Two Trends That Will Force The Fed To Start Buying Stocks

By John Rubino – Re-Blogged From Dollar Collapse

While the Japanese and Swiss central banks have turned themselves into hedge funds by loading up on equities, the US Fed has stuck to supporting the stock market indirectly, by buying bonds. It’s worked, obviously, with all major US indexes at record highs. But it won’t work going forward, thanks to two gathering trends.

First, the main way bond buying supports equities is by lowering interest rates which, among other things, allows corporations to borrow cheaply and use the proceeds to buy back their own stock. Companies avoid paying dividends on the repurchased stock and the government gets capital gains tax revenue from a bull market. From a short-sighted Keynesian perspective, it’s a win-win.

Alas, this New Age public/private partnership on running out of steam. Interest rates have fallen about as far as they can fall and corporations have borrowed about as much as they can borrow. So the buyback binge is topping:

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How Solid Are Canada’s Big Banks?

By Peter Diekmyer – Re-Blogged From http://www.Silver-Phoenix500.com

Originally posted at Sprott Money March 22, 2017

The World Economic Forum consistently ranks Canada’s banks among the world’s safest. Competent regulators have overseen stress tests, tightened lending standards and delinquency rates are low. Demographics are good and the country’s diversified economy is backed by a treasure of oil, wood, gold and other natural resources.

So the experts say.

Institutional investors, relying on the work of Jeremy Rudin, Canada’s chief bank regulator, agree. In fact, Canadian financials accounted for 35.5% of the market capitalization of the benchmark exchange (NBF February).

However this façade hides major uncertainties. Key concerns stand out, which if unaddressed, could spark solvency and liquidity issues in one or more of Canada’s Big Six banks.

The fragilities can be seen in an IMF report, which calculated that Canada’s financial sector accounted for a stunning 500% of GDP in 2012. Today, the assets of the Big Six banks alone are more than double the size of the country’s economy.

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Why Free Trade Is Officially Dead

By Alasdair Macleod – Re-Blogged From http://www.Gold-Eagle.com

G20 Finance ministers meeting in Baden Baden last weekend agreed, on America’s insistence, to drop the long-standing commitment to free trade from the final communiqué. It is hard to know to what extent America’s position is driven by her autarkic view on world trade, or to what extent it is an acknowledgement of the fruitlessness of paying lip-service to an ideal which is never delivered. Doubtless, it’s a bit of both.

It is certainly true that finance ministers in the advanced nations have always shown a protectionist attitude towards international trade, protectionism that has intensified through attacks on American international corporations, which to a large extent can choose where to pay their taxes. The thrust of research by international NGOs, particularly the Paris-based OECD, has been to decry tax competition; however, even though it has bullied tax-havens to supply tax-related information to revenue-hungry states, it has failed to stop multinationals, armed with teams of tax lawyers, from complying with their statist demands.

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Gold Juniors’ Q4’16 Fundamentals

By Adam Hamilton – Re-Blogged From Zeal

The junior gold stocks corrected hard in recent weeks, setting them up to blast higher on Wednesday’s less-hawkish-than-expected Fed.  That started to dispel some of the serious bearish sentiment that has been mounting in this sector.  The junior gold miners’ fundamentals justify much-higher stock prices, as evidenced in their recently-reported fourth-quarter operating and financial results.  They remain very bullish.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports.  Required by securities regulators, these quarterly results are exceedingly important for investors and speculators.  They banish all the sentimental distortions surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities.  This greatly helps in re-anchoring perceptions.

After spending decades intensely studying and actively trading this contrarian sector, there is no gold-stock data I look forward to more than their quarterly reports.  These offer a true and clear snapshot of what’s really going on, overcoming all the misconceptions bred by the ever-shifting winds of sentiment.  If you have capital deployed in this sector but don’t watch the quarterlies, you’re shooting yourself in the foot.

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Stock Market Most Overvalued On Record — Worse Than 1929?

