Financial topics

[mannfm11]

Great economic post today John. I haven't had timeto check AEP's site the past week so I missed it. Still, I am astounded how the game goes on. There is a lot more to this than meets the eye, as it appears that China is in full speculative gear as well, running up huge supplies of iron ore, copper, coal and oil. The question is, what is the trade? I read over and over again the Asian recovery while at the same time reading things like AEP wrote about the level of trade around the world. My best guess is the money that is being churned out is being used to speculate and the speculators need someone to sell to in order to not be left holding the bag. What he said about Goldman is right on, that they are attempting to generate a trade. The reported profits of the banks were for the most part from trading gains. The whole matter has gone from bad to worse, as mortgages are prime assets against commodities and stocks. Don't fool yourself into believing that prior performance is a good indication of the future.

I don't believe the stimulous trade has lost its steam, but instead that it never had any steam. The stimulous was a story. The stimulous in China, to my understanding, was nothing but a big bunch of bank loans. One thing that is clear is that what is going on in China cannot be sustained. Neither can the US consumer ever get it back to where it was in my lifetime. That is a joke and the numbers in relation to the consumer in the US are being cooked, as exports of China and other Asian countries just cannot be down that much and US consumer spending be down less than 5%. Remember, US industrial production has also collapsed.

The world is faced with a paradox. The world needs the US consumer, but the US cannot continue to go into infinite hock in order to provide this demand, nor will they be allowed to do so. The Bernanke/Obama/Geithner solution has hit a brick wall, as the dollar trade and the bond market are now not taking this solution too well. This reaction isn't a recovery as it is being sold as, but instead a refusal of the system to endure such a solution. Only a fool would believe that Bernanke could pull off qualitative easing in the fashion he attempted, as we are dealing with an international financial market in this case. The yen wasn't used to collateralize the entire monetary system of the world, nor were Japans bonds being used as the equivalent of the reserve currency.

I read something very interesting somewhere. I believe it was from Martin Armstrong. Whomever it was, indicated that the supply of government bonds were nothing more than a futures contract on dollars, the coupon being the price of accepting the derivative. Of course, the idea that one was going to get paid in printing press money might cause a little concern as to what the cost of that derivative would be, thus we are now looking at 4% on the 10 year treasury. There is now a damned if they do, damned if they don't situation in this matter because the genie is out of the bottle.

Then there is the other side of the equation, that of Federal Reserve liabilities. It is clear that if the Fed has purchased these securities, they intend to not only use them as a source of income, but cannot merely retire these bonds and leave the funds they put in the system without collateral. The entire banking system falls apart without the mechanism of collateral that can be used to redeem the notes. In this case, it appears to me the Fed isn't anything but another bank that is buying bonds. These are assets of someone or some institution being acquired, not merely floating pieces of paper.

In any case, I don't believe many people understand the head start the black hole of credit has in this game. If they did, not many people would be letting go of their money, speculating on another round of burgeoning demand. The componets of depression are not understood because it isn't in the best interest of those in power, namely the banking monopoly aristocrisy. In any case, the Chinese are further out on the limb than I believe they can remain and I am sure they are madly seeking another finance game in order that something turn before their supply of dollars runs out. The US trade deficit is a mere 2.5% of GDP now and falling. Once the Chinese realize they have moved to corner an endless market and that their gold has turned to water, the gig of the BRIC countries will be up and the price of everything will collapse. In the meantime, our price for pretending everything is going to be okay is another $1 per gallon at the pump.

