Investing in Macro Tipping Points

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RETAIL CRE - Wal-Mart Cuts Sales Forecast by Nearly 50%

WAL-MART CUTS SALES FORECAST BY NEARLY HALF

Wal-Mart Tumbles After Slashing Revenue Guidance, Warns Of "Somewhat Slower" Profit Growth 10-15-14 Zero Hedge

cut its sales forecast by nearly half, to just 2-3% from the prior forecast of 3-5%. From Bloomberg:

• WAL-MART SEES NEXT 3 YRS PROFITS GROWTH 'SOMEWHAT SLOWER'
• WAL-MART SEES FY16 SALES GORWTH 2-4%
• WAL-MART SEES NEXT 3 YRS SALES TO GROW 2.5%-3.5%

Also per Bloomberg, Wal-Mart Stores Inc. plans to dramatically scale back expansion of its U.S. supercenters, while investing more in e-commerce in an effort to pursue customers where they are shopping.

So instead of growth, what will WMT spend its money on? Why making its shareholders as rich as possible, while firing thousands and converting full-time workers to part-time status:

• WAL-MART SEES USING CASH ON DIVS, SHARE BUYBACKS

It's days like today when we wish Tim Geithner's hadn't "welcomed the recovery" back in August 2010.

and so... WMT stock tumbles to the lows...

RETAIL CRE - Wal-Mart Cuts Sales Forecast by Nearly 50%

September retail sales were arguably the worst of the year excluding the "abortion" that was the Polar Vortex. The simple reason: after the US consumer loaded up on debt in the spring and the summer, the payback hangover has finally hit with the payment due in the mail resulting in a collapse in revolving credit as reported previously, and as the September retail sales just confirmed:

• Headline retail sales: -0.3% missing expectations of a -0.1% decline, and down from the 0.6% in August
• Retail sales ex-Autos -0.2%, missing expectations of a +0.2% increase, and down from +0.3%.
• Retail sales ex-Autos and gas: -0.1%, missing expectations of a solid 0.4% rebound and down from 0.5%

And not just that: clothing stores dropped -1.2%, sporting goods dropped -0.1%, furniture was down -0.8%, miscellaneous retailers -0.2%, and, sorry Jeff Bezos, online "non-store retailers" such as Amazon declined -1.1%.

Because nothing screams recovery like the US consumer slamming the spending breaks just as the holiday season begins to unwind.

Finally, the all important Retail Sales Control posted its first sequential decline since unprecedented "snow in the winter" January.

And there goes the latest recovery dead cat bounce.

GLOBAL RISK - "Risk Free" Baseline Manipulation Has Mispriced Risk & Leverage

The Stage Is Set For an Ever Bigger Crash Than 2008

Last week we touched upon the “white elephant” in the room: that the biggest, most important bubble investors should worry about is in bonds, NOT stocks.

Consider the following…

The financial system is based on debt. US Treasuries, the benchmark for an allegedly “risk free” rate of return, is the asset against which all other assets are priced based on their relative riskiness.

This “risk free” rate has been falling steadily for over 25 years.

As a result of this, an entire generation of investors and money managers (anyone under the age of 55) has been investing in an era in which risk has generally gotten cheaper and cheaper.

This, in turn, has driven the rise in leverage in the financial system. As the risk-free rate fell, so did all other rates of return. Thus investors turned to leverage or using borrowed money to try to gain greater rates of return on their capital.

The ultimate example of this is the derivatives market, which is now over $700 trillion in size. This entire mess is backstopped by about $100 trillion (at most) in bonds posted as collateral.

This formula of ever increasing leverage works relatively well when the underlying asset backstopping a trade is rising in value (think of the housing bubble, which worked fine as long as housing prices rose). However, if the asset ever loses value, you very quickly run into trouble because you need to post more as collateral to backstop your trade. If you can’t do this easily, the margin calls start coming and you can find yourself having to unwind a massive position in a hurry.
This is how crashes occur. This is what caused 2008. And it’s what will cause the next crisis as well.

Despite all of the rhetoric, the world has not deleveraged in any meaningful way. The only industrialized country to deleverage since 2008 is Germany.

