Even Goldman Sachs has concluded that this current stock market is a bit bubbly:
"S&P 500 valuation is lofty by almost any measure, both for the
aggregate market (15.9x) as well as the median stock (16.8x)...
"We conclude that further P/E expansion will be difficult to achieve."
If this isn't evidence of a bubble, what is? If this isn't evidence of market distortions by central bankers, what is?
As if the awful jobs report wasn't bad enough, the Baltic Dry Index, one of the better leading economic indicators, just plunged the most for any new year in 30 years!
Only 74,000 jobs created in December. This was awful! This was the fewest jobs created in 2 years, and yet the official unemployment rate DECLINED!
This is the biggest stock market bubble I've seen yet. The bigger they are, the harder they fall!
...but the non-seasonally adjusted jobless claims rose above 486,000. Thus seasonal adjustments removed 150,000 or skewed seasonal adjustment downward by over 40%. 4 week moving average of NSA rises to 440,000. The BLS will have to make massive revisions if this continues.
Retail Sales Figures Weak. It's Obamalaise!
from Lance Roberts at Stawealth.com:
From Guy Haselmann of Scotiabank. As a reminder, exhibiting
decidedly non-Keynesian cult attributes as a member of the sellside is
generally frowned upon.
"Bubbles Always Pop"
The world has been kept on life support mostly by government spending
of trillions of dollars and central bank printing of trillions more.
Both have boosted asset prices and given the allure of economic
progress. Over-zealous regulators, market rule changes, and aggressive
policy stimulus have temporarily stabilized markets. Market vigilantes
have been hibernating, because unclear investment rules and
uncertainties around the ultimate magnitude of stimulus have prevented
them from attacking bad policies or distorting asset price valuations.
It is difficult to know the extent that markets and the global
economy have benefited from official policy stimulus; however, five
years after the crash, economic growth and the labor recovery remain
subpar. Strong growth should have been ignited by now.
Most economists still believe in the ‘official position’ that growth
is edging sustainably higher and that interest rates will slowly rise to
reflect it. They could be correct, but should it fail to unfold as
expected, confidence in the efficacy of official policy will diminish
and the social contract will break down further. Since markets require
confidence, they will also react accordingly.
Some argue that economic benefits to stimulus have run its course,
while the costs from looming unintended consequences have not yet been
unleashed. Many believe (and I am one) that the risks and costs of
current Fed policy outweigh the benefits.
It is difficult to know the extent that markets and the global
economy have benefited from official policy stimulus; however, five
years after the crash, economic growth and the labor recovery remain
subpar. Strong growth should have been ignited by now.
Most economists still believe in the ‘official position’ that growth
is edging sustainably higher and that interest rates will slowly rise to
reflect it. They could be correct, but should it fail to unfold as
expected, confidence in the efficacy of official policy will diminish
and the social contract will break down further. Since markets require
confidence, they will also react accordingly.
Some argue that economic benefits to stimulus have run its course,
while the costs from looming unintended consequences have not yet been
unleashed. Many believe (and I am one) that the risks and costs of
current Fed policy outweigh the benefits.
* * *
The Fed’s asset purchase program (QE) and Zero Interest Rate Policy
(ZIRP) are the foremost factors that have widened wealth inequalities.
The richest few have benefited the most, simply because the 10% richest
Americans own 80% of US stocks. The FOMC believe that its
asset-price-inflation-trickle-down-policy leads to spending which
ultimately leads to job creation, especially for the poor.
However, several FOMC members themselves have questioned Fed
policies, citing that they have not worked as well as had been hoped,
and pointing out that aggregate demand has been weak throughout the
recovery. To his credit Fed Governor Jeremy Stein broached the subject
of unintended consequences of Fed policies when he mentioned in his
February paper, “A prolonged period of low interest rates, of the sort
we are experiencing today, can create incentives for agents to take on
greater duration or credit risk, or to employ additional financial
leverage in an effort to ‘reach for yield’”.
Zero interest rates have incentivized corporations to issue debt in
order to capitalize on the historically low interest rates; however,
corporations have primarily used the money to pay greater dividends,
buyback shares, or modernize plant and equipment. There is a strong case
to be made that holding interest rates at zero for a prolonged period
is actually counter-productive to the Fed’s efforts to achieve either of
its dual mandates. This is because increasing productivity through
modernization typically exposes redundancies: it allows firms to lay-off
workers, while the improvement in competitiveness allows firms to drop
prices.
Furthermore, and as I referenced in my 2013 paper, “Should the
marginal propensity to consume of creditors exceed that of debtors, the
net effect of redistribution could be to lower household spending rather
than raise it. There are some conservative savers who have a
predetermined goal in mind for the minimum amount of savings they wish
to accumulate over time. Those investors may refuse to move out the risk
curve in search of higher yields (likely widening the wealth divide).
