The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

[Milton Kuo]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

By purchasing gold central banks can increase the exchange rate value of the gold they already hold to hedge USD depreciation risk that rises with an increased oil price for a range of reasons including an increased oil import trade deficit and increased budget deficit to offset the recessionary impact of rising oil prices. For obvious reasons the model will remain proprietary.

Doesn't this mean that it would be possible to front-run the central banks' purchases of gold?

[EJ]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

Doesn't this mean that it would be possible to front-run the central banks' purchases of gold?

Per the GAGFO Gold/Oil Model a rising gold price of a certain duration, absent other proximate causes, means that central banks believe oil prices are going to rise persistently or suddenly. They can be wrong but the historical record shows they rarely are.

[Polish_Silver]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

Commodities have not and will not correlate to oil as gold does because gold is not only a commodity it is also a reserve currency.

Gold is the only reserve currency that central banks hold on FX account that is not a national currency.

We have analyzed central bank purchases of net oil producers and consumers with respect to gold and USD reserve accumulations, capital flows, net external debt, and other factors and have a model that we think is predictive with respect to gold prices for a range of future oil price scenarios. For example if the global oil price rises to $200 this implies a gold price of $2400 to $4000 depending on how quickly the price oil change occurs. By purchasing gold central banks can increase the exchange rate value of the gold they already hold to hedge USD depreciation risk that rises with an increased oil price for a range of reasons including an increased oil import trade deficit and increased budget deficit to offset the recessionary impact of rising oil prices. For obvious reasons the model will remain proprietary.

Does the model include US oil imports and federal deficits? Totally cool line of thinking!

[Polish_Silver]

Damn near 15:1

EJ has said several times that GAGFO does not imply a gold/oil ratio. Yet the chart shows the two curves superimpose at 15 barrels of oil for 1 oz of gold. GAGFO perhaps allows a more complex relationship than just a fixed ratio, but the ratio idea is not bad for this data set.

[Woodsman]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

http://www.zerohedge.com/news/2014-11-09/peak-cheap-oil

I know it's frowned upon, but I couldn't let it pass without mention. Haven't read it yet, YMMV.

[don]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

King Dollar For Ever?

Back to the Nineties

November 7, 2014 posted by Doug Noland

Draghi follows Kuroda and king dollar spurs EM contagion fears.

From the perspective of my macro Credit analytical framework, history’s greatest Credit Bubble advances almost methodically toward the worst-case scenario. After more than two decades, the Bubble has gone to the heart of contemporary “money” and perceived safe government debt. The Bubble has fully encompassed the world – economies as well as securities and asset markets. And we now have the world’s major central banks all trapped in desperate “nuclear-option” “money”-printing operations. Moreover, serious cracks at the “periphery” of the global Bubble now feed “terminal phase” Bubble excess at the “core.” Indeed, “hot money” finance exits faltering periphery markets to play Bubbling king dollar securities markets. Euphoria reigns. In many ways, the Bubble that gathered powerful momentum in the Nineties (with king dollar) has come full circle.

Alan Greenspan was interviewed by the Financial Times’ Gillian Tett at the Council on Foreign Relations, October 29, 2014:

Greenspan: “In 1775 we printed a whole bushel full of continentals. And one of the fascinating things about that period is the fact that for the first year or two there was very little evidence that they had any effect on prices. Meaning that that paper currency circulated with the same value as specie (gold and silver). There is an extraordinary lag which exits between actions of that type and consequences. Now, eventually a continental was not worth a continental. But it took a long while, and I think that we’re looking at very similar things now. This again is human propensity. One of the things that I used this book (“The Map and the Territory”) to write was to develop a concept of how do you shift from a system where everybody is acting rationally – which is what all our models basically said – to one where reality is where people are acting intuitively, various different types of forms. Irrationality is in many respects systematic – you can model it. And indeed I show in many cases why for example fear is demonstrably a much stronger force than euphoria… This is the type of thing that I think we’ve got to understand. And one of the reasons why I say, as a conclusion in this book, that the non-financial parts of our economy behave very well. They are highly capitalized, and essentially it is a financial system which is totally divorced – a different function than the type of things we do in the non-financial area. One (the financial sector) has to do with the allocation of savings into investment. That is where “animal spirits” really run wild. And we have to understand that better than we do now. This is the reason why – everybody knew there was a Bubble in 2008 but, to my knowledge, nobody - even when we knew on a Monday morning that Lehman was going to default - did we get the reactions right away. It took several days before the whole system broke down. If you can’t forecast something like that what good is forecasting.”

Gillian Tett: “Do you regret not having pricked the Bubble in, say, 2005?”

