Wednesday, March 11, 2015

A 6-Year Bull Market in Stocks or a 6-Year ZIRP Wealth Transfer?  (Six Years Of Bull Market Bull)

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For those who think the wealth transfer that's been going on for decades has been accidental or unintended . . . David Stockman has some facts that will interest you about what's been going on since the Great Defrauding of 2008, and "attention must be paid" as he gets quoted by almost every reporter still sentient.

A 6-Year Bull Market in Stocks or a 6-Year ZIRP Wealth Transfer?

By Pam Martens and Russ Martens

March 10, 2015

Pundits were out in force yesterday celebrating the six-year anniversary of the bull market in stocks. Notably, no one was talking about the fact that the runup in stock prices has coincided with a six-year zero interest-rate policy (ZIRP) by the Federal Reserve, making the stock market a dandy casino to borrow low on margin and speculate high on risk; or, in the case of corporations, to issue tons of new debt and buy back their own stock.

As mind-numbing as it is to comprehend, it was December 16, 2008 when the Federal Open Market Committee of the Federal Reserve released this statement:   “The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.” And there we have stayed for six long, arduous years with nothing but periodic threats to hike rates coming from the Fed.

Seniors who were subsidizing their meager Social Security checks with interest from Treasury securities or Certificates of Deposit have watched their supplemental income cut by 50 to 75 percent, depending on the maturity of the instrument, as a result of the long period of low interest rates.

The elderly and those unemployed or underemployed might have been able to withstand these low rates for a year or two without dipping into principal to make up for the yield loss, but after six belt-tightening years, many have succumbed to simply eating into the principal to make up for the shortfall.

The Federal Reserve reports that:   “Rates of ownership of certificates of deposits fell markedly between 2010 and 2013, from 12.2 percent to 7.8 percent. The amount held in those accounts also fell, with the median declining 25 percent and the mean declining 17 percent. These declines are, at least in part, attributable to low interest rates over this period …”

ZIRP has effectively been a wealth-stripping mechanism for millions of Americans.

In August of last year, the Federal Reserve released a study showing that 52 percent of Americans would not be able to raise $400 in an emergency by tapping their checking, savings or borrowing on a credit card, which they would be able to pay off when the next statement arrived. That statistic puts into somber perspective just who it is that’s benefiting from the six-year bull market in stocks.

The wealth stripping aspects of ZIRP have likely contributed to the marked decline in the number of individuals participating in the stock market since the bull market began.

Despite the runup year after year, the participation rate of those buying individual stocks has been on a steady decline.

According to the most recent Federal Reserve Survey of Consumer Finances, which is conducted every three years, direct stock ownership was 15.1 percent in 2010 but fell to 13.8 percent in 2013, the date of the last Survey. That’s down from 17.9 percent in 2007, the year before the financial collapse in 2008.

Combining direct and indirect stock ownership, such as through mutual funds and Exchange Traded Funds (ETFs), stock ownership is still sliding, from 53.2 percent in 2007 to 48.8 percent in 2013.

So exactly who has benefitted from the runaway stock market?

The Fed’s Survey of Consumer Finances states that for the top 10 percent income group, the rate of ownership increased 3.9 percentage points from 2010 to 2013, reaching 92.1 percent.

Typically, at a market top, insiders begin to “distribute” their stock to the less savvy investor – the dumb money. Today, there are few willing participants with enough principal left to play the part of dumb sucker.

This may turn out to mean that the super rich become, by default, the dumb money. Unless, of course, the corporations continue to play the dumb sucker by buying back their stock at elevated price-to-earnings levels as their own insiders exit.

David Stockman has a clear idea of where ZIRP is taking the U.S. economy, writing that the “Fed’s free money cascade” is causing “financial distortions and deformations.”
(Not to put too fine a point on it, but financial distortions and deformations on Wall Street are how we got into this mess in the first place.)

On November 20 of last year, Stockman wrote the following:

“… ZIRP has fueled myriad financial bubbles and speculations owing to the desperate scramble for ‘yield’ that it has elicited among traders and money managers. Indeed, the financial system is literally booby-trapped with accidents waiting to happen owing to the vast mispricings and bloated valuations that have been generated by the Fed’s free money.

“Nowhere is this more evident than in the subprime auto loan sector. That’s where Wall Street speculators have organized fly-by-night lenders who make predatory 20% interest rate loans at 115% of the vehicle’s value to consumers who are essentially one paycheck away from default.

“This $120 billion subprime auto paper machine is now driving millions of transactions which are recorded as auto ‘sales,’ but, in fact, are more in the nature of short-term ‘loaners’ destined for the repo man.

