Category Archives: Financial markets

Should Trump “Unleash” Wall Street? by Bill Bonner

Wall Street is a perfect case study in how an industry deteriorates in a mixed economy. From Bill Bonner at bonnerandpartners.com:
LOVINGSTON, VIRGINIA – Stocks show little movement. Investors are waiting for something to happen.

And wondering…

Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014.

Unleashing Wall Street

Why should stocks be so expensive?

Oh, yes… because the Trump Team is going to light a fire under Wall Street.

But they must be wondering about that, too.

Raising up stock prices – as we’ve seen over the last eight years – is not the same as restoring economic growth and family incomes.

And as each day passes, the list of odds against either seems to be getting longer and longer. As the petty fights, silly squabbles, and tweet storms increase, the less ammunition the administration has available to fight a real battle with Congress or the Deep State.

Still…

“Goldman Stock Hits Record on Bets Trump Will Unleash Wall Street,” reads a Bloomberg headline.

Goldman Sachs is a pillar of the Establishment, with its man, Steve Mnuchin, heading the Department of the Treasury. So a win for Goldman is not necessarily a win for us.

“Unleashing” suggests a win-win deal, as in allowing the financial industry to get on with its business. But there are different kinds of “unleashings.”

Some things – like Dobermans – are kept on a leash for a good reason. Unleashing the mob… or a war… might not be a good idea, either.

Untying Wall Street from bureaucratic rules is at least heading in the right direction. But it will only benefit the Main Street economy if Wall Street is doing business honestly, facilitating win-win deals by matching real capital up with worthy projects.

Deep State Industry

That, of course, is what it is NOT doing. It is a Deep State industry aided and abetted by the Fed’s fake money.

To continue reading: Should Trump “Unleash” Wall Street?

 

Advertisements

S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since, by Wolf Richter

If anyone doubted the assertion in SLL’s review of Robert Prechter’s book that earnings have no consistent relationship to stock prices, here’s further proof. From Wolf Richter at wolfstreet.com:

Grounded in some sort of new reality? LOL

The S&P 500 stock index edged up to an all-time high of 2,351 on Friday. Total market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies! At the end of 2011, the S&P 500 index was at 1,257. Over the five-plus years since then, it has ballooned by 87%!

These are superlative numbers, and you’d expect superlative earnings performance from these companies. Turns out, reality is not that cooperative. Instead, net income of the S&P 500 companies is now back where it first had been at the end of 2011.

Hype, financial engineering, and central banks hell-bent on inflating asset prices make a powerful fuel for stock prices.

And there has been plenty of all of it, including financial engineering. Share buybacks, often funded with borrowed money, have soared in recent years. But even that is now on the decline.

Share buybacks by the S&P 500 companies plunged 28% year-over-year to $115.6 billion in the three-month period from August through October, according to the Buyback Quarterly that FactSet just released. It was the second three-month period in a row of sharp year-over-year declines. And it was the smallest buyback total since Q1 2013.

Apple with $7.2 billion in buybacks in the quarter, GE with $4.3 billion, and Microsoft with $3.6 billion topped the list again. Still, despite the plunge in buybacks, 119 companies spent more on buybacks than they’d earned in the quarter. On a trailing 12-month basis, 66% of net income was blown on buybacks.

To continue reading: S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since

 

Buy High and Sell Low? by Robert Gore

Review of The Socionomic Theory of Finance, by Robert R. Prechter

Socionomic theory predicts it will be at its least popular when it’s most useful, implying that right now, few will read The Socionomic Theory of Finance (STF) or this review, although it’s an important book and most financial market participants would benefit immensely from learning why they consistently lose money.

The prevalence of herding throughout the animal kingdom suggests its evolutionary benefits. A gnu in a herd sees a stalking lion and before you know it, they’re all fleeing because they’re all fleeing. One may end up gnu tartare, but the rest are safe, and evolution cares about species, not individuals. On a less bloodthirsty note, when a gnu finds a spring in a parched savannah, before you know it, the herd has bellied up to the bar. In an uncertain world, herding allows for virtually instantaneous dispersal of knowledge and evolutionarily effective responses.

Socionomics (so-shee-o-nom’-ics or so-see-o-nom’-ics) is the study of social mood and its influence over social attitudes and actions. It provides a basis for explaining the genesis of past social events and for anticipating future ones, thereby offering a new science of history and social prediction.

STF, pg. 113

That humans, in contexts of uncertainly, herd, is the least controversial socionomic assertion. It’s all downhill from there, in terms of a first-blush reader’s willingness to accept further assertions. However, Robert Prechter, claiming that socionomics is a science, does what scientists do: views suppositions as hypotheses that must be tested, and if necessary, revised or discarded. So don’t quit reading after the next few paragraphs, even though it may seem, on first blush, absurd. Press on, reminding yourself that socionomics holds itself to scientifically rigorous standards.

