Exploding Debt Levels
It is impossible to know when something will matter but I agree with Peter Cecchini, founder and CEO of AlphaOmega Advisors who says Stocks Can’t Go ‘To the Moon’ Forever.
“Some of the earnings estimates that I’m seeing, as you said, the consensus is just below $170, are going to require multiples that just don’t make a lot of sense to me within the context of the fact that rates can’t go any lower. So if we’re looking for multiple expansion to continue to drive the rally, I don’t think we’re going to get that because the Fed’s efficacy is limited, right? It has firepower, no one’s saying the Fed doesn’t have ammunition. It can print money and it can go buy Treasuries for as long as it would like. But at the end of the day, when you’re at zero, the stimulative impact is muted… I think that is one huge piece that people are missing. We’re not just back to, you know, this `to the moon’ scenario for earnings. If anything, we’re back to a situation where cashflows remain challenge and, by the way, debt levels have exploded.”
Click on the above link for a podcast.
And in case you missed it, please consider Do You Understand the Ramifications of Passive Investing?
Mish
the Doomsayers have calling for a stock market crash…since March 2009. there have been up and downs for the stock market since that date. The only down year was in 2018, because the Fed increased interest rates. However, as Keynes used to say, even a broken clock is right twice a day. the fall will come…but not a crash.
None of that matters. All that matters is perception – people will continue to chase shares for as long as they believe that others will also do so.
The Bandwagon Effect.
Collapsing debt levels will kill the stock moon launch.
And the sooner the better. P/E ratios have been insane and unstainable for years.
Buy stock in Sherwin Williams to ride the wave of theatrical “vandalism” incidents against our brave Congress Crooks.
Poor Nancy and Mitch.
I’d be real curious if they make a claim against their homeowners insurance policies. Vandalism covered, riot and insurrection excluded. In any event, however, insurance fraud a crime.
Mish – I am curious to hear your reaction to this linked article. It seems to make a lot of sense to me but what do I know.
Very good.
One thing that seems a bit contradictory: If the battleground between the USA & China is the semi-conductor industry in Taiwan, and could get “volatile” at any time, is investing in the Asian region very wise?
The validity of using fundamentals like P/E ratios to value stocks went out the window upon the transition from dividend yielding stock, which resembled bonds, but with more risk, to guessing at future earnings for revenueless companies. A classic error is to assume that sociology, the realm of investment finance, must follow laws as if it were a hard science, for example, like physics. It is merely sociology. Using past conventions to argue for a present day departure from “fundamental value” is akin to arguing against rock music as it is not classical music.
Debt no longer matters. Money creation has replaced wealth creation. Gresham had a theory’bout such things.
Dow 1000, stocks can’t go much higher.
Dow 5000, stocks can’t go much higher.
Dow 10,000, stocks can’t go much higher.
Dow 20,000, stocks can’t go much higher.
Dow 30,000, stocks can’t go much higher.
These pundits will still be calling for the zombie apocalypse at Dow 100,000, and will still believe that fundamentals matter.
Because? MMT.
Nominal does not equal real. Unless, of course, one really believes he can still buy a well equipped Chevy pickup for $1800 like back in the 60’s?
What to do? Well, in a world of ever depreciating fiat currencies, ie: liabilities, it may be wise to trade the funny bucks for assets.
Liabilities take value from your pockets. Assets put value into your pockets.
Or, just put $30k in a mason jar and bury it in the back yard. Then dig it up in 10 years and see if it will still buy the DOW? ‘Er maybe 15 ounces of Au?
The Fed is out of ammo, right? That’s what the people who believe that fundamentals will matter one day keep saying.
That’s where they’re wrong, imho. The Fed is not out of ammo quite yet. At least I don’t think so.
The rock and hard place comes if and when when they finally have to raise rates to cool an overheated CPI. Then they have to make a choice between perpetually rising stocks and controlling inflation. As long as inflation stays tame, they get away with their manips.
At least that’s been the case for a decade. Why should 2021 be different?
I got out of stocks in 2009. It’s a completely rigged game, and winning depends on getting out ahead of the crowd when it finally tops and corrects…I’m sure maybe 5% of people with money in stocks will do that. The rest will ride the curve back down and look to blame the Fed for their losses.
