Buy C-R-A-P

We live in a modern world of acronyms and buzzwords, and the financial industry is certainly no exception. In fact, it may be one of the worst culprits, what with FANG, ZIRP, TINA, BREXIT, QUITALY, BRIC, etc. all entering the lexicon over the last few years. Yet, creating some catchy collection of consonants remains one of the most surefire ways to attract attention in this business since it, admittedly, makes for a great headline and gives strategists like us something fun to write about (‘fun’ being a relative measure). Well, now the new eye-catching acronym to watch, according to Tom Lee of Fundstrat is C-R-A-P – Computers, Resources, American Banks, and Phone Carriers – which are all levered to the investment recovery, inflation, and deregulation expected over the next year. Before I comment further on those recommendations, though, I want to point out that I like to follow Tom Lee’s thoughts because, like us, he lets the data do most of his thinking, and, like us, he was one of the few pundits last year who actually saw potential for the US stock market. He backed that up, too, with one of the highest S&P 500 targets among strategists for 2016 (2325), but now, according to Bloomberg, he has the lowest price target for 2017 among the fifteen strategists they track (2275), further proof that he doesn’t just parrot consensus numbers.
Reading between the lines of his comments, Lee does not see a substantial upside for the stock market as a whole in 2017, at least not without a pullback first, but he does believe a potential exists among individual areas of the market. This line of thinking is consistent with our view that passive indexing may be more frustrating for this type of investing environment because you will be dragged down by the underperforming sectors and the increased volatility may make it more difficult to hold onto positions long enough to achieve the eventual performance. We generally agree, too, that the C-R-A-P stocks should do well in the political and economic landscape that many expect on the horizon. If inflation does pick up, driven by fiscal stimulus and more robust economic growth, Fundstrat argues that the contemporaneous increase in wages will not hit technology company margins as hard given their reliance on more high-skilled workers, and we, too, continue to advise an overweight of Tech to benefit from the Computers sub-sector. The big acronym of 2015 and 2016, the so-called FANG stocks, may already be coming back into favor, as well, with Facebook Inc. (FB/$123.41/Outperform), Amazon.com Inc. (AMZN/$795.99/Outperform), Netflix Inc. (NFLX/$131.07/Outperform), and Alphabet Inc. (GOOG/$806.15/Outperform) all breaking out to new reaction highs last week.

This post was published at FinancialSense on 01/10/2017.

Monetary Insanity: When It Doesn’t Work – – Just Promise To Keep Doing It Until It Does

On July 14, 2006, the Bank of Japan raised its benchmark overnight rate off zero for the first time since introducing the world to ZIRP in 1999. In doing so, the BoJ noted that the Japanese economy in its view continued to ‘expand moderately’ and that risks inside the economy were ‘balanced.’ The central bank also sought to reassure, further commenting that despite one 25 bps rate hike ‘an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time.’
These words, all of them, should sound frighteningly familiar, as they are being redeployed in nearly exactly the same phrasing by the Federal Reserve. Whether or not the FOMC votes for a second rate hike today still remains to be seen, as before that ‘news’ there is first the BoJ once more admitting that its prior efforts didn’t actually work. For the record, Japanese officials actually carried out two hikes, a second coming in February 2007 just in time for the open minded to finally see what really had been going on in the global economy.
In other words, the Japanese policymakers made the same mistakes as are being made today. They assumed absence of further contraction was the same as recovery. In the singularly binary model of orthodox economics, if an economy isn’t in recession it must be growing; so if the economy isn’t in further recession and the economy is barely growing or even stagnating then it is assumed that growth is just being delayed. By the middle of 2006, the Bank of Japan believed there were enough signs the economic postponement had ended.

This post was published at David Stockmans Contra Corner on September 21, 2016.

The Folly Of Economists: Negative Interest Rates

Bernanke, the person nicknamed ‘Helicopter Ben’ because he said it would be easy to fight deflation even if it had to be done by throwing money out of helicopters, gave us ‘ZIRP,’ which means ‘zero interest rate policy.’ Now he seems to be leaning toward ‘NIRP,’ ‘negative interest rate policy.’ He is an economics professor now. We can only hope that his students do some outside reading, like Ludwig von Mises.
Jeff Cox and Katie Kramer of CNBC wrote this:
Former Fed Chairman Ben Bernanke thinks policymakers should give serious thought to implementing negative rates.
‘Since that can’t be assured, and since the current low-interest-rate environment may persist, there are good reasons for the Fed and other central bankers to consider changes in their policy frameworks,’ he added. ‘The option of raising the inflation target should be part of that discussion. But … it is premature to rule out alternative or potentially complementary approaches, including the possibility of using negative interest rates.’

