Stock markets are trying a little recovery this morning.
But the question remains as to by how much they are over-valued, since few would really dispute that they are. The answer is, by a long way:
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Stockmarket volatility is expected and has happened for 100s of years. Markets are falling because treasury yields are rising. There is no real news.. Going forward – what we really should be concerned about (and I presume what you should be writing about) is the clash between Italy and the EU. This is structural and is embedded in the single currency and the EUs desire for fiscal and monetary unity. All of the issues Stieglitz wrote extensively about could manifest with this dispute leading to the Italian Banks, through owning Italian Sovereign debt, going bust.. the aftermath could be worse than 2008/9…and the fault will lie entirely with the EU..
Largely, but not entirely
The fact that Italian banks are already stuffed full of bad debt is not all the EU’s fault
Italian banks are stuffed with Italian Sovereign debt. Obviously as solid as the Italian Government. As you zitalian bonds themselves are held up by EU QE and the economy by EU funding. The dependency, just like Greece, is a consequence of the Euro. The problems are entrenched. The EU really could implode before Brexit. I really believe the EU have created a monster problem which presents, by a long way, the biggest problem to the U.K. and the global economy.
That there are (still) different government bond rates across the EU nations surely tells you everything you need to know about the fragility of the Eurozone (?)
Common currency my arse !
Oh dear………….specifics please!
The fault will lie with the European Central Bank (ECB) – not the EU.
And why? Because the ECB is the neo-liberal and not very accountable nerve centre of the zone, packed full of ex-private sector bankers. Just read their profiles for goodness sake.
Maybe the bailout of 2008 is why markets fail to price financial products and risk properly? Never mind bond yields. Has that crossed your mind Mr Analyst?
Just lift your nose out of your numbers for a moment and try quantifying the human factors like er………let me see now ….’greed’ for example or ‘wishful thinking’?
Really…………………?!!
The Buyback Index 🙂
Your chart seems to indicating the opposite. The current level is not much higher than the 2008 and 2000 peaks.
If companies, on average retain profits of say 5% each year the underlying value should double about every 12 years
It takes an optimist with one eye to think that
Just a bog standard correction.
The fiscal flows are keeping everything afloat that’s if you believe the swimming pool anology and you keep on putting more water in the pool than the leakages take out.
Total spending for month (and fiscal year) so far is $145 bln. That is up $48 bln over same time last year. And if I adjust that for a calendar quirk that happened on Sep 30, it’s still up around $28 bln over last year.
The fiscal year 2018 is now concluded and the final numbers are in. Total spending came to $4.7 trillion, up $151.8 bln over last year with a spending growth rate of 3.3% year-over-year. So they have been spending on average $4 trillion every year since 2008.
Interest rate hikes are a fiscal stimulas via the interest income channels.
Tax cuts are a fiscal stimulas.
Then you have bank lending. Total bank credit for all commercial banks was up $11.2 bln to $12.83T, a new high. A growth rate of 3.4%. Which highlights even more the wishful thinking theory about rate hikes curbing bank landing. The increased cost of credit gets passed onto the consumer via higher prices. Rate hikes cause cost push inflation they don’t fight it.
Then you have the deficit. Final deficit for the Fiscal Year 2018, just concluded, was $746 bln or 3.7% of GDP. This is down slightly from the peak levels mid-September, but still the highest nominal deficit in 6 years and the highest as a percentage of GDP in 5 years. As we all know around here the deficit lifts all boats.
Then you have balance sheet reduction. The Fed’s balance sheet was down another $11.8 bln to $4.25T. That’s the lowest level since March 2014. Which is the oppsoite of QE adding interest income to the economy and not stripping it out. They plan another £800 billion over the next 2 years.
So all in all looking at the fiscal flows and the swimming pool there’s nothing much to get woried about.
You realise that is gibberish
Let’s start with the first claim. Total spending on what?
Gibberish !!!!
It’s why they are growing at over 4% Richard.
Social Security, $873 bln, up $30.6 bln y-o-y and growing at 3.6% y-o-y.
