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Re: Yes Virginia...It's a Bubble...
TSLA at 30,9 B is "cheap"....but steadily playing catch up...
TSLA at 30,9 B is "cheap"....but steadily playing catch up...
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Re: Yes Virginia...It's a Bubble...
Looks like they blinked. Again.Originally posted by GRG55 View Post
What a surprise
Even the much vaunted central planners in Beijing are having a wee difficulty restructuring the economy towards the ever elusive consumer.
From The Economist in March:Defusing a bomb
EVER since China’s gargantuan stimulus of 2009, which was unleashed to repel the global financial crisis, there have been concerns about how the debts incurred during that spending binge would be repaid. The finance ministry took a big step this week to address the overhang, introducing a programme to restructure the liabilities of local governments, the most indebted of China’s public institutions. China still has a long way to go to fix its finances. But after years of first denial and then dithering, it has at least started the clean-up operation.
To begin with, local governments will be allowed to swap 1 trillion yuan ($160 billion) of their existing high-interest debts for lower-cost bonds. According to the Economic Observer, a credible local newspaper, this may just be the first tranche, with the finance ministry preparing to give local governments a 3 trillion yuan quota for refinancing. It is easy to imagine that such quotas will become a regular feature of China’s fiscal landscape over the next few years. As this chart shows, the combination of new debt issuance plus swaps will help cover what local governments owe this year, but will make only a small dent in their overall liabilities..,
...China’s local-government debt problem has always been twofold. First, there is the sheer amount of money they owe. That has doubled from less than 20% of GDP in 2007 to nearly 40% today. Second, there is the very peculiar and opaque structure of these liabilities. Because local governments can only borrow with the explicit permission of the finance ministry, which has been miserly in the past, they have been forced to use off-balance-sheet entities to raise funds. Those entities (commonly known as local government financing vehicles, or LGFVs) have borrowed from banks and shadow banks alike. As a result, the size of their debts is unclear, but it is certain that the cost of their debts is much higher than would have been the case had they issued bonds in the first place.The debt swap is aimed squarely at the second problem. Lou Jiwei, China’s finance minister, calculates that local governments will save 40-50 billion yuan this year alone in interest costs thanks to the refinancing...
From the FT in April:
China mulls plan to boost demand for local government debt
April 28, 2015 1:29 pm
China’s central bank is considering extraordinary measures to boost credit flows to heavily indebted local governments, according to local media reports, as Beijing struggles to recapitalise the provinces after years of unsustainable borrowing and investment.
China’s local debt has surged since the 2008 financial crisis as regional governments borrowed to finance infrastructure projects in an effort to stimulate the economy. Economists have warned the debt poses a risk to the banking system.
China’s economy is growing at its slowest pace in six years, according to official figures. Policy makers want to enable local governments to maintain infrastructure spending to cushion the impact from a slowdown in the property and manufacturing sectors...
...China’s finance ministry last month announced a plan for provincial governments to refinance Rmb1tn in maturing debt by selling bonds. The goal is to lower debt-servicing costs and extend maturities by converting short-term, high-interest bank loans to low-interest, long-term municipal bonds.
But this month at least two Chinese provinces were forced to postpone scheduled bond auctions due to insufficient demand from commercial banks. Allowing local bonds to be used as collateral would stoke demand for the paper.
Loans from China’s central bank to commercial banks would expand the People’s Bank of China’s balance sheet, increasing the base money supply...
From the WSJ today:
China Backtracks on Local Government Debt
Beijing reopens ‘back door’ that allowed local governments to load up on debt
By LINGLING WEI
Last edited by GRG55; May 15, 2015, 08:28 PM.Comment
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Re: Yes Virginia...It's a Bubble...
Charged With Graft in China, Some Fugitives Are Finding Luxury in U.S.
By STEPHANIE SAUL and DAN LEVIN
Even before his name appeared on the “most wanted” list, holes had emerged in the immigrant success story of Wei Chen.
His business partner sued him last year, alleging that nearly $50 million was missing from their development project in Plantation, Fla. The ensuing litigation revealed that Mr. Chen had changed his name from He Yejun, and that he had once been a top executive in a state-owned beer company in China.
When the Chinese government released a list last month of what it described as its leading 100 fugitives accused of economic crimes — including 40 people believed to be hiding in the United States — there was He Yejun’s name, along with that of his wife.