This post was published at David Stockmans Contra Corner By Bert Dohmen, Forbes ‘ September 19, 2016.

The Apotheosis Of Bubble Finance – – Folly Of The FANGs, Part 1

………. The inexorable effect of contemporary central banking is serial financial booms and busts. With that comes increasing levels of systemic financial instability and a growing dissipation of real economic resources in misallocations and malinvestment.
At length, the world becomes poorer.
Why? Because gains in real output and wealth depend upon efficient pricing of capital and savings, but the modus operandi of today’s central banking is to deliberately distort and relentlessly falsify financial prices.
As we have seen, the essence of ZIRP and NIRP is to drive interest rates below their natural market clearing levels so as to induce more borrowing and spending by business and consumers.
It’s also the inherent result of massive QE bond-buying where central banks finance their purchases with credits conjured from thin air. Consequently, the central banks’ Big Fat Thumb on the bond market’s supply/demand scale results in far higher bond prices (and lower yields) than real savers would accept in an honest free market.

This post was published at David Stockmans Contra Corner on August 29, 2016.

Crisis Is Us – – -The Inexorable Result Of Modern Central Banking

The inexorable effect of contemporary central banking is serial financial booms and busts. With that comes increasing levels of systemic financial instability and a growing dissipation of real economic resources in misallocations and malinvestment. At length, the world becomes poorer.
Why? Because gains in real output and wealth depend upon efficient pricing of capital and savings, but the modus operandi of today’s central banking is to deliberately distort and relentlessly falsify financial prices.
After all, the essence of ZIRP and NIRP is to drive interest rates below their natural market clearing levels so as to induce more borrowing and spending by business and consumers.
It’s also the inherent result of massive QE bond-buying where central banks finance their purchases with credits conjured from thin air. The central banks’ big fat thumb on the bond market’s supply/demand scale results in far lower yields than real savers would accept in an honest free market.
The same is true of the hoary doctrine of ‘wealth effects’ stimulus. After being initiated by Alan Greenspan 15 years ago, it has been embraced ever more eagerly by his successors at the Fed and elsewhere ever since.
Here, the monetary transmission channel is through the top 1% that own 40% of the financial assets and the top 10% that own upwards of 85%. To wit, stock prices are intentionally driven to artificially high levels by means of ‘financial easing’. The latter is a euphemism for cheap or even free finance for carry trade gamblers and subsidized hedging insurance for fast money speculators.

This post was published at David Stockmans Contra Corner by David Stockman ‘ July 7, 2016.

The Dangerous Conceit Of Central Bankers And The Deceitful Case For ‘Independence’

In February 1999, the Bank of Japan announced that its call money rate would be zero ‘until deflationary concerns subside.’ Other than a temporary shift in 2001 and 2006, deflationary concerns remain. How effective was monetary policy? That point has been partially answered by the introduction of QE over and over and over again. The zero lower bound is to orthodox economists a major problem. They do not, however, have an answer for why it is now a global problem as the ZLB spread out everywhere.
In a speech to the ASSA in Boston, MA, in January 2000, Princeton professor Ben Bernanke criticized the Bank of Japan for its, in his view, reluctance to act. Though he applauded ZIRP and BoJ’s announced intention to keep it in place for as long as ‘necessary’ (without addressing why that might be forever forward), it was nearly enough as he said in conclusion:
Policy options exist that could greatly reduce these [economic] losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work.
There is enormous conceit in that statement, compelled by an inflated sense of duty. Why, if monetary policy isn’t working, does that necessarily lead to more of it? The easy answer is because that is the task central banks have given themselves, covered politically by governmental paralysis on any central bank question. The more central banks fail, the easier they cry ‘independence.’

This post was published at David Stockmans Contra Corner on June 22, 2016.

Janet Whiffs Again – – Take Cover Now!

