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The sudden resignation of Japans Prime Minister Shinzo Abe has led to evaluations of his so-called Abenomics. Many have praised Abe’s aggressive monetary policy because the long shopping list of the Bank of Japan (government bonds, corporate bonds, ETFs and real estate investment trusts) has inflated stock and real estate prices (Shirai 2020; Financial Times 2020). Concerns remain on the fiscal side since Abe’s consumption tax hikes from 5 percent to 8 percent in 2014 and to 10 percent in 2019 are widely seen as a failure (The Economist 2020). Indeed, Abe resolved Japan’s deep-seated fiscal problems only superficially.

Figure 1: Tax Revenues of Japan’s Central Government

Source: Ministry of Finance, Japan.

The core of the problem is cheap money issued by the Bank of Japan, which had caused a stock and real estate bubble in the second half of the 1980s. While the bubble had inflated tax revenues, its bursting was followed by an unprecedented economic slump during which the corporate and income tax revenues collapsed from 43 trillion yen (approx. 390 billion dollars) in 1990 to 23 trillion yen (approx. 185 billion dollars) in 2012 (Figure 1), when Abe took office.

Figure 2: Social Security Expenditure and Local Allocation Tax as Share of Total Tax Revenues

Source: Ministry of Finance, Japan. Central Government.

At the same time Japan’s aging population ballooned the government contributions to the public pension and health insurance system, from 12 trillion yen (approx. 110 billion dollars) in 1990 to 36 trillion yen (approx. 327 billion dollars) in 2019. In addition, the so-called local allocation tax grants of around 16 trillion yen per year (approx. 145 billion dollars) to the economically exhausted Japanese periphery continued to constitute a heavy burden for the central government. In the wake of the global financial crisis, both together had increased far beyond the central governments’ tax revenues (Figure 2).

…click on the above link to read the rest of the article…

It’s Easier To Pretend Our Economic System Works And Just Blow Endless Asset Bubbles

July 17, 2020

It’s Easier To Pretend Our Economic System Works And Just Blow Endless Asset Bubbles

Yesterday saw the US comprehensively beat China. Not in any sporting sense, and certainly not in any dimension of the current Cold War: and for those who still like to think the latter isn’t happening, just listen to what US Attorney General Barr said yesterday. He attacked China for “economic blitzkrieg – an aggressive, orchestrated, whole-of-government (indeed, whole-of-society) campaign to seize the commanding heights of the global economy and to surpass the United States as the world’s pre-eminent superpower.” He also called out Hollywood and US firms for kowtowing to Beijing, alleging corporate officials “display hammer-and-sickle insignia at their desks and attend party lectures during business hours,” before concluding “If Disney and other American corporations continue to bow to Beijing, they risk undermining both their own future competitiveness and prosperity, as well as the classical liberal order that has allowed them to thrive.”

So just where did the US win? In the field that matters most to markets, in fact the only thing that matters to markets – spending. While Chinese retail sales for June fell 1.8% y/y, US retail sales leaped 7.5% m/m vs. 5.0% expected. Yes, it’s apples and oranges, and the US are still down marginally y/y, but considering the States are at least a quarter behind China in the recovery process, it’s a genuinely dynamic retail rebound. USA! USA! USA!

So what is driving this latest round of the US consumer miracle? The $600 a week in special virus-related unemployment benefits. In many instances this is worth more than people’s pre-crisis salary.

…click on the above link to read the rest of the article…

The Bubble In A Fairy Tale World

July 12, 2020

The Bubble In A Fairy Tale World

Great interview with Michael Novogratz, Galaxy Digital founder, CEO, and chairman. He sounds exactly like the global macro heads at GMM. His money quotes from the July 8th CNBC interview should sound very familiar to our readers.