Greenspan: “No. Because of by then – one of the things I conclude in the book is that pricking the Bubble – short of collapsing the economy – doesn’t do anything. We tried at the Fed, for example, in 1994. We raised the Federal Funds rate by 300 basis points –which is a huge amount in a short period of time. We went up 50 basis points, 75 basis points. And we did slow what was - we can call it an incipient rise in the Dow, for example. It stabilized. And we thought we got a previously unachieved safe landing. And so we started patting ourselves on the back, and low and behold as soon as we stopped tightening the Dow took off again. And the reason is that markets are very complex. The markets observing the fact that 300 basis points did not disrupt the economy changed the equilibrium level of the Dow Jones Industrial Average from here to there (raising his hand higher), and the markets just took off. There is no evidence of which I’m aware of where central banks have incrementally tightened. The only occasion where we actually saw something is when Paul Volcker’s Fed hit in late-1979 and early-1980 - put a clamp on the economy. And it’s only by bringing the economy down that you could burst the Bubble. And that is very bad news in a sense that – the only place where incremental tightening actually defuses Bubbles is in econometric models. And that’s because they are mis-specified.”


I have a weekly chronicle of the Great Credit Bubble going back to 1999 ready to do battle against historical revisionism. I began my “blog” in 1999 in part because I had witnessed profound changes in finance, policymaking and the markets that were going completely unreported and unanalyzed. Today’s out-of-control global Bubble arose from the Nineties Bubble in U.S. Credit and asset markets. And no one played a greater role in nurturing the Bubble than Alan Greenspan.

Greenspan remains impressively sharp. Interestingly, he has become a fan of gold. He doesn’t see the euro monetary experiment succeeding. Greenspan is clearly concerned about the current stance of monetary policy and “fiat” currencies. That he would raise the issue of our nation’s terrible experience printing “Continentals” is fascinating. That he would point responsibility to “human propensity” is incredible. Greenspan has expended considerable energy absolving himself of responsibility, in the process revising history. I’ll attempt a few clarifications.

Greenspan states that “everybody knew there was a Bubble in 2008.” As someone that studied, chronicled and warned of the Bubble, I recall things quite differently. Will everybody have known it was a Bubble in 2014? And, actually, wasn’t it perfectly rational to participate in stocks, bonds and asset markets – even on a leveraged basis – during the Nineties and right up to 2008, with the Fed (and Washington policymaking) manipulating, intervening and backstopping finance and the securities markets? Is it not similarly rational to speculate in stocks, bonds, corporate Credit and derivatives today? I would strongly argue that rational responses to government-induced market distortions are instrumental to major Bubbles.

Greenspan was the father of contemporary “activist” central banking. His market assurances and “asymmetrical” policy approach were godsends to speculative markets. An aggressive rate collapse and yield curve manipulation (stealth banking system bailout) were instrumental in fostering historic expansions in both non-bank “Wall Street finance” and leveraged speculation. It’s easy these days to forget the scope of the Nineties Bubble that inflated under Greenspan’s watch.

The S&P500 returned 429% during the decade of the Nineties. The Nasdaq Composite gained almost 800%. Total system (non-financial and financial) debt doubled during the decade to $25 TN. The Asset-Backed Securities (ABS) market expanded 525% to $1.3 TN. Securities Broker/Dealers assets surged 320% to $1.2 TN. Rest of World holdings of U.S. financial assets jumped $3.7 TN, or 370%, to $5.64 TN. Corporate (non-financial) borrowings surged 141% during the decade to $9.319 TN.

If not for the spectacular Nineties Bubble I seriously doubt Bernanke would have become a leading figure. He was brought into the Fed in 2002 when the scope of the post-Nineties Bubble landscape came into clearer view. Bernanke had the academic creed the Fed would adopt as it took central bank “activism” to a whole new level of experimentation. In the name of fighting the scourge of deflation, the Greenspan/Bernanke Fed fueled a reflationary mortgage finance Bubble that left even the Nineties Bubble in the dust.

I’m compelled to amend a few of Greenspan’s comments. Yes, the Greenspan Fed did raise rates 300 basis points between February 4, 1994 and February 1, 1995. But the Fed had previously cut rates 600 basis points – from 9% in October 1989 to 3% by September 1992 (in the end slashing 300 bps in seventeen months).

I certainly concur with Greenspan’s comment that “markets are complex.” I simply don’t buy into Greenspan’s attempt to distance the markets’ propensity for destabilizing “animal spirits” from “activist” government policymaking. Government actions repeatedly throughout the decade backstopped the markets and resuscitated the Bubble. There was the extraordinary use of the U.S. Treasury’s Exchange Stabilization Fund as part of the 1995 Mexican bailout. There was the Federal Reserve orchestrated bailout of Long-term Capital Management. There were scores of (Washington-based) IMF bailouts. There was the February 1999 “Committee to Save the World,” with Greenspan on the cover of Time magazine positioned in front of Robert Rubin and Larry Summers.

