Mish's Global Economic Trend Analysis |
| "Brink" of a New Cold War? Another Cold War Already Started? Is McCain Brain Dead? Posted: 10 Nov 2014 06:08 PM PST Former Soviet Union leader Mikhail Gorbachev warned on Saturday that the Ukraine crisis had brought the world to the "Brink of a New Cold War". "The world is on the brink of a new cold war. Some say it has already begun," said [Mikhail Gorbachev] the 83-year-old former Kremlin chief in a sombre speech delivered in Berlin at an event to mark the 25th anniversary of the fall of the Berlin Wall this weekend.New Cold War Already Started Count me in the group that says it's blatantly obvious a new cold war has already begun. Inane sanctions by the US and Europe led by President Obama and fueled by warmongering hype from Senator John McCain and others provides sufficient evidence. US Blowbacks and Russian Interests The US once again is clueless when it comes to predicting global blowbacks to its inept foreign policy. Gorbachev's statement he was "absolutely convinced that Putin protects Russia's interests better than anyone else" is well beyond reproach. The US is not interested one iota in other country's best interests. Arguably, the US shouldn't be. The other side of the coin should be equally easy to see: Other countries have a need to protect their vested interests. And they will. The US needs to understand that. It also needs to weigh the potential for blowbacks when it doesn't. The blowbacks in Iraq, Ukraine, and Libya have been spectacular. Iran is on deck. US Wakes Up Russian Bear When the US meddled in the internal affairs of Ukraine, it woke up the Russian bear. Threats to make Ukraine a member of NATO in spite of promises otherwise, then fomenting the overthrow of the prior Ukrainian government led by Viktor Yanukovych was too much for Russia to take. The US does not like the annexation of Crimea that followed or the resultant civil war that will break Ukraine in two, although we helped cause those outcomes. (For further discussion, see Ukraine Split in Two; Expect Major Rebel Advance). Even though the overthrow of Yanukovych was unconstitutional and the ensuing election a complete sham, the US accepted that vote. The US does not accept the vote in Crimea or the more recent rebel vote in Donetsk, labeling them "unconstitutional". Why? The former suits US interests but the latter doesn't. That's all you need to know. Fool's Mission to Teach Russia a Lesson In a fool's mission to "teach Russia a lesson", the US initiated sanctions on Russia, then persuaded fools in Europe to go along. The fact of the matter is sanctions don't work. Ironically, it was Russia who taught the US a lesson (except the US was to stupid to learn from it). Sanctions Do Four Things (All Bad)
Is McCain Brain Dead? McCain wants to send missiles to Eastern Europe and arms to Ukraine. And in spite of the complete foolishness of sanctions, he wants to increase them on Russia. Besides wasting taxpayer money for the benefit of McCain's defense industry cronies, what good would any of that do? Would it increase or decrease the odds of war? Is McCain simply too brain-dead to figure out sending missiles to Europe and weapons to Ukraine a bad idea? Another other possibility is that McCain simply does not care. A third possibility is McCain knows what he is doing and wants more wars regardless of cost. I lean towards the idea that McCain is brain-dead, perhaps a result of captivity in Vietnam, but the question is certainly debatable. Whatever your answer, Prepare for War: Obama Asks Congress for ISIS War Authorization; Republican Hawks Have War Plan Prepared. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Posted: 10 Nov 2014 11:19 AM PST Guest Post from Peak Prosperity In an exclusive interview of John Hussman by Peak Prosperity's Chris Martenson, Hussman says Stock Market Is Overvalued By 100%. Chris Martenson: John Hussman is highly respected for his prodigious use of data and adherence to what it tells him about the state of the financial markets. His regular weekly market commentary is widely regarded as one of the best-researched, best-articulated publications available to money managers. John's public appearances are rare, so we're especially grateful he made time to speak with us yesterday about the precarious state in which he sees global markets. Based on historical norms and averages, he calculates that the ZIRP and QE policies of the Fed and other world central banks have led to an overvaluation in the stock market where prices are 2 times higher than they should be: John Hussman: What's interesting here is that if you think about equities, they're not a claim on next year's prediction of earnings by Wall Street analysts. A stock, in fact any security, is a claim on any long-term stream of cash flows that investors can expect to be delivered to them over a very long period of time. When you look at equities you can calculate something called duration. It's essentially the effective life of a security over which you are collecting cash flows in return for the amount you pay. For the S&P 500 the duration is about 50 years. In other words it is a very, very long-term asset. The only reason you would want to price that asset based on your estimate of next year's earnings is if you were convinced that next year's earnings are actually representative of the very, very long-term stream -- and I'm talking 50 years or so of earnings that