Money Quotes

Macro set-up is so perfect for something like gold…central banks around the world keep printing money…more money, more money, more money
Gold is going to take old highs and keep going…we are just starting this move
We are in the irrational exuberance zone in the market but it’s hard to figure out where that stops
Get on the airplane just make sure you are in a seat closest to the exit.
We are in a bubble
I think Biden is going to win by a landslide
He [Biden] is going to jack up capital gains taxes to ordinary income….that won’t be good for the stock market…but they are going to pump in liquidity
We are early in the cycle
The real economy has issues
We are in a fairy tale world because the Fed is giving you so much money
Disposable income is up on the year, not down, which makes no sense
My friends are getting richer than I am

Click here to view the video

The Fed’s Couldn’t Even Stomach a 10% Drop in Stocks… It’s Officially in the Bubble Business

June 18, 2020

The Fed’s Couldn’t Even Stomach a 10% Drop in Stocks… It’s Officially in the Bubble Business

The Fed will soon be buying stocks.

Earlier this week, the Fed announced that it will begin buying corporate bonds from individual companies. Before this announcement, the Fed was already involved in the:

The Treasury markets (US sovereign debt)
The municipal bond markets (debt issued by states and cities)
The corporate bond markets by index (debt issued by corporations)
The commercial paper markets (short-term corporate debt market)
And the asset-backed security markets (everything from student loans to certificates of deposit and more).

With the introduction of individual corporate bonds, the Fed is now one step closer to buying stocks outright.

Indeed, the Fed has made ZERO references to stopping its monetary madness. Just yesterday Fed Chair Jerome Powell emphasized to Congress that the Fed is “years away from halting its assets monetization scheme.”

Again, the Fed is explicitly telling us that it plans on buying assets (Treasuries, municipal bonds, corporate bonds, etc.) for years to come.

The next step will be for the Fed to buy stocks.

It won’t be the first central bank to do so…

The central bank of Switzerland, called the Swiss National Bank has been buying stocks for years. Yes. It literally prints money and buys stocks in the U.S. stock markets.

Then there’s Japan’s central bank, called the Bank of Japan. It also prints money and buys stocks outright. As of March 2019, it owned 80% of Japan’s ETFs.

Yes, 80%.

The BoJ is also a top-10 shareholder in over 50% of the companies that trade on the Japanese stock market.

If you think this can’t happen in the US, think again. The Fed told us in 2019 that it would be forced to engage in EXTREME monetary policies during the next downturn.

…click on the above link to read the rest of the article…

How QE has radically changed the nature of the West’s financial system.

October 31, 2019

How QE has radically changed the nature of the West’s financial system.

Because they are so ensconsed in their little bubble and because they profit so much from maintaining the status quo, Western mainstream media pundits don’t – or perhaps can’t – admit how Quantitative Easing policies have so quickly and so radically changed the financial system of the West and their satellites.

I imagine that most everyone reading this is already aware of what has transpired economically across the West over the last decade:

Elite-class asset (stuff rich people own – stocks, real estate, financial derivatives, luxury goods, etc.) prices have ballooned to pre-2008 levels.
Debt (which is, of course, another elite-owned asset), mainly to pay for banker bailouts and their usurious interest levels, has ballooned national accounts to incredible levels.
The “real” economy has only weakened, as proven by endemic low economic growth across the West and Japan.

As a pro-socialist who has no faith that capitalism seeks anything but inequality, I believe that creating and compounding these issues has been the unstated goal of Western policy over the last decade. But that’s not the main point: what cannot be denied is that those ARE the economic results of the West’s “easy money” policies – i.e., QE and ZIRP (Zero percent interest rate policy) for the 1%, and austerity for the 99% (all coins have two sides).

Similarly, I imagine that everyone reading this is generally aware of what will happen should the West stop easy money: obviously, once artificial demand is no longer being fabricated then these assets will plummet in value, with huge ripple effects in the “real” economy. The West will be right back to dealing with most of the same toxic assets they had back in 2007, but now compounded by a decade of more debt, more interest payments, and a “real” economy which was made weaker via austerity.

