Dec 012014
 December 1, 2014  Posted by at 11:10 pm Finance Tagged with: , , , , , , ,

DPC Government Street, Mobile, Alabama 1906

Is the Plunge Protection Team really buying oil now? That would be so funny. Out of the blue, up almost 5%? Or was it the Chinese doing some heavy lifting stockpiling for their fading industrial base? Let’s get to business.

First, in the next episode of Kids Say The Darndest Things – oh wait, that was Cosby .. -, we have New York Fed head (rhymes with methhead) Bill Dudley. Dudley’s overall message is that the US economy is doing great, but it’s not actually doing great, and therefore a rate hike would be too early. Or something. Bloomberg has the prepared text of a speech he held today, and it’s hilarious. Look:

Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery

The sharp drop in oil prices will help boost consumer spending and underpin an economy that still requires patience before interest rates are increased, Federal Reserve Bank of New York President William C. Dudley said. “It is still premature to begin to raise interest rates,” Dudley said in the prepared text of a speech today at Bernard M. Baruch College in New York. “When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late.” Dudley expressed confidence that, although the U.S. economic recovery has shown signs in recent years of accelerating, only to slow again, “the likelihood of another disappointment has lessened.”

How is this possible? ‘The sharp drop in oil prices will help boost consumer spending’? I don’t understand that: Dudley is talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost?

Investors’ expectations for a Fed rate increase in mid-2015 are reasonable, he said, and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance. Crude oil suffered its biggest drop in three years after OPEC signaled last week it will not reduce production. Lower energy costs “will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending,” Dudley said.

The drop will especially help lower-income households, who are more likely to spend and not save the extra real income, he said.

Extra income? Real extra income, as opposed to unreal? How silly are we planning to make it, sir? Never mind, the fun thing is that Dudley defeats his own point. By saying that lower-income households are more likely to spend and not save the ‘extra real income’, he also says that others won’t spend it, and that of course means that the net effect on consumer spending will be down, not up. He had another zinger, that the whole finance blogosphere will have a good laugh at:

[..] He also tried to disabuse investors of the notion that the Fed would, in times of sharp equity declines, ease monetary conditions, an idea known as the “Fed put.” “The expectation of such a put is dangerous because if investors believe it exists they will view the equity market as less risky,” Dudley said. That could cause investors to push equity markets higher, contributing to a bubble, he said. “Let me be clear, there is no Fed equity market put,” he said.

That’s in the category: ‘Read my lips’, ‘Mission Accomplished’ and ‘I did not have sex with that woman.’ I remain convinced that they’ll move rates up, and patsies like Dudley are being sent out to sow the seeds of confusion. Apart from that, this is just complete and bizarre nonsense. And that comes from someone with a very high post in the American financial world. At least a bit scary.

Another great one came also from Bloomberg today, when it reported that US holiday sales had missed by no less than 11%. Maybe Dudley should have put that in his speech?! This one turns the entire world upside down:

US Consumers Reduce Spending By 11% Over Thanksgiving Weekend

Even after doling out discounts on electronics and clothes, retailers struggled to entice shoppers to Black Friday sales events, putting pressure on the industry as it heads into the final weeks of the holiday season. Spending tumbled an estimated 11% over the weekend, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up. Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure.

The NRF had predicted a 4.1% sales gain for November and December – the best performance since 2011. Still, the trade group cast the latest numbers in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts. “The holiday season and the weekend are a marathon, not a sprint,” NRF Chief Executive Officer Matthew Shay said on a conference call. “This is going to continue to be a very competitive season.” Consumer spending fell to $50.9 billion over the past four days, down from $57.4 billion in 2013, according to the NRF. It was the second year in a row that sales declined during the post-Thanksgiving Black Friday weekend, which had long been famous for long lines and frenzied crowds.

Shoppers are confident enough to not shop. And why do they not shop? Because the economy’s so strong. Or something. They were so confident that 6 million of them just stayed home. While those that did go out had the confidence to spend, I think, 6.4% less per capita. Maybe that confidence has something to do with at least having some dough left in our pocket.

