collapse, but instead I want to share with you a “bonus chart” that Zero Hedge posted on Tuesday

Bonus Chart - Zero Hedge

Do you understand what that is saying?

In 2007 and 2008, junk bonds started crashing well before stocks did.

Now, we are witnessing a similar divergence.  If a similar pattern holds up this time, stocks have a long, long way to fall.

Like Hussman and so many others, I believe that a stock market crash and a new financial crisis are imminent.

The month of August is usually a slow month in the financial world, so hopefully we can get through it without too much chaos.  But once we roll into the months of September and October we will officially be in “the danger zone”.

Keep an eye on China, keep an eye on Europe, and keep listening for serious trouble at “too big to fail” banks all over the planet.

The next several months are going to be extremely significant, and we all need to be getting ready while we still can.

American Dream Vanishing—sent by aaajoker

If The American Dream Is To Own A Home, Then It Hasn’t Been In Worse Shape Since 1967

By Michael Snyder, on July 28th, 2015

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Home House For Sale Mortgage MortgagesThanks to the “Obama recovery”, the rate of homeownership in the United States has fallen to the lowest level in 48 years.  The percentage of Americans that own a home is widely considered to be a key indicator of the health of the middle class, and we have just learned that during the second quarter of 2015 that number dropped from 63.7 percent to 63.4 percent.  It is now the lowest that it has been since 1967.  Unlike a lot of other government economic statistics, this one is fairly difficult to manipulate.  Either someone owns a home or they do not.  And what the homeownership rate is telling us is that the percentage of Americans that can qualify for a mortgage has been falling dramatically.  Just take a look at the following chart.  This is not just a decline – this is a complete and utter collapse…

Homeownership Rate 2015

Never before in U.S. history has the rate of homeownership fallen so far or so fast.

So what is the bottom line to all of this?

The bottom line is that the middle class is dying.

When I was growing up, I lived in a pretty typical middle class neighborhood and I went to a pretty typical high school.  I didn’t know anybody that was “rich”, but I didn’t know anybody that was poor either.  At that time, it seemed like just about anyone that was willing to work hard and be dependable could find a decent job.  Most families that I knew had a nice home and a couple of vehicles in the driveway.  Life was not perfect, but at least things felt “normal”.

But now things have changed.  The “American Dream” is becoming out of reach for an increasingly large number of people.  In fact, the percentage of Americans that do not believe that they will be able to buy a home “for the foreseeable future” just continues to soar.  The following comes from Zero Hedge

Three months ago, just as the last Census Homeownership and residential vacancy report hit, Gallup released its latest survey which confirmed just how dead the American Dream has become for tens if not hundreds of millions of Americans.

According to the poll, the number of Americans who did not currently own a home and say they do not think they will buy a home in “the foreseeable future,” had risen by one third to 41%, vs. “only” 31% two years ago. Non-homeowners’ expectations of buying a house in the next year or five years were unchanged, suggesting little change in the short-term housing market.

As Gallup wryly puts it, “what may have been a longer-term goal for many may now not be a goal at all, and this could have an effect on the longer-term housing market.”

Gallup Homeownership

Why are so many Americans unable to buy homes?

It is because of a lack of good jobs.

Since the year 2000, real median household income in the United States has declined by about 5000 dollars.  Good paying manufacturing jobs that once fueled the rise of the middle class are being shipped overseas, and they are being replaced by low paying service jobs.

This is the new “Obama economy”, and it is absolutely shredding the middle class.

Back in 2008, 53 percent of all Americans still considered themselves to be part of the “middle class”.

By 2014, that number had fallen to just 44 percent.

Since fewer and fewer of us can now afford a mortgage, more people than ever are being forced to rent, and this has helped push rents into the stratosphere.  Here is more from Zero Hedge

Because as homeownership falls, demand for rental housing is booming. The vacancy rate for rented homes in the U.S. fell to 6.8% in the first quarter from 7.5% a year earlier. It was the lowest first-quarter rate since 1986.

And the punchline, which should come as no surprise to anyone: the median monthly asking rent just rose to a record $803 across the US.

Unfortunately, as bad as these numbers are right now, they are about to get a whole lot worse.