…click on the above link to read the rest of the article…

The Next Economic Crisis and the Looming Post-Multipolar System

May 24, 2019

The Next Economic Crisis and the Looming Post-Multipolar System

The Impending Crisis

At one time, specifically during the post-World War 2 Bretton Woods era, it looked like as if the capitalist model could be indefinitely sustainable and avoid plunging the world into major world conflicts. That era began to come to an end during the stagflation crisis of the 1970s, and came to a complete end at the end of the Cold War which ushered in the era of the so-called “globalization” which took form of unbridled competition for markets and resources. At first this competition did not show many signs of trouble. There were many “emerging markets” created as a result of the collapse of the Soviet bloc into which Western corporations could expand. However, the law of diminishing returns being what it is, the initial rapid economic growth rates could not be sustained and attempts to goose it using extremely liberal central bank policies, to the point of zero and even negative interest rates, succeeded in inflating—and bursting—several financial “bubbles”. Even today’s US economy bears many hallmarks of such a bubble, and it is only one of many. Sooner or later the proverbial “black swan” event will unleash a veritable domino effect of popping bubbles and plunge the global economy into a crisis of a magnitude it has not seen since the 1930s. A crisis against which the leading world powers have few weapons to deploy, since they have expended their monetary and fiscal “firepower” on the 2008 crisis, to little avail. The low interest rates and high levels of national debt mean that the next big crisis will not be simply “more of the same.” It will fundamentally rearrange the global economy.

…click on the above link to read the rest of the article…

Chapter 5: Bubbles and Adam Smith

March 5, 2019

CHAPTER 5: BUBBLES AND ADAM SMITH.

This chapter explores how laws enabling debt to be bought and sold transformed Britain. Suddenly, vast quantities of money and value were being created out of nothing. The effect was dramatic and widely commented on. Some people thoroughly approved, while others saw a new kind of tyranny taking over – a tyranny of fictitious wealth.

Speculators and ‘projectors’[1] soon realized that when money and other types of value can be created out of nothing, different types of debt can be created and used to raise prices, and therefore value. Assets can be bought with money made from nothing, prices can be talked up, more money can be created to fuel and satisfy demand, and – hey presto! – when the assets are re sold, sky-high profits are made. The table was laid for an orgy of speculative greed – and the orgy began almost immediately.

‘It was as if all the lunatics had escaped from the madhouse at once’ commented a Dutch observer.^[2]Hysteria for speculation took hold of public life. English poets, novelists, and playwrights wrote and argued about the virtues and vices of ‘Lady Credit’ – and joined in the orgy themselves. A whole century of literature – Daniel Defoe, Jonathan Swift, Alexander Pope, along with many less famous writers – was given over to satirising the new society of speculators and credit-worshippers.^[3]Hogarth did the same in art.

The profits of speculation left ‘honesty with no defence against superior cunning’ wrote Jonathan Swift in Gulliver’s Travels.^[4] Speculations in credit ‘ruin silently… like poison that works at a distance… by the strange and unheard-of engines of interest, discounts, tallies, transfers, debentures, shares, projects, and the devil-and-all of figures and hard names,’ wrote Daniel Defoe, author of Robinson Crusoe.^[5]

…click on the above link to read the rest of the article…

How The Bubbles In Stocks And Corporate Bonds Will Burst

November 18, 2018

How The Bubbles In Stocks And Corporate Bonds Will Burst

As someone who has been warning heavily about dangerous bubbles in U.S. corporate bonds and stocks, people often ask me how and when I foresee these bubbles bursting. Here’s what I wrote a few months ago:

To put it simply, the U.S. corporate debt bubble will likely burst due to tightening monetary conditions, including rising interest rates. Loose monetary conditions are what created the corporate debt bubble in the first place, so the ending of those conditions will end the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will cause stock buybacks to come to a screeching halt, which will also pop the stock market bubble, creating a downward spiral. There are extreme consequences from central bank market-meddling and we are about to learn this lesson once again.

Interestingly, Zero Hedge tweeted a chart today of the LQD iShares Investment Grade Corporate Bond ETF saying that it was “about to break 7 year support: below it, the buybacks end.” That chart resonated with me, because it echos my warnings from a few months ago. I decided to recreate this chart with my own commentary on it. The 110 to 115 support zone is the key line in the sand to watch. If LQD closes below this zone in a convincing manner, it would likely foreshadow an even more powerful bond and stock market bust ahead.