Medicare, $702.3 bln, up $2 bln y-o-y
Marketplace Payments , $48.8 bln, up $2.4 bln.
Medicaid, $382 bln, up $13.8 bln y-o-y and growing at 3.7%
Interest on Treasury Securities, $260.4 bln, up $20.5 bln and growing at 8.5% y-o-y.
Defense Vendor Payments, $315.3 bln, up $36.6 bln over last year and growing at 13.1% y-o-y.
Federal Salaries, $183.5 bln, up $8.5 bln.
Other Withdrawals, $784 bln, up $15.7 bln and growing 2.0% y-o-y.
Education $182.9 bln, down $3 bln y-o-y.
Unemployment Insurance Benefits, $28.8 bln, down $2.753 bln
Supplemental Nutrition Assistance Program, $66.3 bln, down $1.4 bln.
Fiscal flows is what matters. MMT 101.
And looking at the markets it appears I was correct a normal correction.
Still gibberish
Youndon’t even make clear which country younarevtalking about although I can now guess
“You realise that is gibberish”
Not ‘gibberish’, Richard.
Numbers; the weapon of choice of the astute bamboozler.
This bog standard correction is probably giving you a chance to get in at a lower level. As long as government spending stays over $4 trillion per year and bank lending doesn’t fall off a cliff.
And of course you can monitor both of those on a weekly basis.
At the moment it certainly looks like we are not going to catch a cold from across the pond.
Derek Henry says:
“This bog standard correction is probably giving you a chance to get in at a lower level.”
Aye; you might be right. And what about the next one will that be a bog standard correction as well ?
One of them won’t be. Live dangerously, Derek. Enjoy !
It’s not my money you’re playing with, so I don’t care.
The next one I will know more
I follow the fiscal flows weekly. I monitor what is going into the swimming pool and the leakages.
I don’t wait on the monthly reports they are 6-8 weeks out of date.
It’s like being a sailor of a ship no point studying water you’ve already sailed over. You look at the water infront of you.
Derek Henry says:
“It’s like being a sailor of a ship no point studying water you’ve already sailed over. You look at the water infront of you.”
Clever stuff.
If you can see through the fog, avoid the rocks and ignore the Siren’s Song you’ll be fine. Bon Voyage.
I’ll stick to Terra Firma.
There may not be lifeboats next time. No fuel left.
Ga canny. 🙂
Tom McCann says:
“…and the fault will lie entirely with the EU…..”
Don’t think so, Tom. That the Italians have nothing to lose, makes the situation very volatile there.
But it doesn’t matter where the fuse is lit. The whole shooting match across the globe is teetering. it could start from any number of flash points.
Western markets are top heavy with cash. Either orthodox inflation makes good the gap between prices and underlying value or prices will fall into the hole.
Governments, central banks and vulture capitalists are all banking on the latter.
“…..the aftermath could be worse than 2008/9…”
Hmmmm…what could possibly be worse than another decade of doing nothing whatsoever to prevent it happening again ?
The crash damage is likely to be worse, but the solution had better be better next time. Or there’ll be hell on.
It’s still not too late to stop it, but nobody with any influence wants the global economy to not crash.
So crash it will. As sure as God made little apples.
I am not sure as to the point you are making Andy..Richard discussed the reasons and the extent stockmarkets might fall. Lots of factors could cause prices to fall and at the moment it is rising treasury yields. That really is just moving prices. The situation in Italy is structural. Would Italy face the cliff edge risk if they wern’t part of the euro? Definitely not.. so lots of things might cause prices to fall but the EU/Italy situation is nuclear..but if resolved in the near term it is just kicking the can down the road as it will effectively be Germany via the EU providing bigger “subsidies” to Italy etc..the dependency just gets greater, it’s like being hooked on drugs. This problem is the laid at the door of the EU and their pursuit of economic and monetary union.
TomMcCann says:
“…Lots of factors could cause prices to fall and at the moment it is rising treasury yields.”
And that’s a reason is it ? I don’t think so, because if that was a reason it wouldn’t beg the question, ‘why are treasury yields rising?’