To them, lower interest rates simply mean a slower rate of accumulation,
which likely will jeopardize their minimum goal. The only recourse for
this investor is to save more, which is the exact opposite intention of
the Fed’s policy. For example, if interest rates fall from 4% to
3%, an investor would have to increase savings by more than 20% each year to reach the same goal over 30 years.”
Another negative result of ZIRP is that banks and other lenders are
discouraged from lending due to puny return levels; and, therefore, the
Fed’s desire to expand lending is compromised. Are lower (or negative)
interest rates supposed to increase the incentive to lend money? To
assume such is absurd. Although somewhat counter-intuitive, if interest
rates rose, then the supply of money willing to be lent would increase
due to wider interest margins.
Policies are so unprecedented and unproven that it is possible that
the Fed itself has now become a source of financial instability. This
could be the case either through the potential fueling of asset bubbles,
through its compromised ability to conduct future monetary policy (due
to it unwieldy $4 trillion balance sheet), or due to “unknown
unknowns.”
* * *
In a low to zero interest rate policy (ZIRP) environment, investors
desperately search for yield. This frequently chases investors into
assets to which they are ill-suited and to which they will miscalculate
liquidity and downside potential. Under ZIRP paradigms, riskier assets
become the best-performing. Credit spreads collapse and equities soar.
Massive monetary ‘printing’ by global central banks has not just
emboldened investors, but these actions have collectively changed their
behavior and psychology. There is evidence that policies have led to
mis-allocation of resources. Investors are emboldened to take what many
critics believe is inappropriate or reckless levels of risk. The motto,
“Don’t fight the Fed” has taken on added meaning. Moral hazard and a
deep-seated bullish psychology have become rampant.
Extended Fed promises of lower rates and a continuation of asset
purchases even as the economy heals, are conspiring to propel prices
ever-upward. Investing today has become mostly about seeking relative
yield, rather than assessing value or determining if the investment’s
return is sufficient compensation for the risk.
Simply stated, investors and speculators receive ever-lower returns
for ever-higher levels of risks. Over time, the ability of an investor
to assess an asset’s fundamental value becomes ever-increasingly
impaired. It should a warning sign to portfolio manager’s fiduciary
responsibility to maximize return per unit of risk (see market liquidity
section).
There have been persistent cycles of asset booms (bubbles) that
eventually turned to ‘busts’. Very low or negative real rates (seen
recently) always create economic distortions and the mispricing of risk,
thereby creating asset bubbles. Each ‘boom’ had some differences, but
the common factor has always been easy money which the Fed was too slow
to withdraw. Providing liquidity is always easier than taking it away,
which is one reason why the Fed has hit the “Zero Lower Bound” in the
first place.
Eventually (un-manipulated) asset prices always return to their
fundamental value, which is why bubbles always pop. The FOMC has backed
itself into a corner. Current changes in policy are being designed
around efforts to manage the unwind process seamlessly. Central bank
(and government official’s) micro-management appears based on a belief
that they can exert an all-encompassing central control over markets and
peoples’ lives. Those in power have come to believe that policies have a
precise effect that can be defined and managed. This is highly
unlikely.
In ‘normal’ times there is a more discernable connection between
cause and effect. However, the usual relationships particularly break
down during periods of over-indebtedness, unprecedented regulatory
changes, and official rates reaching the zero lower bound. Today, the
world is far from ‘normal’. It is not difficult to imagine the looming
fallout from policies that have promoted asset price inflation, and
which have materially compromised market liquidity.
In the long run, policies that punish savers at the expense of
helping risk-takers and speculators are bad long-run policies for any
country. It would be better to transform the country into net savers,
rather than to continue to promote policies where growth is reliant on
overly-leveraged consumers or speculators, and is micro-managed by
attempts of central-control.
And why not? She has promised them monetary heroin in perpetuity! She is an even bigger money printer than Bubbles Bernanke! And that's why she will ultimately be Calamity Janet!
From Dr. John Hussman's weekly market update today:
from Investor's Business Daily:
The resilience that has long been one of America's remarkable traits
was on display in 2013. Not only did businesses create 2 million jobs,
but the struggling economy actually grew and profits and stock prices
soared to near-record levels.
Still, five years into the Obama presidency, the economy is grossly
underperforming. Contrary to the dominant media narrative, it's not bad
luck or the financial crisis to blame, but bad policies — from the $860
billion "stimulus" that didn't stimulate to the Dodd-Frank financial
reform that killed lending.
Last year was a challenging one for entrepreneurs and other
productive Americans. No fewer than 13 new taxes were put into place.
Big government now consumes one of every four dollars of our GDP and is
getting bigger.
Entering 2014, we face problems, including taxes and spending, that
neither the White House nor Congress is addressing. In the following
charts, we look at a few of the more alarming and intractable ones.
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