Friday, April 24, 2015

China: Short Term Disaster - Long Term Opportunity

The Chinese stock market has been moving in an upward parabolic surge for many months now. The trouble is their economic growth is not. For those that still care that stock prices are backed by something based in reality (and there are few people left who do), the following chart should be troubling. LEI stands for Leading Economic Indicators:

A large part of the fuel behind China's stock market rally has been the steady decline in real estate prices. Hot money has moved from purchasing brand new unoccupied apartments to the surging stock market in hopes of catching the next wave.

China's public and private debt has grown from $2 trillion in 2000 to over $28 trillion as of last year.

This debt growth has supercharged their economic growth with their GDP approaching $10 trillion in size.

I believe even though China will own the 21st century they are approaching their first major Minsky Moment of their magical growth story. Their debt burden will soon reach the point where it will either slow the economy drastically or push them into a crisis.

Remember that while the United States was the economic growth story of the 20th century the country endured the Great Depression in the early 1930's, which paved the way for the peak period of prosperity in the 1950's and 1960's (American prosperity has been in a slow decline since and will soon enter a free fall collapse).

If someone told me I could only buy one market, put my shares in a time capsule, and wake up 30 years from now I would purchase Chinese stocks. If someone asked me what market I would like to purchase and hold for the next year I would be far more interested in Brazilian shares.

For more see: China's Stock Market Continues To Soar: Selling Opportunity?

Sunday, April 19, 2015

Stanley Druckenmiller Bloomberg Interview

For more see: Stanley Druckenmiller On Credit Markets, Financial Markets & Deja Vu

Why Are Average Americans Not Purchasing U.S. Stocks?

We hear continuously from financial advisors the average American has not returned to buying U.S. stocks, which is a bullish sign because there is "money on the sidelines." A recent poll by the Wall Street Journal found it is indeed true that most Americans are not purchasing U.S. stocks, but the most common reason cited is not because they are afraid of the market.

"Nearly seven years after the Panic of 2008, and six years after a massive rally started, more Americans are out of the stock market than in it, according to a new survey from Bankrate finds, and for younger investors the numbers are even more lopsided.
About 52% of Americans are not investing in the stock market, the survey found, and it’s not necessarily that they still don’t trust the market. It’s because they simply don’t have the money. Fully 53% of people who aren’t in the market now said they weren’t investing in the market because they didn’t have the funds to do so. A study from the National Institute on Retirement Security found that 45% of working-age households had no retirement savings at all; among the 55-64 age group, the average was only $12,000."
So if individuals are not pushing this market higher who is? As we have discussed in depth over the past few years it is institutional funds, central banks, banks, hedge funds and corporations themselves. Yes, companies are buying back their own shares (many using debt to make the purchases). Sounds like a ponzi scheme? Well, let's just say that it will not end well.

More from the Wall Street Journal:

The value of new share repurchase programs authorized by companies stood at $257 billion in the first quarter, the strongest start to the year for buyback programs on record, according to a report by Birinyi Associates Inc.
At the current pace, stock buyback authorizations are set to total $1 trillion this year, blowing past 2007’s record of $863 billion, according to Birinyi. And that count doesn’t include General Electric Co.’s $50 billion buyback program announced last week, which ties with Apple Inc.’s as the largest share repurchase program ever announced.

Thursday, April 16, 2015

Federal Taxes & Where It Is Spent

The following is an interesting visual walk through on Federal taxes and income inequality.

How the money is spent:

Monday, April 13, 2015

Down Payments On American Homes

The housing market is roaring in many parts of the United States as new buyers pour in from the sidelines. After the 2008 crisis we can be assured these buyers are finally making intelligent buying decisions with strong down payments, right?

The chart below shows that unfortunately, nothing has changed. 2 out of every 3 home buyers are purchasing a home with 0-6% down today. 

This means if home prices fall by 6% after a purchase two thirds of new buyers will be underwater. It's actually more troublesome than that because it costs at least 4-6% in Realtor/selling costs in order to move. This means buyers are instantly underwater the day they sign on the American dream. Let's hope interest rates stay low forever, the economy never enters recession and the speculative juices continue to roar for decades to come.

