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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The US Economy…Post-Payrolls And Pre-FOMC

By Gary Tanashian – Re-Blogged From http://www.Silver-Phoenix500.com

This week’s Notes From the Rabbit Hole included a little Payrolls/Wages related economic discussion before moving on to the usual coverage of stock markets, commodities, precious metals, bonds, currencies and related indicators and market internals.  With FOMC on tap there will be more data noise directly ahead, but then I expect markets to smooth out into what is looking like a sensible short and intermediate-term plan.

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The Three Lives Of Alan Greenspan

By John Rubino – Re-Blogged From Dollar Collapse

When the history of these times is written, former Fed Chair Alan Greenspan will be one of the major villains, but also one of the greatest mysteries. This is so because he has, in effect, been three different people.

He began public life brilliantly, as a libertarian thinker who said some compelling and accurate things about gold and its role in the world. An example from 1966:

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold in 1934 under FDR. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

Awesome, right? But when put in charge of the Federal Reserve in the late 1980s, instead of applying the above wisdom — by for instance limiting the bank’s interference in the private sector and letting market forces determine winners and losers — he did a full 180, intervening in every crisis, creating new currency with abandon, and generally behaving like his old ideological enemies, the Keynesians. Not surprisingly, debt soared during his long tenure.

Along the way he was instrumental in preventing regulation of credit default swaps and other derivatives that nearly blew up the system in 2008. His view of those instruments:

The reason that growth has continued despite adversity, or perhaps because of it, is that these new financial instruments are an increasingly important vehicle for unbundling risks. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. This unbundling improves the ability of the market to engender a set of product and asset prices far more calibrated to the value preferences of consumers than was possible before derivative markets were developed. The product and asset price signals enable entrepreneurs to finely allocate real capital facilities to produce those goods and services most valued by consumers, a process that has undoubtedly improved national productivity growth and standards of living.

He cut interest rates to near-zero in the early 2000s, igniting the housing bubble – which he was unable to detect along the way. He even made it into the dictionary, as the “Greenspan put” became the term for government bailing out its Wall Street benefactors.

From this the leveraged speculating community learned that no risk was too egregious and no profit too large, because government – that is, the Fed – had eliminated all the worst-case scenarios. Put another way, under Greenspan profit was privatized but loss was socialized.

Greenspan retired from the Fed in 2006 and, miraculously, began morphing back into his old libertarian self. A cynic might detect a desire to avoid the consequences of his past actions, while a neurologist might suspect senility. But either way the transformation is breathtaking. Consider this from yesterday:

Gold Standard Needed Now More Than Ever? – Alan Greenspan Comments

(Kitco News) – It would be best not to be short-sighted when it comes to gold; at least that is what one former Fed chair says.

“The risk of inflation is beginning to rise…Significant increases in inflation will ultimately increase the price of gold,” noted Alan Greenspan, Federal Reserve chairman from 1987 to 2006, in an interview published in the World Gold Council’s Gold Investor February issue.

“Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.”

However, it is really the idea of returning to a gold standard that Greenspan focused on — a gold standard that he said would help mitigate risks of an “unstable fiscal system” like the one we have today.

“Today, going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today, we would not have reached the situation in which we now find ourselves,” he said.

“We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.”

To Greenspan, the reason why the gold standard hasn’t worked in the past actually has nothing to do with the metal itself.

“There is a widespread view that the 19th Century gold standard didn’t work. I think that’s like wearing the wrong size shoes and saying the shoes are uncomfortable!” he said. “It wasn’t the gold standard that failed; it was politics.”

One of the nice things about the information age is that public figures leave long paper trails and can’t therefore easily escape their pasts. Greenspan’s past, being perhaps the best documented of any central banker in history, will haunt him forever.

But hey, at least he’s going out a gold bug.

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Rules Still Matter

By Andy Sutton & Graham Mehl – Re-Blogged From Silver Phoenix

While economics is a science and should be treated as such, economic forecasting is both a science and an art at the same time. However, anyone can forecast. Just like anyone can forecast the weather. To do so accurately and furthermore to do so frequently is a true talent. We think of it along the lines of the ability to hit a major league fastball; a gift granted to maybe 1 in 500 or a thousand babies each year. Then add to that the ability to hit a major league fastball for an average of .300 over an entire career and we’re talking a few babies in an entire generation.

