Posts Tagged ‘Gross Domestic Product’
Bernanke Spells “Recovery” F-A-I-L-U-R-E
Wednesday, 19 June 2013 14:17
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We’re now five years into the worst recovery in the post-WWII period.

 

Based simply on historical business cycles, we should already be out of recovery and into a “growth” stage for the US economy. (Read more…) This should have happened even with barely any stimulus from the Fed.

 

Instead, the Fed has spent TRILLIONS of Dollars and failed to deliver anything resembling economic growth. The number of people who are of working age who are actually working has barely budged since the 2009 low.

 

 

In plain terms, this chart shows us point blank that all the talk of “unemployment falling” is total BS. The Feds simply alter their methodology to make the employment picture look better, but that doesn’t change the fact that jobs have not and are not coming back in any meaningful way.

 

During this period, we had QE 1, QE 2, Operation Twist 2, QE 3 and QE 4. Where in the above chart do you see any real improvement in jobs as a result of these efforts? What data is the Fed looking at when it talks about “recovery” (other than the stock market and housing market which are once again bubbles)?

 

It’s not as though stocks rallying so high is a great thing either. The S&P 500’s CAPE predicts at best a 4% annual return for stock investors over the next 20 years.

 

If you’re unfamiliar with CAPE it is the cyclically adjusted price-to-earnings ratio.

 

In simple terms CAPE measures the price of stocks against the average of ten years’ worth of earnings, adjusted for inflation.

 

The reason you use the average earnings over 10 years is due to the business cycle. Typically the US experiences a boom and bust once every ten years or so.

 

By using the average earnings over a ten-year period, you smooth out your earnings data to account for both booms and busts. As a result you get a much clearer measure of a business’s profits, which is the best means of valuing that business’s worth.

 

CAPE is better at predicting stock market returns than P/E, Government Debt/ GDP, Dividend yield, Fed Model, and many other metrics commonly used by analysts (most of which really predict much of anything).

 

This is not to say that stocks can’t go even higher than they are today. Bubbles, such as the one we’re experiencing today, can often last longer than anyone expects.

 

However, based on over 100 years’ worth of data, anyone who is looking to invest for the long term by buying the market today can expect, at best, a 4% real return per year over the next 20 years (this includes both dividends and capital appreciation after inflation).

 

Today the S&P 500 has a CAPE of over 22. This means the market as a whole is trading at 22 times its average earnings of the last ten years. It’s also definitively in bubble territory.

 

Folks, QE does nothing but create stock bubbles. Nothing at all. The US economy isn’t in “recovery” which is extraordinary because historically even if the Fed had done NOTHING we’d already be in recovery. The fact that the Fed has spent TRILLIONS of dollars and is still talking about a weak recovery only shows that the Fed doesn’t actually have the tools (or know how) the improve the economy… or jobs.

 

We all know how bubbles end, with a bang. This one will be no different from the last three.

 

On that note, we’ve just released a FREE Special Report outlining how to protect your portfolio during times of a market collapse. It outlines the best stocks to own during a crisis as well as how to take out “insurance” on your portfolio.

 

To pick up a copy swing by: http://gainspainscapital.com/protect-your-portfolio/

 

Best Regards

 

Graham Summers

 

 

 

 

 

    



 
Digging Through The Fed’s Improving Forecast
Wednesday, 19 June 2013 13:17
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Perhaps the biggest red flag in today’s FOMC release is the quarterly economic projections which improved from March with the Fed expecting better GDP and employment, offset by lower core and PCE inflation from 2013 all the way to 2015: whether this is sufficient for Bernanke to determine a need to taper the monthly $85 billion flow will be explained during the 2:30 pm press conference.

The central fed tendency: i.e. (Read more…), pretty blue charts

Just as notable: 4 of 19 FOMC members saw the first firming take place before 2015.

Finally, looking at the short end, 3 FOMC members saw a 1% Fed Funds rate by the end of next year, with one expecting for a 1.5% print. Still, the bulk of Fed economists are not too worried about the short end of the curve until 2015.

Source

    



 
China Snugs, Signals Banks Should Get Used to It
Wednesday, 19 June 2013 08:45
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While all eyes are on the Federal Reserve today as the market awaits clues into when the central bank will begin slowing its liquidity provisions, China’s central bank continues its own snugging operation, keeping the money market rates at lofty levels.