Thanks to ultra-low corporate bond yields, U.S. corporations have engaged in a borrowing binge since the Global Financial Crisis. Total outstanding non-financial U.S. corporate debt is up by an incredible $2.5 trillion or 40 percent since its 2008 peak, which was already a precariously high level to begin with.

U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the dot-com bubble and U.S. housing and credit bubble:

…click on the above link to read the rest of the article…

The Primacy Of Income

November 17, 2018

The Primacy Of Income

The Era Of Gains is over

Ever since the central banks became serial bubble blowers twenty years ago, household wealth has mostly been driven by asset price inflation:

But this has been a quixotic pursuit. Created by pulling tomorrow’s prosperity into today, these asset price bubbles are unsustainable, and invariably suffer violent corrections at their end.

So far, the central banks have responded to these corrections by simply doing more of the same, just at greater and greater intensity. To keep the current Everything Bubble going, the world’s central banks have not only had to more than quintuple their collective balance sheets, but have recently had to resort to the extreme (desperate?) measure of injecting the greatest amount of liquidity ever in 2016 and 2017.

History has shown us that the height an asset bubble reaches is proportional to the damage it wreaks when it bursts. Applying this logic, the coming pop of the Everything Bubble will be devastating.

So devastating that analysts like John Hussman forecast a 0% (or worse) total market return over the next twelve years:

Moreover, the primary driver and supporter of asset price appreciation over the past seven years, central bank easing, is now gone. For the first time since the GFC, the collective central bank liquidity injection rate (the solid black line in the below chart) is now net zero.

And plans to tighten much further from here have been clearly committed and communicated to the world:

As a consequence, we fully expect yesterday’s capital gains to become tomorrow’s capital losses. What goes up on thin-air money comes down with its removal.

And while this is going on, interest rates are suddenly exploding higher around the world after spending a decade at all-time historic lows:

…click on the above link to read the rest of the article…

Bubbles, Balloons, Needles and Pins

October 19, 2018

Bubbles, Balloons, Needles and Pins

M. C. Escher Meeting (Encounter) 1940

It’s no surprise that China has its own plunge protection team -but why were they so late?-, nor that Beijing blames its problems on Trump’s tariffs. GDP growth was disappointing at 6.5%, but who’s ever believed those almost always dead on numbers? It would be way more interesting to know what part of that growth has been based on debt and leverage. But that we don’t get to see.

So we turn elsewhere. How about the Shanghai Composite Index? It may not be a perfect reflection of the Chinese economy, no more than the S&P 500 is for the US, but it does raise some valid and curious questions.

Borrowing from Wolf Richter, here are some stats and a graph::
• Lowest since November 27, 2014, nearly four years ago
• Down 30% from its recent peak on January 24, 2018, (3,559.47)
• Down 52% from its last bubble peak on June 12, 2015 (5,166)
• Down 59% from its all-time bubble peak on October 16, 2007 (6,092)
• And back where it had first been on December 27, 2006, nearly 12 years ago.

The first thing I thought when I saw that was: how on earth is it possible that in an economy that’s supposedly been growing 6%+ for a decade, stocks have gone nowhere at all? And obviously the role of the Shanghai index is different from that of the S&P, the DAX or the FTSE, but at the alleged Chinese growth rate, the economy would have almost doubled in size in 10 years. And none of that is reflected in stocks?

And if you think Shenzhen is a better barometer of ‘real’ China, Tyler Durden had this graph yesterday. Not the same as Shanghai, but similar for sure.

…click on the above link to read the rest of the article…

Rising Interest Rates Start Popping Bubbles — The End Of This Expansion Is Now In Sight

October 10, 2018

Rising Interest Rates Start Popping Bubbles — The End Of This Expansion Is Now In Sight

Towards the end of economic expansions, interest rates usually start to rise as strong loan demand bumps up against central bank tightening.