In contexts of uncertainty, herding is what Prechter terms “pre-rational.” It is not governed by the same part of the brain and the same mental processes as solving a math problem or rational herding in contexts of certainty—queuing up early with your friends for what you all know will be a sold out concert. Pre-rational herding impulses take precedence over rational reflexion and are the fundamental psychological driver of inherently uncertain financial markets. So-called rational reflexion comes into play after the impulsive imperative, and is nothing more than rationalization for impulsive action or inaction performed either before or after the rationalization. Following the herd in financial markets brings participants to grief, because the herd always has and always will buy high and sell low.

Socionomic theory breaks revolutionary and controversial ground.

The main theoretical principles are that in human, complex systems:

• Shared unconscious impulses to herd in contexts of uncertainty lead to mass psychological dynamics manifested as social mood trends.

• These social mood trends conform to a hierarchal fractal called the Wave Principle (WP) and therefore are probabilistically predictable.

• These patterns of human aggregate behavior are form-determined due to endogenous processes, rather than mechanistically determined by exogenous causes.

•Social mood trends determine the character of social actions and are their underlying cause.

STF, pg. 313

The concept of individual free will is not negated, but social mood impels social action. The last bullet point often proves the bridge too far, and not just for those seeing it for the first time. Everybody “knows” that events are behind social mood and its swings. Rising stock markets and expanding economies make people optimistic and happy. Depressions and wars make people depressed, pessimistic, fearful, and belligerent. It’s the job of social scientists to figure out how to promote prosperity and rising markets and prevent depressions and wars.

If Prechter’s right, the social scientists are wasting their time. The socionomic theory requires a 180 degree reversal in most people’s thinking. Social mood trends, regulated by their own internal, or endogenous, dynamics and impervious to external influences, motivate social actions. Social mood is the cause; social actions are the effects. Stock markets rise and economies expand because of rising social mood. Depressions and wars are results of falling social mood.

Social mood itself is intangible, although its effects are not, but we have indicators of social mood, called sociometers, from fields of human endeavor that are collective exercises in contexts of uncertainty. The best sociometers are equity markets, which second by second register changes in the speculative herd’s mood. Studying stock market charts in the 1930s and 1940s, Ralph Nelson Elliott discerned the wave patterns that became the basis for the Elliott Wave Theory (EWT).

As established by R.N. Elliott empirically and Benoit Mandelbrot mathematically, financial prices fluctuate as a fractal, with a comparable style of movement on all time scales, from seconds to centuries.

STF, pg. 232

A fractal, according to the Merriam-Webster online dictionary, is: “[A]ny of various extremely irregular curves or shapes for which any suitably chosen part is similar in shape to a given larger or smaller part when magnified or reduced to the same size.”

While Elliott waves are irregular, they take shape according to certain guidelines and mathematical relationships, many incorporating the Fibonacci sequence (0,1,1,2,3,5,8,13,21….). For any given time period a stock market can go up or down, but the EWT yields probabilistic predictions about its likely direction and pattern, which means it can be empirically tested. Much of STF is devoted to demonstrating the EWT’s predictive efficacy in both an absolute sense and relative to other economic and financial theories.

In Part I, Prechter demolishes a slew of external, or exogenous, cause theories purporting to explain financial markets. Think interest rates, earnings, oil prices, trade deficits (or surpluses), the unemployment rate, GDP, war, peace, central bank policy, news shocks, or any other exogenous factor has a consistent relationship to stock averages? They don’t, and Prechter has the charts to prove it. Think the prices of precious metals reliably rise with inflation? More charts, and again, there’s no consistent relationship. Spicing up Part 1 are quotes confidently asserting various consistent relationships. The absolute certainty expressed, in light of subsequent events, makes some of them unintentionally hilarious.

Surely central bank control of short term interest rates is an exogenous factor affecting at least the bond market? Prechter at one point thought so, but had an epiphany, an insight that remains controversial to this day: central bankers are human. As such, they ride the same social mood waves as everyone else, but because they’re basically part of the government and governments are always the last to get the joke, they act with a lag. Turns out—and Prechter’s got the charts here, too—the Fed’s interest rate moves follow rather than lead short-term interest rate markets. If you want to know the Fed’s next move, watch short-term interest rates, which is how the analysts at Elliott Wave International (EWI), Prechter’s company, have accurately predicted such moves, including last December’s increase.

To win acceptance, a theory must be empirically testable and yield accurate predictions if specified test conditions are met. Prechter presents solid evidence that the socionomic theory yields testable predictions that flow logically from its postulates and are far more accurate than random guesses.