As I have been warning about repeatedly, we stand on the very precipice of the next great financial crisis.  These are the last days of “normal life” in America, and we are about to enter a period of time which is going to be extraordinarily difficult and which is going to last for years.

So the truth is that this is not really a good time to be taking out a huge mortgage anyway.  During this next crisis, it will be very important to be “lean and mean”.  The less debt you have, the better off you will be.

If you do have a mortgage right now, that is okay.  Just be sure to build up an emergency fund so that you can make your mortgage payments if you lose your job or your business suffers a reversal.

Don’t forget what happened back in 2008.  When the stock market collapsed, millions of Americans started to lose their jobs, and because most of them were living paycheck to paycheck all of a sudden a whole lot of them could not make their mortgage payments.

We saw foreclosures surge like crazy, and millions of families that were once living comfortable middle class lifestyles very rapidly found themselves dumped out of their homes.

This is why I am constantly pounding away on the need for a sizable emergency fund.  During a crisis situation, the last thing that you are going to need is for someone to be trying to kick you out of your home.  Please make sure that you have a fund that can cover your rent or mortgage for at least six months.

If you are living paycheck to paycheck and you can barely afford the home that you are currently living in, there is no shame in selling your current place and moving to a more affordable location.  It is very, very tough for many people to downsize, but it could end up being a huge blessing in the end.

We are moving into a time in which conditions are going to be changing rapidly.

What worked in the past may not necessarily work in the future.

So be be flexible, be prayerful, and don’t be afraid to do what you think is best for you and your family.

Will FED raise rates?

Paul Craig Roberts – The Global Economy A “House Of Cards”, Fed Most Certainly Will Not Raise Interest Rates, Demand for Gold and Silver Very Very High

Submitted by IWB, on July 29th, 2015

Former Assistant Treasury Secretary Dr. Paul Craig Roberts has repeatedly called the global economy a “house of cards.” Currently, demand for physical gold and silver is spiking even though prices are falling. What does this mean? Dr. Roberts says, “Some people clearly understand it, and that’s why the demand of gold and silver is so high that it often cannot be met. Right now, for example, the U.S. Mint has suspended all sales of Silver Eagles simply because they cannot get enough silver to manufacture the coins to meet the demand. We see that the gold trusts are being depleted. We see extraordinary amounts of withdrawals from the Shanghai Gold Exchange. So, we know the demand for gold and silver is very, very high. Some people know that, but the financial press operates to disguise what’s going on. The financial press says the reason the demand for coins is so high is the price is falling. What made the price fall? Only two things can cause the price of gold to fall. One has to be a great increase in supplies . . . but that’s not what’s happening it’s the opposite. . . . The only other thing that could cause the price to fall is a massive decrease in demand. We are seeing a massive increase in demand. The paper market is driving down the price and it’s fraudulent. All these stories are coming out in the press that gold is not money. It’s a pet rock. . . .”

Join Greg Hunter as he goes One-on-One with former top Treasury Department insider Dr. Paul Craig Roberts.

All links for this story can be found on the site in the “After the Interview” section


Tuesday, July 28, 2015

For those counting on the FED

John Hussman, Hussman Funds

The Other Side Of The Mountain

Jul. 27, 2015 1:51 PM ET 

The financial markets are at a transition that reflects tension between two realities. The first is that the Federal Reserve’s policy of quantitative easing has driven the stock market to valuations associated with the most extreme speculative peaks on record, coupled with a fresh boom in initial public offerings – with companies having zero or negative earnings accounting for three-quarters of new issuance – and record issuance of “covenant lite” leveraged loans (loans to already highly indebted borrowers, lacking normal protections that mitigate losses in the event of default). The other reality is that unconventional monetary policy has done little to push real economic activity or employment past the border that has historically distinguished expansions from recessions (about 1.8% year-over-year growth in both real final sales and non-farm payroll employment).

There is no question that quantitative easing has supported the mortgage market, and was almost wholly responsible for that role in late-2008 and 2009. But QE is not what ended the financial crisis (the March 2009 change in accounting rule FAS 157 is what removed the risk of widespread bank failures). Any economist familiar with the work of Nobel laureates like Milton Friedman or Franco Modigliani, or simply with decades of economic data, could have predicted even in 2010 that Bernanke’s efforts at creating a “wealth effect” would have weak effects on consumption, job creation and economic activity. In order to get any meaningful overall effect, it was clear that the Fed would have to create enormous but ultimately temporary distortions, inviting risk of longer-term financial instability. The Fed has now done exactly that.