Economic forecasting is no different. Anyone can take the classes, read the textbooks by all the proper authors, write the research papers, the thesis, and the dissertation, and still muddle around in the dark for the entirety of a career, issuing bum forecast after bum forecast. We would surmise at that point that there might be a problem with the assumptions going into the exercise of forecasting. Think of the scientist who starts conducting chemistry experiments without knowing Boyle’s Law or the Ideal Gas Law, etc. Or maybe has no clue about Avagadro, let alone the number ascribed to him. Your scientist is going to waste a lot of time and produce nothing of value.

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Debt Surge Producing Fake Recovery

By John Rubino – Re-Blogged From http://www.Silver-Phoenix500.com

What do the following headlines have in common?

US wages grow at fastest pace since 2009

Euro area economy ended year with strongest growth since 2011

Surge in home prices is beating the one in mortgage rates

Manufacturing in U.S. Expands at Fastest Pace in Two Years

German Inflation welcomed back

Obviously they’re all favorable, with the possible exception of German inflation – though even that is “welcome”. Taken together they paint a picture of a global economy that’s finally returning to the kind of solid growth and steady, positive inflation that most people consider both normal and good.

 

Unfortunately, the reason for the improvement is emphatically not good: In 2016 the world borrowed a huge amount of money and spent the proceeds. The result is “growth,” but not sustainable growth.

Consider:

Federal Debt in FY 2016 Jumped $1.4 Trillion, or $12,036 Per Household

(CNSNews.com) – In fiscal 2016, which ended on Friday, the federal debt increased $1,422,827,047,452.46, according to data released today by the U.S. Treasury.

At the close of business on Sept. 30, 2015, the last day of fiscal 2015, the federal debt was $18,150,617,666,484.33, according to the Treasury. By the close of business on Sept. 30, 2016, the last day of fiscal 2016, it had climbed to $19,573,444,713,936.79.

According to the Census Bureau’s latest estimate, there were 118,215,000 households in the United States as of June. That means that the one-year increase in the federal debt of $1,422,827,047,452.46 in fiscal 2016 equaled about $12,036 per household.

The total federal debt of $19,573,444,713,936.79 now equals about $165,575 per household.

(The News PK) – Global debt sales reached a record this year, led by companies gorging on cheap borrowing costs.

The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to data provider Dealogic, breaking the previous annual record set in 2006.

Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.

Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.

The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction.

“The low cost of financing with record-low interest rates simply made building up leverage tempting,” said Scott Mather, chief investment officer for core fixed income at Pimco.

(Reuters) – Global debt levels rose to more than 325 percent of the world’s gross domestic product last year as government debt rose sharply, a report from the Institute for International Finance showed on Wednesday.

The IIF’s report found that global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion. The report also found that general government debt accounted for nearly half of the total increase.

Emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

To sum up: Emerging market borrowing in 2016 was triple the year-earlier level. Corporate borrowing was the highest since 2006. And the US somehow managed to add another $trillion of government debt in the late stages of a recovery, when tax revenues are usually strong enough to shrink or eliminate deficits.

Since every penny of that new debt was presumably spent, it should come as no surprise that the latest batch of headline growth numbers have been impressive. Which is the basic problem with debt-driven growth: The good stuff happens right away while the bad stuff evolves over time – in the form of higher interest costs that depress future growth – making it hard to figure out what caused what.

That’s bad for regular people who have to live through the resulting slow-down or crisis. But it’s fine for the people who made the borrowing decisions because they get credit for the growth pop but won’t be around – having retired with huge pensions and high prestige – before the secondary effects really kick in.

This time, however, the cause-and-effect dynamic is being accelerated by a spiking dollar and rising interest rates, both of which raise the cost of debts that are denominated in dollars and/or have to be refinanced in the year ahead. So the mother of all financial crises that has been inevitable for a couple of decades has, thanks to all this new debt, taken a giant step towards “imminent.”

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