you're likely to get -- that those earnings are in a sense accurately proportional to the whole long-term stream. What's amazing about that is that is it has never been true. It has never been true historically. If you look at corporate profits and especially corporate profit margins, they're one of the most cyclical and mean-reverting series in economics. Right now, we have corporate profits that are close to about 11% of GDP, but if you look at that series you will find that corporate profits as a share of GDP have always dropped back to about 5.5% or below in every single economic cycle including recent decades, including not only the financial crisis but 2002 and every other economic cycle we have been in. Right now stocks as a multiple of last year's expected earnings may look only modestly over valued or modestly richly valued. Really if you look at the measures of valuation that are most correlated to the returns that stocks deliver over time say over seven years or over the next 10 years the S&P 500 in our estimation is about double the level of valuation that would give investors a normal rate of return. So right now, we've got stocks valued at a point where we estimate the 10 year prospective return on the S&P 500 will be about 1.6 to 1.7% annualized -- talking right now with the S&P 500 at 2032 as of today's close. Chris Martenson: I guess 1.6 or 7% doesn't sound bad if you are getting 0% on your risk-free money, I guess. But this says that any move by the Fed to normalize -- which means rates have to go up -- any move to drain liquidity from the system is going to have its own impact. If we held all things equal, a normalization effort is going to then basically expose that the stock market is roughly overvalued by 100%. John Hussman: 100%, yes. I actually think the case is a little bit harsher than that; in fact, quite a bit harsher than that. The idea that well, "1.7% isn't so bad" or "1.6% isn't so bad" ignores the fact that really in every market cycle and economic cycle we have had a point where stocks were fairly valued or undervalued.The only cycle in which we didn't see that was actually the 2002 low where stocks actually ended that decline at an overvalued level on a historical basis. But valuations were still relatively high on a historical basis in 2002. They got slightly undervalued in 2009, but not deeply. On a historical basis, what's interesting is that if you look at measures of valuation that correct for the level of profit margins, you actually get about a 90% correlation with subsequent 10 year returns. That relationship has held up even over the past several decades. It has held up even over the past 5 years where the expected return that you would have forecasted based on time-tested valuations turned out to be pretty close to what you would have forecasted 10 years earlier. Right now, like I say, we are looking at stocks that have been pressed to long-term expected returns that are really dismal. But more important than that, in every market cycle that we've seen with the mild exception of 2002, we've seen stocks price revert back to normal rates of return. In order to get to that point from here, we would have to have equities drop by about half. Audio Podcast Greater Fool Speculation On his November 3, 2014 weekly commentary, Hussman comments on QE and the Massive Speculative Carry Trade. At present, the entire global financial system has been turned into a massive speculative carry trade. A carry trade involves buying some risky asset – regardless of price or valuation – so long as the current yield on that asset exceeds the short-term risk-free interest rate. Valuations don't matter to carry-trade speculators, because the central feature of those trades is the expectation that the securities can be sold to some greater fool when the "spread" (the difference between the yield on the speculative asset and the risk-free interest rate) narrows. The strategy relies on the willingness of market participants to equate current yield (interest rate or dividend yield) with total return, ignoring the impact of price changes, or simply assuming that price changes in risky assets must be positive because low risk-free interest rates offer "no other choice" but to take risk.Mish Take I side with Hussman and have been in his camp for a number of years. Make calls like this and you look foolish until the bust happens. To paraphrase John (I cannot find the exact historical quote) "The choice is whether one looks foolish during the runup, or during the inevitable decline." Financial Repression Revisited Fed policy certainly represents financial repression at its finest. It's very much behind the income inequality that Fed Chair Janet Yellen moans about all the time. That was a central idea I presented in my interview with Gordon Long. See Gordon Long Video Interview of Mish: Topic - Financial Repression (and How to Defend Yourself From It). Forcing stock, bond and other asset prices higher only helps those who hold stocks, bonds and assets (the wealthy, not the poor). When stocks rise, it also drives CEO pay higher and higher via performance incentives and stock options. That money is not taken back when stocks crash. The irony is stunning. If Yellen wants to understand the central cause of income inequality, all she has to do is look in a mirror. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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