The good news is that despite the long-term cost of diverting hundreds of billions to speculative pursuits instead of productive investment, a substantial retreat in the stock market and accompanying losses in illusory “wealth” is likely to compound this damage only weakly and temporarily – provided that the Fed is diligent in its oversight responsibilities and actively looks to minimize any systemic fallout from the portion of margin debt and leveraged loans that will inevitably go bad.

The best course for the Fed is to continue a gradual move toward a less discretionary, more rules-based policy. To the extent it feels the need to intervene, the FOMC should engage those policy tools where it actually has clear and measurable historical evidence of a cause-effect link between policy changes and intended outcomes. Unfortunately, it’s difficult to find such tools.

As Former Fed Chairman Paul Volcker observed last year, “I know that it is fashionable to talk about a ‘dual mandate’ – that policy should be directed toward the two objectives of price stability and full employment. Fashionable or not, I find that mandate both operationally confusing and ultimately illusory: operationally confusing in breeding incessant debate in the Fed and the markets about which way should policy lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic; illusory in the sense it implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel prize winners but by experience.”

Though a substantial normalization in equity valuations and interest rates would certainly have short-run economic impacts, that sort of normalization would be the best way to ensure that scarce savings are allocated toward productive ends rather than repeated bouts of speculation. We don't believe that monetary policy should be used to deflate bubbles, but it should not be used to create or encourage them either, and that damage is already done. Moreover, the Fed also has a regulatory role in the financial markets, and in that role, it has a very real responsibility to provide oversight to reduce the likelihood and assess the potential consequences of reckless misallocation of capital, speculation, and practices that create systemic risk. This is a role that was clearly abdicated in the years prior to 2008, and is essential in the face of record margin debt and low grade leveraged loan issuance today.

Meanwhile, like any policy that creates risk and distortions without reliable effects, more QE isn’t the answer to anything – not even if economic growth were to weaken, not even if inflation was to slow further, and not even if the equity markets were to decline substantially. Among the many problems with quantitative easing, an important feature is that monetary velocity falls in almost exact inverse proportion as the monetary base expands. In other words, regardless of the quantity, the new monetary base simply sits idle. Regardless of effects on financial speculation, there is almost precisely zero effect on economic activity – not on prices, not on real GDP, not on nominal GDP.

In order to increase monetary velocity without proportionally reducing the monetary base, we would have to observe exogenous upward pressure on interest rates. That’s likely to emerge in the back-half of this decade, though probably after an intervening economic slowdown. At that point, fairly early into the next expansion, the Fed is likely to stop hoping for higher inflation and discover it instead to be the last thing it wants. Until then, the Fed would provide the greatest benefit to long-run economic prosperity simply by ceasing its insistence on harming it by promoting speculation in efforts to offset short-run cyclical fluctuations.

The tortured narrative of these efforts should be obvious. As Fred Hickey of the High Tech Strategist observed last week, “After the tech bubble broke, the Fed jumped in to save the markets and economy with a period of extraordinarily low interest rates, which then led to the gross malinvestment in the housing sector (another bubble) and the misallocation of capital in the credit markets. The housing bubble imploded first, and the credit markets followed, leading to one of the worst financial crises in US history in 2008. Once again, the Fed stepped in to save the markets and the economy, this time with really free money (0% short-term interest rates for almost six years and counting) as well as trillions of dollars in outright money printing. Every time the Fed steps in… money gets misallocated and trouble follows.”

Some of the misallocations noted by Hickey include the Fed-enabled runup in the national debt to $17.57 trillion, the surge in global debt issuance to $100 trillion, up from $70 trillion at the mid-2007 peak, the suspension of any need to address unfunded entitlement liabilities, a doubling of the student loan burden, record highs in subprime auto lending, soaring corporate borrowing – partly to buy back stock at inflated valuations (notes Hickey, “as they always tend to do at market tops”) and partly to prop up sagging per-share earnings, a record $465.7 billion in margin debt, more initial public offerings in Q1 than at any point since the 2000 bubble peak, and a litany of other speculative outcomes.