This is not unique to sovereign nations either. As McKinsey recently noted, there has been no meaningful deleveraging in any sector of the global economy (the best we’ve got is households and financial firms which have basically flat-lined since 2008).

In the simplest of terms, the 2008 collapse occurred because of too much leverage fueled by cheap debt. This worked fine until the assets backstopping the leveraged trades fell in value, which brought about margin calls and a selling panic.

The big problem however is that NO ONE got the message that leverage was a problem. Instead, everyone has become even MORE leveraged than they were in 2008. And they did this against an ever-smaller pool of quality assets (the Fed and other Central Banks’ QE programs have actually removed high grade collateral from the financial markets).

Thus, we now have a financial system that is even more leveraged than in 2007… backstopped by even less high quality collateral. And this time around, most industrialized sovereign nations themselves are bankrupt, meaning that when the bond bubble pops, the selling panic and liquidations will be even more extreme.

The next round of the crisis is coming, and it’s going to make 2008 look like a picnic.

PATTERNS - The Point When Human Decisions Overcome Machines

While today's trading volume was better than in recent weeks (as it has been for the last 4 days of collapse),quote activity spiked to the 2nd highest ever on record. As Nanex's Eric Hunsader notes, quote cancellations were higher than ever and are accelerating even as the overall market volume slides lower and lower. What is intriguing is that the last 3 times quote activity spiked this much corresponded with a 'sudden' v-shaped recovery from a significant market weakness - which extended notably for six months or more... is this time different?

Nanex's Eric Hunsader shows the hidden reality behind trading volume in these "markets"... to be clear - actual traded volume continues to tumble structurally but the number of actual quotes (subsequently cancelled) continues to rise as machines dominate more and more of the 'flow'... However, today's spike (just like the other 3) stood out

h/t @nanexllc

And each of those spikes corresponds to market v-shaped bottoms...

Is this the Fed's hidden signal "all-clear"? Along with Fed's Williams idiotic statements about QE4, who knows?

PATTERNS - Buybacks

MACRO OUTLOOK - Forecasts Hinge on a Deteriorating US Economy

Is This The Real Growth Scare That Markets Fear? 10-13-14 Zero Hedge

'Everyone' knows that the Japanese economy is weakening (apart from Abe and Kuroda obviously), 'everyone' knows that the European economy is tumbling towards another recession, 'most' know that China is really slowing (no matter what the magic of excel enables GDP to be)... and 'everyone' knows that the US economy is the cleanest dirty shirt, will decouple from the rest of the world, and thanks to endless extrapolated dreams, will lead the world to escape velocity. Except... recent macro data suggests otherwise...

The US is hockey-sticking higher as the rest of the world's economies slump... phew thank goodness for that!!

But... we hate to steal the jam from the market's all-knowing donut, but recent US macro data suggests GDP growth may be slowing here too...

Without the mirage of American growth - how will equity market valuations ever be achieved...

So, given the recent jawboning, it seems the Fed is in panic mode to either a) revive the "recovery is on and that's why we're tightening" meme, or b) fold, and retreat back to QE, tail between their legs and admit that's all they have left to juice nominal growth...

Charts: Bloomberg

BUYBACKS -Has Boosted Median Eanrings Growth by 100 bps for S&P 500

He then politely requested that Mr Cook ask Apple’s board to use more of its $133bn cash pile – together with money raised in the debt market – to buy back more of its shares. “We thank you for being receptive to us the last time we requested an increase in share repurchases, and we thank you in advance now” for pushing the idea again to the Apple board, he wrote.

While the 14-page letter lacked the antagonism he is known for, the billionaire investor was nonetheless placing himself at the centre of a fight: share buybacks have become one of the most contentious issues in corporate America. Mr Icahn and other “activist” investors argue that buybacks help successful companies such as Apple reach their true value. But to others, including Larry Fink, chief executive of BlackRock, they sap investment that could pay for jobs or research on new products in favour of short-term gain – ultimately hurting the economic recovery.

“Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks,” Mr Fink wrote in an open letter to chief executives this year. “We certainly believe that returning cash to shareholders should be part of a balanced capital strategy; however, when done for the wrong reasons it can jeopardise a company’s ability to generate sustainable long-term returns.”