So here’s the thing:   In an honest free market none of these born-again pawnshops would even exist; nor would there be a market for out-of-this-world junk paper backed by 115% LTV [loan-to-value]/75-month/20% rate loans to consumers who cannot afford them.”

When it comes to Wall Street, bull markets and the Fed – let the buyer beware.

The following essay contains all you need to know to gauge what the economy of the U.S. has in store for us.

And it's difficult to see a way out.

By the end of March 2015, the S&P companies will have flushed the staggering sum of  $4 trillion back into the market in the form of dividends and buybacks or upwards of 85% of their net earnings since the post-crisis bottom.

So the six-year bull market amounts to this. The quality of current earnings is being deeply impaired by the very cash extraction and recycling process that has funded the soaring index averages. That means that PE multiples should be shrinking, not expanding to nearly all-time highs.

Six Years Of Bull Market Bull

March 9, 2015

Bruno de Landevoisin

Submitted by David Stockman – The Contra Corner Blog
Never has there been a more artificial - indeed, phony — gain in the stock market than the 215% eruption orchestrated by the Fed since the post-crisis bottom six years ago today. And the operative word is “orchestrated” because there is nothing fundamental, sustainable, logical or warranted about today’s S&P 500 index at 2080.

In fact, the fundamental financial and economic rot which gave rise to the 672 index bottom on March 9, 2009 has not been ameliorated at all. The US economy remains mired in even more debt, less real productive investment, fewer breadwinner jobs and vastly more destructive financialization and asset price speculation than had been prevalent at the time of the Lehman event in September 2008.

Indeed, embedded in Friday’s allegedly “strong” jobs report is striking proof that the main street economy is the very opposite of bullish. In January 2015 there were still 2 million fewer full-time, full-pay “breadwinner” jobs in the US economy than there were before the crisis in December 2007.

Breadwinner Economy Jobs - Click to enlarge

Not surprisingly, therefore, real median household income is still 4% below where it stood prior to the crisis. That cardinal fact nullifies in its entirety all of the Wall Street propaganda about “recovery” based on spurious paint-by-the-numbers data on waiter and bartender jobs or the temporary surge in car sales fueled by unrepayble subprime auto loans.

As should be more than evident by now, the household sector has reached a condition of peak debt, meaning that sustainable consumption spending is now solely dependent upon income growth. And that’s not happening.

Image result for images of real median household income in 2014

Likewise, the supply side of the economy - where income is actually generated — cannot grow if investment in productive assets lags. On that score, there is absolutely no reason for a bullish stock market, either. Even as measured by the false Keynesian investment “spending” metric, real investment in business fixed assets is up by only 1.1% per year from pre-crisis levels.

And, of course, the flatlining trend shown above doesn’t even take into account the consumption of plant, equipment and other assets in current production. Accordingly, the only valid measure of future economic growth prospects is real net investment — or current spending as recorded in the GDP accounts less depreciation. As I documented last week, that number stood at about $400 billion in Q4 or about 25% lower than the pre-crisis level of $500 billion, and nearly 33% lower than the level recorded at the turn of the century.

So there is nothing bullish at all in the single most important metric for future economic growth and profitability.

Net Real Domestic Business Investment

In short, the endless buy-the-dip trajectory shown below is not the consequence of a sustainably improving outlook for main street prosperity and corporate profits or honest price discovery in the financial markets.

Its just reflective of bull market bull; its the flashing daily scoreboard recorded in a casino that has been juiced by the greatest central bank monetary fraud in human history.

Needless to say, six years of continuous monetary levitation by the Fed and its fellow traveling central banks around the world has generated a ticking time bomb.

That’s because after 80 months of drastic financial repression, financial markets have been reduced to a state of abject addiction to central bank monetary stimulus.

That pathological condition was evident once again in Friday’s stock market plunge — a kneejerk reflection of Wall Street’s abiding fear that its monetary narcotics will someday be withheld. In this case, its mini-hissy fit arose from fear that a purportedly “strong” jobs report would induce the Fed to go ahead with a pinprick 25 basis point increase in money market interest rates. And as soon as 90 days down the road!

Do not be confused by this “goods news is bad news” tantrum. There is now a dangerous fragility embedded in the Wall Street casino.

After all, the six year “bull market” being celebrated today by the financial media was powered upward dip-after-dip-after-dip by the very same headline-reading robo-machines, day traders, hedge fund hustlers and shameless Wall Street equity strategists who, it turns out, are actually afraid of financial mice.

That is, they are petrified at the prospect of tiny interest rate increases that amount to irrelevant rounding errors to main street – and which, at worst, may reach 100 basis points sometime in the year ahead.

Let’s see. Never during the 750 months between the end of WW II and December 2008, did money market rates penetrate below 1%.