If Donald Trump has even a partial clue about the nation’s monumental economic mess one of his first acts will be to demand Janet Yellen’s resignation. And for sheer incompetence among countless other failings.
She was out there again today talking in completely incoherent circles. On the one hand, Yellen robotically insisted that the U. S. economy is moving steadily toward the Keynesian nirvana of full employment.
At the same time, she struck a profile in cowardice that was downright pathetic. Yep, after 90 months of ZIRP the Fed has decided to wait for further confirmation from the ‘incoming data’ before concluding that another baby step toward interest rate normalization is warranted.
Needless to say, our paint-by-the numbers school marm has no clue that money market rates at 0.38 bps have nothing to do with the Fed’s so-called dual mandate. It’s sole impact has been to flood the canyons of Wall Street with zero cost carry trades and endless cheap debt for corporate financial engineering and other leveraged speculations.
By contrast, its massive spree of money pumping never got anywhere near to main street. It couldn’t deliver honest full employment through cheap money inducements to borrow and spend because households are still stranded at Peak Debt.
Based on the most recent flow-of-fund report for Q1, households now have record debt of $14.3 trillion. Anyone who can scratch an application signature has been given a student loan and all who can fog a rearview mirror have been loaned 120% of the cost of a new car. And, of course, the castles of main street families are still mortgaged to the hilt.

This post was published at David Stockmans Contra Corner on June 15, 2016.

The Case For A Super Glass-Steagall

Donald Trump can instantly get to the left of Hillary with respect to Wall Street and the one percenters by embracing Super Glass-Steagall.
The latter would cap U. S. banks at $180 billion in assets (<1% of GDP) if they wished to have access to the Fed’s discount window and have their deposits backed by FDIC insurance. Such Federally privileged institutions would also be prohibited from engaging in trading, underwriting, investment banking, private equity, hedge funds, derivatives and other activities outside of deposit taking and lending.
Instead, these latter inherently risky economic functions would be performed on the free market by at-risk banks and financial services companies. The latter could never get too big to fail or to manage because the market would stop them first or they would be disciplined by the fail-safe institution of bankruptcy. No taxpayer would ever be put in harms’ way of trades like those of the London Whale.
By embracing this kind of Super Glass-Steagall Trump would consolidate his base in the flyover zones and reel in some of the Bernie Sanders throng, too. The latter will never forgive Clinton for her Goldman Sachs speech whoring. And that’s to say nothing of her full-throated support for the 2008 bank bailouts and the Fed’s subsequent giant gifts of QE and ZIRP to the Wall Street gamblers.
Besides, breaking up the big banks and putting Wall Street back on a free market based level playing field is the right thing to do. Today’s multi-trillion banks are simply not free enterprise institutions entitled to be let alone.
Instead, they are wards of the state dependent upon its subsidies, safety nets, regulatory protections and legal privileges. Consequently, they have gotten far larger, more risky and dangerous to society than could ever happen in an honest, disciplined market.

This post was published at David Stockmans Contra Corner on June 4, 2016.

Another Deformation Of ZIRP – -Returns Chasing Pension Funds Plunging Into Risk

What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns.
Thanks to rock-bottom interest rates in the U. S., negative rates in other parts of the world, and lackluster growth, investors are becoming increasingly creative – and embracing increasing risk – to bolster their performances.
To even come close these days to what is considered a reasonably strong return of 7.5%, pension funds and other large endowments are reaching ever further into riskier investments: adding big dollops of global stocks, real estate and private-equity investments to the once-standard investment of high-grade bonds. Two decades ago, it was possible to make that kind of return just by buying and holding investment-grade bonds, according to new research.
In 1995, a portfolio made up wholly of bonds would return 7.5% a year with a likelihood that returns could vary by about 6%, according to research by Callan Associates Inc., which advises large investors. To make a 7.5% return in 2015, Callan found, investors needed to spread money across risky assets, shrinking bonds to just 12% of the portfolio. Private equity and stocks needed to take up some three-quarters of the entire investment pool. But with the added risk, returns could vary by more than 17%.
Nominal returns were used for the projections, but substituting in assumptions about real returns, adjusted for inflation, would have produced similar findings, said Jay Kloepfer, Callan’s head of capital markets research.

This post was published at David Stockmans Contra Corner By Timothy W. Martin the Wall Street Journal – June 2, 2016.