Socionomics deals with herding behavior in contexts of uncertainty, so its predictions are not confined to finance. Take the famous hemline indicator, the correlation between hemlines and the trend in the stock market. Fashion is herding: what’s everybody else wearing? Hemlines, socionomics posits, are driven by the same social mood as the stock market. Women get optimistic, frisky, and daring during periods of rising social mood and wear miniskirts; they wear more somber clothes with lower hemlines during periods of falling social mood. The socionomic theory throws off all sorts of these non-finance hypotheses, which the STF explores in detail.

Prechter’s bread and butter is finance. He’s had his whiffs—predictions can only be probabilistic, not certainties. However, he and EWI’s numerous home runs, including the last stock market crash and the subsequent rally, put them in the prognosticators’ hall of fame. Like most of their big calls, those two evoked widespread derision until they were borne out. Chapter 22, “Elliott Waves vs. Supply and Demand: The Oil Market,” makes a compelling contrary case to whatever everyone “knows”—that the price of oil is governed by supply and demand. EWI has an astounding track record in that market, compiled over a 22-year span by five different analysts.

Prechter does an outstanding job of making his theory accessible. He is a fine writer with a straightforward style, which makes most of the book an easy read. The numerous charts are well labeled and explained.

There are a couple of quibbles. Prechter differentiation of the socionomic theory from other economic and financial theories is at times repetitive and tedious. He makes compelling arguments that socionomics upends much of the conventional social sciences, and that socionomics deserves acceptance as a new social science. It’s not an overstatement to say he’s put the science in social science. However, Part VII consists of articles written by other writers that seem aimed towards establishing socionomics’ credentials among academics. The points established are important, but are mostly refinements and subsidiary to the basic theory, and the writing, unfortunately, is too often in dense academic prose. This section can and probably will be skipped by most general readers, and they won’t have missed the thrust of the book.

Socionomics predicts its own popularity. In periods of rising social mood, the herd listens to the chorus of exogenous cause rationalizations for rising markets and economic vigor, and believes straight-line projections of more of the same. It ignores endogenous mood waves and chart analysis—the heart of the socionomic theory of finance—and predictions the market will reverse course. So the STF’s publication at a time when stock market averages are making new highs almost daily may be an instance of poor timing.

Or perhaps not. Prechter’s prediction for equity markets and the economy is that we are within months of the end of a fractal series of rising mood trends that will mark the top not just of the bull market wave that began in 2009, but a larger wave that began in 1974, a still larger wave that began in 1932, and a still larger wave that began in the 1780s. After these up waves comes a series of huge down waves, a devastating financial crash, and a depression greater than the Great Depression. Then, presumably, Prechter will be more widely read.

The Socionomic Theory of Finance represents a seismic shift in social science, a breathtaking, monumental intellectual accomplishment. Prechter has exposed exogenous cause “theories” as nothing more than post hoc rationalizations with the predictive power of coin flips. It may take a century or two for socionomics to win general acceptance (anyone who understands the theory will understand why), and per its own analysis its popularity will rise and fall inversely with social mood. To his credit as a scientist, Prechter invites further study, refinements, and modifications. However, those who directly challenge socionomics cannot fall back on the comfortable and widely accepted formulations he’s discredited. They must propose a theory that yields testable hypotheses and has more predictive power. That’s how real science works. Until someone builds that better theoretical mousetrap, socionomics will reign intellectually supreme. Let’s leave Prechter with the last word.

To an uninitiated person, conventional economic thinking feels right even though it’s wrong, and socionomic causality feels wrong even though it’s right. To begin your journey out of that mindset, you must learn to accept and then embrace irony and paradox, at least as humans are unconsciously wired to interpret things. Once you recognize that social mood and patterned herding are independent, primary causes that have consequences in social action, once you get used to the world of socionomic causality, the irony and paradox will melt away, and everything the markets do will make sense. Rather than appearing unfathomable, market action will become completely normal, somewhat predictable and wonderfully entertaining.

STF, pg. 373

A BULL MARKET IN GREAT WRITING

cropped-prime-deceit-final-cover.jpg

AMAZON

KINDLE

TGP_photo 2 FB

AMAZON

KINDLE

NOOK

Biggest EU Banks Embark on the Mother of All Debt Binges, by Don Quijones

European banks need to raise capital, so they are issuing a brand new type of debt: senior non-preferred bonds. They are considered capital, have “senior” in the name so they pay a lower interest, but can be “bailed in.” In other words, if the bank runs into trouble, this class of creditors will have made an involuntary and probably unrecoverable contribution to the bank. This will not end well. From Don Quijones at wolfstreet.com:

Spain’s three biggest banks, Banco Santander, BBVA and Caixa Bank, have got off to a flying start this year having issued €8.6 billion in new debt, seven times the amount they sold during the same period of last year. The last time they rolled out so much debt so quickly was in 2007, the year that Spain’s spectacular real estate bubble reached its climactic peak.

