Category Archives: Financial markets

US Asset Bubbles Crack as Frantic China “Restricts” Outbound Investments, by Wolf Richter

Chinese investors, and the Chinese government, have realized they don’t want to be the greatest of the greater fools. From Wolf Richter at wolfstreet.com:

What happens to prices when the biggest, reckless buyer walks away?

China’s State Council has issued guidelines on what Chinese companies can and cannot acquire overseas. The purpose is to “promote healthy growth of overseas investment and prevent risks.” These risks would be that the $18 trillion of Chinese corporate debt will balloon further, though much of this debt is already going bad, and that it will blow up, triggering a spectacular financial crisis. This is to be avoided.

So Chinese companies have been given priorities, and their efforts to invest in overseas commercial real estate – such as office towers and apartment buildings – in hotels, and in Hollywood will be axed.

What’s on:

The guideline intends to drive the output of China’s products, technology and services, and deepen cooperation with countries involved in the Belt and Road Initiative.

The government will support “eligible” Chinese companies “to make overseas investment and join in the construction of projects in the Belt and Road Initiative.”

These enterprises should take the lead to export China’s superior technology and equipment, upgrade the nation’s research and manufacturing ability, and make up the shortage of energy and resources through prudent cooperation in oil, gas and other resources.

What’s off:

Other investments will be “restricted,” particularly those “against the peaceful development, win-win cooperation, and China’s macro control policies.” These policies are now being implemented to dodge this spectacular financial crisis.

Among those outbound investments and acquisitions that will be “restricted” and that directly impact US markets and valuations are:

  • “Real estate”
  • “Hotels”
  • “Entertainment”

To continue reading: US Asset Bubbles Crack as Frantic China “Restricts” Outbound Investments

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Rogoff, Orwell and Kafka, by Raúl Ilargi Meijer

Raúl Ilargi Meijer cuts to the immoral insanity of central banking. From Meijer at theautomaticearth.com:

Harvard professor and chess grandmaster Kenneth Rogoff has said some pretty out there stuff before, in his role as self-appointed crusader against cash, but apparently he’s not done yet. In fact, he might just be getting started. This time around he sounds like a crossover between George Orwell and Franz Kafka, with a serving of ‘theater of the absurd’ on top. Rogoff wants to give central banks total control over your lives. They must decide what you do with your money. First and foremost, they must make it impossible for you to save your money from their disastrous policies, so they are free to create more mayhem.

Prepare For Negative Interest Rates In The Next Recession Says Top Economist

Negative interest rates will be needed in the next major recession or financial crisis, and central banks should do more to prepare the ground for such policies, according to leading economist Kenneth Rogoff. Quantitative easing is not as effective a tonic as cutting rates to below zero, he believes. Central banks around the world turned to money creation in the credit crunch to stimulate the economy when interest rates were already at rock bottom.

Central banks create recessions and crises. Not people, and not economies. Central banks. The next recession, which is inevitable, that’s the one thing Rogoff has right, will come when the bubbles in housing, stocks, bonds, etc., created by central banks’ QE, ZIRP, NIRP, start to pop. And there’s nothing worse than giving central banks even more tools for creating crises. We should take away the tools they have now, not hand them more sledgehammers.

In a new paper published in the Journal of Economic Perspectives the professor of economics at Harvard University argues that central banks should start preparing now to find ways to cut rates to below zero so they are not caught out when the next recession strikes. Traditionally economists have assumed that cutting rates into negative territory would risk pushing savers to take their money out of banks and stuff the cash – metaphorically or possibly literally – under their mattress. As electronic transfers become the standard way of paying for purchases, Mr Rogoff believes this is a diminishing risk.

To continue reading: Rogoff, Orwell and Kafka

Are We Already in Recession? by Charles Hugh Smith

Charles Hugh Smith argues the US economy is already in a recession. He’ll get no argument from SLL. From Smith at oftwominds.com:

If we stop counting zombies, we’re already in recession.
How shocked would you be if it was announced that the U.S. had just entered a recession, that is, a period in which gross domestic product (GDP) declines (when adjusted for inflation) for two or more quarters?
Would you really be surprised to discover that the eight-year long “recovery,” the weakest on record, had finally rolled over into recession?
Anyone with even a passing acquaintance with the statistical pulse of the real-world economy knows the numbers are softening.
— Auto/light truck sales: either down or off a cliff, depending on how much lipstick has been applied to the pig.
— Restaurant/dining sales: down.
— Tax receipts: down.
— Retail sales: flat, stagnant or down, depending on the sector and if the numbers have been adjusted for inflation/loss of purchasing power.
— Rents in high-rent regions: finally softening after years of relentless increases.
— Consumer debt: hitting new highs.
— Corporate profits: stripped of gimmickry, stagnant or down.
Those who study recessions know that employment often tops out just before the economy rolls over into recession. Strong employment is the last gasp of an expansionary phase.
There are several fundamental reasons why we might be in a recession that manages to avoid the official definition. The starting place is the artificial nature of the eight-year long “recovery” since 2009; in the view of many observers, the economy never really exited the 2008-09 recession.
Those in this camp look at fundamentals, not the stock market, which has been held up as a proxy for the real economy, when in fact it is only a proxy for financialization and official selection of the market as the (easily manipulated) signifier of economic vitality and prosperity.
To continue reading: Are We Already in Recession?

Stock Market Warning Siren is Blaring, by Wolf Richter

Stop us if you’ve heard this one: the stock market is massively overvalued. Well, it is overvalued, and Wolf Richter got the stats and charts to prove it. From Richter at wolfstreet.com:

Are we blinded yet by the brilliance of corporate earnings?

“Adjusted” earnings growth is 10.2% year-over-year in the second quarter, according to FactSet, based on the 91% of the companies in the S&P 500 that have reported results. The energy sector was a key driver, with 332% “adjusted” earnings growth from the oil-bust levels of a year ago.

The sectors with double-digit earnings growth: information technology (14.7%), utilities (10.8%), and financials (10.3%). The rest were single digit. Earnings in the consumer discretionary sector declined.

Revenues grew 5.1%, also led by the energy sector. At the beginning of Q2 last year, the WTI grade of crude oil traded at $35 a barrel. In Q2 this year, WTI ranged from $42 to $53 a barrel.

So the Wall-Street hype machine is cranking at maximum RPM to propagate the great news that earnings are soaring, and that this is the reason why stocks should also be soaring, and forget everything else. The hype machine carefully avoids showing the bigger picture which is dismal for earnings and ludicrous for stock valuations.

Aggregate earnings per share (EPS) for the S&P 500 companies on a trailing 12-months basis rose for the second quarter in a row. That’s the foundation of the Wall Street hype. But here’s the thing with these EPS: they’re now back where they had been in… May 2014.

Yep. More than three years of earnings stagnation. No growth whatsoever, even for “adjusted” earnings. In fact, on a trailing 12-month basis, aggregate EPS of the S&P 500 companies are down about 5% from their peak in Q4 2014. And yet, over the same three-plus years of total earnings stagnation, the S&P 500 index has soared 34%.

This chart shows those “adjusted” earnings per share for the S&P 500 companies (black line) and the S&P 500 index (blue line). Chart via FactSet (click to enlarge). I marked August 2012 as the point five years ago, and May 2014:

And these are not earnings under the Generally Accepted Accounting Principles (GAAP). FactSet uses “adjusted” earnings for its analyses. These are the earnings with the bad stuff “adjusted” out of them by management to manipulate earnings into the most favorable light. Not all companies report “adjusted” earnings. Some only report GAAP earnings and live with the consequences. But others put adjusted earnings into the foreground, and that’s what Wall Street dishes up.

To continue reading: Stock Market Warning Siren is Blaring

Social Security requires a bailout that’s 60x greater than the 2008 emergency bank bailout, by Simon Black

By official measures Social Security is going broke, and those measures incorporate overly optimistic assumptions. From Simon Black at sovereignman.com:

A few weeks ago the Board of Trustees of Social Security sent a formal letter to the United States Senate and House of Representatives to issue a dire warning: Social Security is running out of money.

Given that tens of millions of Americans depend on this public pension program as their sole source of retirement income, you’d think this would have been front page news…

… and that every newspaper in the country would have reprinted this ominous projection out of a basic journalistic duty to keep the public informed about an issue that will affect nearly everyone.

But that didn’t happen.

The story was hardly picked up.

It’s astonishing how little attention this issue receives considering it will end up being one of the biggest financial crises in US history.

That’s not hyperbole either– the numbers are very clear.

The US government itself calculates that the long-term Social Security shortfall exceeds $46 TRILLION.

In other words, in order to be able to pay the benefits they’ve promised, Social Security needs a $46 trillion bailout.

Fat chance.

That amount is over TWICE the national debt, and nearly THREE times the size of the entire US economy.

Moreover, it’s nearly SIXTY times the size of the bailout that the banking system received back in 2008.

So this is a pretty big deal.

More importantly, even though the Social Security Trustees acknowledge that the fund is running out of money, their projections are still wildly optimistic.