[aedens]

http://macro-man.blogspot.com/
Men aim at certain ends. Why in the World are they in a hurry right now.
Given logical ends they are in emprical price consideration "cost" as what we can see.
I do rememeber when they told Kissinger come back in 500 years when
you grow up in America.
Best regards,
Aedens

Posts: 79
Joined: Tue Nov 04, 2008 3:13 pm
Private message

Great economic post today John. I haven't had timeto check AEP's site the past week so I missed it. Still, I am astounded how the game goes on. There is a lot more to this than meets the eye, as it appears that China is in full speculative gear as well, running up huge supplies of iron ore, copper, coal and oil. The question is, what is the trade? I read over and over again the Asian recovery while at the same time reading things like AEP wrote about the level of trade around the world. My best guess is the money that is being churned out is being used to speculate and the speculators need someone to sell to in order to not be left holding the bag. What he said about Goldman is right on, that they are attempting to generate a trade. The reported profits of the banks were for the most part from trading gains. The whole matter has gone from bad to worse, as mortgages are prime assets against commodities and stocks. Don't fool yourself into believing that prior performance is a good indication of the future.

I don't believe the stimulous trade has lost its steam, but instead that it never had any steam. The stimulous was a story. The stimulous in China, to my understanding, was nothing but a big bunch of bank loans. One thing that is clear is that what is going on in China cannot be sustained. Neither can the US consumer ever get it back to where it was in my lifetime. That is a joke and the numbers in relation to the consumer in the US are being cooked, as exports of China and other Asian countries just cannot be down that much and US consumer spending be down less than 5%. Remember, US industrial production has also collapsed.

The world is faced with a paradox. The world needs the US consumer, but the US cannot continue to go into infinite hock in order to provide this demand, nor will they be allowed to do so. The Bernanke/Obama/Geithner solution has hit a brick wall, as the dollar trade and the bond market are now not taking this solution too well. This reaction isn't a recovery as it is being sold as, but instead a refusal of the system to endure such a solution. Only a fool would believe that Bernanke could pull off qualitative easing in the fashion he attempted, as we are dealing with an international financial market in this case. The yen wasn't used to collateralize the entire monetary system of the world, nor were Japans bonds being used as the equivalent of the reserve currency.

I read something very interesting somewhere. I believe it was from Martin Armstrong. Whomever it was, indicated that the supply of government bonds were nothing more than a futures contract on dollars, the coupon being the price of accepting the derivative. Of course, the idea that one was going to get paid in printing press money might cause a little concern as to what the cost of that derivative would be, thus we are now looking at 4% on the 10 year treasury. There is now a damned if they do, damned if they don't situation in this matter because the genie is out of the bottle.

Then there is the other side of the equation, that of Federal Reserve liabilities. It is clear that if the Fed has purchased these securities, they intend to not only use them as a source of income, but cannot merely retire these bonds and leave the funds they put in the system without collateral. The entire banking system falls apart without the mechanism of collateral that can be used to redeem the notes. In this case, it appears to me the Fed isn't anything but another bank that is buying bonds. These are assets of someone or some institution being acquired, not merely floating pieces of paper.

In any case, I don't believe many people understand the head start the black hole of credit has in this game. If they did, not many people would be letting go of their money, speculating on another round of burgeoning demand. The componets of depression are not understood because it isn't in the best interest of those in power, namely the banking monopoly aristocrisy. In any case, the Chinese are further out on the limb than I believe they can remain and I am sure they are madly seeking another finance game in order that something turn before their supply of dollars runs out. The US trade deficit is a mere 2.5% of GDP now and falling. Once the Chinese realize they have moved to corner an endless market and that their gold has turned to water, the gig of the BRIC countries will be up and the price of everything will collapse. In the meantime, our price for pretending everything is going to be okay is another $1 per gallon at the pump.