In some key ways, these days it’s Back to the Nineties. King dollar is again flourishing, fueled by Federal Reserve “activism” coupled with faltering Bubbles around the globe. U.S. securities markets are once again bolstered by the perception that policymakers will guarantee marketplace liquidity and quash incipient crises. And, importantly, the Bubble is again being dangerously fueled by an underlying source of finance that is both unrecognized and unsustainable.

Back in 1999, there was absolutely no doubt in my mind that the system was in the midst of a historic Bubble. At the same time, the bull story was compelling (in contrast to today): the “technology revolution,” unprecedented productivity gains, robust growth, globalization, contained inflation and newfound confidence in astute policymaking. There was the collapse of the Soviet Union, European integration and the rise of Capitalism around the globe. But there was as well one major unappreciated problem: The underlying finance encompassing the world’s reserve “currency” was unsound.

GSE assets were up $1.27 TN, or 280%, during the nineties (to $1.72 TN). Notably, GSE holdings increased an unprecedented $150bn, or 24%, during 1994. I can state confidently that the incipient U.S. Credit, securities and speculative Bubbles would have been suppressed had the GSE’s not been there to backstop increasingly speculative markets. Without the GSEs, the 1994 bursting of the bond/derivatives Bubble would have been a major problem (and an invaluable learning experience for market participants and policymakers). Operating as quasi-central banks, GSE assets increased $112bn in 1997, $305bn in 1998 and $317bn in 1999.

To this day, there is no recognition of the profound role the GSE backstop played in distorting markets and promoting risk-taking and speculation. Including GSE MBS, total GSE securities increased about $2.7 TN during the nineties, providing the key source of system Credit underpinning the Nineties Bubble. The Technology and stock market Bubbles burst in 2000. The “miracle” U.S. economy fell into recession. Instead of running budget surpluses and paying off all federal debt (part of the bullish view at the time), deficits returned with a vengeance. By 2002, the U.S. corporate debt market was in crisis. Enter Dr. Bernanke.

There is still little appreciation for the how GSE Credit fueled the securities markets, housing prices, the real economy and government receipts throughout the Nineties. These days, there’s a similar lack of understanding for how almost $3.6 TN of Federal Reserve Credit has stoked securities markets, the real economy and Federal receipts. The view in the Nineties was that the GSEs didn’t matter – “only banks create Credit.” The view today is that QE-related Federal Reserve “money” just sits there inertly on the U.S. banking system’s balance sheet.

We’re at a critical juncture in the global Bubble. Serious cracks have developed at the periphery. The Russian ruble sank another 8.0% this week (two-week decline 10.5%). The Ukrainian Hryvnia dropped 10.5%. The week saw the Brazilian real fall 3.2%, the South Korean won 2.3%, the Colombian peso 2.0%, the Malaysian ringgit 1.7% and the Chilean peso 1.7%. The Iceland krona, Romanian leu and Hungarian forint all lost about 1%.

Last week saw the Bank of Japan’s Kuroda (after a 5 to 4 vote) shock the markets with a major boost in QE. This week, with various reports of serious dissension within the Governing Council, Mario Draghi emerged from committee policy discussions more determined than ever to push through with his Trillion euro increase in ECB holdings.

I struggle believing Kuroda and Draghi are driven by domestic considerations alone. I am not alone in discerning an element of desperation. Their aggressive measures have definitely thrown gas on the king dollar fire. And the week saw further acute pressure on commodities markets. King dollar and sinking crude helped incite crisis dynamics for Russia’s currency. The Russian central bank spoke of the ruble under attack from “speculative strategies” and “threats to the nation’s financial stability.” Putin on Thursday claimed “politics prevail in oil pricing.” By Friday, there were reports of Russian tanks again entering Ukraine.

In Back to the Nineties-type analysis, emerging markets contagion now seems to gain momentum by the week. This week’s ruble collapse certainly seemed to pull down the vulnerable Brazilian real. The sinking real then tugged at Colombian and Chilean pesos – and even the Mexican peso (trading at a 15-month low early Friday). EM bonds also showed some vulnerability. After beginning the week at 12.1%, Brazilian 10-year (real) yields traded to almost 13% Friday morning (closed the week at 12.56%). Venezuela yields jumped 232 bps to 18.50% (high since March ’09). Other EM markets were hinting at contagion vulnerability. The Turkish lira declined 1.6% this week, as Turkish 10-year yields jumped 17 bps to 8.61%. Turkey’s major equities index was hit for 3.25%. On the back of a Moody’s debt downgrade, South Africa’s currency lost 2.1%, while bond yields rose 11 bps (to 8.0%).

European equities popped somewhat on Draghi but posted another unimpressive week. Notably, Spanish stocks were down 3.4% and Italian stocks were hit for 3.5%. And with German yields down another 2.5 bps to a record low 0.815%, bond spreads widened in Spain (11bps), Italy (6bps) and Portugal (9bps). It’s worth noting that Italian CDS rose four basis points this week to 132bps, up 46 bps from September lows (only 9bps below the “panic” 10/16 close).