Share buybacks are not new, but US companies have been gorging themselves on their own stocks in recent years – in part spurred on by activists such as Mr Icahn. But they are also a broader reflection of how the Federal Reserve’s aggressive policy of lowering interest rates has benefited financial assets – notably stocks, bonds and house prices – even as the recovery in the broader US economy has been halting.

The contrast between record share prices – the S&P 500 has nearly tripled since its March 2009 nadir – and the sluggish rebound remains a striking aspect of the central bank’s quantitative easing era, which draws to a close this month.

The longevity of QE and suppression of interest rates has created fertile conditions for the buyback boom.

In the 12-month period to the end of June, S&P 500 companies have returned a record amount of cash to shareholders, consisting of $533bn in buybacks and paying out $332.9bn in dividends, according to S&P Dow Jones Indices. Since the start of 2011, buybacks have exceeded $1.6tn.

“When QE was launched, it was not envisaged lasting for five years,” says Edward Marrinan, head of credit strategy at RBS Securities. “It was seen as providing a short kick-start for the economy and not becoming a protracted policy that has changed the incentives for markets and companies.”

The post-financial crisis performance of the economy, dubbed by some as a “secular stagnation” during the QE era, has animated critics of buybacks. Rather than returning excess cash to shareholders, they say companies should invest in their businesses and recruit more workers at higher wages to sow the seeds for sustained long-term growth of the economy.

William Lazonick, professor of economics at University of Massachusetts Lowell, says buybacks manipulate share prices. While that can boost prices in the short term, their long-term consequences include undermining income equality, job stability and overall economic growth.

“When you have an economy dominated by large-scale corporations, their decisions about the allocation of capital drives the economy,” he says. “Executives are judged on the performance of the company’s stock price and that is something they can control and manipulate.”

Apple epitomises the US companies selling cheap debt and then ploughing the proceeds back into enormous purchases of their own stock to pay chunky dividends to shareholders.

Over the past 18 months, Apple has sold two blockbuster offerings of bonds to the tune of $29bn, which has helped fund $50bn of buybacks. It lags behind only ExxonMobil and IBM in terms of such largesse since the start of 2009.

Mr Fink says he feels strongly that activism such as Mr Icahn’s is “creating a chilling response” among chief executives, spurring them to eschew spending on capital expenditures in favour of share buybacks.

“I am not here to suggest that there are not examples where the activists were entirely right but when you have one activist tell Tim Cook to raise $150bn in bonds to buy back shares – I don’t agree with that type of behaviour,” he said in an interview.

. . .

Companies reducing their amount of outstanding shares and boosting earnings have provided a tail wind for the S&P 500’s bull run during the QE era. Barclays estimates that buybacks are adding more than $2 a share to S&P 500 earnings at the index level.

Buybacks are executed secretly since market knowledge of their size and actual timing would push prices higher and cost the company more. But the constant source of demand for shares via buybacks has certainly been rewarding for company insiders and equity investors.

Vadim Zlotnikov, chief market strategist at AllianceBernstein, estimates the top 100 S&P companies undertaking buybacks and issuing dividends – with share repurchases going beyond just settling expiring options – have outperformed the rest of the S&P by 4 per cent this year, and 8 per cent for all of 2013. “These are huge numbers,” he says.

Digging deeper into the numbers reveals a gulf between buybacks and cash spent on capital projects. Barclays estimates that the portion of cash flow allocated to repurchases for S&P 500 companies has increased to more than 30 per cent, nearly twice what it was in 2002, while the portion allocated to capital expenditures is down to 40 per cent from more than 50 per cent in the early 2000s.

Critics say devoting large amounts of cash to buybacks can also signal that a management team has run out of ideas for sources of long-term growth. A common example is how RIM splurged on buybacks when the BlackBerry dominated the mobile handset market, while underestimating the challenge being mounted by Apple and Samsung.

Thanks to cost-cutting and low interest rates, companies have generated record profits in recent years. But the missing component has been solid revenue growth because of a sluggish economy. As a result many companies have decided that the best option for deploying their cash flow is in acquisitions and buybacks.