[greghaught]

Hi there everyone!

i've read back through some of this thread, and i wanted to make sure that you folks knew about the CDAR.

http://www.cdars.com/index.php

bottom line, it's a way to get $50mil FDIC insurance through a single account agreement and one statement. currently there are over 2000 participating banks. the rates are low, but a slight spread over treasuries. dont ever let a bank roll CD's automatically. they'll do you. first, agree (argue) with them on a rate everytime.

also, i know PE formulas are controversial, but imho if you use the same one everytime, you can establish some meaninful relationships. shiller at yale uses what he calls a PE10 that uses an average of the last 10 years earnings adjusted for inflation.

http://www.multpl.com/

that chart is kind of like reading a tide book. obviously the tide is now going out. it looks like if you did your dollar cost averaging below, say, 12 and then sold somewhere above 20 (and moved to fixed) you would have done alright. it's been 20+ years since that formula has been below 12. looks like that's where we're headed. enjoy it!

[freddyv]

Hi there everyone!
...i know PE formulas are controversial, but imho if you use the same one everytime, you can establish some meaninful relationships. shiller at yale uses what he calls a PE10 that uses an average of the last 10 years earnings adjusted for inflation.

http://www.multpl.com/

that chart is kind of like reading a tide book. obviously the tide is now going out. it looks like if you did your dollar cost averaging below, say, 12 and then sold somewhere above 20 (and moved to fixed) you would have done alright. it's been 20+ years since that formula has been below 12. looks like that's where we're headed. enjoy it!

Yes, being consistent is the key. The problem with the media - CNBC, The Wall Street Journal and Bloomberg - is that they are all quoting P/E ratios that are misleading and never state that they are using data that is not historically relevant. People see these P/E charts all the time and in almost all cases they are based on reported earnings, yet the P/E ratios they are now comparing to these charts are based on operating earnings or may even be 'normalized' in some other way.

To me it is simple, you use P/E ratios based on 12 months reported earnings as the rule and anytime you use something else you state that you are using something else. The average (retail) investor actually believes that the current P/E ratio is lower than normal because it has been repeated so often in the media, not just by analysts but by the anchors.

BTW, I see that the Wall Street Journal is now back to using "as-reported earnings". See their page at

http://online.wsj.com/mdc/public/page/2 ... dc_h_usshl

...this happened because of the pressure their readers put on them. I have heard from other people who have been writing, calling and emailing them about this matter.

Of course they are still fudging the numbers somehow because there is no way the S&P 500 P/E is 36...but it's a start.

--Fred

[John]

Of course they are still fudging the numbers somehow because there is no way the S&P 500 P/E is 36...but it's a start.

The S&P spreadsheet shows the S&P 500 P/E for Q1 at 136. So maybe they figured, what the
hell, let's just drop the "1".

John

[malleni]

Italian Police Ask SEC to Authenticate Seized U.S. Treasuries

June 12 (Bloomberg) -- Italy’s financial police said they asked the U.S. Securities and Exchange Commission to authenticate U.S. government bonds found in the false bottom of a suitcase carried by two Japanese travelers attempting to cross into Switzerland.

The bonds, with a face value of more than $134 billion, are probably forgeries, Colonel Rodolfo Mecarelli of the Guardia di Finanza in Como, Italy, said today. If the notes are genuine, the pair would be the U.S. government’s fourth-biggest creditor, ahead of the U.K. with $128 billion of U.S. debt and just behind Russia, which is owed $138 billion.

The seized notes include 249 securities with a face value of $500 million each and 10 additional bonds with a value of more than $1 billion, the police force said on its Web site. Such high denominations would not have existed in 1934, the purported issue date of the notes, Mecarelli said. Moreover, the "Kennedy" classification of the bonds doesn’t appear to exist, he said.

The bonds were seized in Chiasso, Italy. Mecarelli said he expects a determination from the SEC "within a few days."

This can't be good...

Of course NOT!
... but for whom?

Samir,
I really think that you can not expect ANY reasonable discussion on this death forum.
Here you MUST talk about nonsense as S&P 500 P/E, "generational" dynamic in Iran and so on...

Apparently, this news are TOTALLY IGNORED in all US mainstream media (!!!) - and it is nothing special here on this "forum" too.