In fact, other than during the 24 months of the Greenspan panic between June 2003 and June 2005 — did they even come close.

So this is really not about interest rate ticks in the federal funds market. Its actually about the fact that the entire post-crisis bull market is a monumental house of cards built on a historically aberrant monetary regime that is unsustainable and eventually heading for a crash landing.

Stated differently, today’s S&P 500 index at 3X its March 2009 low is rooted not in the real domestic and world economy, but in the perverse mechanics that ZIRP and QE have touched off within the canyons of Wall Street. On that matter there is no better authority than the very bullish “strategists” who dispense the Cool Aid.

Thus, calling in the homegamers for yet another slaughter, Charles Schwab’s perpetually bullish stock peddler, Liz Ann Sonders, assured one and all that the huge gain during the last six years is completely on the up-and-up:

“Earnings growth and the power of stock buybacks have more than explained the >250% appreciation since the March 2009 lows,” she said.
Well, yes, by the end of this month there will have been approximately $2.5 trillion of stock buybacks by the S&P 500 companies alone since March 2009.

So a drastic shrinkage of the share count has flattered the math of EPS calculations. But that only begs the question of earnings quality, and whether on that basis market multiples should be rising or falling.

In fact, the Fed’s drastic money printing regime has transformed corporate America into an equity strip-mining machine.

Virtually the entirety of S&P net income is being flushed back into the stock market, meaning that there is virtually no free cash flow left to fund growth — a development fully consistent with the sharply declining trend of real net investment for the overall US economy depicted above.

Thus, during the year ended in Q3 2014 (latest available data), the S&P 500 companies reported aggregate net income of $945 billion, but flushed fully $892 billion or 95% of that total back into the Wall Street casino in the form of dividends and share repurchases.

Nor are these results an aberration. In fact, go back to the beginning of today’s six-year bull market and the data show that the stock market is essentially capitalizing at higher and higher multiples the earnings generated by companies with steadily deteriorating growth prospects and balance sheets.

By the end of March 2015, the S&P companies will have flushed the staggering sum of  $4 trillion back into the market in the form of dividends and buybacks or upwards of 85% of their net earnings since the post-crisis bottom.

So the six-year bull market amounts to this. The quality of current earnings is being deeply impaired by the very cash extraction and recycling process that has funded the soaring index averages. That means that PE multiples should be shrinking, not expanding to nearly all-time highs.

Yet with 98% of companies reporting, GAAP earnings for the S&P 500 came in at $102/share during Q4, meaning that today’s 6th anniversary market is trading at 20.5X LTM profits.

Needless to say, the last time outside of recession quarters that the broad market PE ratio was above 20X was during the fall of 2007.

Even that is cold comfort, however. At least back then when reported earnings peaked at $85 per share in Q2 2007 they had not yet been deformed by 75 quarters of ZIRP — a distortion that has subsequently ballooned earnings by $5-10 per share owing to artificially cheap interest carry costs on upwards of $3 trillion of S&P company debt.

Nor had a concerted global central-bank-driven economic boom lifted materials, energy and industrial company earnings to wholly artificial heights.

Nor had virtually zero cost funding — extracted from the hides of savers and depositors — artificially boosted bank and financial company earnings by triple digit billions.

So there has been an enormous deterioration in the quality of reported earnings. On an apples-to-apples basis, today’s $102/share does not likely even equal the $85/share reported way back in the June 2007 quarter. Moreover, after adjusting for the impact of inflation it is not even close.

The more important point, however, is that all of these bull market stimulants are now in the rear-view mirror.

Thus, the global economy is rapidly cooling under the double whammy of $200 trillion of credit market debt compared to $140 billion prior to the financial crisis; and profitability is being hammered by a deflationary crunch in the energy, materials and industrial sector and by the rising dollar exchange rate propelled by the global scramble to fund massive amounts of off-shore dollar debts.

So six years on from the bottom the market is now chasing its own tail, valuing artificially inflated earnings at nosebleed PE multiples and buying the dips on any faint sign that the central bank stimulus drugs will be dispensed for a while longer. All the while, of course, the fundamental malady that triggered the last crisis goes unrelieved – namely, the crushing burden of public and private debt that has been enabled by more than two decades of drastic financial repression and systematically false pricing throughout the financial markets.

In fact, the US economy now has $8 trillion or 16% more public and private debt outstanding than it did when the “debt crisis” first incepted in Q4 2007. Once upon a time it was understood that nation’s can not borrow their way to prosperity. By  contrast, today’s celebrants of the 6-year “bull market” are apparently happy to believe that wealth can be manufactured out of thin air by central bank printing presses.

That amounts to something for nothing. It's never worked before, and most assuredly this time is not different.

David Stockman

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