In order to build their long-term financial models, Social Security’s administrators have to make certain assumptions about the future.

What will interest rates be in the future?
What will the population growth rate be?
How high (or low) will inflation be?

These variables can dramatically impact the outcome for Social Security.

To continue reading: Social Security requires a bailout that’s 60x greater than the 2008 emergency bank bailout

 

If This is 1929… by Michael Batnick

The market is richly valued, only in 2000 and 1929 has it been more expensive, and we know how those years turned out. From Michael Batnick at theirrelevantinvestor.com:

Eight days before the market bottomed in July 1932, Ben Graham wrote an article in Forbes, Should Rich But Losing Corporations Be Liquidated? In it he wrote, “More than one industrial company in three selling for less than its net current assets, with a large number quoted at less than their unencumbered cash.” At a time when the CAPE ratio was just above 5, many businesses were worth more dead than alive.

In the ten-years leading up to the crash in 1929, the CAPE ratio went from a low of 5.02 up to 32.56. Today, it’s as close to the 1929 peak as it’s ever been, with the exception of the late 1990s. “The CAPE ratio in the United States has never gotten above 30 without a subsequent market crash” would be a true statement. Perhaps misleading, with a sample size of two, but true nonetheless. So is it possible that today is 1929 redux?

What would have to happen for companies to be selling for less than their net current assets? I don’t have the slightest idea. An asset bubble built on the back of artificially low rates seems like the obvious answer, so that can’t be right, but if it is, I warned ya. But honestly, for the market to fall 90%, I’m thinking aliens, an asteroid, or another world war seem the most likely culprits.

hoover-2

The aftermath of the depression was a gold mine for value investors. Well, really for any investors, but for those that measured intrinsic value, it was nearly impossible to miss. From The White Sharks of Wall Street:

Here was a company being offered for sale for less than the cash in its pocket! All a fellow had to do was borrow the purchase price, buy the company, and use the company’s own cash to pay off the loan- it was like getting the company for free. Why wasn’t everyone lining up to bid against him? The answer lies partly in the psychological baggage that American industry carried out of the Depression. Despite the almost unprecedented prosperity brought by government wartime contracts, many American business leaders believed that the nation would slide promptly back into a depression the moment the war was over. A gamble on the scale that Evans was prepared to take was simply unthinkable for most of them. The engine for the deal, after all, was debt. And going into debt to finance a speculative venture- well, wasn’t that what the 1920s had been about? And didn’t it end very badly?

To continue reading: If This is 1929…

This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time, by Wolf Richter

Are the Chinese withdrawing from the US commercial real estate market. If so, that’s not bullish for real estate prices. From Wolf Richter at wolfstreet.com:

The last big enthusiastic buyer, China, is leaving the party.

Commercial real estate, such as office and apartment towers, in trophy cities in the US and Europe has been among the favorite items on the long and eclectic shopping lists of Chinese companies. At the forefront are the vast, immensely indebted, opaquely structured conglomerates HNA, Dalian Wanda, Anbang Insurance, and Fosun International. In terms of commercial real estate, the party kicked off seriously in 2013. Over the two years in the US alone, according to Morgan Stanley, cited by Bloomberg, Chinese firms have acquired $17 billion worth of commercial properties.

In the second quarter in Manhattan, Chinese entities accounted for half of the commercial real estate purchases. This includes the $2.2 billion purchase in May of the 45-story office tower at 245 Park Avenue, the sixth largest transaction ever in Manhattan. At $1,282 per square foot, the price was also among the highest ever paid for this type of property.

Most of HNA’s funding for this deal — one of its 30 major acquisitions since the beginning of 2016 — was borrowed from China’s state-owned banks. But HNA also borrowed $508 million from JPMorgan Chase, Natixis, Deutsche Bank, Barclays, and Societe Generale. This has been the hallmark for all Chinese acquirers: a lot of borrowing from China and some funding from offshore sources.

Similarly, Chinese acquirers accounted for about one-quarter of commercial property transactions in central London in 2016, according to the Morgan Stanley report. In Australia, over the past few years, Chinese firms accounted for 12% to 25% of all office transactions by value.

But now these conglomerates and other Chinese firms engaging in outbound acquisitions have run into a veritable buzz saw of regulatory efforts by Chinese authorities designed to accomplish two things: slow down these capital outflows; and keep the Chinese banks from getting perforated by their exposure to the overleveraged conglomerates.

The authorities put the banks under intense pressure to deleverage. And the banks put the conglomerates under pressure to deleverage. A number of deals have already gotten scuttled.

To continue reading: This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time