Having witnessed the glorious advancing portion of the uncompleted market cycle since 2009, investors might, perhaps, want to consider how this cycle might end. After long diagonal advances to overvalued speculative peaks, the other side of the mountain is typically not a permanently high plateau. I captured a screenshot on Friday morning, in order to put a timestamp on what may prove – in hindsight – to be a point in history worth remembering.

That said, I should also reiterate that market peaks are not a moment but a process. The bars on the chart above are monthly. If you look carefully, it should be clear that the 2000 and 2007 peaks involved an extended period of volatility that included sharp sell-offs, thrilling recoveries, marginal new highs, fresh breakdowns, and sideways movement. All of that day-to-day and week-to-week emotion and uncertainty is absent from a long-term chart where investors know, in hindsight, how utterly insignificant all of it was in the context of what followed.

In 2000 and 2007, we regularly encountered two arguments, which boil down to a) there’s no catalyst, and b) this time is different. In 2000, it was a New Economy. In 2007 and 2008, Ben Bernanke assured investors that the risks were “contained” and Janet Yellen confidently dismissed concerns about speculative risk with the words “No, No, and No.” History suggests a straightforward response: following speculative peaks, market losses are typically in full swing well before any catalyst is widely recognized, and b) the specifics of every cycle may be different, but broadly speaking, speculative episodes end the same way.

Adieu Quantitative Easing

Notably, these now inexorable risks are clearly evident to several members of the FOMC itself. In particular, Dallas Fed President and FOMC voting member Richard Fisher gave an informed, thoughtful speech in Hong Kong on Friday that is essential reading. While I have a very strong bias toward rules-based, historically informed economic policy having reliable cause-effect relationships, my sense is that if the Fed is going to be flexible, Fisher’s comments about forward guidance are probably the most straightforward guide to understanding the direction of Fed policy that investors are likely to get. A few excerpts:

“Adieu Quantitative Easing… Thus far, much of the money we have pushed out into the economy has been stored away rather than expended to the desired degree. For example, we have seen a huge buildup in the reserves of the depository institutions of the United States. Less than a fifth of commercial credit in the highly developed U.S. capital markets is extended through depository institutions. Yet depository institutions alone have accumulated a total of $2.57 trillion in excess reserves—money that is sitting on the sidelines rather than being loaned out into the economy. That’s up from a norm of around $2 billion before the crisis.

“Through financial engineering, we have helped bolster a roaring bull market for equities… Alongside these signs of rebound have been some developments that give rise to caution. I have spoken of these in recent speeches, echoing concerns I have raised in FOMC discussions: The [cyclically adjusted] price-to-earnings (NYSE:PE) ratio of stocks is among the highest decile of reported values since 1881. .. the market capitalization of the U.S. stock market as a percentage of the country’s economic output has more than doubled to 145 percent—the highest reading since the record was set in March 2000… Margin debt has been setting historic highs for several months running and, according to data released by the New York Stock Exchange on Monday, now stands at $466 billion… Junk-bond yields have declined below 5.5 percent, nearing record lows… Covenant-lite lending is becoming more widespread. In my Federal Reserve District, 96 percent of which is the booming economy of Texas, bankers are reporting that money center banks are lending on terms that are increasingly imprudent. The former funds manager in me sees these as yellow lights. The central banker in me is reminded of the mandate to safeguard financial stability.

“At the current reduction in the run rate of accumulation, the exercise known as QE3 will terminate in October (when I project we will hold more than 40 percent of the MBS market and almost a fourth of outstanding Treasuries). We will then be back to managing monetary policy through the more traditional tool of the overnight lending rate that anchors the yield curve.

“Enter Forward Guidance: My own view is that commitments aren’t always credible, especially if they purport to extend far into the future. It’s hard to bind future policymakers, and it’s difficult to anticipate all the various economic circumstances that might arise down the road. As a general rule, then, the further into the future a commitment extends, the vaguer it tends to be. Along these lines, the FOMC periodically reiterates its commitment to do what it is legally mandated to do: pursue full employment, price stability and a stable financial system.