The rest of your comment just goes to show how deeply we are into broken orthodox market thinking: “Germany via the EU providing bigger “subsidies” to Italy etc..the dependency just gets greater,…”
Germany is, and has been for years, in receipt of enormous subsidy by virtue of it’s favourable exchange rate which cripples other parts of the Eurozone. A Euro-tax-zone could correct for that. Since no such entity exists the imbalance continues until another national economy is wrecked. This one is a bit bigger than Greece and might not cave in to hollow blandishments.
It’s not simply Italy that needs Germany, via the EU, to bail it out, Germany needs the EU to bail out Italy or German banks go down the toilet…and French ones too and the UK banks with them and….and….and. You know how it works. You were around ten years ago presumably ? And you’ve seen what has, and has not, been done to remedy the mess.
If you are saying the Eurozone is unstable I’m not arguing with you, but you’re not saying anything that isn’t screamingly obvious. If the EU finance ministers were to accept that an economy cannot run on principles of controlling money supply alone we might be getting somewhere and so might they.
But yes, the fanciful asset pricing on the stock markets, and elsewhere, is a somewhat separate problem….except that all these things play together.
A tissue. A tissue, we all fall down.
Yes Andy I am saying the Euro is unstable and I am also saying the whole system of European monetary and fiscal union is deeply flawed..it amazes me why the damage it has done to Southern Europe is barely mentioned by advocates..it will implode, it has to and when it does the effect on financial markets and the real economy will be devestating
But the Euro is not the EU
The euro is a disaster
It does not mean Eu membership has to be
The EU is not the Euro, but the entity that is the EU created and continued to run with the Euro..for the southern states of Europe they form the same deal. Do you think there have been discussion of member states to consider leaving the Euro but staying in the EU? I think there might but the penalty of withdrawal from the Euro is disastrous.. the EU as a loose body to promote trade is a trade concept. The reality is it is much much greater than that and indeed the politics of the EU is to push for a federal Europe with fiscal and monetary union. So for the impoverished southern countries the euro and the EU are part of the same deal. I really do not see any merit in supporting the EU and for those that do it either for having a vested interest or being entirely desperate.
And your alternative is?
Exchange rates have to float and the end of the euro..the EU continues in a different guise, where it abandons the dream of fiscal and monetary union..it offers massive financial assistance to the obvious countries and continues as a trading zone…regardless of the disruption the Euro has to be abandoned. Better it happen voluntarily instead of being the consequence of a crisis – bit like what we are approaching in Italy.
TomMcCann says:
“Exchange rates have to float and the end of the euro..the EU continues in a different guise, where it abandons the dream of fiscal and monetary union…..”
Okay, that’s an option; unwind and go back. Trouble is you can’t go back. Where you want to go back to is not there any longer,
……..but let’s say you could unwind the Euro and everybody gets their national floating currency back…..
“[The EU then] offers massive financial assistance to the obvious countries and continues as a trading zone.”
Where does that money come from when (because you just scrapped it) there’s no ECB to issue it ?
(I can guess where the Germans think it’s going to come from and I can guess how much they are going to like the idea.)
Where does that money come from when (because you just scrapped it) there’s no ECB to issue it ?
(I can guess where the Germans think it’s going to come from and I can guess how much they are going to like the idea.)
Well Andy – Germany has become so wealthy will a suppressed exchange rate, so in order to stabilise a post euro europe they are going to have to give some of that wealth back..or we continue as we are until it comes to a confrontation and crisis. Either way the Euro is unsustainable as the concept is completely flawed.
TomMcCann :
Touche, here Tom. Now I don’t see what point you are making.
” Do you think there have been discussion of member states to consider leaving the Euro but staying in the EU? I think there might but the penalty of withdrawal from the Euro is disastrous..”
For whom would it have been disastrous had Greece decided to bail out of the Euro ? Not Greece.
” the EU as a loose body to promote trade is a trade concept….” Hmmm….that’s the Common Market you are referring to. Things have indeed moved-on rather a long way from there.
“The reality is it is much much greater than that and indeed the politics of the EU is to push for a federal Europe with fiscal and monetary union.”