Meanwhile, U.S. equities bulls just love (Back to the Nineties) king dollar. Scoffing at global crisis dynamics, those seeing the U.S. as the only place to invest are further emboldened. And, no doubt about it, “hot money” flows could further inflate the U.S. Bubble. Speculative flows (underpinned by Kuroda and Draghi) have surely helped counter the removal of Federal Reserve stimulus. Yet this only increases systemic vulnerability to de-risking/de-leveraging dynamics. At the end of the day, it’s difficult for me to look ahead to 2015 and see how the household, corporate and governmental sectors generate sufficient Credit growth to keep U.S. asset prices levitated and the Bubble economy adequately financed. Perhaps this helps explain why - with stocks at record highs, the economy expanding and unemployment down to 5.8% - 10-year Treasury yields closed Friday at a lowly 2.30%.

[Bundi]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

http://www.zerocred.com/news/2014-11-09/peak-cheap-oil

I know it's frowned upon, but I couldn't let it pass without mention. Haven't read it yet, YMMV.

Woodsman, I hope you don’t mind that I piggyback on your post, I actually have not read that pco piece.

On the broader topic of oil though, I’d like to say thank you very much EJ for all of your analysis. Thought provoking, consistent, honest, and fearless research. It is a privilege to be in a position to read and appreciate it.

I’ve been away from this topic for several months but since initially (late to the game, I know) discovering the issue while reading the 2010 JOE, I have gone through many of the mental and emotional stresses and strains likely experienced by others here.

And while I remain skeptical of our ability to navigate the road ahead without experiencing serious problems, I must admit to having, for the first time in a while, enjoyed a relatively carefree weekend (contrary indication?). Not sure if this was warranted but that is how it felt. Lots of issues remain unresolved, lots of challenges, risks and opportunities. It is somehow though encouraging to me, at least for now anyway, to feel a sense that there is evidence of someone being at the wheel, maybe even in an informed way. This may just be a measure of how low my expectations have become, not sure.

Whether or not the FA strategy is a good one though, all things considered, I suppose remains to be seen and analyzed.

In any event, thank you again for all of your hard work, consistent approach, and first class insights.

[Bundi]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

http://www.zerocred.com/news/2014-11-09/peak-cheap-oil

I know it's frowned upon, but I couldn't let it pass without mention. Haven't read it yet, YMMV.

Woodsman, I hope you don’t mind that I piggyback on your post, I actually have not read that pco piece.

On the broader topic of oil though, I’d like to say thank you very much EJ for all of your analysis. Thought provoking, consistent, honest, and fearless research. It is a privilege to be in a position to read and appreciate it.

I’ve been away from this topic for several months but since initially (late to the game, I know) discovering the issue while reading the 2010 JOE, I have gone through many of the mental and emotional stresses and strains likely experienced by others here.

And while I remain skeptical of our ability to navigate the road ahead without experiencing serious problems, I must admit to having, for the first time in a while, enjoyed a relatively carefree weekend (contrary indication?). Not sure if this was warranted but that is how it felt. Lots of issues remain unresolved, lots of challenges, risks and opportunities. It is somehow though encouraging to me, at least for now anyway, to feel a sense that there is evidence of someone being at the wheel, maybe even in an informed way. This may just be a measure of how low my expectations have become, not sure.

Whether or not the FA strategy is a good one though, all things considered, I suppose remains to be seen and analyzed.

In any event, thank you again for all of your hard work, consistent approach, and first class insights.

[metalman]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

Woodsman, I hope you don’t mind that I piggyback on your post, I actually have not read that pco piece.

On the broader topic of oil though, I’d like to say thank you very much EJ for all of your analysis. Thought provoking, consistent, honest, and fearless research. It is a privilege to be in a position to read and appreciate it.

I’ve been away from this topic for several months but since initially (late to the game, I know) discovering the issue while reading the 2010 JOE, I have gone through many of the mental and emotional stresses and strains likely experienced by others here.

And while I remain skeptical of our ability to navigate the road ahead without experiencing serious problems, I must admit to having, for the first time in a while, enjoyed a relatively carefree weekend (contrary indication?). Not sure if this was warranted but that is how it felt. Lots of issues remain unresolved, lots of challenges, risks and opportunities. It is somehow though encouraging to me, at least for now anyway, to feel a sense that there is evidence of someone being at the wheel, maybe even in an informed way. This may just be a measure of how low my expectations have become, not sure.

Whether or not the FA strategy is a good one though, all things considered, I suppose remains to be seen and analyzed.

In any event, thank you again for all of your hard work, consistent approach, and first class insights.