By Mark O’Byrne – Re-Blogged From http://www.Silver-Phoenix500.com

The US stock market today has never been more dangerous and overvalued, according to respected Wall Street market analyst John Hussman.

Indeed, Hussman goes as far as to say that “this is the most dangerous and overvalued stock market on record — worse than 2007, worse than 2000, even worse than 1929” as reported by Marketwatch.

For some months now, Hussman of Hussman Funds’ has been warning in his research that investors are ignoring extremely high stock market valuations and are being lulled into a false sense of security by central bank liquidity, massive quantitative easing and zero percent and negative interest rates.

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Here’s What The Market Could Do For The 3rd Time In 17 years

By Michael Pento – Re-Blogged From http://www.PentoPort.com

The major averages continue to set record highs, which provides further evidence that Wall Street is becoming more complacent with the growing dichotomy between equity prices and the underlying strength of the U.S. economy. When investors view the Total market cap to GDP ratio, it becomes strikingly clear that economic growth has not at all kept pace with booming stock values in the past few years.

In fact, this key metric, which oscillated between 50-60% from the mid-seventies to mid-nineties, now stands at an incredible 130%

The reason for this huge discrepancy is clear: massive money printing by the Fed has led to rising asset prices but at the same time has failed to boost productivity. In fact, since Quantitative Easing (QE) began back in November of 2008, the Fed’s balance sheet has grown from $700 billion, to $4.5 trillion today. That is an increase of 540%! Yet, during the same time period U.S. GDP has only managed to increase from $14.5 trillion, to $18.8 trillion; for a comparative measly blip in growth of just 29%.

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Is Stagflation Stalking?

By Gordon T Long – Re-Blogged From http://www.Gold-Eagle.com

It is important to anticipate whether Stagflation is stalking because the yield curve will start pricing it in which will place equity yields, earnings and PE growth multiples at risk.

We believe there are clear signs of stagflation already occurring and according to the recent Global Fund Manager Survey many already believe, if we don’t have elevated Inflation and an emerging period of Stagflation, we can soon expect it!

Yield Curve

What is particularly critical to the equities markets is how the yield curve will react differently regarding whether it anticipates increasing Inflation through Reflation or Stagflation. If it views reflation the yield curve will shift up but also steepen as long-term yields increase faster than short term yields. If it sees stagflation because the drivers for inflation also impede economic growth, then the yield curve also shifts upward,  but instead can be expected to flatten. The longer-term yields rise slower than the short term yields.

In both case yields rise which places pressures on equities but the shape of the yield curve has the most profound impact on equity prices. In the last 5 years  71% of equity index increases are a result of P/E multiple expansion from 10X to 18X. This places PE multiple of the S&P 500 currently in the 90 percentile of historical valuations relative to the last 40 years. Anticipating what may occur is presently of the utmost importance to smart investors.

The 10 Year US Treasury Yield lifted violently on the Trump victory and reflation policy expectations. After a brief consolidation it has again aggressively moved up but it is important to view this as part of three reasons bond yields increase – 1- Economic growth rate, 2- Inflation and 3-Creditworthiness. The current Treasury yield lift in my judgment is more about the pending US debt ceiling congressional hurdles and potential Creditworthiness factors than reflation or stagflation concerns.

Stagflation

STAGFLATION: “Is persistent high inflation combined with high unemployment and stagnant demand in a country’s economy”

Stagflation is very costly and difficult to eradicate once it starts, both in social terms and in budget deficits. It is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It raises a dilemma for economic policy, since actions designed to lower inflation may exacerbate unemployment, and vice versa. Historically, inflation and recession were regarded as mutually exclusive, the relationship between the two being described by the Phillips curve.

Economists offer two principal explanations for why stagflation occurs:

First (Think: ’70’s) stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock that causes an increase in the price of oil for an oil-importing country. Such an unfavorable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable.  Milton Friedman famously described this situation as “too much money chasing too few goods”.

