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Joseph Stuber  

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  • Why This Is The Most Hated Bull Market Of All Time - Understanding The Folly Of Financial Engineering [View article]

    I am not saying that Mark Zuckerberg has $15 billion more to invest. That was not the point at all. His wealth increase is merely a function of the appreciation in Facebook stock.

    What I did say is that it is not unreasonable that he did earn 2% on his wealth and if he did he would be hard pressed to find a way to spend it on goods and services. And 2% is only $600 million, not $15 billion.

    The real point is that "money begets money" and those in the upper 1% or even 5% end up with a lot more than they will spend on goods and services leaving them with only one choice - buy risk assets.

    There is no question the rich are getting richer and the rest are just holding on at best. If the money is flowing to the rich at an ever increasing rate and they can't spend it on goods and services, at some point the imbalance is so extreme that it begins to show up in declining GDP. It is just math.

    Jul 24, 2014. 04:41 PM | 10 Likes Like |Link to Comment
  • Keep Your Feet On The Ground As The Market Flies [View article]

    Actually, great analysis Stephen. I haven't had much to say of late but been thinking GDP is where we need to focus. There have been a number of very logical reasons for why this market has continued higher.

    The first is massive fiscal stimulus that drove GDP up out of the trough in 2009 with a vengeance. Something like $1.6 trillion I think. Combine sharply lower labor costs with massive fiscal stimulus and profits soared.

    Then we sustained it for a time with roughly $1 trillion a year in fiscal stimulus, but sales and profit growth stalled out in 2012. Then in 2013 profits began to climb again and can only be explained by huge levels of stock buy-backs. Stock buy-backs were able to offset the modest reduction in fiscal stimulus in 2013 and keep profits climbing. Creative accounting helped a little as well.

    All the while the underlying economy is stagnant and not going anywhere. Withdraw fiscal stimulus, and without something to offset that such as stock buy-backs, and we see GDP implode in the first quarter.

    It is simple enough. All the money is flowing to the 1% and away from the rest - the rest being those who drive GDP. The 1% literally can't support GDP as they invest in risk assets - not good and services.

    Everybody focuses on monetary policy and hardly any focus on fiscal policy. It seems reasonable to me that a slowdown in deficit spending is the reason for the dismal GDP print in the first quarter. The big question - will we get another surprise in the second quarter? And, if so then what?

    Biggest bubble in stocks I've ever seen and there is no way the math works to create real organic economic growth absent a major shift in policy that deals with the continuing collapse of per capita disposable income. When the rich keep getting richer and the poor keep getting poorer there comes a point where Marx ends up being right - capitalism ends up destroying itself.

    One thing seems certain - lower corporate tax rates won't solve the problem. Doubling them might though in that corporations might be more inclined to raise wages rather than give the government the money. Put more money in the hands of those who spend it for goods and services and less in the hands of those who spend it investing in risk assets and we may actually see some organic growth.

    I really believe in capitalism and would have it no other way but the imbalance is so extreme today that if we don't take rapid and dramatic moves to shift it back the other way we are headed for a depression. The math just doesn't work anymore.

    Jul 19, 2014. 01:51 PM | 1 Like Like |Link to Comment
  • Some Problems We Can See, Some Problems We Cannot [View article]

    "I simply wish more people participated in it. As it is less than 10% of people in the US have brokerage accounts."

    Be careful what you wish for. Somebody has to spend their money on goods and services instead of blowing asset bubbles. Consider somebody like Zuckerberg. If he is earning 2% on his net assets he is earning about $1.6 million a day. Hard to spend that on goods and services and so those of his ilk just keep plowing that money into risk assets blowing the bubble ever bigger.

    Compare that to the average wage earner who gets maybe $200 a day. They spend probably 95% of that sum on goods and services. If the 90% were gambling in this casino the game would have been over a long time ago. Somebody's got to buy the stuff these companies sell don't they?

    Jul 3, 2014. 04:24 PM | 5 Likes Like |Link to Comment
  • It's Bubble Time: A Study Of Peak PE For The S&P 500 [View article]

    "And yes, your statement that the Fed uses JPM as a "surrogate" for equity purchases is pure speculation. The credibility issue arises on the part of those that make such unfounded claims, not when somebody such as myself says their is no evidence for it."