+1

zerocred pco rip-off at this link... http://goo.gl/9ECbc6

ej dollar/pco update this am this link... http://www.itulip.com/forums/showthr...555#post288555

[don]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

Tales from Planet ZIRP: REITs

Now comes a prime example of central bank financial repression at work. It’s downright ugly and crystalizes how the Fed and other central banks are generating massive mis-allocations of capital and staggering windfall gains to Wall Street gamblers and their top 1% patrons.

In this case, the nation’s largest luxury mall operator, Simon Property Group (SPG), has announced a hostile offer for the other large US luxury mall operator, Macerich (MAC). Naturally, that made for “Merger Monday” cheerleading on CNBC, and a market surge well above the offer price—-indicating that the Wall Street arbs expect SPG’s offer to be fattened considerably before its all over.

The reason this kerfuffle is about financial repression and gambling games in the liquidity intoxicated Wall Street casino rather than an honest capital markets transaction is evident in a single number——namely, 56X. That’s the ratio you get when you divide the deal’s TEV by free cash flow—–and it represents a completely lunatic valuation.

So this warrants some elaboration. During the LTM period ending in September 2014, MAC posted EBITDA of $636 million and CapEx of $230 million, meaning that it generated $406 million of operating free cash flow. But SPG’s hostile offer at $91 per share plus assumption of existing debt results in a deal TEV (total enterprise value or debt plus market equity) of $22.4 billion.

Now here’s the thing. In an honest free market no one in their right mind would pay 56X cash flow for what amounts to a static portfolio of 52 Class A luxury malls and 6 strip malls.

The crucial point is that MAC is not an operating business with dynamic growth prospects owing to a red hot product, gee wiz technology or a world beating branding strategy with global markets to conquer. Instead, its just a dumb financial engineering portfolio which matches up a mountain of debt and REIT shares on one side of its balance sheet with a pile of long-term retail leases (10-20 years) at fixed rental rates on the other side. Its profits represent the arb between the two sides of its property balance sheet and these spreads are inherently fixed in nature.

Other than plowing the snow in the parking lot, operating the HVAC system in the mall and keeping the lights bright and the floors shiny, mall REITS provides virtually no business value added. Their leasees sell Apple gadgets and Prada fashions, but as a business MAC and SPG are actually an anti-Apple enterprise. At best their organic operating income can creep forward a few percentage points a year, and even that would represent positive inflation in the periodic roll of their store leases.

Stated differently, mall REITs are financial vehicles for the ownership of low growth rental properties that in a honest market would be valued at a 8X-12X free cash flow. To value an enterprise at 56X, by contrast, requires deep value added and double digit growth as far as the eye can see.

Needless to say, neither MAC nor SPG remotely correspond to the latter formulation—–nor do they have the capacity to generate the so-called synergies which are often used to justify huge takeover premiums. In fact, the discretionary operating costs of these property portfolios are downright trivial and amount to less than 5% of revenue.

Thus, today’s combined TEV of the two REITS at the deal offer price is about $96 billion. By contrast, the SG&A of Simon Property Group is about $350 million and MAC’s is about $26 million. Since SPG has been a serial deal machine and has done more than $40 billion of acquisitions over the last two decades, it has presumably squeezed every dime of possible synergy out of its existing base of operating expense—at least that’s what is claimed by its management and the equity analysts who follow it. So even if all of MAC’s operating expense could be eliminated—–it would amount to a 0.0003% improvement in free cash flow yield from the combined enterprise.

Likewise, mall level expense is almost entirely fixed, representing maintenance, depreciation, land leases and vendor services; and these expenses are heavily location and facility specific depending upon mall age, layout and similar factors. There is no reason to suppose that SPG would be any more proficient at operating MAC’s malls than the local management teams and routines already in place.

By the same token, SPG’s public rationale for the combination is the typical thin gruel that comes from the C-suite in deal heat. In this case, SPG claims that the combination will have more clout with the retail chains domiciled in the malls, and therefore will be in a position to extract higher rents.

C’mon. Rents like all real estate are local, local, local—–and depend on occupancy, the sales and traffic yield of specific retailers and much more. Why Simon Property Group would get more juice out of the leasees at a prime property like Tysons Corner Mall or the Biltmore Fashion Park (Phoenix) than would Macerich when these leases roll-over slowly under unpredictable conditions during the next two decades is not evident in the slightest.

In short, this deal is about combining two capital intensive property portfolios with virtually no operating synergies and scant organic property level growth capacity. Accordingly, its all about the cap rate——and that’s set by the massive intrusion of the Fed into financial markets, not the long ago discarded law of supply and demand and the process of price discovery by at- risk investors.

The truth is, both companies were trading at lunatic values even before SPG’s November 18 announcement that it had taken a toehold position in MAC. Specifically, SPG trades at 22X its operating free cash flow and MAC was trading at 44X prior to the announcement. And the manner in which these absurd valuations were attained in the Wall Street casino is not hard to divine.

