Stockmarkets will have to fall for a better yield

Nov 11, 2010

Paris, France

Armistice Day

The Dow went up 10 points yesterday. Gold went down $10.

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Noise. Forget about it.

But wait...maybe this noise is whispering to us. "Watch out!" it seems to say.

Surveys show investor sentiment more bullish than it has been at any time since '06/'07 - that is, since the peak of the bubble years.

And now the Fed has just entered the market with the biggest wad of cash investors have ever seen. The Fed's pockets bulge with $600 billion. It says it will spend $105 billion next month alone. The Fed is all bid. No ask. And everyone knows it.

How come the stock market isn't soaring? How come it didn't soar yesterday? And how come gold fell yesterday?

Is all this buying power already priced in?

True, the Fed is buying bonds, not stocks. But where does the money go? Into the hands of the bondholders. What do they do with it? Why don't they buy the underbid, underpriced, underappreciated risk asset?

What's going on?

We don't know. But we raised our "Crash Alert" flag yesterday. Anything could happen. And 'anything' is usually not good.

But hold could the market crash when the Fed is pumping in so much money?

Again, anything could are sometimes smart and sometimes dumb. In times of trouble, the market's IQ tends to go up. It gets begins doubting what it hears...and what it sees. It looks farther ahead.

If it looked ahead now, what would it see? It would probably see a speculative surge...followed by a sell-off. Looking at the big, long-term picture, it might see that there is little reason for much price appreciation in US stocks over the next 5, 10, 15 years. How are companies going to make more money? The economy is de-leveraging.

If prices don't go up, investors have to look to yield for their money. The current yield is only about 2.5%. Not enough. In order to get the yield up to a more respectable 3.5%, stock prices would have to fall - by about 40%.

The stock market will probably come to terms with that logic sooner or later. Maybe it will skip the speculative run-up in prices all together. Maybe it will just sell off, to bring stocks down to a point where yields make them attractive again.

Stay tuned...

More news...

And more thoughts...

*** As an institution matures, more people get a good grip on it. And take advantage of it. Typically, it is corrupted by its own custodians. Instead of serving its original purpose, it serves to enrich its managers and employees.

The wage slaves become the masters. The zombies take over. USA Today has the report:

"The number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and doubled since President Obama took office, a USA TODAY analysis finds."

"FEDERAL WORKERS: Earning double their private counterparts.

"Federal salaries have grown robustly in recent years, according to a USA TODAY analysis of Office of Personnel Management data". Key findings:

  • Government-wide raises. Top-paid staff has increased in every department and agency. The Defense Department had nine civilians earning $170,000 or more in 2005, 214 when Obama took office and 994 in June.

  • Long-time workers thrive. The biggest pay hikes have gone to employees who have been with the government for 15 to 24 years. Since 2005, average salaries for this group climbed 25% compared with a 9% inflation rate.

  • Physicians rewarded. Medical doctors at veteran hospitals, prisons and elsewhere earn an average of $179,500, up from $111,000 in 2005.
"Federal workers earning $150,000 or more make up 3.9% of the workforce, up from 0.4% in 2005."

"Since 2000, federal pay and benefits have increased 3% annually above inflation compared with 0.8% for private workers, according to the Bureau of Economic Analysis."

Some government employees provide good and useful service. Most probably work hard at jobs that aren't worth doing.

In either case, if bailed-out bank chiefs get to pay themselves million-dollar bonuses, the feds should keep their money too. They all stole it fair and square.

Of course, paying people a lot of money to do things that aren't worth doing is not exactly good business. That's how you go broke. So it shouldn't be a surprise that the US is headed for bankruptcy. Last month the US government posted a $140 billion deficit. The newspapers reported it as good news, because it was down from $176 billion the year before. But this is like saying that the airplane managed to slow to only 300 miles an hour before it crashed.

Bloomberg has more details:

"While the economic recovery that started in June last year has helped generate more revenue for the Treasury, the Congressional Budget Office estimates the deficit this fiscal year will exceed $1 trillion for a third time. Cutting the budget shortfall may prove challenging with a newly elected Republican majority in the House of Representatives and President Barack Obama, a Democrat, in the White House."

"The CBO said Aug. 19 that the budget shortfall this fiscal year will be almost $1.1 trillion. The deficit will amount to 7 percent of the nation's gross domestic product, the nonpartisan agency's semi-annual budget report projected."

Let's see. A trillion here. A trillion there. It starts to add up. And pretty soon, your political system is corrupted by it. You can't correct the situation. Too many zombies on the payroll. And the zombies vote.

So, what happens when you spend more than you can afford? First, your credit rating goes down. Then you go broke.

And here, we turn to the Telegraph, in London:

"Leading Chinese credit rating agency downgrades USA government bonds."

Many of the world's leading economies have condemned America's money printing. Brazil, Germany, China - all think the US is headed in the wrong direction. Here's more of the report in the Telegraph:

"If China, now the second biggest economy in the world, stops buying US government bonds this could have a very negative effect on the global recovery. The Dagong Global Credit Rating Company analysis is highly critical of American attempts to borrow their way out of debt. It criticises competitive currency devaluation and predicts a "long-term recession".

"Dagong Global Credit says: "In order to rescue the national crisis, the US government resorted to the extreme economic policy of depreciating the U.S. dollar at all costs and this fully exposes the deep-rooted problem in the development and the management model of national economy.

"It would be difficult for the U.S. to find the correct path to revive the US economy should the US government fail to understand the source of the credit crunch and the development law of a modern credit economy, and stick to the mindset of traditional economic management model, which indicates that the US economic and social development will enter a long-term recession phase."

"The analysis concludes: "The potential overall crisis in the world resulting from the US dollar depreciation will increase the uncertainty of the U.S. economic recovery. Under the circumstances that none of the economic factors influencing the U.S. economy has turned better explicitly it is possible that the US will continue to expand the use of its loose monetary policy, damaging the interests of the creditors."

We can't quite understand the language of some of Dagong's report. But what the Chinese don't know about mismanaging an economy is probably not worth knowing. They did some amazingly stupid things during their pre-capitalist days. Backyard steel making, Great Leaps forward, price controls - they know what kind of mischief you can get up to with central planning. And they see the US headed for trouble. So do we...

*** We're on our way to London, where news reports tell us that the zombies are waking up. Students smashed windows yesterday...protesting government cutbacks.

If you happen to be in London tomorrow, dear reader, we're giving a speech at the Queen Elizabeth II conference center at 10:30AM. Then, at 9pm on Channel 4, we have a small part in a documentary about how countries go broke.

Here's a link to an offline version of the film.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Stockmarkets will have to fall for a better yield"


Jan 6, 2011

Yes, it is true, market has to fall for further push.

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