On the – even – more serious side, two different reports on how much stocks in the US are overvalued. First John Hussman talking about his investment models, an where he did get it right:

Hard-Won Lessons and the Bird in the Hand

[..] the S&P 500 is more than double its historical valuation norms on reliable measures (with about 90% correlation with actual subsequent 10-year market returns), sentiment is lopsided, and we observe dispersion across market internals, along with widening credit spreads. These and similar considerations present a coherent pattern that has been informative in market cycles across a century of history – including the period since 2009. None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk.

I know exactly the conditions under which our approach has repeatedly been accurate in cycles across a century of history, and in three decades of real-time work in finance: I know what led me to encourage a leveraged-long position in the early 1990’s, and why were right about the 2000-2002 collapse, and why we were right to become constructive in 2003, and why we were right about yield-seeking behavior causing a housing bubble, and why we were right about the 2007-2009 collapse. And we know that the valuation methods that scream that the S&P 500 is priced at more than double reliable norms, and that warn of zero or negative S&P 500 total returns for the next 8-9 years, are the same valuation methods that indicated stocks as undervalued in 2008-2009.

As an important side note, the financial crisis was not resolved by quantitative easing or monetary heroics. Rather, the crisis ended – and in hindsight, ended precisely – on March 16, 2009, when the Financial Accounting Standards Board abandoned mark-to-market rules, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The decision by the FASB gave banks “significant judgment” in the values that they assigned to assets, which had the immediate effect of making banks solvent on paper despite being insolvent in fact.

Rather than requiring the restructuring of bad debt, policy makers decided to hide it behind an accounting veil, and to gradually make the banks whole by lowering their costs and punishing ordinary savers with zero interest rates, creating yet another massive speculative yield-seeking bubble in risky assets at the same time. [..]

This is 5.5 years ago. Do we still think about this enough? Do we still realize what the inevitable outcome will be? Hussman suggests the moment is near.

The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, is 115% above reliable historical norms and only 15% below the 2000 extreme. Based on valuation metrics that are about 90% correlated with actual subsequent returns across history, we estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years. At this point, the suppressed Treasury bill yields engineered by the Federal Reserve are likely to outperform stocks over that horizon, with no downside risk.

As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There’s clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There’s no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad.

115% above reliable historical norms. That’s what the equity put that doesn’t exist, plus the Plunge Protection Team, have achieved. None of that stuff is worth anything near what you pay for it. But people do it anyway, and think very highly of themselves for doing it. Because it makes them money. And anything that makes you money makes you smart.

Then, the crew at Phoenix Capital, courtesy of Tyler Durden:

Stocks Have Been More Overvalued Only ONCE in the Last 100 Years (Phoenix)

Stocks today are overvalued by any reasonable valuation metric. If you look at the CAPE (cyclical adjusted price to earnings) the market is registers a reading of 27 (anything over 15 is overvalued). We’re now as overvalued as we were in 2007. The only times in history that the market has been more overvalued was during the 1929 bubble and the Tech bubble. Please note that both occasions were “bubbles” that were followed by massive collapses in stock prices.


Then there is total stock market cap to GDP, a metric that Warren Buffett’s calls tge “single best measure” of stock market value. Today this metric stands at roughly 130%. It’s the highest reading since the DOTCOM bubble (which was 153%). Put another way, stocks are even more overvalued than they were in 2007 and have only been more overvalued during the Tech Bubble: the single biggest stock market bubble in 100 years.


1) Investor sentiment is back to super bullish autumn 2007 levels.
2) Insider selling to buying ratios are back to autumn 2007 levels (insiders are selling the farm).
3) Money market fund assets are at 2007 levels (indicating that investors have gone “all in” with stocks).
4) Mutual fund cash levels are at a historic low (again investors are “all in” with stocks).
5) Margin debt (money borrowed to buy stocks) is near record highs.

In plain terms, the market is overvalued, overbought, overextended, and over leveraged. This is a recipe for a correction if not a collapse.