    All analysis done for the purpose of forecasting trends based on that analysis is speculation and that includes yours as well as mine. You make it sound like speculating on possible reasons for why markets move as they do is somehow irresponsible and that is simply not true.

    And there is certainly ample empirical support for my thesis on JPM and to reject that evidence is to reject a very important part of the reason stocks have acted as they have. There is also empirical support for the idea that they are no longer supporting the market and that too is a very important consideration.

    If you wait for the Fed and others to admit to this you will be well past the point where it will make any difference to you as it pertains to your account balance. And, for what it's worth, a lot has been revealed over the course of the last year on the shenanigans pulled by the Fed, Paulson, Bernanke and the big banks during the crisis so we will - at some point - probably know the truth on this issue as well. Problem is it will be to late.

    To be useful as an analyst you don't wait for those who might be manipulating markets to admit to it - you look for empirical support that suggests it might be happening. That doesn't make you a conspiracy theorist - it makes you a good analyst.

    The truth is the magnitude of the banks manipulations that have been revealed in the last year far surpasses what I expected even though I have known for some time they were doing it and written about it.

    Here's the sad truth - those who do point these things out based on empirical evidence get dismissed as conspiracy nuts and then when the assertions are proven to be true a few years later those who sounded warnings rarely get credit for their analysis.

    Anyway, you responded about like I thought you would. You made a statement that was in error and figured out a way to mitigate a little of the damage by rephrasing your statement by saying you only meant "mysterious, presumably secret buying of equities".

    Apr 12, 2014. 06:33 PM | 4 Likes Like |Link to Comment
  • It's Bubble Time: A Study Of Peak PE For The S&P 500 [View article]

    You sure about this statement?

    "no evidence for the proposition that central banks are driving up the US equity market by buying stocks on their own accounts or through third parties."

    How about this from Bloomberg last year:

    "Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.

    In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves."

    Here is the Bloomberg article:

    Here are a few more pretty credible sources establishing that you are wrong:

    The Fed of course uses JPM as their surrogate for equity purchases as the FOMC isn't supposed to do that. Pure supposition on my part as I have no proof that they are buying at the direction of the Fed but it seems a reasonable conclusion to me.

    If your were going to support your original statement in spite of this evidence to the contrary, you would probably assert that this offers no concrete evidence that they are buying US equities - just equities - and therefore your position is still correct.

    If you go there it would seem you are more concerned about your credibility with readers than your intellectual honesty. I suggest you gain a lot more credibility when you admit you may be wrong on a point.

    Apr 12, 2014. 05:03 PM | 1 Like Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    Certainly the fractional reserve bank system has more than ample motivation to finance the debt. They just use excess reserves to purchase the debt and then when the Treasury spends the money back into the economy the money comes right back to them. They end up with the same cash position they had at the start plus the added benefit of a government bond that pays them interest.

    When you can create money out of thin air and use it to buy an asset that makes you money you are going to do that. US Treasuries will never go begging for a buyer as long as the fractional reserve bank system is in place.

    Apr 8, 2014. 02:24 PM | Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    Those who know how to exploit inflation can do quite well. The way to do that is to leverage one's money. A house for instance can be purchased for 10% down and if inflation is occurring it is because price is rising faster than carry cost.

    If inflation is running at 8% and the cost of money is 5% then a house that cost $300,000 is gaining by $24,000 a year whereas the carry cost is only $13,500 netting $10,500 on an initial cash outlay of $30,000.

    Just saying - it isn't all bad.

    Apr 8, 2014. 12:25 PM | Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    "Higher rates in theory would defend the bond market, but not in this case because the world will front-run the Fed and get out of bonds when they realize the Fed is exiting the QE game for real."

    If the world doesn't already know the Fed is exiting for real they just refuse to listen. QE is over and bonds are actually getting a safe haven bid as stocks seem serious this time about coming off.

    The bond markets biggest threat is inflation spurred by a dollar glut. As the dollar falls and inflation heats up the Fed will respond by allowing interest rates to normalize and I think we will see a gradual - perhaps even rapid - spike at the front end of the yield curve and a general flattening of the curve. The middle and long end won't go up near as much as the front end and the curve will look a lot like the 2007 curve reflected in the chart above - at least that is what I think.