Mr Zlotnikov says buybacks will continue until companies regain pricing power – a sign of a robust economy. “There are a lot of projects and investments that look less attractive when pricing power is under pressure.”

. . .

The most pressing question is whether US equities can continue rising as the Fed ends QE. Companies will face a higher cost of buying back their stock while having not yet really committed capital for long-term expansion.

Jonathan Glionna, head of US equity strategy research at Barclays, says the market has entered a period of lower returns as “share repurchases prove to be already priced in and a return of faster revenue growth becomes a prerequisite for another re-rating higher”.

With the central bank ending QE and poised to start normalising interest rate policy in 2015, the buyback boom has shown signs of easing, potentially removing a vital pillar of support for the equity bull run. In the three months ending in June, the pace of buybacks dipped to $116.17bn, the lowest quarterly figure since early 2013, though there are signs they picked up in the third quarter.

“Companies issuing at low yields into this buying frenzy are doing what they always like doing with debt in the final throes of an economic cycle: they issue cheap debt to buy expensive equity,” says Albert Edwards, strategist at Société Générale. “This pro-cyclical process always ends in tears and is regarded in retrospect as typical end-of-cycle madness.”

Share buybacks peaked during the third quarter of 2007, just before the financial crisis began. Companies that had splurged on share buybacks found themselves scrambling to save cash.

The rise in US share prices – thanks in part to QE – requires vindication in the form of a stronger economy, marked by rising wages that can propel consumer spending and company revenues. However, that requires a change in the mindset of companies whose managers have focused on their stock price rather than long-term growth, many argue.

“Wall Street loves buybacks as there is a large buyer supporting the market,” says Prof Lazonick, who believes the focus on cost cutting and buybacks has hurt average workers and exacerbated income equality. “A prosperous economy comes when people have stability in terms of being employed.”

BOND MARKET - Slowing Global Growth Expectations & A Flattening Yield Curve

GOLDMAN'S GLI PLUMMETS

Changes in forward five-year U.S. swap rates indicate increased pessimism about future U.S. GDP growth. The thinking goes that if the market accepts forward five- year rates significantly lower than those that prevailed at the beginning of the year, weak growth and the Fed response is being priced in on those future dates. The implied slower growth or recession is most pronounced between five and 10 years where the five-year swap rate, five years forward, has declined a whopping 125 basis points this year. Said another way, the curve is flattening.

The three-year Treasury yield has widened 24 basis points while the 10-year yield has tightened by 61 basis points year to date despite rising equities, declining unemployment, improving financial conditions and Fed tapering. And the market is not only taking a negative stand on rates five years hence, it is doing so in every forward tenor from one year out to thirty years.

Economists’ consensus GDP forecast for 2016 saw only one small adjustment in August — so despite the rate market speaking loudly, few seem to be listening. Last weekend Jim Grant, the publisher of Grant’s Interest Rate Observer, exclaimed that we’re in an “Era of Central Bank Worship.” And though it has been hard to argue otherwise for a long time now, it may no longer be for the U.S. The expectation for reduced economic growth coincides with the start of Janet Yellen’s tenure as Fed chair.

The five-year swap rate and the five-year forward flipped from moving in lock step for many years, to moving in opposite directions — unusual for its timing and sudden change.

EARNINGS GRWOTH RATE CUT NEARLY IN HALF SINCE JUNE 30th

Since the start of July, S&P 500 Q3 earnings expectations have collapsed from 11.0% to just 6.4% with 9 of the 10 sectors lower and Consumer Discretionary now expected to see negative growth.

The chart below shows the change in the growth rates of expected future trailing year dividends per share (a.k.a. "rational future expectations") for each quarter from the present through 2015-Q2 (we'll start getting the data for 2015-Q3 later this month).

What we observe is that at present, investors would appear to be focused on 2014-Q4 in setting today's stock prices, which is a relatively recent development - one that has come about largely as a result of better than expected earnings reported by many companies in the S&P 500 in recent months. Prior to that development, investors had been largely focused on 2015-Q2, which is the period during which many believe the Fed will begin hiking short-term interest rates.

