by Zero Hedge - September 27th, 2016 8:43 pm
One of the key themes that have emerged in the past year is that, having loaded up their balance sheets with tens of trillions in various assets, central banks are “running out of road.” While it is a topic extensively discussed on these pages, going all the way back to 2014, a good summary of the practical limitations on central banks comes from the following series of charts from Deutsche Bank.
The first slide looks at the bond transmission mechanism, namely that central banks have become increasingly aware of the adverse impact of low bond yields on financial sector profitability; another aspect is that European pension liabilities as a % of market cap are at a 10-year high – and above the levels they reached in 2008, when the European market cap was at half the current level. This means that absent an independent rise in inflation expectations, central banks’ attempts to push up nominal bond yields (via less QE or faster hikes) risks leading to higher real bond yields as well; the implication is that equities tend to de-rate when real bond yields rise (i.e. the discount rate increases).
There is a limitation from the standpoint of markets as well: European 12-month forward P/E, at 14.9x, is around 20% above its 10-year average; DB notes that its P/E model suggests that this deviation is fully accounted for by the fact that real bond yields are 180bps below their 10-year average; more troubling is the admission that any removal of monetary accommodation would likely lead to a sharp rise in credit spreads to reflect the deterioration in fundamentals (with default rates now at 5.7%), while equity strategist note that accommodative monetary policy has driven aggregate bond and equity valuations to the highest level since 1800
In the third slide, DB points out that while equities would likely react positively to any rise in nominal bond yields driven by higher inflation expectations (rather than by higher real bond yields), underlying inflation is only likely to accelerate if growth accelerates to be clearly above potential (i.e. the output gap closes). Meanwhile, weakening growth momentum in the US points to downside risks for inflation, and that since the Chinese RMB is still around 10% overvalued – and any renewed devaluation is likely to weigh on DM
by Zero Hedge - September 27th, 2016 8:20 pm
Earlier today we noted that Wells Fargo’s board was actively considering whether to claw back pay from former retail-banking head Carrie Tolstedt as well as from Chief Executive John Stumpf. Now, just a few short hours later it looks like we have our answer with a Special Committee of Independent Directors announcing that they have hired Sherman Sterling as counsel to conduct a thorough review of the bank’s retail banking sales practices and that both Stumpf and Tolstedt will be forfeiting salary, stocks options and 2016 bonuses.
More specifically, CEO John Stumpf will forfeit unvested equity awards valued at approximately $41mm, will forgo salary during the Special Committee’s investigation and will not receive a bonus for 2016.
Meanwhile, Carrie Tolstedt, who was head of community banking before recently departing, will forfeit all of her outstanding unvested equity awards valued at $19m, will not be paid a severance and will not receive any retirement enhancements in connection with her separation from the Company. Tolstedt has also agreed that she will not exercise her outstanding options during the course of the investigation.
As mentioned above, Wells Fargo’s board formed a Special Committee of Independent Directors that will lead a thorough investigation into the company’s retail banking sales practices with the assistance of independent counsel Shearman & Sterling. Stephen Sanger, Lead Independent Director, made clear that additional compensation may be clawed back if deemed appropriate and that “other employment-related action” would be taken as necessary.
“We are deeply concerned by these matters, and we are committed to ensuring that all aspects of the Company’s business are conducted with integrity, transparency, and oversight. We will conduct this investigation with the diligence it deserves — and will follow the facts wherever they lead. Our thousands of outstanding team members and millions of loyal customers and shareholders deserve no less. Based on the results of the investigation, the Independent Members of the Board will take such other actions as they collectively deem appropriate, which may include further compensation actions before any additional equity awards vest or bonus decisions are made early next year, clawbacks of compensation already paid out, and other employment-related actions. We will proceed with a sense of urgency but will take the time we need to conduct a
by Zero Hedge - September 27th, 2016 8:00 pm
Largest Theft in History
As expected, Ms. Yellen smiled last week, announcing no change to the Fed’s extraordinary policies. For the last eight years, she has been aiding and abetting the largest theft in history.
Asset valuations are not outside of historical norms, particularly if one disregards the past 5,000 years.
Cartoon by Bob Rich
Thanks to ZIRP (zero-interest-rate policy) and QE (quantitative easing), every year, about $300 billion is transferred from largely middle-class savers to largely better-off speculators, financial asset owners, and the biggest borrowers during that period – corporations and the government.
The financial press, nevertheless, finds something vaguely heroic about enabling the grandest larceny ever. Bloomberg:
“Federal Reserve Chair Janet Yellen braved mounting opposition inside and outside the U.S. central bank and delayed an interest-rate increase again to give the economy more room to run.”