I don’t think the Fed can run out of ammo. I know for a fact that they had been studying ways of sending money directly into peoples’ bank accounts bypassing Congress if necessary back in early 2019. They can create as much money as they want and grow their balance sheet to the sky. The trade-off is inflation vs growth. For the moment the large sums of inflation are mainly in real-estate and the stock markets. Sooner of later it will roll into general prices. It’s been ten years now that rates are close to zero. All bonds with a decent return have come due and have been rolled over. Rates are at the lowest since 200 years. With bondholders the cycle oscillates between nice returns and heavy losses. Nice returns come when rates decline. Heavy losses come when rates rise. Now if we look at the national debt there are two ways for it to decline relative to GDP. The first is to pay it down and the second is to inflate it away. I am just wondering if the Fed issues debt and buys it back immediately it is the market. They could then keep rates close to zero even if inflation in the general economy rises. That would make the national debt level very manageable. The Fed was forced into this situation by 2008 and now 2020, a double whammy. This is their solution for a way out….I hope.
Thanks for that.I think you are 100% right about the intent to inflate the debt away.
Nice chart. It clearly shows hysterically (pun intended) where interest rates are. It also shows the US experiences generally declining rates for the 125 years prior to the FED’s existence. There is a well defined ~60 year cycle of the peaks. This cycle is 40 years old, so the next 20 years should be absolutely horrible for investing. Macro trends like that show the FED is not in control of financial markets.
Given the amount of existing debt in the system, refinancing will not be an option. Defaults will abound. Rates shooting up to the 6% level will add to the cost of buying a house, so housing prices will have to come down since many home buyers have payment inelasticity. The collapse of credit is DEFLATION, regardless what the interest rate is.
And this is the flip side of the coin……the specter looking over ALL our shoulders. Deflation occurs not slowly over time but in a series of waterfalls events that wipes out wealth for everybody who owns any kind of asset.
This is the case for gold, in a nutshell.
” Rates shooting up to the 6% level will add to the cost of buying a house, so housing prices will have to come down since many home buyers have payment inelasticity. “
Worse, about 10% of mortgages are now once again ARM’s. So dumb to do that in this environment.
I expect housing prices to come down..the question for investors is…..will that be what wipes you out, or will it be an opportunity? That depends on what market you’re in, how much cash you’re sitting on, and whether you have adequate cash flow to service your debt.
What is interesting is the price of houses typically do not drop with rising rates. Housing prices drop when liquidity dries up.
i am pretty sure the price of housing rose in the late 70s even as interest rates aired from single digits to 18%
So….if you want to see REAL numbers for housing inflation….and so you google “housing inflation over time” your first hit would be some site like:
link to in2013dollars.com
Claims to be BLS numbers.
But if I enter my house…..purchased for a modest 316K (including the pool) in 1993….the inflation calculator says it should now be worth $606K….which is just over $400K less than what Zillow says it’s worth…. $1053000.
They (BLS) say average inflation has been 2.53% in housing from 1990 to 2020.
So much obviously depends on location.
And timing. And what the starting point is, price-wise. For good appreciation it needs to be a house people can afford to buy.
The 3 bdrm starter house I bought here for my first house in 1989…..for just under $100K (admittedly at a long term local market low)…..Zillow now says is worth $600K.
If I take those two real world examples as typical (both houses are in the same general part of town, same schools, etc) then I get price inflation in my career lifetime in my neighborhood….of 5-6% on houses.
And that is the just price of the houses….not the ROI of the investments. Low mortgage rates are a real gift to small RE investors.
Price-wise the more modest house went up more in price…… But given the way rates fell over my adult life, the second house has been a better investment than the first.
The Fed can control the rate at which it borrows because it just borrows from itself creating cash to give to the Federal government. It’s the tax payer of last resort. However that doesn’t mean the your bank will give you a bargain rate. However there is a technic that would allow them to do that but it’s radical.
It has more to do with coming off the gold standard than just the creation of the Fed itself. That doesn’t mean I want the gold standard back because the supply of money would then depend on how much gold you can mine. In a sense Bitcoin is the new gold and since it is hyper-portable, instantaneous transaction time and costs nothing to store. It’s actually better than gold I would say.
It’s not secure. It could be made so, but at present it conceivably could be hacked.
That’s my worry but considering my bank could be hacked too and physical gold is dangerous to store in my home then it might be worth the risk. However personally I don’t have the courage to buy Bitcoin at these prices. My son-in-laws walked my through it a few years ago but I didn’t “get it”.
Here is the thing…since the fed was created i think we have not had more than 3 consecutive quarters of deflation in 100 years. so over 400 quarters there has been less than 20 quarters of negative GDP growth. the feds gave a stellar record at defeating deflation. Don’t fight the fed long term.
Is this a bet against Yellen? Nobody bets against Yellen!