They were accused of misappropriating funds in China before moving to the United States in the late 1990s. Records show that among Mr. Chen’s luxury purchases since immigrating are a $2 million condo near Miami, a Bentley and a 70-foot yacht owned through a corporation.
The highly publicized release of the most-wanted list comes as President Xi Jinping presses an anticorruption crackdown that has already brought down one of the country’s most powerful former officials and sent scores of security agents on a global chase for economic fugitives and their ill-gotten gains.
Last year alone, 680 fugitives suspected of economic crimes were repatriated from 69 countries and regions in the operation known as Fox Hunt, according to the state news agency Xinhua.
This newest phase of the campaign, named Sky Net, was rolled out last month with the publication in Chinese news media of a collection of Interpol alerts that also included one for Yang Xiuzhu, a former deputy mayor of Wenzhou whose stature earned her the top placement on the list.
Ms. Yang previously owned a five-story building on West 29th Street in Manhattan.
The United States was identified as the leading destination by the Chinese authorities, with Canada second and New Zealand and Australia tied for third. The four countries do not have extradition treaties with China, partly because of concerns about due process of law, human rights violations and excessive punishment in China.
The Chinese authorities say the reluctance of the four countries to hand over suspects has made them especially attractive havens for suspected economic fugitives.
Whether those on the list are truly China’s most wanted is a question of some debate. Chinese news reports say Beijing has handed Washington a far larger list of about 150 fugitives believed to be in the country.
Ding Xueliang, a Chinese politics expert at Hong Kong University of Science and Technology, said Beijing preferred not to publicly identify some suspects for fear that they or their families might retaliate by leaking party secrets. “The biggest targets are not on this list,” he said. “Some of these people could cause enormous political trouble for the party-state system by revealing what they know.” Indeed, some experts suspect the list is intended more as a warning to those whose identities remain secret than to those now widely known.
The zeal with which Mr. Xi and his allies have pursued corrupt officials has sent shock waves through long-untouchable institutions such as the military and the Politburo Standing Committee. Last month, the nation’s former domestic security chief, a retired standing committee member, Zhou Yongkang, was formally charged with taking bribes, making him the highest-ranking party official ever to face corruption charges.Comment
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Re: Yes Virginia...It's a Bubble...
Oh, oh...
Markets| Mon May 18, 2015 1:36am EDT
REUTERS HONG KONG
China's new home prices fell for the eighth consecutive month in April from a year earlier but were flat from March, adding to hopes that a property downturn which is weighing heavily on the economy is beginning to bottom out.
But analysts warned any recovery in the market will take some time given a huge inventory of unsold homes, and said the property sector remains the biggest risk to the world's second-largest economy, which looks set for its worst year in 25 years.
That will keep pressure on policymakers to roll out more interest rate cuts and other stimulus measures later this year to boost activity.
Average new home prices in China's 70 major cities dropped 6.1 percent last month from a year ago, the same rate of decline as in March, according to Reuters calculations based on official data published on Monday. But nationwide prices steadied from March, further narrowing from a 0.1 percent fall in the previous month.
Beijing saw prices rise, albeit modestly, for the second month in a row, while those in Shanghai rose for the first time in 12 months. But prices in many smaller cities, which account for around 60 percent of national sales, continued to fall...
..."But the big impact for the overall economy is from property investment, where I don't expect a quick rebound in growth...that's why we forecast China will miss its 7 percent target (for 2015)."
Zhao said real estate investment, which comprises around 20 percent of China's GDP, may grow less than 5 percent this year, compared with 10.5 percent in 2014, knocking 1 percentage point off economic growth...
...But real estate investment growth continued to slow in the first four months of 2015 to the lowest since May 2009 as new construction slumped, impacting demand for everything from steel and cement to appliances and furniture...
...China relaxed tax rules and downpayment requirements on second homes in late March. Earlier this month, the central bank cut interest rates for the third time since November to lower companies' borrowing costs and stimulate loan demand...
...Of the 70 major cities the NBS monitors, 48 posted a monthly decline, down from March's 50.
Comment
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Re: Yes Virginia...It's a Bubble...
Originally posted by GRG55 View Post
From the FT today:
Last updated: May 19, 2015 1:16 pm
Gabriel Wildau in Shanghai
Capital is flowing out of China at a record pace, sparking fears over financial stability and complicating efforts by the central bank to support a slowing economy with lower interest rates.