The U.S. economy is barely limping along. As we noted last week, when you adjust nominal GDP growth by a more accurate measure of inflation – David Stockman’s “Flyover CPI” – you see that the economy is actually in recession. Room to run? It is backing up!
Bloomberg continues its brain-dead coverage:
While agreeing that the case for a rate rise had strengthened, Yellen on Wednesday argued that it made sense to put off a move for now amid signs that discouraged Americans who dropped out of the labor market are returning and looking for work.
“The economy has a little more room to run than might have been previously thought”, Yellen told a press conference in Washington after the Fed’s two-day meeting, as she explained the decision to keep rates on hold. “That’s good news.”
We have numerous reservations about GDP as a measure of economic growth, but it will do for the purpose of showing the long term trend in output growth. It is worth noting that this downshift has occurred in tandem with accelerating credit and money supply growth. While there are other factors in play as well (such as the inexorable increase in regulations), this outcome is in line with Austrian business cycle
by Zero Hedge - September 27th, 2016 7:35 pm
We have spent a lot of time talking about the unintended consequences of accommodative global central banking policies. Skyrocketing pension liabilities and the numerous corresponding reach for yield/duration trades, which have resulted in several of their own off-shooting market bubbles (in fact we just wrote about how one of the bubbles is bursting just yesterday “P2P Meltdown Continues: LoanDepot’s CDO Collapses Just 10 Months After Issuance“), is just one of the many unintended consequences.
But, as Deutsche Bank’s European equity strategist, Sebastian Raedler, points out today, even if central banks wanted to steepen the yield curve they likely can’t. Raedler disputes the common explanation that low bond yields are due to discretionary central bank policies and argues instead that the recent fall in bond yields has been due to sustained weak global growth. This suggests low bond yields are not principally due to discretionary central bank policies (which could be reversed at will), but to the weakened global growth picture, to which central banks have only responded by making policy more accommodative. Of course, if Raedler is correct, the question then becomes why continue with accommodative policies if they’re not driving incremental economic growth but clearly creating detrimental asset bubbles?
Raedler argues that global bond yields have fallen with central banking target rates but both have really just followed slowing global economic growth.
And accomodative policies can’t be removed because expectations for future growth continue to decline.
Meanwhile, DB points out that despite accommodative policies the US economy has now activated all 4 of their “recession warning indicators” a condition which has resulted in a recession every time it’s occurred over the past 30 years with the exception of 1986.
But, of course, as we’ve noted many times, central banks are stuck with their accommodative policies because any efforts to unwind them would result in a simultaneous unwind of the equity bubble they’ve facilitated.
Central banks are running out of road. They would like to engineer higher nominal bond yields to protect bank profitability. However, without stronger growth and higher inflation expectations, the only way to do so (less QE, faster hikes) would also push up real bond yields. Given that the fall in real bond yields has been a key driver in boosting asset prices
by Zero Hedge - September 27th, 2016 7:10 pm
In business, the 80/20 rule states that 80% of your business will come from 20% of your customers. In an economy where more than 2/3rds of the growth rate is driven by consumption, an even bigger imbalance of the “have” and “have not’s” presents a major headwind.
I have often written about the disconnect between Wall Street and Main Street. As shown in the chart below, while asset prices were inflated by continued interventions of monetary policy from the Federal Reserve, it only benefited the small portion of the population with assets invested in the market. Cheap debt, excess liquidity and a buyback spree, led to soaring Wall Street and corporate profits, surging executive compensation and rising incomes for those in the top 10%. Unfortunately, the other 90% known as “Main Street” did not receive many benefits.
This divide is clearly seen in various data and survey statistics such as the recent survey from National Institute On Retirement Security which showed the typical working-age household has only $2500 in retirement account assets. Importantly, “baby boomers” who are nearing retirement had an average of just $14,500 saved for their “golden years.”
Further evidence of the failure of ongoing Central Bank interventions to spark a broad economic recovery that lifted “all boats” is shown in the chart below. 4-0ut-of-5 working-age households have retirement savings of less than one times their annual income. This does not bode well for the sustainability of living standards in the “golden years.”
Here is the problem that is unfolding for investors going forward. While the mainstream financial press continues to extol the virtues of investing in the financial markets for the “long-term”, the assumptions are based on historical data that is not likely to repeat itself in the future.
Jeff Saut, Liz Ann Sonders, and others have continued to prognosticate the financial markets have entered into the next great “secular” bull market. As I have discussed previously, this is not likely to the be case based upon valuations, debt and demographic headwinds that are currently facing the economy.
Let’s set aside valuations and look strictly at the main driver of economic growth – the consumer.