Mall property REITs are essentially a bond in drag with a tiny equity kicker. Under the Federal tax law, they are relieved of the corporate income tax, but in return must distribute approximately 90% of their earnings each year to shareholders. So what theoretically gets valued by the stock market is their ample dividend stream—–and the heart of the matter is this: REIT dividends compete with bond yields, meaning that the capitalization rate or valuation multiple for REIT dividends track the 10-year treasury note with a small spread for risk.

Moreover, the principle cost of semi-leveraged REITs like SPG and MAC is their carry cost of long-term debt, which is their second source of capital to fund mall assets in addition to REIT shares. At the present time, for example, SPG has about $20 billion of debt net of cash, and pays about $1 billion of annual interest or about 4.5%.
Needless to say, ever since the Greenspan money printing era began in the 1990s, both the debt costs and the dividend yields of the REITs have been falling. Conversely, their valuation multiples have steadily risen, generating massive capital gains for investors who have been happily pleasured by the Fed’s crushing of interest rates over the last two decades.

The graph below shows the dramatic decline in SPG’s dividend yield since the 1990’s. Other than during the 2008-09 panic, when its share price plunged with the overall market, the dividend yield has trended steadily lower from about 9% to 3% at present. At the same time, its earnings were flattered by an equivalent drop in its long-term debt costs—-making for a double whammy of more earnings and more multiple on its share price.

“>
SPG Dividend Yield (TTM) data by YCharts

And, folks, this is how the Fed actually plays the wealth effects game. Since 2007, SPG’s EBITDA has risen by about 60% and its per share earnings have doubled. Furthermore, even these modest gains are primarily the result of acquisitions—–especially its purchase of the nation’s largest factory outlet mall company.
By contrast, there is nothing modest about it share price and its total market capitalization. Since the turn of the century its share price has increased 7X and its market cap has soared from $4 billion to $57 billion.


SPG data by YCharts

In this context, the pure financial engineering of the Macerich deal is quite evident. SPG proposes to fund the $16 billion equity purchase price with $8 billion of new debt and an equal amount of new share. In combination with assumed debt of $6.4 billion, SPG will take-on $14.4 billion of debt at a carry cost of under 3% or about $400 million. That will leave it with about $230 million of acquired free cash flow on $8 billon of new share for a yield of about 3%.

In short, the deal is completely pointless, generates no appreciable economic value, efficiency gains, new jobs or service capacity in the shopping mail market. But it does permit the company’s empire building CEO, David Simon, to upsize SPG’s holdings by about 40%. And to pay the absurd price of 56X free cash flow without apparent dilution to his earnings!

David Simon will undoubtedly send a heartfelt thank you note to Janet Yellen. It would complement the ones he should have sent to Greenspan and Bernanke as his growing warehouse of mall properties exploded in value over the years.

And, yes, the fast money traders who “got wind of something” before the public announcement on November 18 owe Yellen a thank you, too. In an honest capital market there would be no point in this deal whatsoever. But in Yellen’s casino, the market value of 59 malls doing nothing more than running in place soared by $5 billion virtually overnight.

That’s financial repression at work. That’s another day in the casino. No wonder they celebrate merger Monday with so much enthusiasm on bubblevision.

David Stockman

[Chris Coles]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

Thank you Don and one last point to make; every penny of the value of the shares is a reflection of the "market" value, not additional investment of new capital value into new business creation.

If and when the market value collapses; so too does the credability of the asset underpinning the borrowing.

[porter]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

This is a great analysis. Can you clarify how the Fed's actions translate into this market price distortion, step by step? I see the correlation, but I'm not sure I see the causation.

[seobook]

Re: The Post-Market Economy - Part I: Chaos on Planet ZIRP - Eric Janszen

I don't have 1% of Finster's or EJ's knowledge, but here's my attempt...

1.) central bank buys government bonds
2.) that additional demand adjusts the supply/demand balance, which drives down yield on government bonds
3.) entities selling those government bonds have to redeploy capital elsewhere (either other bonds or stocks or bond funds or ETFs or such)
4.) as that capital gets redeployed elsewhere, it drives down yields on other bonds.
5.) with stocks, price is the reciprocal of yield. lower bond yields equate to stocks trading at a higher P/E ratio.
6.) as P/E ratios expand, it attracts inflow of capital as more people chase returns. more people buy because it is going up rather than because there is fundamental value behind it.
7.) some people who profit from expanding financial markets might spend more into the real economy.
8.) as asset prices rise, more money can be borrowed against those assets.
9.) with bond yields artificially low, it becomes cheaper to use debt leverage for financial engineering (buying stocks with leverage, companies buying back their own shares, companies using artificially cheap debt to overpay for competing businesses in acquisitions, etc.)

a lot of the above work in the opposite direction at some point.

