Biderman on the markets.
here is no way sustainable economic growth is at all possible in the United States, Europe and Japan over the near term under current government policies of providing citizens with all sorts of economically unfeasible cradle-to-grave entitlement programs. And without sustainable growth there is no way stock prices will remain as high as they are for very much longer.
Guest post by Hussman Funds.
In the day-to-day focus on the “fiscal cliff,” our own concern about a U.S. recession already in progress, and the inevitable flare-up of European banking and sovereign debt strains, it’s easy to overlook the primary reason that we are defensive here: stocks are overvalued, and market conditions have moved in a two-step sequence from overvalued, overbought, overbullish, rising yield conditions (and an army of other hostile indicator syndromes) to a breakdown in market internals and trend-following measures. Once in place, that sequence has generally produced very negative outcomes, on average. In that context, even impressive surges in advances versus declines (as we saw last week) have not mitigated those outcomes, on average, unless they occur after stocks have declined precipitously from their highs. Our estimates of prospective stock market return/risk, on a blended horizon from 2-weeks to 18-months, remains among the most negative that we’ve observed in a century of market data.
On the valuation front, Wall Street has been lulled into complacency by record profit margins born of extreme fiscal deficits and depressed savings rates. Profits as a share of GDP are presently about 70% of their historical norm, and profit margins have historically been highly sensitive to cyclical fluctuations. So the seemingly benign ratio of “price to forward operating earnings” is benign only because those forward operating earnings are far out of line with what could reasonably expected on a sustained long-term basis.
It’s helpful to examine valuations that are based on “fundamentals” that don’t fluctuate strongly in response to temporary ups and downs of the business cycle. The chart below compares historical price/dividend, price/revenue, price/book and Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) to their respective historical norms prior to the late-1990’s market bubble – a reading of 1.0 means that valuations are at their pre-bubble norm.
The US has decided not to declare China as having manipulated its currency to gain an unfair trade advantage.
But the Treasury did say that China’s currency, the yuan, remains “significantly undervalued” and urged China to make further progress.
In its semi-annual report, it said Beijing did not meet the criteria to be called a currency manipulator, which could have sparked US trade sanctions.
Critics of China say it keeps the yuan low to keep its exports cheap.
There’s a point that no-one in the establishment will admit.
Guest post by Vix and more.
The biggest change in investor fears over the course of the past two weeks is a growing trend toward the mistrust of the role of institutions such as central banks and governments in economic matters. Concerns about central bankers and politicians are significant enough to poll in the #3 and #4 spots for all respondents, but rate even higher in the U.S., where government and politicians were the #2 concern and excessive central bank intervention worries garnered the #3 spot.
Latest on central banks, liquidity, rates and much more, by PIMCO’s T ony Crescenzi.
- If the eurozone is to endure, it will require reduced economic differences among countries and larger common fiscal capacity.
- Emerging market central banks are likely to remain in wait-and-see mode while looking to the U.S. for clarity on the fiscal negotiations and domestic macro prints for signs of moderation in both inflation and activity.
- While central banks in advanced economies have not traditionally used explicit policies to target exchange rates, the European debt crisis may change all that.
Full read here.
Guest post by Peter Tchir.
But Quebec Isn’t a Country? Exactly.
The Catalonian elections are interesting and shouldn’t surprise anyone. In stressful economic times people look for alternatives. They want someone to blame (“the other guy”) and like to be told how great they themselves are. If that wasn’t the case, it is unlikely that an angry megalomaniac with a toothbrush moustache would ever have ruled Germany.
At this stage, the elections and referendum movement remind me a lot of Quebec in Canada. Economic decline coupled with an identity lead to the belief that separation was a good way to go. For many of us outside of Spain it is hard to realize how long Catalonians have held a belief that they are different. I remember back in the 1980’s being corrected by a soccer player when I said he was Spanish, and he replied, with a bit of anger, that no, he was Catalonian.
Guest post by Gold Silver Worlds.
Marc Faber is one of the very successful investors on earth. He recently explained his view on the monetary policies of the developed regions in the world. Obviously he is no fan of the Keynesian way of thinking which is applied by the central banks in the developed regions.
The Keynesian policy considers easy money as a way out of economic recession and deflation. They argue that money creation smoothens out the business cycle. In his presentation, Marc Faber demonstrates that these kind of interventions achieve exactly the opposite: they make the business cycles much more violent, create extreme fluctuations in economic activity and result in far more financial volatility. In his opinion, the essential problem is that the Keynesian way of thinking tries to solve long term structural problems with short term fixes, with an emphasis to create bubbles to help the economy. However, Mr Faber notes that bubbles usually hurt the majority of market participants.
Guest post by Peter Tchir.
The Year End Yield Chase
Closed end fixed income funds continued their bounce, high yield ETF’s had inflows, and much of what we discussed last week came true.
The move the prior week was rational. We saw steep declines in closed end funds on a combination of big premiums, leveraged assets, and dividend tax confusion. This helped push all credit markets lower. Credit moved not just with the other “risk off” trades but with fear and confusion that retail in particular was having a mass exodus from fixed income.
That wasn’t true and isn’t likely to be true anytime soon.
I am the most bullish I have been. I think we will see continued strength in credit into year end at this point. I am making a key assumption here that the fiscal cliff will be dealt with in a way that benefits the markets. I expect a deal that has minimal impact in the next 6 months to a year. At the Ben Bernanke luncheon this week, it seemed clear to me that is what he is telling congress. So congress is being told not to raise taxes and not to cut spending in the near term but by the Chairman of the Federal Reserve. That seems to be a policy that congress can get on board with, as can kicking seems to be their specialty.