Anyway, just as information for ALL uninformed American "patriots", these seized bonds have at least (!) two big implications:
1) If they're real, some government is trying to unload large quantities of US securities.
2) If they're fake, this is arguably the biggest counterfeiting operation ever, by a factor of many times.

But, as said - that is NO news on this "forum".

[greghaught]

well. i guess we saw today what effect the WSJ's revised P?E formula had on the market

it would be nice to know how many WSJ insiders and their friends shorted the indexes as that change was made. oh well, even if the SEC did investigate, they would make sure that no one paid more than a small fine. no admission of guilt required, of course.

[mannfm11]

I wrote a piece about 6 years ago I titled "Who killed portfolio theory"? The pricing of stocks goes way beyond PE's, but in truth PE's should play a part in stocks. But, just like I continually bring up on economic sites the fact that bank credit to excess, which is what consumer credit it this time around always puts us in this kind of economy, it is the flow of income from stocks that determine value over time. These 2 ideas seem to fall on deaf ears and the idea that a portfolio of stocks returns 9% or 10% or whatever on trend forever wins out.

I learned something about portfoiio theory and about the valuation of stocks over time when I earned a finance degree in the late 1970's. I have never seen anything other than a formula to discount a stream of dividends over time that was to determine the value of a stock. Portfolio theory was not about reaping some kind of magical automatic return, but instead about putting several risky assets together and coming out with an asset that creates the assumption of the several assets as priced for an outcome. Thus, the idea is if you have 10 stocks, 2 of them flop, 6 of them go as planned and 2 of them are home runs. Thus, if you can look at each stock and see that it is going to pay $1 and it is going to grow at 5% and the stock is selling at $20 and the market for risk is 10%, then you can make 10% owning this stock provided it performs. Risk isn't the chance of loss, but instead the varability of an outcome. So, the company could go broke and the $20 be gone with the wind or something could take place and the growth rate go to 10% for a period of time and essentially double the dividend in a much shorter period of time. Thus the dividend determines the short run value of the stock in all cases when financially valuing the stock. Due to the chance the company could underperform or even go broke, portfolio theory provides for a safe way to make 10% in such a case by purchasing a number of these companies priced to return 10% on assumption.

Where portfolio theory has failed is the mantra has become stocks return 10% rather than stocks are priced to return 10%. If for instance the same company that pays $1 dividend is now assumed to go up 9% a year, the $1 is now 1% instead of 5% and the price of the stock goes to $100 instead of $20. This is very near what the SPX did in 1995-2000. The idea was sold and bought to be that you merely own stocks and they pay you 10%. Problem is that the stock has to be priced to pay 10%, just like a bond has to be priced to pay 10%. Thus portfolio theory went from a financial formula to a marketed idea. The fact that so much public money went into SPX funds by itself determined that these stocks were required to be owned regardless of price. Some of you might recall a company named JDS Uniphase, ticker symbol JDSX. I think the stock sold for $1200 at its peak, having been reverse split. It went to $150 billion because of a limited amount of stock free to purchase and the fact that it was put in the S&P 500.

My point on this account is there is nothing wrong with portfolio theory as long as you have reasonably priced assets or risks to put into the portfolio. I can broaden this idea as the idea behind portfolio theory was also the idea behind CDO's, the idea that the performing assets will take care of the nonperforming assets. Only problem with interest bearing paper is there isn't a high side to offset the low side. By this, I mean with 10 stocks, 2 go bad and 2 out perform and you might come out fairly well if the price is right. Mortgages or credit card paper or whatever, every loss reduces return, as the maximum is already baked into the pie. Point being they sold CDO's just like they sold dotcom mutual funds, with the idea that the long run takes care of the losses. But, the stock funds were not systematic like the CDO's.

