One of the more extraordinary developments since the U.S. presidential election is that the paranoia and the grotesque disregard for facts, evidence and logic that characterized the Trump-inspired “birther movement” can now be reasonably said to characterize the Left’s stance toward Donald J. Trump.
Unfortunately, investors seem to have concluded that central bank easing is omnipotent, despite the fact that the Fed eased persistently and aggressively, to no effect, through the entire course of the 2000-2002 and 2007-2009 market collapses. It’s almost impossible for convey how badly investors are likely to regret dismissing valuations and ignoring market internals by the time the current speculative market cycle is completed. This movie has been re-made many times, always with the same ending. The most egregious misuse of “fair value” in recent decades was during the speculative episode that ended in 2000, as Wall Street abandoned historically-informed valuation approaches, and embraced methods that directly conflicted not only with the basics of asset pricing, but with all economic experience.
Although the Fed’s decision this week to raise interest rates by 25 basis points was widely expected, the surprise came in how the medicine was administered. Most observers had expected a “dovish” hike in which a slight tightening would be accompanied by an abundance of caution, exhaustive analysis of downside risks, and assurances that the Fed would think twice before proceeding any farther. But that’s not what happened. Instead Yellen adopted what should be viewed as the most hawkish policy stance of her chairmanship…..
A key predictor of the health of the American economy is inching closer to signaling a recession. The indicator in question is the US Treasury yield curve, a measure of the gap between short- and long-term interest rates. When it is steep — meaning it costs more to borrow money for the long term — that’s a good sign investors expect a quickly growing economy.
Amazon, which is getting blamed profusely for the meltdown of brick-and-mortar stores and malls across the US, and which has been dabbling with its own initiatives into brick-and-mortar operations – including bookstores, after nearly wiping bookstores off the face of the US – said it would buy brick-and-mortar Whole Foods Market for $13.7 billion……Amazon has a huge luxury: Its shares trade at a sky-high PE ratio of nearly 200, as its earnings are paper-thin, and as the market doesn’t care. The shares of brick-and-mortar retailers get destroyed with profit margins this thin. Amazon is using its shares, of which it can create an unlimited number, as an over-inflated currency to buy other assets. It’s one of the many distortions of what has become a crazy stock market.
Liberals and conservatives alike get teary-eyed when they hear this. They think that massive spending, especially on roads and bridges, will “put people back to work” and make America more productive. Here is the reality: America’s infrastructure is not crumbling, massive spending won’t create any permanent jobs, and productivity is not suffering because of our infrastructure. These are economic myths that lobbyists, infrastructure contractors, and the ASCE perpetuate to get fat contracts.
You get the drift. Liberalism, along with norms, rules, openness, and internationalism: these ostensibly define the postwar and post-Cold War tradition of American statecraft. Allow Trump to scrap that tradition and you can say farewell to what Stewart Patrick refers to as “the global community under the rule of law” that the United States has upheld for decades. But what does this heartwarming perspective exclude? We can answer that question with a single word: history….Washington’s meddling in foreign elections; coups and assassination plots in Iran, Guatemala, the Congo, Cuba, South Vietnam, Chile, Nicaragua, and elsewhere; indiscriminate aerial bombing campaigns in North Korea and throughout Southeast Asia; a nuclear arms race bringing the world to the brink of Armageddon; support for corrupt, authoritarian regimes in Iran, Turkey, Greece, South Korea, South Vietnam, the Philippines, Brazil, Egypt, Nicaragua, El Salvador, and elsewhere….
Historians of the future, huddled around their goose-fat lamps in muddy woolen cloaks, may cite this as the month that the Kardashian Dreamland formerly known as “The USA” finally lost its collective mind. Submitted for your approval, as the late, great Rod Serling (senator from The Twilight Zone) used to say: this week’s Russia-Russia-Russia hearing on Capital Hill. I caught the final hour of this circus when freshman senator Kamala Harris (D – Cal) was hectoring Attorney General Jeff Sessions about his “contact with Russian Officials” and had to be reprimanded by the chair for her rude behavior.
Reminding us of what McKinsey reported over a year ago, namely that the world never deleveraged after the financial crisis, Citi’s Hans Lorenzen released a fascinating presentation today discussing the “invincible” stock rally, and pointing out its Achilles heel, which happens to be the thing that made it possible in the first place: central banks. As the first charts below show, the permissive factor that allowed the world to “emerge” from the financial crisis and the global recession, was a surge in debt, which on a consolidated basis is above 360% of GDP in all five select developed regions. The chart on the right shows that while private sector releveraging has been slow, it has been drowned out by a historic surge in public sector debt.
We saw the “blowoff” top in bonds last summer. This summer investors get to witness what the “blowoff” stage of a massive stock market bubble looks like. My friend, John Hussman, outlined the technical case earlier this week…..This mania is unique in that it’s a less direct form of bullishness. Investors aren’t necessarily going gaga for residential real estate or dotcom stocks. They are going gaga for passive investing.