China ran a balance of payments deficit of $80bn in the first three months of the year, the largest quarterly net outflow on record, according to official data.
The outflows are all the more striking because China’s trade surplus remained strong over the period. As falling commodity prices slashed the country’s import bill, it recorded a $79bn current-account surplus — the largest in nearly five years.
But this was overwhelmed by outflows on the capital and financial accounts worth a record $159bn. The lure of China's surging stock market also failed to counter the outflow trend...
..."All things considered, [Beijing] would rather not have confidence-sensitive capital going out," said Tim Condon, head of Asia research for ING Financial Markets in Singapore.
By some measures, outflows have been continuing for more than a year. The central bank’s holdings of foreign assets have dropped for seven consecutive quarters — the longest run of declines on record.
But economists say that as yet, capital outflows have not accelerated to a level that would threaten the stability of the financial system...
...They also reflect recent reforms to loosen capital controls and cautiously encourage financial outflows through initiatives such as the Shanghai-Hong Kong Stock Connect, which allows mainland Chinese to invest in foreign equities...
...Nevertheless, capital outflows are complicating efforts by the People’s Bank of China to support the economy through monetary easing. For the past decade, central bank purchases of foreign exchange inflows were the main source of base money creation in China's banking system. Now, with outflows threatening to shrink the money supply, the central bank is turning to new mechanisms to expand it...
...“From the start of this year, capital inflows have been negative. We believe the key factor now restricting effective monetary easing is that the required reserve ratio remains at a high level,” said Liu Liu, macroeconomic analyst at China International Capital Corp.
In addition to RRR cuts, the central bank has slashed benchmark rates three times since November. But lower rates could exacerbate capital flight by making Chinese assets less attractive, especially in comparison to the US, where the Federal Reserve is expected to raise interest rates this year.
Forex traders say the PBoC has drawn down its foreign exchange reserves to head off depreciation of the renminbi. That explains why the exchange rate has been flat this year despite the record-setting outflows.
“As long as the renminbi remains broadly steady, domestic capital outflows are likely to be modest,” Standard Chartered analysts led by Beckly Liu wrote last week.
The PBoC’s signal to the market that it intends to hold the renminbi stable has helped prevent the trickle of outflows from becoming a flood.
Comment
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Re: Yes Virginia...It's a Bubble...
well, we know where it's all going, don't we?Originally posted by GRG55 View PostFrom the FT today:
Last updated: May 19, 2015 1:16 pm
Gabriel Wildau in Shanghai
Capital is flowing out of China at a record pace, sparking fears over financial stability and complicating efforts by the central bank to support a slowing economy with lower interest rates.
China ran a balance of payments deficit of $80bn in the first three months of the year, the largest quarterly net outflow on record, according to official data.
The outflows are all the more striking because China’s trade surplus remained strong over the period. As falling commodity prices slashed the country’s import bill, it recorded a $79bn current-account surplus — the largest in nearly five years.
But this was overwhelmed by outflows on the capital and financial accounts worth a record $159bn. The lure of China's surging stock market also failed to counter the outflow trend...
..."All things considered, [Beijing] would rather not have confidence-sensitive capital going out," said Tim Condon, head of Asia research for ING Financial Markets in Singapore.
By some measures, outflows have been continuing for more than a year. The central bank’s holdings of foreign assets have dropped for seven consecutive quarters — the longest run of declines on record.
But economists say that as yet, capital outflows have not accelerated to a level that would threaten the stability of the financial system...
...They also reflect recent reforms to loosen capital controls and cautiously encourage financial outflows through initiatives such as the Shanghai-Hong Kong Stock Connect, which allows mainland Chinese to invest in foreign equities...
...Nevertheless, capital outflows are complicating efforts by the People’s Bank of China to support the economy through monetary easing. For the past decade, central bank purchases of foreign exchange inflows were the main source of base money creation in China's banking system. Now, with outflows threatening to shrink the money supply, the central bank is turning to new mechanisms to expand it...
...“From the start of this year, capital inflows have been negative. We believe the key factor now restricting effective monetary easing is that the required reserve ratio remains at a high level,” said Liu Liu, macroeconomic analyst at China International Capital Corp.
In addition to RRR cuts, the central bank has slashed benchmark rates three times since November. But lower rates could exacerbate capital flight by making Chinese assets less attractive, especially in comparison to the US, where the Federal Reserve is expected to raise interest rates this year.
