Guest post by Peter Tchir of TF Market Advisors.
Don’t the Markets NEED QE?
No. While QE has helped support the market and was the main reason the S&P 500 managed to stay above 1,300 in spite of weak data, it isn’t necessary. Taking the most “disruptive” scenarios off the table in Europe is more important. If Europe can stabilize, then the markets could price in a better “multiple”. One thing holding down the PE multiple is the concern that Europe could become a complete disaster. As that get removed, there is the real possibility that investors will get more comfortable with risk and we can see a multiple expansion. If we see over time, some (and I hate the term) “green shoots” in Europe, then we could actually see some increased expectations of earnings. Europe has been a drag on earnings, and pessimism about Europe is keeping earnings forecasts down, but it wouldn’t take much of a turn in Europe to give earnings here a small boost.
So if (and it remains a big if) Europe takes tail risk off the table we could see an increased multiple, and if Europe actually manages to stop the slowdown, then we could see earnings expectations grow, so the market could do well as it shifts from QE to PE.
Good weekend reading on Veblen’s theories, via Michael Hudson.
Simon Patten recalled in 1912 that his generation of American economists – most of whom studied in Germany in the 1870s – were taught that John Stuart Mill’s 1848 Principles of Political Economy was the high-water mark of classical thought. However, Mill’s reformist philosophy turned out to be “not a goal but a half-way house” toward the Progressive Era’s reforms. Mill was “a thinker becoming a socialist without seeing what the change really meant,” Patten concluded. “The Nineteenth Century epoch ends not with the theories of Mill but with the more logical systems of Karl Marx and Henry George. But the classical approach to political economy continued to evolve, above all through Thorstein Veblen.
Like Marx and George, Veblen’s ideas threatened what he called the “vested interests.” What made his analysis so disturbing was what he retained from the past. Classical political economy had used the labor theory of value to isolate the elements of price that had no counterpart in necessary costs of production. Economic rent – the excess of price over this “real cost” – is unearned income. It is an overhead charge for access to land, minerals or other natural resources, bank credit or other basic needs that are monopolized.
This concept of unearned income as an unnecessary element of price led Veblen to focus on what now is called financial engineering, speculation and debt leveraging. The perception that a rising proportion of income and wealth is an unearned “free lunch” formed the take-off point for Veblen to put real estate and financial scheming at the center of his analysis, at a time when mainstream economists were dropping these areas of concern.
Just a quick reminder of the Spanish new record. From El Pais.
Spain hit an Olympic record on Friday when the unemployment rate soared to an all-time high of 24.63 percent for the second quarter of the year. According to the latest figures released by the National Statistics Institute’s Survey of the Active Population (EPA), 5,693,100 people are out of work.
The Rajoy administration’s severe cutbacks, the ongoing recession and the relaxation of rules governing layoff schemes – known in Spanish as EREs – which make it easier and cheaper for companies to let workers go – are the three factors being blamed for the record number.
Friday’s figure surpasses the previous jobless record of 24.55 percent recorded in 1994, during the country’s last major economic crisis.
With investors in major “hate equities” mood, and massive squeezes over the past days, the pain trade is the performance trade among funds and retailers. As people have poured money into “safe yields”, things could get very interesting later this autumn, as there are few out there that give any major squeeze any possibility. Meanwhile here is an update by Doug Short on those “safe” yields….
What’s New: After the yields on several Treasuries hit consecutive new lows earlier in the week, the bond market did a complete about face. For example the benchmark 10-year went from a historic closing yield of 1.43 on Wednesday to 1.58 today. That wouldn’t be so stunning if the 10-year were in the low five percents, which is where it was five years ago before the Great Recession. But at today’s rates, that 15-basis-point jump is a 10.5% increase!
As for the Fed’s, Operation Twist, here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of program.