Sunday, April 12, 2015

Stanley Druckenmiller On Credit Markets, Financial Markets & Deja Vu

A speech billionaire Stanley Druckenmiller gave in January this year was released to the public on Friday. Druckenmiller ran the legendary Quantum fund with George Soros in the 1990's. He was well ahead of the 2008 crisis and profited handsomely during the crash. You can read the entire transcript of the speech here. The following are the sections I found most interesting (I added the chart on covenant lite loans):

On investing in the future tense, not the present.....

First, never, ever invest in the present. It doesn't matter what a company's earning, what they have earned. Speros Drelles taught me that you have to visualize the situation 18 months from now, and whatever that is, that's where the price will be, not where it is today. And too many people tend to look at the present, oh this is a great company, they've done this or this central bank is doing all the right things. But you have to look to the future. If you invest in the present, you're going to get run over.

On how today's financial world feels like 2004 - 2007 all over again.....
One of the things I would say is about 80 percent of the big, big money we made was in bear markets and equities because crazy things were going on in response to what I would call central bank mistakes during that 30-year period. And probably in my mind the poster child for a central bank mistake was actually the U.S. Federal Reserve in 2003 and 2004. I recall very vividly at the end of the fourth quarter of 2003 calling my staff in because interest rates, fed funds were one percent. The nominal growth in the U.S. that quarter had been nine percent. All our economic charts were going through the roof, and not only did they have rates at one percent, they had this considerable period - sound familiar? - language that they were going to be there for a considerable time period.
So, I said I want you guys to try and block out where fed funds are and just consider this economic data and let's play a game. We've all come down from Mars. Where do you think fed funds would be if you just saw this data and didn't know where they were? And I'd say of the seven people the lowest guess was 3 percent and the highest was 6 percent. So, we had great conviction that the Federal Reserve was making a mistake with way too loose monetary policy. We didn't know how it was going to manifest itself, but we were on alert that this is going to end very badly.
Sure enough, about a year and a half later an analyst from Bear Stearns came in and showed me some subprime situation, the whole housing thing, and we were able to figure out by mid-'05 that this thing was going to end in a spectacular housing bust, which had been engineered - or not engineered but engendered by the Federal Reserve's too-loose monetary policy and end in a deflationary event. And we were lucky enough that it turned out to be correct. My returns weren't very good in '06 because I was a little early, but '07 and '08 were - they were a lot of fun.
So, that's why if you look at today I'm experiencing a very strong sense of deja vu.
How the credit markets today compare with the last bubble peak.....
Okay. I mentioned credit. Let's talk about that for a minute. In 2006 and 2007, which I think most of us would agree was not a down period in terms of speculation, corporations issued $700 billion in debt over that two-year period. In 2013 and 2014 they've already issued $1.1 trillion in debt, 50 percent more than they did in the '06, '07 period over the same time period. But more disturbing to me if you look at the debt that is being issued, Kenny, back in '06, '07, 28 percent of that debt was B rated. Today 71 percent of the debt that's been issued in the last two years is B rated. So, not only have we issued a lot more debt, we're doing so at much less standards.
Another way to look at that is if those in the audience who know what covenant-light loans are, which is loans without a lot of stuff tied around you, back in '06, '07 less than 20 percent of the debt was issued cov-light. Now that number is over 60 percent. So, that's one sign.
The other sign I would say is in corporate behavior, just behavior itself. So, let's look at the current earnings of corporate America. Last year they earned $1.1 trillion; 1.4 trillion in depreciation. Now, that's about $2.5 trillion in operating cash flow. They spent 1.7 trillion on business and capital equipment and another 700 billion on dividends. So, virtually all of their operating cash flow has gone to business spending and dividends, which is okay. I'm onboard with that.
But then they increase their debt 600 billion. How did that happen if they didn't have negative cash flow? Because they went out and bought $567 billion worth of stock back with debt, by issuing debt. So, what's happening is their book value is staying virtually the same, but their debt is going like this. From 1987 when Greenspan took over for Volcker, our economy went from 150 percent debt to GDP to 390 percent as we had these easy money policies moving people more and more out the risk curve. Interestingly, in the financial crisis that went down from about 390 to 365. But now because of corporate behavior, government behavior, and everything else, those ratios are starting to go back up again.
Look, if you think we can have zero interest rates forever, maybe it won't matter, but in my view one of two things is going to happen with all that debt. A, if interest rates go up, they're screwed and, B, if the economy is as bad as all the bears say it is, which I don't believe, some industries will get into trouble where they can't even cover the debt at this level.
And just one example might be 18 percent of the high-yield debt issued in the last year is energy. And I don't mean to offend any Texans in the room, but if you ever met anybody from Texas, those guys know how to gamble, and if you let them stick a hole in the ground with your money, they're going to do it. So, I don't exactly know what's going to happen.  I don't know when it's going to happen. I just have the same horrific sense I had back in '04. And by the way, it lasted another two years. So, you don't need to run out and sell whatever tonight.
On central bank monetary policy....