“We’ll see. That about sums it up. The FOMC is seeking to make sure that we have a sustained recovery without giving rise to inflation or market instability. We will conduct monetary policy accordingly. Regardless of the way we may finally agree at the FOMC to write it out or have Chair Yellen explain it at a press conference, we really cannot say more than that. As Deng Xiaoping would have phrased it: “We will cross the river by feeling the stones.”

As a bonus, the chart below may help to demonstrate why Fisher is rightly concerned about the extreme ratio of market capitalization to GDP. This measure actually has a stronger correlation (about 90%) with subsequent 10-year returns in the S&P 500 than the Shiller P/E and a wide variety of other measures. Notice that the chart shows market capitalization / GDP on an inverted log scale. Actual subsequent S&P 500 annual total returns over the following decade are plotted on the right scale. Investors learned the hard way how the 2000 and 2007 extremes in this measure turned out. Though we don’t have a 10-year figure for actual returns since 2009, investors should also notice that the improved valuations evident in 2009 will indeed have been followed by a decade of 10% S&P 500 total returns even if the total returns for the market over the coming 5 years are somewhat negative (which we view as likely).

(click to enlarge)

Presently, on the basis of market capitalization to GDP, investors can expect negative total returns (nominal and including dividends) on the S&P 500, not only for the next 5 years, but for the coming decade. Using a broader range of historically reliable valuation measures, we actually estimate a somewhat higher annual total return for the S&P 500 of about 2.3% annually, though still with negative returns on horizons shorter than about 7 years. In any event, history suggests that it is a rather large speculative leap to believe that present extremes will not be amply corrected over the completion of this market cycle.

The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Only comments in the Fund Notes section relate specifically to the Hussman Funds and the investment positions of the Funds.

Europe Next? sent by aaajoker

The Economic And Financial Problems In Europe Are Only Just Beginning…

By Michael Snyder, on July 27th, 2015

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Euro Gears - Public DomainRight now, the financial world is focused on the breathtaking stock market crash in China, but don’t forget to keep an eye on what is happening in Europe.  Collectively, the European Union has a larger population than the United States, a larger economy than either the U.S. or China, and the banking system in Europe is the biggest on the planet by far.  So what happens in Europe really matters, and at this point the European economy is absolutely primed for a meltdown.  European debt levels have never been higher, European banks are absolutely loaded with non-performing loans and high-risk derivatives, and the unemployment rate in the eurozone is currently more than double the unemployment rate in the United States.  In all the euphoria surrounding the “deal” that temporarily kept Greece in the eurozone, I think that people have forgotten that the economic and financial fundamentals in Europe have continued to deteriorate.  Whether Greece ultimately leaves the eurozone or not, a great financial crisis is inevitably coming to Europe.  It is just a matter of time.

In many ways, the economy of Europe is in significantly worse shape than the U.S. economy.  Just recently, the IMF issued a report which warned that the eurozone is “susceptible to negative shocks” and could be facing very tough economic times in the near future.  The following comes from the Guardian

The International Monetary Fund has warned the eurozone faces a gloomy economic outlook thanks to lingering worries over Greece, high unemployment and a banking sector still battling to shake off the financial crisis.

The IMF’s latest healthcheck on the eurozone found it was “susceptible to negative shocks” as growth continues to falter and monetary policymakers run out of ways to help. It called for an urgent “collective push” from the currency union to speed up reforms or else risk years of lost growth.

A moderate shock to confidence – whether from lower expected future growth or heightened geopolitical tensions – could tip the bloc into prolonged stagnation,” said Mahmood Pradhan, the IMF’s mission chief for the eurozone.

But even if there are no “shocks” to the European economy in the months ahead, the truth is that it is already in terrible shape and much of the continent is already mired in an ongoing economic depression.

Today, the official unemployment rate in the United States is just 5.3 percent, but the unemployment rate for the eurozone as a whole is sitting at 11.1 percent.  That is an absolutely terrible number, but most Europeans have come to accept it as “the new normal”.  The following are some of the prominent nations in Europe that currently have an unemployment rate of above 10 percent…

France: 10.3 percent

Italy: 12.4 percent

Portugal: 13.7 percent

Spain: 22.37 percent

Greece: 25.6 percent

And remember, these unemployment numbers often greatly understate the true scope of the problem.

