Hussman view of equity valuation

What’s new here is somehow Hussman has picked on the idea that corporate profits fall as the federal deficit falls. He stops short of suggesting we need a higher federal deficit, of course.

After all his endless inane out of paradigm raving against federal deficits it might take him a few months to reverse course. ;)

Nor does he mention the well known Levy Profit Equation from maybe 75 years ago that shows same, or Wynne Godley’s work or any of the MMT sources that he no doubt perused regarding sector balances.

An Open Letter to the FOMC: Recognizing the Valuation Bubble In Equities

By John Hussman

fiscal update

No talk yet of waiving the sequesters?

McConnell: Stand Firm on Spending

November 19 (WSJ) — With budget negotiations stalled, Senate Minority Leader Mitch McConnell is pushing his GOP colleagues to resist efforts to ease across-the-board spending cuts due to take effect in mid-January. Mr. McConnell has argued it is better to let the cuts take effect than to agree to a budget deal that would allow overall spending to increase or revenues to rise. House Budget Committee Chairman Paul Ryan, also speaking at the Journal event, said he would continue negotiating with Democrats to reach an agreement but didn’t express optimism. Mr. Ryan, who chairs the conference, said if necessary Republicans would pass a bill to keep the government open and allow the sequester’s new spending cuts to take effect.

comments on euro zone and india

Do you think they know austerity causes loans to go bad?

Troubled loans at Europe’s banks double in value (FT) European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising. A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. Richard Thompson, a partner at PwC, said the “reshaping” of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets. He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012.

Do you think they know higher rates support higher inflation and weaken the currency?

India’s Central Bank Expects Inflation to Remain Stubborn (WSJ) The Reserve Bank of India Monday sounded concern about inflation, which it said would remain outside its comfort zone this fiscal year. In its half-yearly review of macroeconomic and monetary developments, released a day before its monetary-policy meeting, the RBI also highlighted the need to boost economic growth. But its stress was more on inflation. Inflation at the wholesale level—the main measure of prices in India—notched a seven-month high of 6.46% in September. It has remained above the central bank’s comfort level of 5% for four consecutive months through September. The RBI said it expects both consumer and wholesale inflation to remain around their current levels. “This indicates persistence of inflation at levels distinctly above what was indicated by the Reserve Bank earlier in the year,” it said.

Pending home sales drop 5.6 percent in September

Problem is the private sector is path dependent/pro cyclical. When sales slow incomes slow sales slow, employment slows, etc. etc.

Govt can be/is counter cyclical. When sales slow tax payments fall and unemployment comp. rises, etc. etc. AKA ‘automatic fiscal stabilizers.’

This cycle’s prior slowdowns had a safety net of govt deficit spending of near 10% of GDP, then a year or so later maybe 7%, etc. As the automatic fiscal stabilizers cut back that govt support with the modest recovery raising tax liabilities and cutting transfer payments.

But today, after this year’s proactive deficit reduction measures, we’ve gapped down to maybe a 3% deficit for ‘support’ when things slow. And it feels to me like the demand leakages have begun ‘winning’ when govt proactively stepped back to ‘make room for the private sector’.

What that actually means is the private sector now must (deficit) spend increasingly more than its income on goods and services to offset those agents spending less than their incomes (demand leakages), or the output doesn’t get sold. By identity. To the penny.

Well, sure doesn’t look like it’s going to come from housing. And while cars remain up some it’s not nearly enough. And capex isn’t coming through as hoped for and as needed to fill the spending gap left by the govt cutbacks. And the 126,000 print for NFP private sector job growth fits the same narrative as well- no top line growth = no job/income growth, etc.

Not to mention QE and low rates in general from the Fed remain a source of drag via the interest income channel, and all as Congress continues to fight for bragging rights with regard to deficit reduction.

It’s all nothing that a big fat tax cut and/or spending increase wouldn’t reverse, of course, as the slow motion train wreck continues.