    As rates are allowed to spike higher the bond market should attract investors and that is what I think could happen but the impact to the bond market in the short term is a sell off as the Fed allows the rates to climb followed - hopefully - by a stabilization of bonds when the yield curve flattens to perhaps 5% or 6%. That is my opinion anyway.

    I think you are right that the carry cost for the debt will approach $875 billion as this occurs meaning even a $1 trillion deficit is going to be a problem as most of it will go to covering carry cost.

    My own view is that the Fed realizes they are going to have to let inflation spike higher in order to monetize the debt. Inflation will produce a higher M2 velocity and, in addition, we could see M2 climb pretty fast as dollars locked up in foreign held treasuries move back into the banking system. As money supply increases and M2 velocity picks up it will be a driver of GDP and we could actually see a drop in debt to GDP even if we do continue to run $1 trillion deficits.

    I think the best period to compare to is the 70's after closing the gold window. We've never had a situation quite like the one we have now but the dollar did come under attack in the 70's and inflation spiked sharply higher moving GDP roughly 40% higher during that period. A repeat of the same rate of climb on GDP would put GDP at $24 trillion. Compare that to just a 12% overall gain in GDP since the 2009 trough.

    Of course the other thing to consider is that in the 1970's inflation spiked from about 3% to 13% - a little more than a 4 fold increase. From current levels a 4 fold increase would be in the 7% range on inflation and I think we could easily see that 13% inflation rate again at some point in the next several years and that would push GDP even higher.

    As ugly as this sounds it doesn't mean a US default on treasuries and in fact I think TIPS could be a pretty good performer in the next 4 or 5 years.

    Apr 7, 2014. 07:41 PM | Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    "Who is going to fund the new issuance of Treasuries to finance the fiscal deficit if the Fed isn't there to monetize? A permanent end to QE would mean a U.S. default."

    Higher rates defend the bond market. The US won't default on treasuries - they will certainly have to allow the rates to normalize though and that isn't a good thing for economic growth.

    There are a lot of fixed income investors that would love to see rates in the 5% to 6% range. And of course the banking system will be there as well to pick up the slack.

    Apr 7, 2014. 04:10 PM | Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    I may reach out to you. Just curious - are you an energy trader?

    I know a number of energy traders - most now retired - and they do have a very focused knowledge of energy markets. My brother in law worked in the industry for years staring out with Koch and moving from Houston to London. Then moving to Phibro and even Enron for a very short time. He eventually set up his own company in the early 90's dealing in OTC derivatives in the energy markets and did very well there.

    Your bio doesn't help a lot as there isn't one and just curious about your background.

    Apr 7, 2014. 07:14 AM | Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    Now we are talking. Good input and good analysis.

    As I said there could be many reasons for the spread contracting and I only offered one perspective. You have offered another - and now backed with some good logic - and I can't argue that you may well be correct in your analysis.

    I truly appreciate these kinds of comments as they inform me on areas that I may not have considered and that, after all, is the most important thing. It is not about me being right for the sake of being right. It is about me being right for the sake of my money and my investments and to close my mind to other views puts me at risk of being wrong.

    I intend to investigate a little further based on your comments and appreciate your take on this. Thanks.

    Apr 6, 2014. 11:52 AM | 1 Like Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    "That is a fundamental oil story. . . "

    No, the idea that it is a fundamental story is nothing more than an opinion based on very limited knowledge just as my premise is an opinion. The difference is I acknowledged that my view was an opinion and you make your statement as a matter of fact.

    My question to you - how the hell do you know? And the answer is you don't know nor do I. As for me, I can only guess but I am willing to look at all the various explanations I can think of and I think the one I set forth makes more sense than any other. You certainly aren't offering me any analysis that suggests it is a "fundamental oil story".

    I did consider the fundamental argument and looked at crude supplies and we are in the upper half of the average inventory levels so it certainly isn't based on a shortage as it relates to WTI. On the other hand there are legitimate reasons to assume that oil stocks using Brent price as the benchmark could be an issue as the tensions in that area could slow or halt flows of crude suggesting that Brent should be pricing in that geopolitical risk and yet that is not what we are seeing.

    Freedom of speech is everyone's right but to be relevant you should at least offer some basis for why you think it is a "fundamental oil story". I certainly offered a basis for why I think it isn't.

