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 Azizonomics.
Britain has returned to growth:
But compared even to the USA — which has huge problems of its own — Britain is still mired in the depths of a depression:
An Olympic bounce does not constitute a recovery. As I noted in March, in every respect Britain is under-performing the United States — in GDP and in unemployment. Although Cameron and Osborne keep claiming that they are deficit hawks who want to cut the government deficit, the deficit keeps climbing, at an even faster pace than the United States.
Defenders of Cameron’s policies might claim that we are going through a necessary structural adjustment, and that lowered GDP and elevated unemployment is necessary for a time. I agree that a structural adjustment was necessary after the financial crisis of 2008, but I see little evidence of such a thing. The over-leveraged and corrupt financial sector is still dominated by the same large players as it was before. True, many unsustainable high street firms have gone out of business, but the most unsustainable firms that had to be bailed out — the banks and financial firms who have caused the financial crisis — have avoided liquidation. The real story here is not a structural adjustment but the slow bleeding out of the welfare state via deep and reaching cuts.
A few thoughts on the American dream, by Doug Short.
What is the single best indicator of the American Dream? Many would point to household income growth. My study of the Census Bureau’s data shows a 600.7% growth in median household incomes from 1967 through 2011. The ride has been bumpy, but it equates to a 4.5% annualized growth rate. Sounds impressive, but if you adjust for inflation using the Census Bureau’s method, that nominal 600.7% total growth shrinks to 19.0%, a “real” annualized growth rate of 0.4%.
But if we dig a bit deeper into the method of inflation adjustment, the American Dream looks more like an illusion, as in “money illusion“.
Guest post by Azizonomics.
The modern “debt jubilee” is characterised as “quantitative easing for the public”. It has been boiled down to a procedure where the central bank does not create new money by buying the sovereign debt of the government. Instead, it takes an arbitrary number, writes a check for that number, and deposits it in the bank account of every individual in the nation. Debtors must use the newly-created money to pay down or pay off debt. Those who are not in debt can use it as a free windfall to spend or “invest” as they see fit.
The major selling feature of this “method” is that it provides the only sure means out of what is called the global “deleveraging trap”. This is the trap which is said to have ensnared Japan more than two decades ago and which has now snapped shut on the whole world. And what is a “deleveraging trap”? It is simply the obligation assumed when one becomes a debtor. This is the necessity to repay the debt. There are only three ways in which a debt can be honestly repaid. It can be repaid with new wealth which the proceeds of the debt made it possible to create. It can be repaid by an excess of production over consumption on the part of the debtor. Or it can be repaid from already existing savings. If none of those methods are feasible, the debt cannot be repaid. It can be defaulted upon or the means of “payment” can be created out of thin air, but that does not “solve” the problem, it merely makes it worse.
Biderman on growth, the Bernanke put and the markets.
The Bernanke put is keeping stocks priced levitated these days, at least in my opinion. Specifically, the Bernanke put exists because the stock market believes that the Federal Reserve can and will do “something” that saves the day, whatever saving the day is. Ultimately that belief falls into the same category as a superstition, like the evil eye or the tooth fairy. The reality is that the Fed cannot do anything to solve the fundamental flaw at the heart of the US economy.
So Merkel and her friends deliver another “Europe is saved” moment. This time with 120 billion USD pact in order to spur growth. The Algos managed lifting the markets, and may we remind you of the half year window dressing. The can is kicked down the road yet again, and yes, only the Spanish banks need more than 120 billion USD. They tell us we must save the Euro, but why, and for who? More on the subject by Golem.
It is a troubling aspect of our present financial and political situation that there has been a tendency, I would say a deliberate desire, to confuse wealth with debt; to present them as flip sides of each other when they are, in fact, entirely different. Why should this be? Well it might be because much of Mr Soros’ wealth, the wealth of the institutions he owns shares in, the wealth of banks and other financial institutions and the wealth of those who own and run them, is tied up in debt agreements of one kind or another. Your wealth and mine is probably in sovereign issued ‘money’. Most of us don’t have investments. Many don’t have savings to speak of. The wealth of the top 10%, on the other hand, is tied up in debt of one kind or another.