But the danger in focusing on the fourth quarter of 2014 is such that any shift in focus by investors to another future quarter would be associated with either flat or falling stock prices. And then there is the question of what expectations of the future will replace those of the soon to expire 2014-Q3. Or the next to expire 2014-Q4. Investors can hold their attention on 2014-Q4 through the end of the third quarter of 2014, but that won't be an option for long in the fourth quarter.

It's that kind of scenario with expectations that explains why the month of October is historically feared by investors, because it can come with the greatest downside potential when compared with every other calendar month. If those new expectations are more negative than the ones they replace, then the stock market's reaction will likely be as well.
So we actually do have some idea of when stock prices will change. How much they will change will hinge upon three factors: the future point of time to which investors turn their attention next, the expectations that correspond to that future point in time, and how those expectations might themselves change.

Sorting it all out is complex, but not difficult. It's not like stock prices haven't always behaved this way.

As if this isn't clear enough, Barclays is making a call that " Barclays Warns "King Dollar" Could Crush Earnings"

ATALS SHRUGGED - Financial Repression A Mirror Image

Sick of the overbearing regulation, taxation, and entitlement mentality in society—in the book Atlas Shrugged, John Galt went to one entrepreneur after another to convince them that they just didn’t need to put up with it anymore.

They didn’t need to keep propping up a system that was trying to destroy them. Where’s the point in continuing to feed a parasitic system?

So one by one, these innovators and producers simply closed up shop, deciding to just “shrug” and abandon what they were providing thanklessly to the looters.

Today many companies are doing the same. They may not be abandoning their businesses altogether, but they are moving them out of the hands of the parasites by moving their tax bases abroad.

In Ayn Rand’s book, the Economic Planning Bureau dealt with this by legislating that no businesses could leave: “[a]ll the manufacturing establishments of the country, of any size and nature, were forbidden to move from their present locations, except when granted a special permission to do so.”

In real life today, we have a string of policies being proposed to similarly discourage companies from leaving, or failing that, to try to claw as much money as possible from them first.

Even the language used by these bill’s supporters is eerily similar to the novel, as politicians call for corporations to pay their “fair share” and bemoan that Americans have to “pick up the tax burden inverted companies shrug off.”

At the time, Rand might have thought that she was writing about an extreme, fictional society. But it seems that the Land of the Free is eager to exceed even her worst expectations.

When she wrote about the “Economic Emergency Law”, which forbade any discrimination “for any reason whatever against any person in any matter involving his livelihood”, she was likely thinking about criteria such as race, gender, and age.

She might have even considered they would try to prevent employers from making judgments based on a person’s ability, though I’m sure she would not have even imagined what politicians have actually come up with in the US.

H.R. 5278: No Federal Contracts for Corporate Deserters Act

First, take the H.R. 5278: No Federal Contracts for Corporate Deserters Act, which bars federal contracts for American companies that have gone overseas for tax purposes.

H.R. 5549: Pay What You Owe Before You Go Act

Then take the H.R. 5549: Pay What You Owe Before You Go Act, which seeks the seizure of unrepatriated corporate revenue.

 S. 1972/ H.R. 3972: Fair Employment Opportunity Act

Try the S. 1972/ H.R. 3972: Fair Employment Opportunity Act that proposed to prohibit discrimination according to a person’s history of unemployment.

S. 1837: Equal Employment for All Act

Or even worse, the S. 1837: Equal Employment for All Act that would have prohibited employers from even looking at prospective employee’s credit ratings.

 H.R. 4904: Vegetables Are Really Important Eating Tools for You (VARIETY)

The literary similarities don’t just stop with corporations either. Compare the fictional Project Soybean, designed to “recondition” people’s dietary habits to the actual H.R. 4904: Vegetables Are Really Important Eating Tools for You (VARIETY).

Tell me, which one sounds more ludicrous to you? With each new piece of legislation being proposed in the Land of the Free, Atlas Shrugged seems to be ever more prophetic.

While even the most terrifying elements of the book are coming true, so are the reactions. People and companies are leaving, refusing the put up with the looting of their efforts any longer.