Forex traders say the PBoC has drawn down its foreign exchange reserves to head off depreciation of the renminbi. That explains why the exchange rate has been flat this year despite the record-setting outflows.
“As long as the renminbi remains broadly steady, domestic capital outflows are likely to be modest,” Standard Chartered analysts led by Beckly Liu wrote last week.
The PBoC’s signal to the market that it intends to hold the renminbi stable has helped prevent the trickle of outflows from becoming a flood.
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vancouvergoin'up
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Re: Yes Virginia...It's a Bubble...
well, we know where it's all going, don't we?Originally posted by GRG55 View PostFrom the FT today:
Last updated: May 19, 2015 1:16 pm
Gabriel Wildau in Shanghai
Capital is flowing out of China at a record pace, sparking fears over financial stability and complicating efforts by the central bank to support a slowing economy with lower interest rates.
China ran a balance of payments deficit of $80bn in the first three months of the year, the largest quarterly net outflow on record, according to official data.
The outflows are all the more striking because China’s trade surplus remained strong over the period. As falling commodity prices slashed the country’s import bill, it recorded a $79bn current-account surplus — the largest in nearly five years.
But this was overwhelmed by outflows on the capital and financial accounts worth a record $159bn. The lure of China's surging stock market also failed to counter the outflow trend...
..."All things considered, [Beijing] would rather not have confidence-sensitive capital going out," said Tim Condon, head of Asia research for ING Financial Markets in Singapore.
By some measures, outflows have been continuing for more than a year. The central bank’s holdings of foreign assets have dropped for seven consecutive quarters — the longest run of declines on record.
But economists say that as yet, capital outflows have not accelerated to a level that would threaten the stability of the financial system...
...They also reflect recent reforms to loosen capital controls and cautiously encourage financial outflows through initiatives such as the Shanghai-Hong Kong Stock Connect, which allows mainland Chinese to invest in foreign equities...
...Nevertheless, capital outflows are complicating efforts by the People’s Bank of China to support the economy through monetary easing. For the past decade, central bank purchases of foreign exchange inflows were the main source of base money creation in China's banking system. Now, with outflows threatening to shrink the money supply, the central bank is turning to new mechanisms to expand it...
...“From the start of this year, capital inflows have been negative. We believe the key factor now restricting effective monetary easing is that the required reserve ratio remains at a high level,” said Liu Liu, macroeconomic analyst at China International Capital Corp.
In addition to RRR cuts, the central bank has slashed benchmark rates three times since November. But lower rates could exacerbate capital flight by making Chinese assets less attractive, especially in comparison to the US, where the Federal Reserve is expected to raise interest rates this year.
Forex traders say the PBoC has drawn down its foreign exchange reserves to head off depreciation of the renminbi. That explains why the exchange rate has been flat this year despite the record-setting outflows.
“As long as the renminbi remains broadly steady, domestic capital outflows are likely to be modest,” Standard Chartered analysts led by Beckly Liu wrote last week.
The PBoC’s signal to the market that it intends to hold the renminbi stable has helped prevent the trickle of outflows from becoming a flood.
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vancouver real estateComment
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Never Saying the B Word
SAN FRANCISCO — It is a wild time in Silicon Valley. Two-year-old companies are valued in the billions, ramshackle homes are worth millions and hubris has reached the point where otherwise sane businesspeople muse about seceding from the United States.
But the tech industry’s venture capitalists — the financiers who bet on companies when they are little more than an idea — are going out of their way to avoid the one word that could describe what is happening around them.
Bubble.
“I guess it is a scary word because in some sense no one wants it to stop,” said Tomasz Tunguz, a partner at Redpoint Ventures. “And so if you utter it, do you pop it?”
A bubble, in the economic sense, is basically a period of excessive speculation in something, whether it is tulips, tech companies or houses. And it is a loaded, even fearful, term in the tech industry, because it reminds people of the 1990s dot-com bubble, when companies with little revenue and zero profits sold billions in stock to a naïve public.
In 2000, tech stocks crashed, venture capital dried up and many young companies were vaporized. Even today, with the technology industry on fire, venture capital investment remains below its 2000 peak.
“Anybody who lived through that will always wake up and see ghosts,” said Jerry Neumann, founder of Neu Venture Capital in New York.