1.) inflation rises.
2.) central bank lifts rates.
3.) cost of borrowing increases across the yield curve & across various quality of debt
4.) rolling over financial engineered debt leverage gets more expensive.
5.) lower quality debt has increasingly large yield spreads.
6.) financial asset prices fall (because the relative risk free rate of return is higher & rolling over debt gets more expensive & higher interest expenses eat more of the operating cashflow from the business).
7.) assets must be sold off to pay down debt.
8.) P/E ratios contract.
9.) economy slows due to less "wealth effect" & leverage being drained from the system.

[don]

The Bonar: Soaring, Like an Eagle

I am constantly braced with questions about the US dollar and its impending demise. The reasoning seems to be that if America is a debt addicted dystopia—-and it surely is—- won’t the US dollar sooner or later go down in flames as the day of reckoning materializes? Won’t you make money shorting the doomed dollar?

Heavens no! At least not any time soon. The reason is simply that the other three big economies of the world—Japan, China and Europe—are in even more disastrous condition. Worse still, their governments and central banks are actually more clueless than Washington, and are conducting policies that are flat out lunatic—–meaning that their faltering economies will be facing even more destructive punishment from policy makers in the days ahead.

Indeed, Draghi, Kuroda and the commissars of red capitalism in Beijing make Janet Yellen and Stanley Fischer (Fed Vice-Chairman) appear to be slightly sober. So as trite as it sounds, the US dollar is the cleanest dirty shirt in the laundry. And on a relative basis, its is going to look even cleaner as two decades of monetary madness around the world finally hit the shoals.

You have to start with a stark assessment of the other three major economies.To hear the Wall Street analysts and economists tell it, Japan, China and Europe are just variants of the US economy with different mixes of pluses and minuses, experiencing somewhat different stages of the economic cycle and obviously shaped by their own diverse brands of domestic politics and economic governance. Yet despite these surface difference, the non-US big three economies are held to be just part of a global economic convoy heading for continued economic growth, rising living standards and higher stock market prices.

Actually, not so. Japan is a bankrupt old age colony. China is the most monumental credit and construction Ponzi in human history. Europe is a terminal victim of socialist welfare and statist dirigisme. All three are attempting to defer the day of reckoning via resorting to a final spasm of money printing and central bank manipulation that is so desperate and crazy that it can only end in disaster.

So there is no global convoy of inexorable economic growth and progress. Instead, we are entering a new era of spectacular financial disorder and credit fueled booms turning into unprecedented deflationary busts. And it is the three big economies outside the US which will hit the wall first, causing the US dollar to thrive on a relative basis.

Consider the absolute monetary madness in Japan—-where the current policy of the BOJ is to expand its balance sheet each month by what would amount to one-quarter trillion dollars on a US scale GDP. Yet this madcap money printing cannot possibly help the Japanese economy because it already has essentially zero interest rates and has had them for nearly two decades. So Kuroda can’t possibly induce Japanese households and business to borrow more money and stimulate growth because they have long been at “peak debt” and couldn’t borrow more if you paid them.

At the same time, the BOJ’s massive bond buying campaign is sucking up 100% of the supply of new government debt—–and Japan’s fiscal deficit is still massive—-and actually eating into the existing float. As a result, the Japanese government bond market is dead as a doornail; the only “bid” comes from the BOJ.

Here’s the thing. The Japanese government is hands-down the largest debtor in the world, with its gross public debt currently at 240% of GDP. Accordingly, it needs a healthy public debt market more than anything else, but its monetary policy has actually killed what remained of it on the eve of Abenomics.

The consequences for fiscal policy and Japan’s ability to finance its immense public debt as its collective old age home steadily fills up is simply mind-boggling. If it continues to monetize the public debt at current rates, it will destroy the yen—sending into free-fall from today’s 121/ dollar to 200, 300 or even worse.

By contrast, if it sends the madmen who are currently running the BOJ packing, installs new central bankers and allows interest rates to normalize, debt service on Japan’s public debt will skyrocket. As it is, more than 40% of Japan’s current tax receipts go to interest on the public debt and that’s with the 10-year bond yield at 0.4%. Under normal rates, debt service would absorb all of Japan’s current tax revenues, causing welfare and retirement spending to be slashed on upwards of 40% of its population, which will soon be retired, while raising tax burdens on its shrinking labor force to truly brutal levels.

So Japan’s fiscal equation is calamitous and terminal. Its governments will resort to increasingly dangerous and destructive expedients as they wrestle with its impossible nature. Indeed, the built-in financial, fiscal, demographic and economic trends are so powerful that there is virtually no set of policy measures that could reverse Japan’s headlong tumble into old age bankruptcy.

As shown below, its debt to GDP ratio and the size of the BOJ balance sheet have been exploding for decades. Yet these maneuvers have only made matters worse. As also shown below, Japan’s nominal GDP in dollar terms is no higher today than in was in 1996:




Notwithstanding the perennial bullish expectations of Wall Street Keynesians, the BOJ’s mad money printing campaign has accomplished nothing. In fact, after the downward revision to Q4 GDP it is absolutely evident that its economy is still sputtering. Real GDP is barely higher than it was in December 2012 before Abenomics launched its truly monstrous money printing spree.