Despite politicians’ desperate attempts to stop it, Atlas is already shrugging.

“John Galt is Prometheus who changed his mind. After centuries of being torn by vultures in payment for having brought to men the fire of the gods, he broke his chains—and he withdrew his fire—until the day when men withdraw their vultures.”

FED POLICY ADOPTION - Underpinnings of Financial Repression

FED POLICY ADOPTION - Macro Prudential Policies (Financial Repression)

In July, Janet Yellen remarked about what seems to be her preferred choice, a topic that has been central to her Chair.

.. efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment. As a result, I believe a macroprudential approach to supervision and regulation needs to play the primary role.

We are, as Yellen proclaims, in the capable hands of regulators and their “macroprudential” systems and arcana:

The Federal Reserve is stepping up its oversight of high-risk leveraged loans, shifting to a deal-by-deal review after its previous industry-wide guidelines were largely ignored by banks.

Truer words have never been written, as if you were observing the leveraged loan market from afar with little prior experience you would come to the conclusion that there was no such thing as “guidelines” in leveraged loans.

Until now, supervisors collected loan data in an annual survey, and last year told banks they needed better adherence to standards they put forth in guidelines in March 2013. Over the past several weeks, they have shifted tactics and are examining loans as they are made, showing a new urgency in avoiding the kind of overly risky lending that was blamed for igniting the financial crisis.

To sum up: the leverage lending market had prior guidelines that were supervised (using that term loosely) via an annual loan survey leading to a surge in the kind of “overly risky lending” usually reserved for the bitter ends of cycle peaks; and now, long after all that behavior has been entrenched and hundreds of billions of loans made, macroprudential policy wishes to step up regulatory pressure.

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FLOWS - Liquidity, Credit & Debt

This is a major concern.

Its ALL ABOUT the RATE OF CHANGE

FLOWS - Liquidity, Credit & Debt

Why the Federal Reserve Will Launch Another Round of QE Richard Duncan

In November 2002, Fed Governor Ben Bernanke introduced the concept of Quantitative Easing to the world. In a speech entitled “Deflation: Making Sure It Doesn’t Happen Here”, he explained that the Fed could prevent deflation from taking hold in the United States by creating money and using it to acquire government and agency (i.e. Fannie Mae and Freddie Mac) bonds. He proclaimed that this “unorthodox monetary policy” would be particularly efficacious if carried out in combination with an expansionary fiscal policy.

With this speech, Bernanke reassured the banking industry and the rest of the speculating community of the Fed’s omnipotence. In doing so, he encouraged even more aggressive credit creation and risk-taking. As a result, the credit bubble, which had already grown quite large, became very much larger. When it imploded six years later, Fed Chairman Bernanke, in cooperation with Treasury Secretaries Paulson and Geithner, responded to the crisis using the exact policies Bernanke had described in 2002.

The Fed began printing very large amounts of money and using it to buy very large amounts of government and agency debt. The Treasury began borrowing and spending trillions of dollars, which it was able to finance at very low interest rates thanks to the Fed’s purchases of government debt. This combination of very aggressive fiscal and monetary stimulus prevented a new great depression and the horrific collapse in prices that would have accompanied it.

Therefore, while it should not be forgotten that Bernanke bears much blame for allowing this crisis to occur, it must also be acknowledged that he was correct when he declared the Fed would be able to prevent deflation through the aggressive use of unorthodox monetary policy.

Many financial commentators have noticed that bank reserves held at the Fed have increased by $2.9 trillion since early 2009. As this is equivalent to 83% of the amount of money the Fed has created during that period, they have concluded that almost all of the money created through QE has been stuck in the banks and therefore has had no impact on the economy whatsoever. This interpretation is incorrect, however.

Between 2009 and 2013, the government borrowed approximately $5.8 trillion to finance its budget deficits. During that time, the Fed acquired $1.9 trillion worth of government bonds. If the Fed had not bought those bonds, either the government would have had to spend $1.9 trillion less, which would have removed $1.9 trillion of aggregate demand from the economy, or else the government would have had to borrow the $1.9 trillion from the financial markets.