Today, people see shades of 2000 in the enormous valuations assigned to private companies like Uber, the on-demand cab company, which is raising $1.5 billion at terms that deem the company worth $50 billion, and Slack, the corporate messaging service that is about a year old and valued at $2.8 billion in its latest funding round.
A few years ago private companies worth more than $1 billion were rare enough that venture capitalists called them “unicorns.” Today, there are 107, according to CB Insights, enough that venture capitalists had to create a second term — “decacorn” — for private companies like Uber and the data analysis company Palantir Technologies that are worth more than $10 billion.
Nobody doubts that many of tech’s unicorns are indeed real businesses and that some could be with us for decades. But because of low interest rates, tech companies are raising gobs of money from investors whose desperate need for returns has pushed them into riskier territory. Start-ups have begun attracting money from hedge and mutual funds that don’t usually invest in tech companies before they are public.
Valuations — and there is no real standard for determining how much a private company is worth — are inflating, leading some people to worry that investment decisions are being guided by something venture capitalists call FOMO — the fear of missing out.
In a recent analysis, Mr. Tunguz of Redpoint, who was in high school when the dot-com bubble burst, found that investors were paying twice as much for stakes in private technology companies as they were for those that were publicly traded.
He called it “a runaway train of late-stage fund-raising.” He also called it “a really weird time” and “a really hard environment to maintain financial discipline.”
The problem with the bubble question is nobody seems to agree on what exactly a bubble is. Robert Shiller, an economist whose work on stock prices earned him the 2013 Nobel Prize and who wrote the bubble book “Irrational Exuberance,”
defined speculative bubbles as “a psychological epidemic” in which people put reason aside and instead buy into a story.
“It’s a complicated social phenomenon that gets people into trouble, just like smoking too much and drinking too much,” Mr. Shiller said.
And no matter how hard people try to avoid them, bubbles happen again and again, from the Dutch tulip bubble of 1636, to the 1929 stock bubble that resulted in the Great Depression, to the housing bubble that buckled Wall Street in 2008.
Even the smartest get caught up. Isaac Newton, whose laws of motion and gravity arguably make him the most important scientist ever, bought into the South Sea Bubble of 1720. It was a bad bet on a company granted a monopoly on trade with South America by the British government. He reportedly said: “I can calculate the motions of the heavenly bodies, but not the madness of people.”
Bubbles seem obvious after the crash, of course. The problem is they are almost impossible to see in the present. Mr. Neumann admits he was caught in the dot-com bubble.
“I was a true believer in the Internet and all that,” he said.
So, do the staggering values of today’s private tech companies look like yet another bubble?
“If the question is, Are these valuations divorced from fundamentals? I think they are,” he said.
But that is not a bubble, he said. Rather, it is “an irrational pricing decision.”
Investors are happy to admit that this torrid pace of investment has started to worry them. But they still try to steer clear of the b-word, unless they are describing what Silicon Valley is not.
“There’s definitely some craziness and people overpaying” for stakes in companies, said Anand Sanwal, founder of CB Insights, an analytics firm focused on the venture capital industry. “But a bunch of bad decisions don’t necessarily mean we are in a bubble.”
Does George Zachary, a partner in the Menlo Park office of CRV, a venture capital firm, think we’re in a bubble? “I think we’re in a period of overvaluation and frothiness,” he said.
Sam Altman, president of Y Combinator, an incubator that invests in very young companies, has grown so tired of bubble talk that this month he countered it with a $100,000 “no bubble” bet.
The bet, which will be donated to charity, is based on several variables, including his prediction that the five most valuable unicorns, a list that includes Uber and Airbnb, the home rental service, will be worth more than $200 billion by 2020.
Of course, there is a difference between not thinking there is a bubble and not being concerned about how easy it has become for start-ups to raise money.
“Do I think companies are overvalued as a whole? No,” Mr. Altman said. “Do I think too much money can kill good companies? Yes. And that is an important difference.”
Some investors go so far to avoid the word bubble that they describe situations that sound quite a bit worse.
Take Charlie O’Donnell, founder of Brooklyn Bridge Ventures. His view is that when it becomes harder to raise money, companies that are funding losses with outside money will be forced to find profitability by cutting jobs and slowing expansion plans, Mr. O’Donnell said.
But that is not a bubble, he said. Rather, as he outlined in a recent blog post, that would be “the coming zombie start-up apocalypse.”
NYTimesComment
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Re: Yes Virginia...It's a Bubble...