The impression I get from reading financial media is much of the corporate debt incurred is not going to productive use; therefore, defaults will be massive. It’s being used to pay executives for the options they’ve exercised and enrich other large sharholders while implicitly selling a poorly performing company to banks. Leveraged mergers make comparing pre and post merger earnings difficult and confusing, which offers a great way to hide poor performance with continuing to own/run a company.
the possible breakup of the United Kingdom link to ukandeu.ac.uk
It’s England’s fault. They really should have let the Scots win at football occasionally.
Wishful NONSENSE by sore Remoaners ! Unless it is looking for some kind of revenge, the hopelessly divided EU circus is not interested in Scotland, it would be a win/ lose operation again, unaffordable this time, with empty coffers .
You are wrong. France lusts after Scottish fish.
This is an interesting read, perhaps there’s more scope for others to follow our lead than the breakup of the UK.
The validity of using fundamentals like P/E ratios to value stocks went out the window upon the transition from dividend yielding stock, which resembled bonds, but with more risk, to guessing at future earnings for revenueless companies. A classic error is to assume that sociology, the realm of investment finance, must follow laws as if it were a hard science, for example, like physics. It is merely sociology. Using past conventions to argue for a present day departure from “fundamental value” is akin to arguing against rock music as it is not classical music.
Seems like propaganda to me, as have noticed similar stories in local european press just recently. IOW “if there are going to be questions asked about stability of union, ask them about UK, not EU”. So it draws on any hostility or resentment towards UK from european public and tries to transform it into a pro-EU pride. A bit sad really, if not twisted.
It’s the standard government boilerplate on the Continent to say that the UK made a big mistake, they will regret it and that Scotland will leave the UK and N. Ireland will be taken over by the republic of Ireland and that eventually the UK will come back crawling on their knees begging to be taken back. It’s quite funny because it is detached from what regular people think.
The English cry freedom and self determination, except for their vassal states. The EU provided a framework that allowed Eire to progress and that can work for Scotland as well. The concept that is England is still rooted in a a world of southern and landed nobles. Fk em.
Interesting that the folk I would assume would be pro state rights in the context of the USA seem to be anti self-determination for other peoples.
Just the opposite Mish. Exploding debt is what is sending stocks to the moon. Debt is on one side of the ledger, stock prices on the other.
What happens when it reverses?
Think 2007
Public, private or all debt ? Peter Cecchini admits money can be pushed into circulation by “conventional” means, the purchase of treasuries by the fed feeding public deficit at approaching ZIRP (or NIRP in real terms). The problem he states is the zero bound sees interest in treasuries diminish (which would be why the fed takes up the slack), and the disappearance of productive use / multiplier – stimulative impact. However that is a long cycle of debasement where fully artificial money and corporate (via provision of goods) reception of it (by nature or monopoly) would lead to a long government controlled inflation of corporate values and ultimately combined state control of business and industry (beyond that which exists currently in the form of “crony capitalism”). The same could go for public rent subsidy upholding property prices, or other.
Alternatively though the political or pseudo market organisation of this attempt is not capable of directing it at the grand level, and clearly towards zirp “money” loses a lot of its meaning – which would be to wreck the basic economic principles interest/discounting are deemed to allow, so setting the stage for a chaos. This might even be edged towards purposefully for a number of reasons ( just simple examples would be to implement further monetary or political reform).
I think there are those for “centralised authority” (for want of a more direct label) who think total management is possible and would be a superior objective.
So really the only question is how much people or societies will accept of this direction, and aside from ignorance the answer is still “a lot”, because they are hostage to potential loss or already subsidised if not seeking further of that.
Negative rates, monetization of municipal bonds, there’s more “tools” left for the Fed.
Your friend Cramer won t agree Mish; with sleeves rolled up he ll shout : BUY BUY ! At one point this will mean bye bye to your money, the x trln questions being : how WHEN and why…As far as the why question is concerned your article does make sense though…
2021 will be rangebound.
The Fed has been the largest buyer of debt. Money is in the form of electrons.
With zero bound interest rates here comes UBI in the next crisis. Oh wait! We already started a crude form of it!
“I don’t think we’re going to get that because the Fed’s efficacy is limited, right?”
Wrong.
The $3 trillion the Fed threw at the financial markets can just as easily be made to $30 trillion or $300 trillion or $3,000 trillion.
Skeptical?
See: Japan.
“Exploding Debt Levels”
But wait. Setting limits in debt interest rates makes loans scarce. Therefore, debt must have disappeared because Fed limited rates to 0.00%-0.25%1
How about this instead?
HOW TO MAKE LOANS SARCE IN NOT THREE BUT TWO (2) WORDS:
POSTAL BANKING.