    Apr 5, 2014. 05:58 PM | 2 Likes Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    "I do not believe that real estate will be see a big benefit from inflation returning to the USA. With rising mortgage rates, stricter loan standards, millenials swamped in student loan debt and real incomes falling, the demand will be lacking. SOme areas will do well of course but overall, with the baby boomers past their spending prime, I think that we have seen the highs in real estate for a long time."

    All the points you make are logical as it relates to real estate value appreciation. There are opposing forces at work though in a high inflation environment. The question is one of a significant spike in inflation and not just a modest spike.

    When we closed the gold window inflation spiked from about 3% to 11%. Then, in 1973 we had the oil crisis created by an OPEC embargo pushing crude up by 4 times in a short time window and producing a recession. That pushed inflation lower for a time but even this drop in inflation bottomed out at 6% - a rate that was still 2 times higher than prior to the closing of the gold window.

    Thereafter, inflation again spiked moving from 6% to 13%. Keep in mind this inflation created an era of what was eventually termed "stagflation" but the point is this - inflation did drive real estate much higher during the 70's in spite of the "stagflation".

    Just to put the matter in perspective I will use my own experience. I bought my first house in 1973 for $17,500. I sold it in 1975 for $29,000 and used the equity to leverage into another house that I paid $45,000 for and sold that house in 1977 for $72,000. I put the equity into a c.d. and used it as a form of compensating balance to establish a bank line of credit for the purpose of buying more real estate.

    I bought 3 houses and moved into one of them as I made modest improvements on the other two. I sold the other two for substantial gains over the course of a little over a year and eventually sold the one I lived in. I bought the one I lived in for $29,000 and sold it for $45,000 and had similar gains on the other two.

    I then moved into commercial real estate and started building new houses. Over a 7 year period I built my holdings to roughly $1,400,000 by 1979 and banks were begging me to borrow from them and in fact the smaller banks were advising me on how to overcome their lending limits by forming multiple entities so they could loan me more money. Keep in mind at the end of that period inflation was running at 13% so my appreciation on my asset holdings - even at 10% - was $140,000 a year which was a lot in 1970's dollars and especially for a kid still in his 20's.

    Of course all that came to an abrupt end when rates spiked under Volcker but that is not the point. The point is we had a period of recession, demand destruction created by the oil embargo and just a generally sluggish economy but that didn't stop real estate appreciation.

    Additionally, banks will be forced to expand M2 through credit creation if we see the yield curve flatten. That may not make sense on the surface but here is the point - at the present even conservative banks can make money on the yield curve with no risk. But when the yield curve flattens that opportunity no longer exists and banks must revert to lending again.

    And keep in mind they are creating money when they loan. In other words, they simply make a journal entry that debits their loan account and credits deposits. They have the added incentive to lend in that inflation is an effective hedge against their risk in the sense that each year the asset (real estate) gains in value increasing the value of their collateral.

    Maybe I need to write an article on this as I think it bodes well for bank earnings as well as real estate.

    Apr 5, 2014. 10:13 AM | 1 Like Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    I clicked on the link and saw the chart reflecting China's total reserves from Fred. There is no basis for suggesting that China is supporting the dollar based on China's total reserve holdings as only the dollar holdings are relevant as it pertains to supporting the dollar.

    Although the chart is vague on what exactly is included here I assume that euro, yen and SDR's are included along with US Treasuries. In any event the $4 trillion is not the total value of dollar reserves.

    Apr 4, 2014. 05:43 PM | 1 Like Like |Link to Comment
  • How The Fed Has Exported Inflation And What Happens To Risk Assets When The Money Flows Reverse [View article]

    I didn't get down to the granular detail on the matter of M2 and GDP growth rate and simply referred readers to the line slopes of the two metrics.

    However, since you raised the question I went back and calculated both GDP and M2 growth rate using the following variable rates: growth rate is measured as percent change for each data value from a year ago; data values are quarterly; and the period was 5 years with the last data value calculation for both metrics being the last quarter of 2013.

    The growth rate for the last quarter was 4.07 for GDP and 4.74 for M2. Of course those values will change based on the way you play with the variables so in my view the granular look lacks useful information as it relates to inflation. However, looking at the line slope on the raw numbers does reflect that M2's slope is flatter than GDP slope and demonstrates that M2 is not outpacing GDP at a rate that creates much inflation.

    Apr 4, 2014. 04:53 PM | Likes Like |Link to Comment