For instance, in Italy the number of people “willing to work but not actively searching” is much higher than the number of Italians that are officially unemployed

For every 100 working Italians, there are 15 people seeking a job and another 20 willing to work but not actively searching, the highest level among the 28 EU countries, according to statistics agency Eurostat.

So would the true rate of unemployment in Italy be greater than 30 percent if honest numbers were being used?

That is something to think about.

Meanwhile, debt levels in virtually all European nations have shot up substantially since the last financial crisis.  Just consider the staggering debt to GDP ratios in the following nations…

France: 95.0 percent

Spain: 97.7 percent

Belgium: 106.5 percent

Ireland: 109.7 percent

Portugal: 130.2 percent

Italy: 132.1 percent

Greece: 177.1 percent

Greece is not the only debt crisis that Europe is facing by a long shot.  All of the other nations on that list are going down the exact same path that Greece has gone down.

So whether or not a “permanent solution” can be found for Greece, the reality of the matter is that Europe’s debt problems are only just beginning.

Meanwhile, the economic crisis in Greece continues to become even more dire.  At this point, nearly half of all loans in the country are non-performing, authorities are warning that bank account holders may be forced to take 30 percent haircuts when the banks are finally “bailed in”, and it is being reported that Greek banks may keep current restrictions on cash “in place for months”

Greek banks are set to keep broad cash controls in place for months, until fresh money arrives from Europe and with it a sweeping restructuring, officials believe.

Rehabilitating the country’s banks poses a difficult question. Should the eurozone take a stake in the lenders, first requiring bondholders and even big depositors to shoulder a loss, or should the bill for fixing the banks instead be added to Greece’s debt mountain?

Answering this could hold up agreement on a third bailout deal for Greece that negotiators want to conclude within weeks.

The longer it takes, the more critical the banks’ condition becomes as a 420 euro ($460) weekly limit on cash withdrawals chokes the economy and borrowers’ ability to repay loans.

Nothing has been “solved” in Greece.  The only thing that has been accomplished so far is that Greece has been kept in the euro (at least for the moment).  But for the average person on the street things continue to go from bad to worse.

How soon will it be until we see similar scenarios play out in Italy, Spain, Portugal and France?

As things in the eurozone continue to deteriorate, nations that were planning to join the euro are suddenly not so eager to do so

Poland will not join the euro while the bloc remains in danger of “burning”, its central bank governor said. Marek Belka, who has also served as the country’s prime minister, said the turmoil in Greece had weakened confidence in the single currency. “You shouldn’t rush when there is still smoke coming from a house that was burning. It is simply not safe to do so. As long as the eurozone has problems with some of its own members, don’t expect us to be enthusiastic about joining,” he said.

Yes, definitely keep an eye on what is happening in China.  Without a doubt, it is very big news.

But I believe that what is going on in Europe will ultimately prove to be an even bigger story.

The greatest financial crisis that Europe has ever seen is coming, and it is going to shake up the entire planet.

Monday, July 27, 2015

Spreads Widen


FRED Series BAMLH0A0HYM2EY: BofA Merrill Lynch US High Yield Master II Effective Yield©, %, D, NSA

The following Federal Reserve Economic Data (FRED) series has been updated:

BofA Merrill Lynch US High Yield Master II Effective Yield©
Frequency: Daily
Units: Percent
Seasonal Adjustment: Not Seasonally Adjusted
Updated: 2015-07-27 7:31 AM CDT

Why Central Banks shouldn’t Play the Market

When Authorities “Own” the Market, The System Breaks Down: Here’s Why

by IWB · July 27, 2015

by Charles Hugh-Smith

Central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors.

Panicked by the possibility of declines that undermine the official narrative that all is well, authorities the world over are purchasing assets like stocks, bonds and mortgages directly. Central banks are explicitly taking on the role ofbuyers of last resort on the theory that if they place a bid under the market to arrest any decline, private buyers will re-enter the market once they detect that the risk of a drop has dissipated.

The idea is that once private buyers flood back into the market, central banks can unload the assets they bought to stem the panic. In this view, the market is not based on fundamentals such as revenues, profits and price-earnings ratios–it’s all about confidence. If central banks restore confidence by reversing any drop with massive buying, this central-planning manipulation will restore the confidence of private investors.