The gap between the young and elderly population has shrunk dramatically in recent years as
by Zero Hedge - September 27th, 2016 6:43 pm
There was one topic prominently missing from last night’s debate – Obamacare and soaring US healthcare costs- and with good reason: with most middle-class Americans suffering as a result of surging premiums, and even the Obama administration admitting, if only behind the scenes, that Obamacare needs a major overhaul, why tempt the presidential candidates with a topic that would sour the public’s mood about the defender of the status quo on the first debate.
After all, anyone who points out all that is wrong with Obama’s recovery is “peddling fiction.”
Unfortunately, its omission from the debate does not mean it is going away. On the contrary, as the following analysis from SocGen shows, what may now be the most important topic for not only the well-being but also the wallet of America’s middle class – as well as the presidential debates – is only going to get worse.
As SocGen writes, the jump in medical care services this year has been driven “in large part by soaring health insurance premiums, but more recently, both physician and hospital services prices have accelerated. In August, hospital services prices in particular soared, notching their largest increase since October 2015. In short, rising out-of-pocket payments and perhaps higher insurance reimbursements could continue to drive the medical care services index higher this year.”
In August, the core CPI climbed by 0.25%, with about 41% of that increase coming from a 1.0% surge in the cost of medical care, which was driven largely by a 0.9% rise in the medical care services gauge. Health insurance costs continued to accelerate, rising by 1.1% (the data are only on a not seasonally adjusted basis) in the month and by 9.1% yoy, the fastest rate of growth since December 2012. While in recent months rising health costs were mostly the result of health insurance, more recently, and especially in August, other components of the medical care services index have begun to accelerate.
Most of the 0.9% jump in medical care services in August was due to a 1.7% increase in the cost of hospital services. Hospital services accounted for about 46% of the increase in total medical care services, and they accounted for around 19% of the total rise in the core CPI. That is a hefty contribution from a component that
by Zero Hedge - September 27th, 2016 6:20 pm
It’s over! The entire model our societies have been based on for at least as long as we ourselves have lived, is over! That’s why there’s Trump.
There is no growth. There hasn’t been any real growth for years. All there is left are empty hollow sunshiny S&P stock market numbers propped up with ultra cheap debt and buybacks, and employment figures that hide untold millions hiding from the labor force. And most of all there’s debt, public as well as private, that has served to keep an illusion of growth alive and now increasingly no longer can.
These false growth numbers have one purpose only: for the public to keep the incumbent powers that be in their plush seats. But they could always ever only pull the curtain of Oz over people’s eyes for so long, and it’s no longer so long.
That’s what the ascent of Trump means, and Brexit, Le Pen, and all the others. It’s over. What has driven us for all our lives has lost both its direction and its energy.
We are smack in the middle of the most important global development in decades, in some respects arguably even in centuries, a veritable revolution, which will continue to be the most important factor to shape the world for years to come, and I don’t see anybody talking about it. That has me puzzled.
The development in question is the end of global economic growth, which will lead inexorably to the end of centralization (including globalization). It will also mean the end of the existence of most, and especially the most powerful, international institutions.
In the same way it will be the end of -almost- all traditional political parties, which have ruled their countries for decades and are already today at or near record low support levels (if you’re not clear on what’s going on, look there, look at Europe!)
This is not a matter of what anyone, or any group of people, might want or prefer, it’s a matter of ‘forces’ that are beyond our control, that are bigger and more far-reaching than our mere opinions, even though they may be man-made.
Tons of smart and less smart folks are breaking their heads over where Trump and Brexit and
Billionaire Capital Turns Into Ghost Town: “Home Contracts Down 80%”, Trophy-Cars Pile Up In Showrooms
by Zero Hedge - September 27th, 2016 5:55 pm
As recently pointed out by Bloomberg, Greenwich has long been one of the most prosperous communities in America with one out of every $10 in hedge funds in the country being managed there by the most elite funds like Viking Global, AQR and Steven Cohen’s Point72.
But these days, as hedge fund returns have suffered and banking bonuses have remained stagnant for years, the trophy items like expensive jewelry and exotic cars are just piling up in luxurious Greenwich showrooms.
The lonely $250,000 S-Class coupe at Mercedes-Benz of Greenwich says it all. For six months, it’s been sitting in the showroom, shimmering in vain.
“We haven’t had anyone come in and look at it,” says Joey Licari, a sales consultant at the dealership, looking over his shoulder at the silver beauty. “I feel like normally they would, maybe a few years ago.”
Ten-carat diamonds that can cost in the six figures collect dust in stores on the main drag.
But exotic cars and jewelry aren’t the only items not moving as real estate brokers say that Greenwich mega mansions are sitting on the market for years amid collapsing prices. As head of Starwood Capital Group, Barry Sternlicht, said the rich are being maddeningly frugal “you can’t give away a house in Greenwich.” In fact, according to Houlihan Lawrence contracts for homes between $5 million and $5.99 million are down 80%.