Finance deals with compound values. You want 10% two years from now, you need 1.21 times what you count now. If you want 5% over the same time you need 1.1025 times. The problem arise with the divergence of these numbers. After 4 years, the 5% equates to 1.2155 while the 10% equals 1.4641. Now how do you make 1.2155 equal 1.4641? This is probably a strange question to many of you, but when one factor expands by 5% and a corresponding factor goes up by 10% on an annual basis, this idea has to eventually come into play. The 1990's was a period where growth was about 3% and inflation about 2.5 for a nominal 5.5%. If the base asset was geared to pay 2%, the most you could expect over time was 7.5%. Yet, they pushed the price of stocks up 20% for 5 straight years and by the end of 1999, the dividend base was about 1.25%. Thus they were attempting to sell 1.25% as 10% and ever since then, the drum beat to buy stocks, to plow your money into the 401K has not ceased.

I don't believe stocks are going up because the PE's, but instead because the US and the rest of the world is still in a speculative bubble. Existing home sales are 4.5 million units or higher and to my knowledge have never been below 4.3 million during this bust. You will never hear anyone on TV comment that existing home sales had never exceeded 4 million units prior to 1997. There is no move up market, only first time buyers and speculators. The speculators are trying to snap up all the deals. What happens if these are not deals, but instead homes that have to be sold. I am seeing billboards here advertising outfits that buy homes. This has been a major real estate market all my life and I have never seen that prior to now. Cars have been running around town for quite a few years with signs that say I buy houses. There is a huge speculative business built up behind housing, much like there has been around stocks. Do any of you doubt the stock market isn't the same, only that the market makers have much more pricing power in stocks, in that they can simply move prices over the short term to force buying and selling. Could you imagine a price tag on a house that moves when you look at it, either forcing you to walk away or dive in?

The reason I believe in the deflation trade besides the fact that bank credit has no mathematical solution is that very few believe in the idea that prices can go down. The reflation trade is being done, regardless of whether there is a real reflation or not because that is all people know how to do. It doesn't occur to people that every dollar in existance is owed or committed to something already. The idea there is X dollars in money market accounts is always pumped on Crooked news by crooks as money on the sidelines to buy stocks. Money on the sidelines to buy stocks can't go anywhere, nor can it disappear because to buy stocks means to change accounts, not to extinguish. But, maybe that money on the sidelines is to pay off a loan coming due, in which case it is money about to vanish from the scene. In any event, the losses will eventually dry up the money to buy stocks and people will realize their portfolios don't follow the theory and that the long run is longer than they will live.

[mannfm11]

That is funny about the bonds. Anyone with a brain knows that is a hoax because there wasn't $134 billion in US government debt ever issued in 1934, much less $500 million bonds. This is almost like a joke, as who would be stupid enough to buy them, even if they were perfect fakes. In any case this is just the lead in.

Someone brought up Shillers PE/10. I actually did a little corresponding with Shiller and I did a massive amount of work on his data back in 2003. My work was to discover the long term formula for stock valuations in regard to the stream of income to be reaped out of the SPX. I was taught the risk free rate of return was inflation plus 3%, which in his data at the time, Shiller had literally verified through discounting short term interest rates. I think I still have the data on an old computer.

The great thing about Excel is that you can generate an amazing number of compound or discounted figures rapidly. Through the use these compound figures, I was able to deduce that growth in dividend payouts on stocks were roughly 1/2% to 1% above the rate of inflation. Point being that treasuries should return inflation plus 3% and AAA rated corporate securities maybe 1/2% to 1% higher. All other debt is at a higher risk profile with junk probably rated another 2% to 3% higher over time on average. Most US corporations are either junk or near it and very few are AAA or even A rated paper. In all cases, the risk on stocks is higher than the risk associated with the bonds of the same companies. Point being that the portfolio return on stocks should be in the inflation plus 5% to 6% range if the hype is to be believed.