When this restoration of confidence has been accomplished, private buyers will happily buy the central banks’ stocks, bonds and mortgages. The central banks’ portfolios of assets will shrink and the central banks will once again have “dry powder” to buy assets the next time markets falter.

This sounds reasonable in the abstract, but it doesn’t work in the New Normal economy central banks have created. Let’s consider a simple example to see why.

Let’s start by recalling that prices are set on the margin, i.e. the last view shares, bonds or homes bought/sold. In a neighborhood of 100 houses, the price of each home is based on the last few sales which become the comparables appraisers use to establish the fair market value of all the nearby properties.

As the risk-on investment mindset switches to risk-off, house prices start declining. If the last home sold for $400,000, the next seller will expect at least $400,000. But since the mood has changed and risk has re-emerged, buyers are suddenly scarce. Homes listed for $400,000 don’t sell. Eventually a house sells for $350,000 because the seller just needed to get out.

Suddenly, the value of the other 99 homes is in question. Home prices are sticky, meaning sellers refuse to believe the value of their home has declined. So listings of homes asking $399,000 pile up while potential buyers are wondering if $350,000 is a bit rich and perhaps $340,000 is the “real value.”

Then two houses sell for $325,000. Maybe it was a divorce, or a transfer to another state. For whatever reason, the sellers needed out.

As few as 5 home sales revalues the entire neighborhood. Price is set on the margin.

As prices plummet, authorities decide to prop up valuations by directly buying homes. The next five homes are bought by authorities at full asking price.

The authorities expect new private buyers to come in and buy the next batch of homes, but the bubble-mindset of prices are only going up has switched to the fear-mindset oflet’s wait, prices are falling–and one of us might lose our jobs.

Now the authorities are trapped by their policy of central planning distortion of price discovery: since sellers sense prices are being manipulated (or the news that authorities are buying houses to prop up the market leaked out), they don’t trust the price accurately reflects market valuations.

Pretty soon, authorities own 20 houses. Private buyers have vanished, and sellers are realizing it might be their last best chance to sell for $325,000, because if authorities stop buying homes, the price could revert to pre-bubble valuations–at $250,000 or even less.

At $325,000, the homes are poor investments for investors. With property taxes and junk fees soaring while rents are stagnating as layoffs increase, there is no way to make money buying a house for $325,000 once appreciation is no longer a sure thing.

The moment authorities stop buying, the price of the next house sold will be substantially lower as prices re-set to historical norms. This repricing to $250,000 saddles the authorities with immense losses, as they now own 25% of all the homes bought at $325,000 each.

By propping up the price, the authorities have injected false information into the market, and as a result, nobody can trust that current prices are real. If the price of the home might drop $50,000 next year when authorities finally stop buying, why buy now?

With prices distorted and trust lost, where can private investors put their money? Certainly not into houses that might drop in value once authorities cease beingbuyers of last resort.

In effect, central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors. With authorities buying assets, investors have no place to put their money that isn’t exposed to sudden policy changes by authorities.

With investment information and feedback now distorted, private investment dries up, leaving productivity and growth stagnant.

In system language, the markets are now tightly bound to central planning policies: any change in policy has an immediate and potentially disastrous effect on the values of assets.

This is why buying assets to prop up prices is a one-way street: once you distort markets to prop up prices, you destroy information, independent price discovery and trust– all the essentials of a market.

What authorities have created is a facsimile of a market. It looks like a market on the surface, but only gamblers and fools risk capital in markets based on false information.


The sky is falling?

The Stock Market Will Start To Fall In July? The Dow Plummeted More Than 500 Points Last Week

By Michael Snyder, on July 26th, 2015

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Falling - Public DomainWas last week a preview of things to come? There are quite a few people out there that believe that the stock market would begin to decline in July, and that appears to be precisely what is happening. Last week, the Dow Jones Industrial Average fell by more than 530 points. It was the biggest one week decline that we have seen so far in 2015, and some are suggesting that this could only be just the beginning. By just about any measurement that you might want to use, the stock market is overvalued. But we have been in this bubble for so long that many people have come to believe that this is “the new normal”. In fact, earlier today someone that I know dropped me a line and suggested that our financial overlords may be able to use the tools at their disposal to get this current bubble to persist indefinitely. Unfortunately, the truth is that no financial bubble ever lasts forever, and right now some very alarming things are starting to happen behind the scenes. Over the past couple of weeks, the smart money has been dumping stocks like crazy, and the lack of liquidity in the bond markets is beginning to become acute.  Could it be possible that another great financial crisis is just around the corner?

