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Central Bankers Panic Over Exuberant Financial Market “Fragility”, Warn Risks Are “Underestimated”

Central Bankers Panic Over Exuberant Financial Market “Fragility”, Warn Risks Are “Underestimated”

You know it’s bad when… even the central bankers are warning that the monster they’ve created is out of control.

As stocks have exploded higher in the face of declining earnings…

Source: Bloomberg

And collapsing macro-economic data…

Source: Bloomberg

Policy makers from the world’s central banks are suddenly raising cautionary flags at the potentially unsafe investing environment stoked by their efforts to flood economies with ultra-cheap money.

  • “While vulnerabilities related to low interest rates have the potential to grow, thus calling for caution and continued monitoring, so far, the financial system appears resilient” — Federal Reserve, Nov. 15.
  • “Very low interest rates, coupled with the large number of investors which have gradually increased the duration of their fixed income portfolios, could exacerbate potential losses if an abrupt repricing were to materialize” — ECB, Nov. 20.
  • “This type of environment can lead to an increase in risk‐taking, to assets being overvalued and to indebtedness increasing in an unsustainable manner” — Riksbank, Nov. 20.
  • “Many investors are focused on the search for yield and could be tempted to take on greater risk” — Bundesbank, Nov. 21.

Most notably, Bloomberg reports that the spate of recent financial stability assessments began Nov. 15 with the Fed, which warned that low rates could encourage riskier behavior such as eroding lending standards.

A prolonged period of low rates could also “spur reach-for-yield behavior, thereby increasing the vulnerability of the financial sector to subsequent shocks,” it said.

However, as Bloomberg notes, despite central banks’ qualms about side effects, there’s little sign that they’ll do any more than issue warnings. 

“The Fed since September, the ECB as well, the BOJ, even the central bank of China is starting to provide some more easing,” Kevin Thozet, an investment strategist at Carmignac Gestion, told Bloomberg TV on Wednesday.

That’s contributed to “a bull market of everything in 2019.”

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

5 More Signs That The Global Economy Is Careening Toward A Recession

5 More Signs That The Global Economy Is Careening Toward A Recession

The global economy is already in the worst distress that we have seen since 2008, and it appears that the global slowdown is actually picking up pace as we head into 2020. And this is happening even though central banks around the world have been cutting interest rates and pumping massive amounts of money into their respective financial systems. The central bankers appear to be losing control, and it certainly wouldn’t take much of a push for this new crisis to evolve into a complete and utter nightmare. The U.S. economy hasn’t been hit quite as hard as economies in Asia and Europe have been, but without a doubt things are slowing down here too. Corporate earnings have been falling quarter after quarter, auto loan delinquencies just hit a record high, the Cass Freight Index has declined for 11 consecutive months, and we just witnessed the largest drop for U.S. industrial production since 2009. Everywhere around us there is bad economic news, but most Americans are still completely oblivious to what is happening.

In this article, I am going to share even more evidence that a global economic slowdown has already begun. When you add these numbers to all of the other numbers that I have been sharing in recent weeks, it becomes impossible to deny that something major is taking place.

The following are 5 more signs that the global economy is careening toward a recession…

#1 It is being projected that global auto sales will be down approximately 4 percent this year. According to CNN, this will be the second consecutive year that global auto sales have fallen…

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

Technically Speaking: This Is Nuts

Technically Speaking: This Is Nuts

Since the election, markets have accelerated the pace of the advance as shown in the chart below.

The advance has had two main story lines to support the bullish narrative.

  • It’s an earnings recovery story, and;
  • It’s all about tax cuts.

There is much to debate about the earnings recovery story but as I showed previously, and to steal a line from my friend Doug Kass, this “new meme increasingly resembles ‘Group Stink.’” To wit:

“Despite many who are suggesting this has been a ‘rational rise’ due to strong earnings growth, that is simply not the case as shown below. (I only use ‘reported earnings’ which includes all the ‘bad stuff.’ Any analysis using “operating earnings” is misleading.)”

“Since 2014, the stock market has risen (capital appreciation only) by 35% while reported earnings growth has risen by a whopping 2%. A 2% growth in earnings over the last 3-years hardly justifies a 33% premium over earnings. 

Of course, even reported earnings is somewhat misleading due to the heavy use of share repurchases to artificially inflate reported earnings on a per share basis. However, corporate profits after tax give us a better idea of what profits actually were since that is the amount left over after those taxes were paid.”

“Again we see the same picture of a 32% premium over a 3% cumulative growth in corporate profits after tax. There is little justification to be found to support the idea that earnings growth is the main driver behind asset prices currently.

We can also use the data above to construct a valuation measure of price divided by corporate profits after tax. As with all valuation measures we have discussed as of late, and forward return expectations from such levels, the P/CPATAX ratio just hit the second highest level in history.”

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

Global Financial Markets Go Nuts

Global Financial Markets Go Nuts

The global economy has, let’s say, some issues, including a slight demand problem. Growth has shifted into low gear in China and has stumbled in the US so far this year, while Europe has trouble wading out of the mire. But stock markets jubilated last week:

Hong Kong’s Hang Seng soared a stunning 7.9% followed by the Shanghai Composite’s jump of 4.4%. Chinese stocks are beautifully spiking as everyone in China is now once again gambling on them as a way to get rich quick. It worked out last time too. In Europe, the German DAX rose 3.4%, The British FTSE 4%, and the French CAC 40 3.5%. Stocks have been booming in Europe all year, with for example the DAX up 26% year-to-date! Japan’s Nikkei and India’s SENSEX rose about 2% for the week. The S&P 500 “edged up,” given  how this week has been,  by only 1.7%. It was a phenomenal week for global stocks.

So corporate earnings look terrible for the first quarter. In the US, quarterly earnings estimates have been slashed by the largest amount since 2009, and are now expected to decline. It’s not just energy. Some of this is merely an effort to lower the bar so far that even companies with crummy earnings can still clear it, and that by “beating” the estimates – no matter how terrible earnings are – shares can still march higher. Either way, it doesn’t look good.

It’s just one more phenomenon in a long list of phenomena so far this year in the global financial markets. As Michael Hartnett, Chief Investment Strategist at BofA Merrill Lynch, put it so succinctly:

 

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

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