China trade shrinks again in latest sign of economic weaknessOriginally posted by GRG55 View PostLooks like they blinked. Again.
What a surprise
Even the much vaunted central planners in Beijing are having a wee difficulty restructuring the economy towards the ever elusive consumer.
...
The Associated Press
Published Monday, June 8, 2015 9:34AM EDT
HONG KONG -- Chinese imports and exports shrank again in May, the latest sign of sputtering growth in the world's second biggest economy that adds to pressure on Beijing to avoid a sharp slump.
Customs data released Monday showed that exports contracted 2.8 per cent from a year earlier to $1.17 trillion yuan ($189 billion).
Imports shrank 18.1 per cent to $803.3 billion yuan ($129 billion). For the first five months of the year, total imports and exports fell 7.8 per cent.
In dollar-denominated terms, exports shrank 2.5 per cent while imports tumbled 17.6 per cent, leaving a trade surplus of $59.49 billion, according to the customs data.
China's leaders are trying to steer the economy toward growth based on domestic spending and reduce its reliance on trade and investment.
The economy expanded 7 per cent in the first quarter, the slowest quarterly growth since the global financial crisis in 2008.
The poor trade data comes a week after an official index of activity in China's giant manufacturing industry remained subdued, with both export demand and employment shrinking.
Policymakers in Beijing have unleashed several rounds of stimulus, including cutting interest rates three times in six months and slashing reserve requirement ratios for banks to free up money for lending. Analysts say more measures will likely be needed if growth slows too abruptly.
Last edited by GRG55; June 08, 2015, 09:54 PM.Comment
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Re: Yes Virginia...It's a Bubble...
I don't quite understand if both times imports and exports are referred to in dollar terms.
If that is so prices may have a big part in it. Oil, natural gas and iron ore (to name the ones that come to my mind) have all of them fell in prices from last year. As for exports I don't know. Anyway, their economy seems to be growing much slower than before.Comment
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Re: Yes Virginia...It's a Bubble...
iirc savings = investments.
the only way to have more consumption is to have relatively less investment. the only way to have relatively less investment is to have less saving. the only way to get the chinese saver to save less is to have more of a social safety net, which to my knowledge the chinese don't have much of. am i missing something here?
and is the chinese gov't doing anything towards securing pensions and health care, the 2 social goods which would allow chinese to relax their grip on their money. [gee, i sound like ben bernanke with this "savings glut" analysis!]Comment
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Re: Yes Virginia...It's a Bubble...
The Warren Buffet Economy——Why Its Days Are Numbered (Part 1)
During the 27 years after Alan Greenspan became Fed chairman in August 1987, the balance sheet of the Fed exploded from $200 billion to $4.5 trillion. Call it 23X.
Let’s see what else happened over that 27 year span. Well, according to Forbes, Warren Buffet’s net worth was $2.1 billion back in 1987 and it is now $73 billion. Call that 35X.
During those same years, the value of non-financial corporate equities rose from $2.6 trillion to $36.6 trillion. That’s on the hefty side, too—- about 14X.
Corporate Equities and GDP – Click to enlarge
When we move to the underlying economy that purportedly gave rise to these fabulous gains, the X-factor is not so generous. As shown above, nominal GDP rose from $5.0 trillion to $17.7 trillion during the same 27-year period. But that was only 3.5X
Next we have wage and salary compensation, which rose from $2.5 trillion to $7.5 trillion over the period. Make that 3.0X.
Then comes the median nominal income of US households. That measurement increased from $26K to $54K over the period. Call it 2.0X.
Digging deeper, we have the sum of aggregate labor hours supplied to the nonfarm economy. That metric of real work by real people rose from 185 billion to 235 billion during those same 27 years. Call it 1.27X.
Further down the Greenspan era rabbit hole, we have the average weekly wage of full-time workers in inflation adjusted dollars. That was $330 per week in 1987 and is currently $340 (1982=100). Call that 1.03X
Finally, we have real median family income. Call it a round trip to nowhere over nearly three decades!
OK, its not entirely fair to compare Warren Buffet’s 35.0X to the median household’s 0.0X. There is some “inflation” in the Oracle’s wealth tabulation, as reflected in the GDP deflator’s rise from 60 to 108 (2009 =100) during the period. So in today’s dollars, Buffet started with $3.8 billion in 1987. Call his inflation-adjusted gain 19X then, and be done with it.