Santander accounts for well over half of the new debt issued, with €5.12 billion of senior bonds, subordinate bonds, and a newfangled class of bail-in-able debt with the name of “senior non-preferred bonds” (A.K.A. senior junior, senior subordinated or Tier 3) that we covered in some detail just before Christmas.

Investors beware…

This newfangled class of bail-in-able debt was cooked up last year by French-based financial engineers in order to help France’s four global systemically important banks (BNP Paribas, Crédit Agricole, Groupe BPCE and Société Générale) out of a serious quandary: how to satisfy pending European and global regulations demanding much larger capital and debt buffers without having to pay investors costly returns on the billions of euros of funds they lend them to do so.

That’s what makes senior non-preferred debt so ingenious: it pretends to be simultaneously one thing (senior), in order to keep the yield (and the cost for the bank) down, and another (junior) in order to qualify as bail-in-able. What it amounts to is a perfect scam for big banks to bamboozle bondholders – usually institutional investors like our beaten-down pension funds – into buying something with other people’s money that doesn’t yield nearly enough to compensate them for the risks they’re taking.

To continue reading: Biggest EU Banks Embark on the Mother of All Debt Binges

 

Recession 2017? Things Are Happening That Usually Never Happen Unless A New Recession Is Beginning, by Michael Snyder

Real GDP increased an estimated 1.6 percent in 2016, and for each $1 increase in growth, debt increased $5.70. If you have to borrow $5.70 to generate a buck’s worth of growth, are you even growing? Notwithstanding growth bought with debt and the official statistics, SLL argues that the economy has been in a recession, headed for depression, for several years (see Debtonomics Archive). More support from Michael Snyder at theeconomiccollapseblog.com:

Is the U.S. economy about to get slammed by a major recession? According to Gallup, U.S. economic confidence has soared to the highest level ever recorded, but meanwhile a whole host of key economic indicators are absolutely screaming that a new recession is beginning. And if the U.S. economy does officially enter recession territory in 2017, it certainly won’t be a shock, because the truth is that we are well overdue for one. Donald Trump has inherited quite an economic mess from Barack Obama, and it was probably inevitable that we were headed for a significant economic downturn no matter who won the election.

One of the key indicators to watch is average weekly hours. When the economy shifts into recession mode, employers tend to start cutting back hours, and that is happening right now. In fact, as Graham Summers has pointed out, we just witnessed the largest percentage decline in average weekly hours since the recession of 2008…

In addition to the decline in hours, Summers has suggested that there are a number of other reasons to believe that a new recession is here…

The fact is that the GDP growth of 4%-5% is not just around the corner. The US most likely slid into recession in the last three months. GDP growth collapsed in 4Q16, with a large portion of the “growth” coming from accounting gimmicks.

Consider the following:

• Tax receipts indicate the US is in recession.
• Gross private domestic investment indicates were are in a recession.
• Retailers are showing that the US consumer is tapped out (see AMZN’s recent miss).
• UPS, another economic bellweather, dramatically lowered 2017 forecasts.

To me, even more alarming is the tightening of lending standards. In our debt-based economy, the flow of credit is absolutely critical to economic growth, and when credit starts to get tight that almost always leads to a recession.

To continue reading: Recession 2017? Things Are Happening That Usually Never Happen Unless A New Recession Is Beginning

Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”? by Charles Hugh Smith

This article offers food for thought about which assets will be worth holding on to when governments start going bankrupt. From Charles Hugh Smith at oftwominds.com:

Your skills, knowledge and social capital will emerge unscathed on the other side of the re-set wormhole. Your financial assets held in centrally controlled institutions will not.

Longtime correspondent C.A. recently asked a question every American household should be asking: which assets are most likely to survive the “system re-set” that is now inevitable? It’s a question of great import because not all assets are equal in terms of survivability in crisis, when the rules change without advance notice.

If you doubt the inevitability of a system implosion/re-set, please read Is America In A Bubble (And Can It Ever Return To “Normal“)? This brief essay presents charts that reveal a sobering economic reality: America is now dependent on multiple asset bubbles never popping–something history suggests is not possible.

It isn’t just a financial re-set that’s inevitable–it’s a political and social re-set as well. For more on why this is so, please consult my short book Why Our Status Quo Failed and Is Beyond Reform.

The charts below describe the key dynamics driving a system re-set. Earned income (wages) as a share of GDP has been falling for decades: this means labor is receiving a diminishing share of economic growth. Since costs and debt continue rising while incomes are declining or stagnating, this asymmetry eventually leads to insolvency.

The “fix” for insolvency has been higher debt and debt-based spending–in essence, borrowing from future income to fund more consumption today. But each unit of new debt is generating less economic activity/growth. This is called diminishing returns: eventually the costs of servicing the additional debt exceed the increasingly trivial gains.

To continue reading: Which Assets Are Most Likely to Survive the Inevitable “System Re-Set”