The fed keeps talking about deflation, but there is nothing more deflationary than creating a phony asset bubble, having a bunch of investors plow into it and then having it pop. That is deflationary. But the point I was making earlier is there was a great enabler, and that was the Federal Reserve... pushing people out the risk curve. And what I just can't understand for the life of me, we've done Dodd-Frank, we got 5,000 people watching Jamie Dimon when he goes to the bathroom. I mean all this stuff going on to supposedly prevent the next financial crisis. And if you look to me at the real root cause behind the financial crisis, we're doubling down.
Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we're doubling down on the same policy that really put us there and enabled those bad actors [ph.] to do what they do. Now, no matter what you want to say about them, if we had had five or six percent interest rates, it would have never happened because they couldn't have gotten the money to do it.
h/t Zero Hedge

Thursday, April 9, 2015

Financial Strain

The charts below help show the importance of financial education, something that is not taught in American schools. Americans spend 17 years of their lives in school (many taking on tens of thousands of dollars in debt) in order to prepare themselves to find the best job possible. There is not one class during those 17 years that educates students on how to live a healthy financial life with the income you earn from your job. In addition, many of the jobs kids are going to school for today are not there waiting for them when they finish school (see lawyers).

Here are two unfortunate charts that summarize the abysmal state of American financial balance. The first shows 47% of households have a 0% savings rate.

The second shows the stress financial difficulties have on both work and life. If you spend the bulk of your day worried about paying your bills there is no question it will negatively impact both your daily work and family life.

There is no discussion currently on the table for education reform in the United States so these trends will be with us for many years to come.

Wednesday, April 8, 2015

Shiller's CAPE Ratio Continues To Move Higher For U.S. Stocks

Robert Shiller discusses the grossly overpriced stock market in the United States based on his CAPE price to earnings ratio. He says there are relative values around the world in markets such as Singapore and Hong Kong. As I have said since the start of the year, if you live in the United States and want to invest in stocks do not let home bias keep you over weighted within the domestic market. You can look around the world to find Shiller's relative value.

Here is the updated CAPE chart for U.S. stocks, hitting 27.85 as we enter the month of April. In an interview with Bloomberg earlier this week Shiller commented that 10 year returns at these levels are historically flat because "inevitably there is a major correction."

For more on why U.S. stocks today are more over priced than 1929 and even the 2000 mania peak see: Averaging Valuations Shows U.S. Stocks More Dangerous Than The 1929 Peak

Tuesday, April 7, 2015

Stephen Roach: We've Opted For Financial Engineering Through Bubbles

An excellent summary from Stephen Roach on where we are today;

"We've tried to squeeze too much juice out of the lemon. We have opted for financial engineering through bubbles. That provides some temporary gratification but ultimately comes back to bite you. We're in a bubble right now."

When we ultimately raise rates...

"We will definitely have a difficult time dealing with another piece of bubble induced economic activity. The debt overhang is there."

Monday, April 6, 2015

Julian Robertson: The Bigger This Bubble Gets The Bigger The Bust

Legendary hedge fund investor and founder of Tiger Management, Julian Robertson, discusses his thoughts on the financial markets and economy with Fox Business. Robertson hopes the Fed raises rates this year so they do not let the twin bubbles (stocks and bonds) "boil over into a complete explosion."

"I am looking at a bubble that is almost sure to pop at some time and I don't know when it's going to happen, but I know it's going to happen."

"The bigger this bubble gets, the bigger the bust."

"I don't think it's at all ridiculous to think of a sell-off like we saw in 2008."

Interview Part One:

Interview Part Two:

But who really wants to listen to someone that has been actively working in the financial industry for 58 years? I'd much rather listen to a 25 stock salesman who can command three trading screens and still fit the time in during the day to come on CNBC and tell the audience why U.S. stocks are cheap and safe.

For more see: An Early Warning To U.S. Stock Market Investors: Dividend Payments Can Bet Cut