If we combine Hussman and Phoenix, we see an enormous amount of people playing with fire. And their lives. And that of their families. All as ‘confident’ as those American shoppers are (were?) supposed to be. At least a whole bunch of those were smart enough not to show up. How smart will the investment world be? Their senses have been dulled by 6 years of low interest rates, handouts and other manipulations. They’re half asleep by now.

Nobody knows what anything is worth anymore, investors probably least of all. After all, their sentiment is back to ‘super bullish autumn 2007’ levels. And they listen to guys like Dudley, who don’t have their interests at heart. Everybody thinks they’ll outsmart the others, and the falling knife too. Me, I’m wondering how much y’all lost on oil stocks and bonds recently. And how much more you’re prepared to lose.

Home Forums Oil, Gold And Now Stocks?

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    DPC Government Street, Mobile, Alabama 1906 Is the Plunge Protection Team really buying oil now? That would be so funny. Out of the blue, up almost 5%
    [See the full post at: Oil, Gold And Now Stocks?]

    Golden Oxen

    While strictly not a measure of valuations the graph of the record amount of margin debt is most troubling. This is usually gambling, not investing money, and is hardly an indicator of subdued speculation.


    So, how many have left the labor force, and how many have been down shifted in their earnings just since 2008? What if we measure back to 2000 for those same losses, what is the shrinkage, the deflation that is in play. We pretend the GDP has grown in the face of manufacturing jobs morphing into lawn care, auto spas, dog groomers and life coaches. Control frauds have replaced paid for homes, and pensions and 401k accounts with SSN disability and SNAP. The american dream in progress.


    Phoenix Capital has been dead wrong in probably every prediction they’ve made every month for the last few years. Why? Because the central banks buy all this stuff to bring it wherever they want. None of the previous bubbles provide a reference to compare today’s since that never used to happen.

    Seriously, if I had done the complete opposite of what Phoenix Capital had said to do, I’d be a rich man today.

    Golden Oxen

    “Every normal man must be tempted at times to spit upon his hands, hoist the black flag and begin slitting throats.” – H. L. Mencken


    @Mark: It’s exactly because of the unprecedented nature of this central bank behavior that we can predict that it can’t go on forever. It has all been a bag of tricks ever since late 2008, and such blatant manipulations can only go on for so long. That said, I’m pretty amazed the Masters of the Universe have been able to keep juggling all those running chainsaws as effectively as they have been for going on six years now.

    Let us also not forget that all those TBTF Banks are all nice and set up for going even bigger boomsies than they were six years ago.


    “Is the Plunge Protection Team really buying oil now? That would be so funny. Out of the blue, up almost 5%? Or was it the Chinese doing some heavy lifting stockpiling for their fading industrial base? Let’s get to business.”

    The Chinese have a “fading” industrial base?! The most spectacular industrial development story of all time, over decades, and they are “fading”?! Are we living on the same planet?


    Hey Alan, long time.

    Big things fade too. Or as the French say: Un éléphant se trompe énormement.


    Alan, China’s industrial “miracle” could only have happened as a result of the west’s de-industrialization. And there seems to be lots of evidence that they are in a huge bubble of their own. Recently they lowered rates. Don’t forget, the stronger the growth, the faster it will hit limits.


    “How is this possible? ‘The sharp drop in oil prices will help boost consumer spending’? I don’t understand that: Dudley is talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost?”

    This remark by Dudley must involve the idea that money spent on gasoline produces low spending multipliers because it is effectively spent out of domestic circulation, whereas said money spent on other things produces higher multipliers because it remains in circulation at higher velocity, or produces credit multipliers if saved, but generally promoting higher productive employment when not spent on gas.
    The logic seems fallacious, but could be conditionally true, depending on where and how the gas money normally ends up. Do gasoline supply chain companies pay much in taxes or wages domestically? If so, much of said money would be spent right back into circulation anyway. But if not, there may be a pathway for said gas money to effectively escape domestic circulation in an unproductive fashion. This pathway would then supposedly be narrowed by a gasoline price plunge.