And you can make the same adjustment to the market value of total non-financial equity. In 2014 dollars, today’s aggregate value of $36.7 trillion compares to $4.5 trillion back in 1987. Call it 8.0X.
Here’s the thing. Warren Buffet ain’t no 19X genius nor are investors as a whole 8X versions of the same. The real truth is that Alan Greenspan and his successors turned a whole generation of gamblers into the greatest lottery winners in recorded history.
That happened because the Fed grotesquely distorted and financialized the US economy in the name of Keynesian management of the purported “business cycle”. The most visible instrument of that misguided campaign, of course, was the Federal funds or money market rate, which has been pinned at the zero bound for the last 78 months.
Not only did the Fed spend 27 years marching toward the zero bound, but in the process it has gotten addicted to it. During the last 300 months, it has either cut or kept flat the money market rate 80% of the time. And it has now been 108 months since it last raised interest rates by even 25 bps!
The simple truth is, the Fed has caused systematic, persistent and massive falsification of prices all along the yield curve and throughout all sectors of the financial market. The single most important price in all of capitalism is the money market rate of interest. It sets the cost of carry in all asset markets, and therefore indirectly fuels the bid for all debt, equity and derivative securities in the global financial system.
The Fed’s Addiction To The ‘Easy Button': Rates Falling Or Flat 80% Of The Time Since 1990 – Click to enlarge
Needless to say, when the cost of money is set at— and held at— zero in nominal terms, and driven deeply negative in after-inflation and after-tax terms, it becomes the mothers milk of speculation. Accordingly, it is neither a slightly lower trend rate of CPI inflation over the past 27 years nor an improvement in the art of central banking which has driven the core reference rate in the world financial markets—the 10-year US Treasury Note—–down by 80%.
Instead, the true agent of that decline is massive central bank intrusion into financial markets, wholesale manipulation of prices and fraudulent monetization of public debt and other securities. Just since 2006, the combined balance sheets of the world’s central banks have expanded from $6 trillion to $22 trillion, meaning that the scale of the implicit monetary fraud has been monumental.
Needless to say, the plunge of the world market’s core “cap rate” to what are false and unsustainably low levels caused two powerful distortions. In the DM economies like the US, it generated an enormous expansion of unproductive debt that funded fiscal expansion, household consumption and business financial engineering.
The result was a massive financialization of the economy that took the sum of business debt and market equity from about $12 trillion at the time of Greenspan’s arrival at the Eccles Building to $93 trillion today. Stated differently, the value of debt and equity securities mushroomed from about 2.4X GDP to 5.4X.
It was this massive financial bubble that begat paper wealth gains of 8X and 19X and even more.
Secondly, the worldwide central bank financial repression led by the Fed resulted in massive over-investment in fixed productive assets on a global basis, but especially in China and the EM. The impact was a one-time acceleration of global economic activity that temporarily inflated current income and further goosed the value of financial assets.
Total Marketable Securities and GDP – Click to enlarge
This central bank fueled boom will ultimately be paid for in the form of a prolonged deflationary contraction. Then, trillions of uneconomic assets will be written off, industrial sector profits will collapse and the great inflation of financial assets over the last 27 years will meet its day of reckoning.
On the morning after, of course, it will be asked why the central banks were permitted to engineer this fantastic financial and economic bubble. The short answer is that it was done so that monetary central planners could smooth and optimize the business cycle and save world capitalism from its purported tendency toward instability, underperformance and depressionary collapse.
As will be shown in Part 2, the whole case for this sweeping and unprecedented Keynesian demand management by the monetary authorities was a crock. Accordingly, the days of the Warren Buffet economy are indeed numbered.
David Stockman
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Re: Yes Virginia...It's a Bubble...
"Accordingly, the days of the Warren Buffet economy are indeed numbered."
Good....but what's the number: 100 1000 10000 or 1000000000?
That's the question nobody answersComment
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Re: Yes Virginia...It's a Bubble...
Originally posted by Southernguy View Post
The dollar has gone up more than 10% against almost all currencies in the last year or so. But the fall in imports is surprisingly large. This doesn't bode well for commodities exporting economies.
For those who are well traveled in China will know that China has a large consumer economy (the largest consumer of iron ore, cement, cellphones, television, etc) - although relatively small as compared to exports - so the steep fall in commodity prices more than offsets the fall in exports.Last edited by touchring; June 10, 2015, 04:55 AM.Comment
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