At first the effect on the broader economy is minimal, so consumers, companies and governments don’t let a slight uptick in financing costs interfere with their borrowing and spending. But eventually rising rates begin to bite and borrowers get skittish, throwing the leverage machine into reverse and producing an equities bear market and Main Street recession.

We are there. After a year of gradual increases, interest rates are finally high enough to start popping bubbles. Consider housing and autos:

Mortgage Rates Up, Affordability Down, Housing Party Over

The past few years’ housing boom has been relatively quiet, but a boom nonetheless. Mortgage rates in the 3% – 4% range made houses widely affordable, so demand exceeded supply and prices rose, eventually surpassing 2006 bubble levels in hot markets like Denver and Seattle.

But this week mortgages hit 5% …

… and people have begun to notice. Here’s an example of the resulting media coverage:

Mortgage rates top 5 percent, signaling more home price cuts

Some of us out there still remember when the average rate on the 30-year fixed mortgage hit 9 percent, but we are not the bulk of today’s buyers. Millennials, now in their prime homebuying years, may be in for the rude awakening that credit isn’t always cheap.

The average rate on the 30-year fixed loan sat just below 4 percent a year ago, after dropping below 3.5 percent in 2016. It just crossed the 5 percent mark, according to Mortgage News Daily. That is the first time in 8 years, and it is poised to move higher. Five percent may still be historically cheap, but higher rates, combined with other challenges facing today’s housing market could cause potential buyers to pull back.

…click on the above link to read the rest of the article…

Pensions Now Depend on Bubbles Never Popping (But All Bubbles Pop)

October 3, 2018

Pensions Now Depend on Bubbles Never Popping (But All Bubbles Pop)

We’re living in a fantasy, folks. Bubbles pop, period.

The nice thing about the “wealth” generated by bubbles is it’s so easy: no need to earn wealth the hard way, by scrimping and saving capital and investing it wisely. Just sit back and let central bank stimulus push assets higher.

The problem with bubble “wealth” is it’s like an addictive narcotic: now our entire pension system, public and private, is dependent on the current bubbles in stocks, real estate, junk bonds and other risk assets never popping.

But a funny thing eventually happens to financial bubbles: they all pop. And when the current bubbles pop, they will gut pension reserves, projections and promises.

Take a look at the chart below of taxpayer contributions to Calpers, the California public pension fund. Note that in the heady days of Bubble #1, the dot-com era, enormous gains in Calpers’ stock holdings meant taxpayers’ contributions were a modest $159 million annually.

Based on bubbles never popping and monumental annual gains continuing forever, Calpers projected taxpayer contributions in 2010 of $6.6 billion. But since Bubble #2 had popped in 2008-09, stock market gains had cratered and as a consequence taxpayers had to pay almost four times the Calpers projection: $24.6 billion.

In a few short years, taxpayer contributions have nearly doubled, despite the outsized returns generated by Bubble #3, the largest of them all. By 2015, taxpayer contributions to Calpers totaled $45 billion, even as Calpers reaped huge gains in its stock portfolio.

So what happens to taxpayer contributions when all the asset bubbles pop?They go through the roof right when taxpayers are themselves facing staggering declines in their own personal wealth and the inevitable declines in income that accompany recessions. (What’s a recession? I thought the Fed banned those.)

…click on the above link to read the rest of the article…

UN Report Cites Central Bank Liquidity Bubbles, Loose Money, Debt Expansion

October 3, 2018

UN Report Cites Central Bank Liquidity Bubbles, Loose Money, Debt Expansion

A UN report has everything wrong as to the cause of current problems. Yet, the report mentions central bank liquidity.

Seldom does one see a report that “debt is the problem” while being 180 degrees wrong as to the cause of the buildup in debt.

The United Nations’ Trade and Development Report for 2018 blames the “Free Trade Delusion” for what ails the word.

International trade in the late nineteenth century was managed through an unholy mixture of colonial controls in the periphery and rising tariffs in the emerging core, often, as in the case of the United States, pushed to very high levels. But like today, talk of free trade provided a useful cover for the unhindered movement of capital and an accompanying set of rules – the gold standard, repressive labour laws, balanced budgets – that disciplined government spending and kept the costs of doing business in check.