Yet, the Abe government and BOJ does not hesitate to threaten even more monetary carnage—even as the abysmal failures of current policies are reported month after month. So the yen is heading down, down, down. Not because the dollar is inherently strong, but because it is currently being traded against a slow-motion trainwreck.

In China the scene is even more tortured. As McKinsey’s charts so dramatically document, the overseers of red capitalism in Beijing have driven China into a monumental debt trap.

Its massive spree of construction and fixed asset investment has created an utterly deformed economy that will literally implode unless its keeps building empty luxury apartments, phantom cities, silent shopping malls and hideously redundant roads, bridges, subways and airports. Yet whenever the short-term indicators stumble, the government finds some new, convoluted way to release more credit into the system.

This too is reaching the farcical stage. During the six-short years since the financial crisis, China has boosted it credit market debt outstanding by the staggering sum of $20 trillion or by 4X the growth of GDP during the same period. How in the world could any one believe that China’s tottering house of cards can be rescued by piling on even more debt financed construction and fixed asset acquisition?

Source: McKinsey

The rate at which the China Ponzi is falling apart is now accelerating. In a nearby post this morning, Mish Shedlock provided a devastating survey of the excess capacity which looms in nearly every industry and the massive overbuilding of public infrastructure and housing based on debt that cannot be serviced and customers and users who are non- existent.

But now things are heading into the theatre of the economic absurd. Government officials are forcing the restart of idle steel and aluminum plants so that the can produce unwanted supplies to dump on the world market in order to generate enough cash to pay interest.
In a similar vein, the whole phony bullish thesis about the growth wonders to come from China’s highly touted “urbanization” campaigns are being revealed for what they are—-a monumental Ponzi of borrowing from Peter to pay Paul.

Millions of peasants have had their land taken over by local governments which borrowed huge sums to pay inflated compensation for the land—-so the displaced farmers could buy newly built high-rise apartments, also built with borrowed money. That was called “urbanization”, but what it means is that former peasants have been stranded literally high and dry without incomes and without farms, while the local development agencies which borrowed all this money have no possible way to repay it.

Needless to say, as China veers ever closer to a crash landing, the China-dependent EM economies are rapidly faltering. It now appears that Brazil will suffer back-to-back years of GDP decline for the first time since 1930-1931. Indeed, the China-led global commodities and industrial production boom is cooling so fast that global CapEx in mining and energy, materials processing, manufacturing and shipping is on the verge of a huge downward correction. And that will hit the high end machinery and engineering exporters like Germany and the US, creating a further negative loop in the gathering deflationary crisis.

And these ricocheting impacts from the China implosion will drive the dollar higher as well. That’s because Chinese companies have borrowed something like $1.5 trillion in external dollar markets, and the EM economies which boomed from the China trade also borrowed trillions in dollar markets—– owing to the cheap dollar interest rates manufactured by the Fed, and the global scramble for “yield” by dollar based money managers.

While it lasted, the tsunami of cheap dollar based capital which flowed into China and the EM appeared to fuel economic miracles. The socialists of Brazil, the crooks of Indonesia and corrupt crony capitalist of Turkey all feasted on the capital markets deformations emanating from the Eccles Building.

But now the financial boomerang is flying back at them at devastating speed. As China and the EM struggle against global deflation, their economies are faltering and exchange rates are sinking. Accordingly, they are desperately trying to hedge their immense dollar exposures—a process which drives the greenback steadily higher.

Finally, the madness in Europe speaks for itself. The ECB is now literally destroying the Euro in a disastrous quest to restart economic growth by monetizing $1.2 trillion of mostly European government debt. But Europe’s stagnation is not due to insufficient private sector borrowing or interest rates that discourage it.

The problem is a state sector that has reached nearly 50% of GDP and is thereby smothering entrepreneurs and investment everywhere on the continent. And it also means a public debt burden so high that prohibitive levels of taxation are unavoidable.

Stated different, Europe’s economic growth problem is structural and was the result of statist policies over many decades. The only thing Draghi will accomplish with his massive bond buying campaign is to drive the Euro to par and below; and enable Europe’s government —–all of which can now borrow long-term money at 1% or less—-to kick the can down the road, thereby insuring that Europe’s eventual day of fiscal reckoning will be cataclysmic.


Euro Area Government Debt As % of GDP



So there is a reason why the dollar is soaring. The other shirts in the laundry are not just dirtier. They are actually disintegrating.

David Stockman

[vt]

Re: The Bonar: Soaring, Like an Eagle

Interesting and disturbing analysis. Looking forward to EJ's report on this and other matters to clarify just where in the devil do we go from here!