Many continue to try to sell their real estate holdings. As of Sept. 14, there were 46 homes at $10 million or more on the market, some that have been lingering since 2014, according to data from Miller Samuel and Douglas Elliman.
Back in the day, “everybody in the world wanted five acres and pillars on their driveways, because that’s what you got when you ‘made it,”’ says Frank Farricker, a principal with Lockwood & Mead Real Estate who’s chairman of the Connecticut Lottery board. “Now, ‘made it’ means on the waterfront — on a small lot with a brand-spanking new house.”
On example of the tanking Greenwich real estate market is the following 19,773-square-foot mansion once owned by Republican presidential candidate Donald Trump that has been looking for a buyer for nearly two years. It’s now on
by Zero Hedge - September 27th, 2016 5:53 pm
Ever wondered just what happens when the immovable object of safe-space-demanding social justice warriors collides with the irresistible force of free-speech-seeking American students? Wonder no longer…
On Thursday night protestors at Kansas University (KU) hijacked a Young Americans for Freedom (YAF) meeting, reportedly unleashing a virulent tirade against the conservative students, providing a glimpse into the crazy arguments of the far Left.
Leftists can be seen screaming obscenities, berating the calm YAF students, shouting about privilege, safe spaces, and micro aggressions, and threatening to “tear this motherf***ing school up on a daily motherf****ing basis.”
“I don’t study in the library because I don’t feel comfortable with people always wondering what my gender identity is and how I express myself, and I don’t feel comfortable being in classrooms where I am supposed to speak as a transhuman and as a queer person as all queer people,” one student whined. “That shows you that there is a problem with this institution about there not being—that these students are not being taught that they are supposed to create safe spaces.”
Cox, who was also present for the conversation, declared emphatically that “safe spaces are a necessity” and making clear that she would brook no dissent on the matter.
“It’s not a question. It’s not for you to say. It’s not for anyone else to say. Safe spaces are necessary because the institution that we’re at is not a safe space in its entirety,” she claimed. “We have to carve out places and fight for places that we feel safe because not only will we get harassed, we’ll be murdered, we’ll be all this stuff and discriminated against because we have to do that. It’s not because we want to.”
At one point when KU YAF Chairman Gabe Lepinski referred to the protesters as “you guys,” one leftist completely exploded, screaming, “Do not call us guys! That is a micro aggression!”
At another point, one of the protestors broke down when asked about safe spaces, pounding fists on the table and shouting, “I am not retreating! I’m making myself safe and comfortable… If I want this space, I can have this space! It’s my right to have this space!”
The leftists also repeatedly referred to
by Zero Hedge - September 27th, 2016 5:30 pm
If there was no evidence of criminal activity, why all the immunity?
That is the awkward question that William McGurn asks in a Wall Street Journal op-ed today…
Why did Cheryl Mills require criminal immunity?
This is the irksome question hanging over the FBI investigation into Hillary Clinton’s home-brew server in the wake of news that Ms. Mills was granted immunity for her laptop’s contents.
Ms. Mills was a top Clinton aide at the State Department who became Mrs. Clinton’s lawyer when she left. She was also a witness, as well as a potential target, in the same FBI investigation into her boss’s emails. The laptop the bureau wanted was one Ms. Mills used in 2014 to sort Clinton emails before deciding which would be turned over to State.
Here’s the problem. There are two ways a witness can get immunity: Either she invokes the Fifth Amendment on the grounds she might incriminate herself, or, worried something on the laptop might expose her to criminal liability, her lawyers reveal what this might be before prosecutors agree to an immunity deal.
As with so much else in this investigation, the way the laptop was handled was out of the ordinary. Normally, immunity is granted for testimony and interviews. The laptop was evidence. Standard practice would have been for the FBI to get a grand-jury subpoena to compel Ms. Mills to produce it.
Andrew McCarthy, a former U.S. attorney, puts it this way: “It’s like telling a bank robbery suspect, ‘If you turn over that bag, I’ll give you immunity as to the contents’—which means if the money you robbed is in there, I can’t use it against you.”
The Mills immunity, which we learned of on Friday, has unfortunately been overwhelmed by the first Trump-Clinton debate. But the week is still young. On Wednesday, Congress will have an opportunity to put the Mills questions to FBI director James Comey when he appears before the House Judiciary Committee.
Back in July, Mr. Comey must have thought he’d settled the issue of Mrs. Clinton’s emails with a grandstanding press conference in which he asserted “no reasonable prosecutor” would bring a case against her based on what the FBI had found. In so doing, he effectively wrested the indictment decision (and any hope for political accountability)