Wow. There’s more:

But if there is one lesson to take from the interwar years, it is that talking up free trade against a backdrop of austerity and widespread political mistrust will not hold the centre as things fall apart. And simply pledging to leave no one behind while appealing to the goodwill of corporations or the better angels of the super-rich are, at best, hopeful pleas for a more civic world and, at worst, willful attempts to deflect from serious discussion of the real factors driving growing inequality, indebtedness and insecurity.

With such an ass-backward premise, one might expect the entire report to be wrong. Far from it.

Liquidity Driven Bubbles

Unlike their progressive MMT brethren, the authors understand some things:

There’s an unsustainable buildup of debt
There are huge asset bubbles
Cheap liquidity stretched valuations to extreme levels

…click on the above link to read the rest of the article…

Bubbles and Zombies

October 2, 2018

Bubbles and Zombies

They say nobody rings a bell at the top of the market. But whether this is the top or not, two prominent market observers and historians, Robert Shiller and Edward Chancellor, are expressing concern.

First, Shiller warns readers not to take big increases in earnings too seriously because earnings are volatile.

Everyone knows that stock prices have risen dramatically since 2009. A $100 investment in the S&P 500 in 2009 has grown to nearly $400 at the end of August 2018. But Shiller reminds us that earnings have grown dramatically too. In fact, “real quarterly S&P 500 reported earnings per share rose 3.8-fold over essentially the same period, from the first quarter of 2009 to the second quarter of 2018,” according to Shiller. Prices, in fact grew a bit more slowly than earnings since the end of the crisis.

So should we think stocks are reasonably priced since earnings have grown at the same pace as prices? Not so fast, Shiller says. Earnings, the difference between two other data sets — revenues and expenses, are volatile, and cyclical. Rapid rises in earning are often followed by a return to long term trends or subpar levels. Such episodes have occurred more than a dozen times in U.S. stock market history.

Earnings can grow dramatically from things like “panicky demand” for U.S. goods from Europeans at the beginning of World War I. This led to political calls for “wealth conscription” or a heavy taxation on war-related profits. At that time stock prices didn’t follow profit advances as investors seemed to realize those gains would be short-lived.

In the “Roaring ‘20s,” however, emergence from a “war to end all wars” and a spirit of freedom and individual fulfillment spurred stock prices by Shiller’s lights. And this, of course, led to a crash at the end of the decade.

…click on the above link to read the rest of the article…

Mike Pento Warns Global Central Banks Are Entering The Danger Zone

October 1, 2018

Mike Pento Warns Global Central Banks Are Entering The Danger Zone

Authored by Michael Pento via PentoPort.com,

Investors are experiencing huge moves in commodities, currencies, equities and in sovereign debt across the globe. And now the fall has arrived. Expect the volatility currently witnessed in markets to only surge.

This is because global central banks have overwhelmingly turned hawkish in a vain attempt to gradually let the air out of the massive bubbles they have spent the last decade recreating. Unfortunately, that is not the nature of asset bubbles—they don’t end with a whimper–and they are about to burst in violent fashion.

First off, our central bank hiked rates for the 8th time since December 2015 at the September FOMC meeting. While the Fed did remove the word accommodative from its policy statement, it also raised the neutral rate to 3%, from 2.9% on the Fed Funds Rate. And, most importantly, predicted it would stay above that neutral rate for two years—keeping it at the 3.4% level. It also indicated that December would be the next rate hike and that three more hikes are on the agenda for 2019.

Nevertheless, the Fed is now caught in a hydraulic press of its own making; and is completely unaware of the predicament it is in. An inflation rate of 2% has been its goal for the past decade. And now inflation, when measured by core CPI, is up 2.2% y/y and is up 2.7% y/y on the headline rate. Even though the Fed emphasizes the Personal Consumption Expenditure inflation rate rather than Consumer Price Inflation, it is still aware that inflation is rising above its target.

…click on the above link to read the rest of the article…

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