And therein lies the folly. The folly of doing half a job. There is some monetary union but because of the BS that is ‘monetarism’ the EU set up a common currency zone without a fiscal counterpart. Put delicately, that was fucking stupid.
“So for the impoverished southern countries the euro and the EU are part of the same deal. ” They don’t…didn’t ….have to be. The Northern States were keen enough to cook the books to get the Southern States on board. It’s questionable whether Italy was in fit state to join the Euro, and Greece was not even shoe-horned…it was crow-barred in. It took two sides to agree these compromises. Why were they made?
“I really do not see any merit in supporting the EU and for those that do it either for having a vested interest or being entirely desperate.”
No country has any interest in being a member of the EU without that being a ‘vested’ interest.
The theory is the whole becomes more than the sum of its parts so that everyone wins. The UK has been at least as bad, if not worse than other EU states, in wanting more out than it puts in. This when push comes to shove is the essence of neoliberalism.
Neoliberalism has no concept of social, collective responsibility, nor of cooperation. It is the shark in the goldfish bowl.
Andy crow – so you want monetary and fiscal union? That is completely insane. The aspirations of the EU should indeed be the common market and indeed things have moved on a bit and what a mess has been created a a consequence exchange rates have to float end of story.
No, Tom. What we’ve got is insane.
See how well it’s working. !! Chaos and destruction.
The mistake was to launch the single currency without an understanding of what the consequences would be. A US Dollar is a US Dollar all across the continent and all across the world. Why ? Because the FED giveth and the IRS taketh away.
A Euro is not common currency, it has national characteristics, taint, you might say. In the modern terminology of the commoner blogs it is a ‘clusterfuck’.
“The answer is, by a long way”
What short positions would you advocate taking given this guarantee of success?
I don’t
Richard Bareback says:
“What short positions would you advocate taking given this guarantee of success?”
Doesn’t matter much, as long as you can keep your nerve (and have the credit) to ride the next uptick. But you wouldn’t be shorting from here would you ?
MMT 101 – Fiscal flows
https://www.youtube.com/watch?v=OP0s0s1N9K0
The MMT 101 – bathtub anology
https://www.youtube.com/watch?v=wNN3B57UrZI
@ Derek Henry
Not directly related to the topic but more an addendum to the YouTube presentations you’ve posted and perhaps of interest to others here, is this recent (yesterday) interview with Stephanie Kelton who gives as simple an explanation about MMT as one can reasonably expect – albeit for a US audience but the basic principles of course remain the same: ‘What Is MMT And How It Works’ – https://www.youtube.com/watch?v=5baKgv7Zl5g&t=0s.
However, more directly related to the topic is the wonderfully eccentric MMT trader Mike Norman’s take on the current situation on Wall Street – https://www.youtube.com/watch?v=OP0s0s1N9K0.
On a general note it’s encouraging to see a marked increase in the general exposure MMT is getting, even if only on Alt-news channels. Hopefully this upward pressure will eventually force the MSM to give it the air-time it merits.
Apologies, Derek Henry, I only just noticed I erroneously posted the same Mike Norman vid as you. Maybe indicative of how we both rate him as a smart reader and analyst of market trends. I’m sure he’d appreciate the double exposure!
Thinking on how far markets might fall – consider Sears going into chapter 7 bankruptcy in order for the banks it owes tp get its mall assets and sell them off to pay a percentage of the debts. Back in the day retailers would queue to take the properties. These mall and high street properties look worth nowt squared to me and may be millstone liabilities. The high street and malls are toast – but this doesn’t mean all their trade disappears. We can still consume like Japanese hornets via internet stores as long as we are paid or are lent dosh. Huzzar!
The Plunge Protection Squads will try to keep markets up – the real bottom would that of firms we actually need – maybe 20% of current market cap, though once we were this sensible money would mean something else.
“The euro is a disaster. It does not mean Eu membership has to be”
Absolutely agree. And the UK as currency issuer has and had a degree of economic latitude that could have taken advantage of both.
The entire Brexit ‘manifesto’ was based on a false narrative. Narratives; plural actually.