Since the advent of securitization, that process whereby debts can circulate as a form of currency, which can be used as collateral for issuing loans and can be counted as capital, debt has become a larger repository of wealth than sovereign currencies. Why do you think no one talks about the money supply the way they did in the 80’s? Governments do not control the money supply. The issuers of private debt control it.
Guest post by Azizonomics.
George W. Bush is back. And he’s got a plan!
From the NYT:
Two months from now, he plans to publish a book outlining strategies for economic growth. And on Tuesday, he made a rare return to Washington to promote freedom overseas.
Freedom overseas? Yes — it would be nice to be free of George W. Bush’s destructive and costly neocon agenda (and I know many people overseas agree) but sadly the current White House occupant seems to be following the same authoritarian script; Bush hit Iraq and Afghanistan, and Obama seems intent to continue expanding the wars into Pakistan and Yemen.
On the economy, let’s judge him on his record:
Guest post by Azizonomics.
The entire economics world is abuzz about the intriguing smackdown between Paul Krugman and Ron Paul on Bloomberg. The Guardian summarises:
- Ron Paul said it’s pretentious for anyone to think they know what inflation should be and what the ideal level for the money supply is.
- Paul Krugman replied that it’s not pretentious, it’s necessary. He accused Paul of living in a fantasy world, of wanting to turn back the clock 150 years. He said the advent of modern currencies and nation-states made an unmanaged economy an impracticable idea.
- Paul accused the Fed of perpetrating “fraud,” in part by screwing with the value of the dollar, so people who save get hurt. He stopped short of calling for an immediate end to the Fed, saying that for now, competition of currencies – and banking structures – should be allowed in the US.
- Krugman brought up Milton Friedman, who traversed the ideological spectrum to criticize the Fed for not doing enough during the Great Depression. It’s the same criticism Krugman is leveling at the Fed now. “It’s really telling that in America right now, Milton Friedman would count as being on the far left in monetary policy,” Krugman said.
- Paul’s central point, that the Fed hurts Main Street by focusing on the welfare of Wall Street, is well taken. Krugman’s point that the Fed is needed to steer the economy and has done a better job overall than Congress, in any case, is also well taken.
Still rather bearish, Hussman delivers some good points below. From Hussman funds.
Over the past 13 years, and including the recent market advance, the S&P 500 has underperformed even the minuscule return on risk-free Treasury bills, while experiencing two market plunges in excess of 50%. I am concerned that we are about to continue this journey. At present, we estimate that the S&P 500 will likely underperform Treasury bills (essentially achieving zero total returns) over the coming 5 year period, with a probable intervening loss in the range of 30-40% peak-to-trough.
Why? First, with respect to 5-year prospective returns, it’s important to recognize that returns at that horizon are primarily driven by valuations – not the “Fed Model” kind, but the normalized earnings and discounted cash flow kind. Stocks remain strenuously overvalued here, and only appear “fairly priced” relative to recent and near-term earnings estimates because corporate profit margins are more than 50% above their long-term norm. Meanwhile, corporate profits as a share of GDP are about 70% above the long-term average. As I detailed in Too Little To Lock In, these abnormally high margins are tightly related (via accounting identity) to massive fiscal deficits and depressed household savings rates, neither which are sustainable.
Our projection for 10-year S&P 500 total returns – nominal – is about 4.4% annually, which is far better than the 2000 peak, far inferior to the 2009 trough, and save for the period before the 1929 crash, worse than any prospective return observed prior to the late-1990′s bubble – even in periods having similarly depressed interest rates.
- The current acceleration of credit via central bank policies will likely produce a positive rate of real economic growth this year for most developed countries, but the structural distortions brought about by zero bound interest rates will limit that growth and induce serious risks in future years.
- Not suddenly, but over time, gradually higher rates of inflation should be the result of QE policies and zero bound yields that will likely continue for years to come.
- Focus on securities with shorter durations – bonds with maturities in the five-year range and stocks paying dividends that offer 3%–4% yields. In addition, real assets/commodities should occupy an increasing percentage of portfolios.