Throughout all history prior to 1990, the yield on the SPX always stopped at 3%. In some fashion, 3% made sense in 1966 because we had an extended period of time where growth in dividends had far outrun stated inflation. But, you might recall the post war era was also backstopped by Bretton Woods and gold convertibility of the dollar. This factor allowed a much more rapid expansion of credit and thus a much higher hidden inflation rate than can happen long term today. In any case, the 3% represents the minimal yield over inflation allowable with sound finance and long term would imply an inflation plus 3.5% to 4% return. Mistakes on stocks are much worse than bonds because the formula for pricing a stock implies no maturity, while the bond will give you your capital back at the end of the term. Point being if the dividend yield is 2%, in order that the stock provide the 5.5% needed return, its dividend would have to grow 3.5% faster than inflation, basically forever. We are looking at MSFT here, as forever caught up with price. The real idea is that in order to get the risky return out of a portfolio of stocks or a group of individual stocks is to either lower the price to where the dividend gets in the neighborhood of 5% or raise the dividend. In any case, the real growth plus dividend has to be in the 5% to 6% range and a 6% dividend doesn't necessarily get you there because growth could be negative.

There is the other problem with potential deflation. If there is no inflation, there probably isn't any earnings growth either. Currently the figures John posted reveal the SPX is paying a dividend of 2.93%. What happens if there is no growth and no inflation? Well, the risk parameter says the dividend yield needs to go to 6%. In fact the risk parameter might even increase to where the yield needs to be 8%. Lets say prices start falling 5% annually for a few years. A zero percent 5 year t-bond priced at zero has a real return of 5%. Who wants stocks when you can get 5% risk free? Dividend yield then needs to be about 8%. That is 5% for the shrinkage and 3% for the risk differential between stocks treasuries.

You might note the dividend yield of 2.93%. Again, this is a historically low figure, not a high figure, though recently it is a relatively high figure. This only shows the degree of the bubble. Stock investors surely realize by now that they haven't made a dime since 1997 above the dividends they have received. At some point,they are going to realize 10 year treasuries at 4% are a bonanza against holding the SPX and go for it instead, asking for dividends in the 5% to 6% range to make up the difference.

What I recall from 2003 is that the finacial price of the SPX then was about 370. I was also able to deduce that from the 1967 peak there had been no growth in the SPX and that the price to equate to 1966 was about 570. I believe tax changes and other things like a bigger financial bubble pushed dividends between 2000 and 2007 up about 60% which means we might be able to substantiate a 600 or so SPX. This would equate to about a 4.5% dividend, a minimum during times that aren't booming.

[malleni]

That is funny about the bonds. Anyone with a brain knows that is a hoax because there wasn't $134 billion in US government debt ever issued in 1934, much less $500 million bonds. This is almost like a joke, as who would be stupid enough to buy them, even if they were perfect fakes. In any case this is just the lead in.
...

I do not agree.

We discussed on this topic quite a bit "the confidence" in the US dollar.
Do you really believe that this event (even it those bonds are "perfect fakes") - can help increasing it?

Even if these bonds are a "perfect counterfeit", they still present a major problem for the US.

High-quality fraudulent treasury bonds measured in the hundreds of billions is the last thing the US needs to deal with right now.
http://www.marketwatch.com/story/treasu ... 0961091100
http://online.wsj.com/article/BT-CO-200 ... 07644.html
http://www.bloomberg.com/apps/news?pid= ... gZ7EeTvFbk
more of the same:
http://www.foxnews.com/story/0,2933,526541,00.html
http://business.smh.com.au/business/mar ... -ccoy.html
http://www.ft.com/cms/s/0/de0d19e6-5a02 ... ck_check=1

Obviously, US is already struggling to find lenders to finance the government’s record deficit spending.
These fake (or real) bonds also do nothing to inspire famous "the confidence" in the US dollar at a time when investors around the world are worried about its worth.

"Deflation" of US dollar:

...There is the other problem with potential deflation....

Regarding this issue - in my point of view it is really painful to talk about "deflation" any more (at least when we considering US dollar) - after all happened in the last couple months and happening now...