Rather than inject liquidity into the money markets, as the banks were clamoring for, the PBOC drained CNY2 bln yesterday, which continued the cash crunch and ensured that today’s 10-year bond auction would see lukewarm demand.  Sure enough, today’s CNY30 bln 10-year bond offering saw its lowest bid-cover ratio in a year.

(Read more…)

The 7-day repo rate, which is an indicator of interbank liquidity rose 144 bp today to 8.26%, which is the highest rate since in two years.  It has averaged about 3.3% this year through last month and has averaged about 6.2% this month.  Other measures of liquidity, such as the inversion of the swaps curve, also reflects this shortage of liquidity. 

There are several factors at work, some of which are market based. For example, there are reports that a large amount of wealth management products sold by the banks are coming due at the end of June.  There is also has been a decline of capital inflows into China.   Yuan holdings by Chinese banks from sales of foreign exchange to almost CNY67 bln in May (reported June 14), which is the smallest increase since last November.

Yet if it was just this, the PBOC could have counteracted it.  In addition, if  the PBOC had simply under-estimated the holiday impact and other liquidity needs, the PBOC could have injected liquidity into the system.  There was some speculation that the PBOC was going to cut reserve requirement today, which it has not.  Many participants appear to have misjudged the PBOC’s policy intentions. 

The PBOC is taking advantage of the tighter liquidity conditions, ensuring that they stay tight as Tuesday’s draining operation indicates to drive home an important point.  That point is that there has been an overly rapid expansion of credit from the banks that it will not accommodate.  It wants banks to scale bank on the credit expansion plans and manage their own liquidity better. 

Total social financing, which is understood as a broad measure of China’s credit expansion, rose 52% in the Jan-May period from a year ago.  Much of these funds appear to be remaining in the financial sector rather than the  real economy.  Money supply itself has exceeded the government’s 13% target every month so far this year and was up 15.8% above year ago levels in May. 

Chinese regulators are forcing trust banks and wealth management firms to shift assets to publicly traded securities.  This began at the end of Q1 and is in essence taking funds from the so-called shadow banking system that was drawn upon by property developers and local government financial vehicles.  The impact is beginning to be felt.  Trust loans, for example, in May  (reported June 9) slowed to 8.4%  from a 16% pace at the end of last year.  Rating agencies such as Fitch previously, and Moody’s today has issued warnings about the risks posed by the shadow banking system related to local governments’ financing arms.

Total credit in China, include off-balance sheet loans stood at 198%  of GDP at the end of last year. This is up from 125% in 2008.   According to Fitch figures this rise is a bit faster than what Japan experienced at the tail end of its bubble (45% growth 1985-1990) and South Korea (+47% 1995-1998).

Chinese officials are trying to reduce the excess in the banking system, which appears to be of growing concern to the new government, despite the liquidity squeeze that has led to failed auctions in recent days by the government and government owned banks.

Cash crunches in China are not that uncommon, but they are often short-lived.  What make what is happening now noteworthy is that officials are tightening the proverbial screws tighter and longer than participants are accustomed.  The tightness cannot be simply attributed to last week’s holiday. 

The tightening of liquidity was one of the factors that pushed Chinese shares to six month lows today.  Banks and property developers were hit harder than the overall market.  There was also talk that the government, which has refused to grant permission for new initial public offerings, may soon relent.  There is also some nervousness ahead of HSBC and Markit initial PMI readings due out tomorrow.

Some near-term reprieve from the central bank is expected soon to prevent a deeper panic.  Reports suggest that PBOC has asked local banks to submit orders for 14-day  reverse repo agreements earlier today.  This is one of the tools that the PBOC uses to inject liquidity into the system, but has not been used for more than four months.   This would appear to offer the banking system some help to get through the quarter and month end.  However, it also asked banks to submit orders for a 28-day repos, which would ensure that liquidity remains tight for longer. 

The yuan itself was fixed lower for the second consecutive session.    From mid-February through last May, the dollar fell about 2.1% against the yuan.  Over the last couple of weeks it has stabilized in mostly a CNY6.1230-CNY6.1400 range.  The 12-month NDF implies about  a 2.4% depreciation of the yuan, which is the most in 4 1/2 years, which seems a bit exaggerated.