That would have drained liquidity from the system and pushed up interest rates (resulting in old fashioned Crowding Out). Higher interest rates would have pushed the collapsing property market down even further and damaged the economy in countless other ways. QE allowed the government to boost aggregate demand through deficit spending and to finance its deficit spending at very low interest rates.

The Fed also bought $1.7 trillion worth of agency debt or, in other words, the mortgage-related debt issued and guaranteed by Fannie and Freddie. That pushed up the price of those bonds and drove down their yields. By acquiring that debt at a much higher price than would have otherwise prevailed, the Fed helped restore the solvency of the crippled financial industry, which was then teetering on the edge of the abyss.

By pushing down the yield on mortgage-related debt, the Fed stopped the collapse in property prices and later, under QE 3, brought about their rebound. Higher property prices helped reflate the economy by pushing up household sector net worth. If the Fed had not bought $1.7 trillion worth of mortgage-related debt, the yield on that debt would have remained high (or moved higher), the owners of that debt would have been stuck with impaired assets and the property market would have weakened further instead of rebounding.

In these ways, QE greatly strengthened the economic fundamentals of the United States. Recognizing this, equity investors drove the stock market higher each time a new round of QE was announced. Surging stock prices also served to reflate the economy.

Between the rebound in property prices and the sharp rise in stock prices, household sector net worth increased by $25 trillion (or by 45%) from the low it reached in 2009. It is now 17% above its pre-crisis peak. This increase in wealth was the result of Quantitative Easing. What else could possibly explain it? That surge in net worth clearly created a wealth effect that allowed much more consumption and, therefore, economic growth, than would have been possible otherwise.

It was not a coincidence that net worth rose by $25 trillion at the same time that the central bank was creating unprecedented amounts of fiat money and using it to acquire financial assets. It is certain that QE reflated the US economy by pushing up asset prices. It is not at all certain, however, that the economy will remain “reflated” when QE ends in October. In fact, the odds are quite high that it will begin to deflate again.

Should that occur, the Fed would then have to decide whether to do nothing and allow everything it has accomplished to unravel in a process most probably leading back to severe recession and deflation or else to launch yet another round of Quantitative Easing. I believe it will be an easy decision for the Fed to make. After all, what’s a few trillion dollars more (shared) among friends?

FLOWS - Liqudity, Credit & Debt

Don't be Fooled! 09-30-14 Richard Duncan

It was reported that the US economy grew by 4.6% during the second quarter. But don’t be fooled.The US economy is far weaker than that headline number suggests.

In large part, the second quarter was strong because the first quarter was so weak. In that quarter, GDP contracted by -2.1%. During the first six months of 2014, the economy grew by only 0.6%, which translates into an annualized rate of only 1.2%. To put that into perspective, take a look at the following chart, which shows the US GDP growth numbers going back to 1980.

There were only six years out of the past 34 when the economic performance of the Unites States was worse than it was during the first half of this year.

OK. It’s true that the very harsh winter caused the economy to be particularly weak at the beginning of this year. Therefore, it is almost certain that the economy will be considerably stronger during the second half of the year than it was during the first. Nevertheless, it is clear that the economy is suffering from something more than just cold weather.

Notice how much more slowly the economy has been growing during this decade than in the past. The economy grew by an average annual rate of 3.2% during the 1980s and the 1990s. So far during this decade, it has expanded by an average annual rate of only 2.0% - despite the massive government life support infusions it has received since the global economic crisis began. Over the last five and a half year, the budget deficit has exceeded $6 trillion, the Fed has injected $3.5 trillion of newly created money into the financial markets and the Federal Funds rate has been held at zero percent. That kind of stimulus should have created an economic boom of the first degree. That fact that it didn’t should serve as a warning that something is very fundamentally wrong with the US economy.

The financial markets have chosen to ignore the economy’s fundamental weakness and, instead, have seized on the strong second quarter GDP number as proof that the long-awaited US economic recovery is, at last, upon us. This belief, combined with the approaching end of the third round of Quantitative Easing and weak economic numbers out of Europe and Japan, have produced a meaningful bull market in the US dollar.

Over the last couple of months, the dollar has gained 7% to 8% against both the Euro and the Yen.