Second (Think today), both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by allowing excessive growth of the money supply,  and the government can cause stagnation by excessive regulation of goods markets and labor markets. Excessive growth of the money supply, taken to such an extreme that it must be reversed abruptly, can be a cause. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway price/wage spiral.

Let’s consider the four elements of stagflation, 1- Inflation, 2- Unemployment, 3- Demand and 4- GDP Growth to see whether this is a real possibility for the US.

1- Inflation

According to The Federal Reserve, entrusted with monitoring and managing Inflation pressures in the economy, until recently it is has been low and well below the Fed’s 2% target.  But the times they are a changing!

Since this time last year inflation expectations have  been increasing steadily and rose even more dramatically with the Trump Presidential victory. The Trump spike was a result of his proposed economic stimulus programs such as Infrastructure and Defense.

However, it is isn’t just expectations that have been increasing, but also actual price tags.

Some price increases have been much higher than how such measures as the CPI tabulates inflation.

From a long-term historical perspective (if you believe government statistics) the inflation rate is still relatively low.

However, taking out “special” government adjustments such as “Substitution”, “Hedonics” and “Imputation” along with the other changes that have been made by the government since the early 80’s, we see the real picture.

ShadowStats.com which tracks inflation closely show that in fact if we consider inflation in terms of how the government calculated it in 1980 (before interest rates started falling abruptly) you find it approximates 10% per annum!  I personally believe this much more closely matches what the average US household would suggest they are experiencing.

CONCLUSION: We DEFINITELY have inflation and it is worse than the Federal Reserve acknowledges or is actually aware!

2- Unemployment

According to the government narrative we have low unemployment with concerns about a tight labor market. This is pure fabrication or minimally misinformation and distortion of the facts. John Williams at ShadowStats again shows the reality.

The ShadowStats Alternate Unemployment Rate for January 2017 is 22.9%.

We presently have a labor force participation level at historically low levels with nearly 100 million working age adults not in the work force and many with jobs not able to to get sufficient hours to support a middle class life style.

As Presidential candidate observed at a campaign rally in front of 30,000 people. “If the unemployment rate was really 5% do you think we would really have this many people here!” Do you believe government statistics or “your lying eyes”?

CONCLUSION: We have high a very high unemployment and under-utilization of the American workforce.

3- Demand

What we have in the US is “Artificial Demand” rather than “Stagnant Demand”. The difference being that the former temporarily camouflages the later –  but only temporarily as in reality we have “Stagnant Demand” being camouflaged by massive credit expansion and low finance rates. This only brings demand forward creating a demand void in the future.

Consider that Consumer Credit is rising rapidly in comparison to Disposable Income. In other words we are borrowing increasingly to make ongoing purchases but those purchases are not increasing. Debt is surging to buy the same amount of stuff — not more. In reality real economic demand is shrinking and is only presently artificially being supported.

CONCLUSION: We have Weak Demand being supported by high levels of credit in relationship to disposable income. 

4- Growth

How can the US current GDP levels seen to be anything other than terribly weak! Thus far this quarter 1Q17 is tracking at 1.8%

The common narrative is that the US is entering a golden age in its economy and that this growth will drive stocks ever higher.  The reality is that GDP growth has collapsed. The third quarter of last year (3Q16) was the quarter everyone thought signaled a new beginning with growth of 3.5%. However, the very next quarter’s growth (4Q16) collapsed to 1.9%.

Put simply, growth is NOT coming soon if at all. Even Trump’s top economic advisor has admitted that GDP growth of 3% is unlikely until the end of 2018.

CONCLUSION:  We have historically weak economic growth

Summary

It is hard not to conclude that we are already living in a period of STAGFLATION which the markets have yet to fully recognize (may we suggest “Cognitive Dissonance”?).

There is little way out other than praying for the Trumponomic Economic miracle that the markets are so clearly euphoric about!  Of course I have never found prayer as a reliable approach to investment strategy!

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