July payrolls revised down to 89,000

July was first initially released at up 162,000 which, while lower than expected, I noted was still inconsistent with low top line growth. That is, without top line growth there aren’t any new private sector jobs unless productivity is negative. And causation runs from sales to employment.

So there’s no reason to expect job growth without top line growth that exceeds underlying productivity increases.

Also, the conventional wisdom all year has been that when govt ‘gets out of the way’ the ‘underlying private sector strength’ will come through and growth will resume. It was noted that reduced job totals were lowered by govt cutbacks while private jobs remained high. I suggested govt employment cutbacks would reduce private sector job growth, as that many fewer govt employees meant that much less spending/sales/employment for the private sector.

Conclusion-
With fiscal support down to less than 3% of GDP from around 7% about a year ago, and at least 1.5% of that from the recent proactive tax hikes and spending cuts, and the automatic fiscal stabilizers as aggressive as they are, and with ‘financial conditions’ as they are, I don’t see any signs of the domestic credit expansion needed to support anything more than
very modest levels of real growth. And I also continue to see substantial risk of negative growth should the housing softness persist, auto sales revert back to the 15 million level, student loan growth continue to decelerate, business investment not accelerate, and net imports not do a lot.

Lower fuel prices are a plus but not yet nearly enough overcome the fiscal hurdles.

(feel free to distribute)

Employment Situation
Released On 10/22/2013 8:30:00 AM For Sep, 2013

Highlights
The payroll data and household numbers were mixed in September at the headline level but soft in detail. Markets were looking over their collective shoulder at the Fed. Total payroll jobs in September advanced 148,000, following a revised increase of 193,000 for August (originally up 169,000) and after a revised gain of 89,000 for July (previous estimate was 104,000). The consensus forecast was for a 184,000 gain for the latest month. The net revisions for July and August were up 9,000.

The unemployment rate slipped to 7.2 percent after dipping to 7.3 percent in August. Analysts expected a 7.3 percent unemployment rate. But the improvement was largely related to a decline in the pool of available workers, affecting the number of unemployed.

Turning back to payroll data, growth in recent months has been on a slowing trend. Private payrolls gained 126,000, following an increase of 161,000 in August (originally 152,000). The median forecast was for a 184,000 rise.

Wage growth eased in September, rising only 0.1 percent for average hourly earnings, following 0.2 percent the month before. Expectations were for a 0.2 percent gain. The average workweek held steady at 34.5 hours, matching the consensus projection

NFP:


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Private NFP:


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Y/Y growth in household labor force survey:


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today’s charts and opinion

Not looking good. And Congress and the President not in any rush either, seems. Still looking to me like they are getting their sense of security from:

The stock market doing ok, believing a balanced budget is a good thing, both sides trying to take credit for this year’s drop in the deficit. Recalling the ‘fear mongering’ in front of the last round of tax hikes and sequesters. Recalling markets bounced back after the Aug 2011 debacle, etc. Voters convinced govt should limit spending to what it takes in.

That is, letting the US go cold turkey to a balanced budget is consistent with their ideology and with current political dynamics.

They are maneuvering only to try to make sure that if it works they get the credit and if it fails the opposition gets the blame.

And I hope I’m wrong!!!

Fama’s Fallacy

Here’s how you have to think to win a Nobel prize:

Fama’s Fallacy:

There is an identity in macroeconomics… private investment [PI] must equal the sum of private savings [PS], corporate savings (retained earnings) [CS], and government savings [GS]…. (1) PI = PS + CS + GS…. Government bailouts and stimulus plans seem attractive when there are idle resources – unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt…. The added debt absorbs savings that would otherwise go to private investment…. [G]overnment infrastructure investments must be financed — more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount…. Suppose the stimulus plan takes the form of lower taxes… lower tax receipts must be financed dollar for dollar by more government borrowing. The government gives with one hand but takes them back with the other, with no net effect on current incomes…

Eugene Fama

good grief!!!
:(