This big move in the dollar is starting to have interesting implications. First, when the dollar strengthens, commodity prices (including the price of gold and silver) tend to weaken. That is what we are seeing now. The Thomson Reuters CRB Commodity Index, which measures a basket of commodities has fallen 10% since July. Many commodities are already under pressure due to either a surge in new supply (oil, corn, wheat) or weakening demand from China (most metals). Consequently, the currencies of the commodity-producing countries (such as Australia and Brazil) are taking a hit.

This strong dollar trend may continue for some time. If it does, some really exciting investment opportunities could arise. The market consensus view is that the Fed is going to stop its program of Quantitative Easing just as the European Central Bank launches one in Europe and the Bank Of Japan accelerates its Yen printing program in Japan. So long as this remains the consensus view, the downward pressure on the price of gold, silver, most other commodities and the currencies of the commodity-producing countries could continue until they are all considerably oversold.

The strong dollar trend is built on the belief that the US economy will become stronger as we move into 2015. I believe this view is mistaken. With QE 3 ending later this month, the US stock market is likely to experience a significant correction between now and next spring. When it does, the US economy will weaken again and that will cause the dollar to fall.

In that scenario, where the US economy moves back toward recession, the global demand for commodities would also weaken. Therefore, while commodity prices would benefit from a weaker dollar, they would suffer from reduced global demand. Global deflationary pressures would probably intensify.

What would happen after that would depend on the central banks. Ultimately, I believe the Fed will have to return as the Printer-Of-Last-Resort and launch he fourth round of Quantitative Easing on an aggressive scale. If I am right, when QE 4 is announced, the dollar will weaken further, while the price of gold, silver, most other commodities, and the currencies of the commodity-producing countries would all rebound sharply.

As they say, timing is everything. Getting the timing right on these moves in currencies and commodities is going to be tricky. But, don’t allow yourself to be fooled. The US economy is much weaker than the second quarter GDP number would suggest. Therefore, the current strong dollar trend, while is could last for some time, is not underpinned by strong foundations.

SUB-PRIME AMERICA - Where is the De-Leveraging?

Student And Car Debt Exponential; Credit Card Debt Declines 10-07-14 Zero Hedge

The summer rebound is well and truly over, and the latest nail in the short-lived rebound came moments ago when the Fed reported that in August, consumer credit rose by only $13.5 billion: only because it was far below the $20 billion expected and a plunge from the $26 billion surge in July, since revised far lower to $21.6 billion. Worse, revolving credit actually declined in the month by just over $200 million, its first decline since February. But don't worry: while US consumers put their credit cards on ice, they had no problems continuing to borrow like drunken sailor when it comes to car and student loans, which rose to a new record high of $2.366 trillion, an increase of $13.7 billion, which still was the lowest monthly increase since January.

Total credit monthly change:

Revolving credit alone:

And student and car loans, i.e. non-revolving credit.

Finally, this is what an exponential chart looks like.

SUB-PRIME AMERICA - Auto Financing versus Credit Card Spending

Trend of Autos Boosting Consumer Credit May Not Last 10-08-14 Bloomberg Brief

Sky-rocketing auto loans bolstered total outstanding consumer credit by an annualized 5 percent in August, continuing a trend of several months. Non-revolving credit — largely auto loans — increased 7 percent, while revolving credit — commonly referred to as credit card debt — slipped 0.3 percent.

Consumers were reluctant to shop in August during the back-to-school season, the second largest behind the winter holidays. The heavily promotional environment may also have played a role in the contraction in revolving debt.

The increase in motor vehicle lending was somewhat expected since U.S. auto sales totaled a seasonally adjusted annual rate of 17.45 million units in August — the highest level since January 2006's 17.63 million units.

Also, the net percentage of domestic respondents witnessing higher demand for auto loans in the Fed’s Loan Officer Survey totaled 24.2 percent at the end of July, more than twice the 10.9 percent at the end of April, which was a period of inclement weather.

Credit will not likely be as strong in September since the pace of auto sales has cooled to 16.34 million units, and the need to shop has moderated prior to the holiday shopping season.