    The shale boom situation should derail the argument, providing that the employment and taxable income lost because of the booms sudden reversal would outweigh possible employment gains elsewhere by higher multipliers in discretionary spending.
    Do multipliers actually exist in reality, as functions of monetary velocity and viscosity?

    Gravity is the thrice-greatest algorithm.


    Not to worry, the Fed can guarantee plenty of money to keep the system liquid,,,just not it’s purchasing power.


    Mark BC: “China’s industrial “miracle” could only have happened as a result of the west’s de-industrialization.”

    Irrelevant. Regardless of the cause, China has undergone a spectacular industrialization, combined with massive urbanization, massive improvement in living standards across almost the entire population, dramatically reduced illiteracy, fertility collapse, etc. (all of the foregoing being related).

    Mark: “And there seems to be lots of evidence that they are in a huge bubble of their own.”

    Some evidence, yes. They’ll undoubtedly contract somewhat (correct some of the internal imbalances) and, ongoing, be unable to sustain double-digit growth rates as they had in the past. That’s just part of the process; nothing to get in a twist about. The important thing is that they have made gigantic productive investments that will pay off for over a century, or longer. Their debt problems are different from ours, since they’ve spent their money on industry, infrastructure and the like — the basis for wealth generation — while we have pissed-away our money on worthless crap. The issue is not debt; it is debt in relation to the ability to generate wealth, so as to service or pay off the debt. On that point they are far ahead of us, and gaining almost by the month.

    As for “big things fading” (ilargi): there’s zero evidence that China is now fading, or that it is in any danger whatsoever of becoming weaker as a regional and indeed global force in any foreseeable future. To the contrary: there’s every indication that China is coming into its own as a great world power — having just this year (for example) surpassed the U.S. in GDP (PPP basis). There’s a blizzard of evidence, in contrast, that the West, and the U.S. in particular, is on the verge of fading. All of the fundamentals are in place for a sharp downward turn in the fortunes of the Western powers in general and especially the U.S., with simultaneous rise of the East or Eurasia. Whether or not that materializes remains to be seen, but it is a more than fair bet.

    Though not “fading” in the slightest right now, demographics does allow a rough guess about China’s fate in the latter half of this century: population stabilization and likely decline, combined with a rapidly aging population, will render China less of a dynamic economic power and world player. In other words, China will rise and fall (or come in for a long slow landing) at some point, probably starting in 50 years or so. This is not surprising. Other areas such as India, and then Africa, will by then be on growth trajectories similar to China’s of the last few decades — i.e. dramatic growth and development. After that, who the heck knows? That’s far too distant to even guess. Perhaps the battered old U S of A will be ready for a comeback by then… 😉


    Let he who has ears to hear….

    EURASIAN ECONOMIC BOOM AND GEOPOLITICS: China’s Land Bridge to Europe: The China-Turkey High Speed Railway

    EURASIAN ECONOMIC BOOM AND GEOPOLITICS: China’s Land Bridge to Europe: The China-Turkey High Speed Railway
    By F. William Engdahl
    Global Research, April 27, 2012
    The prospect of an unparalleled Eurasian economic boom lasting into the next Century and beyond is at hand. The first steps binding the vast economic space are being constructed with a number of little-publicized rail links connecting China, Russia, Kazakhstan and parts of Western Europe. It is becoming clear to more people in Europe, Africa, the Middle East and Eurasia including China and Russia that their natural tendency to build these markets faces only one major obstacle: NATO and the US Pentagon’s Full Spectrum Dominance obsession. Rail infrastructure is a major key to building vast new economic markets across Eurasia.

    [go to the link for exciting details, map]


    Signs of the times:

    High-speed rail, kilometers:

    China, year 2000: 0
    China, end 2013: 11,085
    China, end 2020: 25,000 (est)

    U.S.A., year 2000: 0
    U.S.A., end 2013: 0 *
    U.S.A., end 2029: 600? **

    * U.S. has a few hundred miles of slightly-upgraded old-style track, sometimes described as “high speed”, but nothing high speed in the modern (China) sense.

    ** If the California Bay-to-LA line is built (problematic; supposedly by 2029 if it happens). Other than that, nothing clearly on the docket.

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