Saturday, December 7, 2019

Markets detached from reality.

No kidding.
Markets are now completely detached from reality because we are in PE [stock price/earnings ratio] expansionary phase supported by monetary policy.

97% of companies reported S&P 500 GAAP earnings were down 6% over the past year – largest decline since Q4 2015[.][1]

Monetary policy supports unreal P/E expansion by keeping interest rates low thereby penalizing savers. They understand they are foolish to keep money in savings with a 1.00% rate of return when inflation is running at, for the sake of argument, 2%. And low rates allegedly get money into the hands of enterprises to invest who would not otherwise be able to take on debt with interests costs of 5%. That is in part an inaccurate assumption as the phenomenon of stock buy-backs is widespread.

Ditto for cheap money acquired by banks. They loan that money to consumers who then make wise decisions to purchase cars, trucks, boats, electronics, apparel and homes thereby goosing the economy with spending that would not otherwise occur. As we know, however, such spending isn't necessarily wise, leads to bubbles in car and housing markets, for example, and, even if its stimulates the economy, is subject to the law of diminishing returns.

Too, as the middle class is pressed to the wall by H-1B engineer imports and as the working class is hammered by illegal immigrants stealing construction and other jobs (and everyone is adversely affected by lunatic offshoring except the megacorporations) the coonsumer debt that is taken on is more likely to be to maintain the semblance of normal life by making purchases for necessities. Borrowing to tread water, in short.

Low rates also keep government debt service costs artificially low as lunatic social and military spending has led to astronomical debt. This debt must be serviced and the amount of it is so huge that even a modest rise in the interest rate threatens to require unpopular higher tax rates to finance the extra debt service burden. Thus, keep taxes low and embrace malinvestment or raise rates and enrage the voters. With a dash of "austerity" and shakeout of marginal businesses, thanks ever so ta.

Would-be savers thus withdraw their money from banks and invest in the stock market hoping to protect their nest egg by riding the markets higher ahead of inflation. And note that if Jones buys 1,000 shares of Boeing stock from Smith at $100 a share, none of that money is available to Boeing to invest but only to Smith.

The author, Mr. Jain, also highlights the European intention to find yet another way to avoid making productive investments by buying "green bonds" to combat the "climate change" menace, on which we have of late been masterfully instructed by a Swedish teenager. IKYN.

This worship of the stock market now is artificial and eery. Pres. Trump is no exception as he rarely fails to remark on the soaring heights of the Dow. This is an odd position to take for a supposedly sophisticated businessman. High stock prices are clearly the result of Fed manipulation and represent the unhealthy lurch away from productive investment into froth.

Note that I'm a man of limited financial insight but if this basic observation about low rates leading to malinvestment is wrong I very much want to know how they are healthy. Mr. Jain says the "FED wants to allow inflation to run 'HOT.'" Somehow I get the impression Mr. Powell at the Fed is not someone who'd be up to the task.

[1] "How Did We Get Here (No, Seriously, How?!)." By Ritesh Jain, ZeroHedge, 12/6/19. Check out the alarming spread between the equities market and global GDP illustrated by this graph from the foregoing article. Does this seem like it will end well? How much do you think a rational investor would want to dive into ANY equity market now?

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