Last week took a lot of investors by surprise. The following is how Zero Hedge summarized the carnage…

-Russell 2000 -3.1% – worst week since Oct 2014 (Bullard)
-Dow -2.8% – worst week since Dec 2014
-S&P -2.1% – worst week since Jan 2015
-Trannies -2.8% – worst week since Mar 2015
-Nasdaq -2.2% – worst week since Mar 2015

The talking heads on television were not quite sure what to make of this sudden downturn. On CNBC, analysts mainly blamed the usual suspects…

“I think the market’s very much concerned about the commodity (decline),” said John Lonski, chief economist at Moody’s. “The contraction in China manufacturing activity is gaining momentum and the credit market has yet to signal that rates are not about to go higher.”

He also noted a surprising decline in new home sales and continued lack of revenue growth in earnings. Nearly all the commodities are in a bear market and gold and crude settled at lows Friday.

“You’ve got some major growth concerns and that is what’s weighing on investors minds,” said Peter Boockvar, chief market strategist at The Lindsey Group.

And without a doubt, there are some new numbers that are deeply troubling for Wall Street. For example, it is being projected that S&P 500 companies will collectively report a 2.2 percent decline in earnings for the second quarter of 2015. If this comes to pass, it will be the first drop that we have seen since the third quarter of 2012.

The biggest reason for this decline in earnings is the implosion of U.S. energy companies due to the crash in oil prices. The following comes from CNBC

Thanks to a collapse in the price of oil, the energy sector is slated to report a monster 54 percent drop in earnings and 28 percent swoon in revenue, compared to the second quarter in the year prior.

Hmm – unlike what so many others were saying initially, it turns out that the oil crash is bad for the U.S. economy after all.

But just like at this time of the year in 2008, most people fully expect that everything is going to be just fine. So many of the exact same patterns that we witnessed the last time around are playing out once again, and yet most of the “experts” refuse to see what is happening right in front of their eyes.

When things crash this time, it won’t just be stocks that collapse. As I have been writing about so frequently, we are also headed for an implosion of the bond markets as well. The following comes from Dr. David Eifrig

In the U.S. Treasury securities market, financial-services giant JPMorgan Chase estimates that five years ago, you could move about $280 million worth of Treasury securities before your trades moved the market’s price. Now, that’s down to $80 million… a decline of more than 70%.

When a panic sets in, reduced liquidity can cause big swings in market prices.

There is that word “liquidity” again. This is something that I have repeatedly been taking about. Just check out this article from a little over a month ago. A bond is only worth what someone else is willing to pay for it, and if the market runs out of buyers that can cause seismic shifts in price very rapidly. Here is more from Eifrig

In a run-of-the-mill bear market, you just have a downward trend… When enough investors are selling bonds, it drives down prices. Falling prices lead more investors to start selling. We see that all the time.

A liquidity crisis goes even further. It’s like a classic run on a bank… Without sufficient liquidity, the sellers don’t just see lower prices… they see no prices. Since no one wants to buy bonds at this particular time, the price for them effectively becomes zero.

There has been a lot of speculation about what will happen in the second half of 2015.

We only have a little over five months to go in the year, so it won’t be too long before we see who was right and who was wrong.

Our perceptions of the future are very much shaped by our worldviews. All the time, I get “Obamabots” that come to my website and leave comments on my articles telling me how Barack Obama has “turned the economy around” and has set the stage for a new era of prosperity in America.

Despite all the evidence to the contrary, they choose to believe that things are in great shape because that is what they want to believe. Just check out the results from one recent survey

While 55 percent of Democrats reported feeling positive about the economy, for example, just 25 percent of Republicans felt the same from March 25 to May 27.

When asked if they thought the economy would improve over the next 12 months, 53 percent of Democrats said yes. Only 23 percent of the Republicans in the survey agreed.

The same perception gap extends to the far future, with 41 percent of Democrats believing that the next generation will be better off than their parents, and just 24 percent of Republicans saying the same.

To me, those numbers are quite striking.