The OECD’s $11 Trillion Forecast Miss – – Stunning Proof That ‘Stimulus’ Hasn’t Worked

The OECD pleaded this morning for more ‘coordinated action’, i.e., ‘stimulus’, without even bothering to explain why anyone would feel confident if governments around the world might actually oblige. This economy, the singular global economy, has been stimulated to death, awash in especially monetary influence of constant ZIRP and QE’s and now threatened by nominal punishment through NIRP. When all of that was first introduced, there were no doubts ever expressed that they wouldn’t work, at most these orthodox institutions would admit that there were only risks to their modeled success rates.
In May 2009, the OECD published a report that anticipated nothing but positive and lasting impacts from especially coordinated fiscal policy. Believing very strongly in ‘spillover effects’, that is local ‘stimulus’ benefiting those beyond national boundaries through increased ‘demand’ and thus trade, at that point in 2009 the OECD was more worried about rising interest rates cutting back some of the effectiveness:
Secondly, it is assumed that there is no increase in interest rates in 2009-10 as a consequence of the fiscal stimulus, whereas if interest rates did increase this would also tend to dampen multiplier effects both at home and abroad, involving partially offsetting negative spillover effects. Further fiscal actions would raise positive trade spillover effects, but also increase the likelihood of an adverse reaction from interest rates.
They treated the Great Recession as any typical cycle, only much deeper and more synchronized globally than any economist thought possible. No matter what has happened in disappointment since then, they do not deviate from that assumption. Seven years later, the OECD now worries that the global economy is stuck in a ‘low growth trap’ and once again appeals to the myth of fiscal potency. All for the children:

This post was published at David Stockmans Contra Corner on June 2, 2016.

Why The Flyover Zone Is Hurting – – – Bubble Finance Is Strictly For The Bicoastal Elites

We are now in month 83 of this so-called recovery. Yet there are still 45 million people on food stamps – – one out of every seven Americans. The median real household income is still 5% below its level in the fall of 2007. There are still only 71 million full-time, full-pay ‘breadwinner’ jobs in the nation – – nearly 2 million fewer than when Bill Clinton was packing his bags to vacate the White House.
At the same time, we have had monetary stimulus like never before. There has been 90 straight months of virtually zero interest rates. The balance sheet of the Fed has been expanded by $3.5 trillion. For point of reference, that is 4X more than all the bond-buying during the entire first 94 years of the Fed’s history.
So something doesn’t parse, and that’s to put it charitably. The truth is, the Fed’s entire radical regime of ZIRP and QE constitutes a monumental monetary fraud.
It has not ‘stimulated’ a wit the struggling main street economy of flyover America. Instead, it has showered Wall Street speculators with trillions of windfall gains and gifted the bicoastal elites with a false prosperity derived from financial inflation and government expansion.

This post was published at David Stockmans Contra Corner on May 21, 2016.

Yelling ‘Stay’ In A Burning Theater – – Yellen Ignites Another Robo-Trader Spasm

Simple Janet has attained a new milestone as a public menace with her speech to the Economic Club of New York. It amounted to yelling ‘stay’ in a burning theater!
The stock market has been desperately trying to correct for months now because even the casino regulars can read the tea leaves. That is, earnings are plunging, global trade and growth are swooning and central bank ‘wealth effects’ pumping has not trickled down to the main street economy. Besides, there are too many hints of market-killing recessionary forces for even the gamblers to believe that the Fed has abolished the business cycle.
So by the sheer cowardice and risibility of her speech, Simple Janet has triggered still another robo-trader spasm in the casino. Yet this latest run at resistance points on a stock chart that has been rolling over for nearly a year now underscores how absurd and dangerous 87 months of ZIRP and wealth effects pumping have become.
As we have indicated repeatedly, S&P 500 earnings – – as measured by the honest GAAP accounting that the SEC demands on penalty of jail – – -have now fallen 18.5% from their peak. The latter was registered in the LTM period ending in September 2014 and clocked in at $106 per share.
As is shown in the graph below, the index was trading at 1950 at that time. The valuation multiple at a sporty 18.4X, therefore, was already pushing the envelope given the extended age of the expansion.
Indeed, even back then there were plenty of headwinds becoming evident. These included global commodity deflation, a rapid slowdown in the pace of capital spending and the vast build-up of debt and structural barriers to growth throughout China and its EM supply train, as well as Japan, Europe and the US.

This post was published at David Stockmans Contra Corner on April 2, 2016.

Janet Yellen: Monetary Arsonist – – – Armed, Dangerous And Lost

Simple Janet should have the decency to resign. The Fed’s craven decision last week to punt on interest rate normalization is not merely a reminder that she is clueless and gutless; we already knew that much.
Given the overwhelming facts on the ground – – 4.9% unemployment, 2.3% core CPI and a 23.7X PE multiple on the S&P 500 – -her decision to ‘pause’ after 87 months of ZIRP actually proves she is a blindfolded monetary arsonist – -armed, dangerous and lost.
That’s right. In the midst of vastly inflated and combustible financial markets, the all-powerful Fed is being led by a Keynesian school marm stumbling around in an explosives vest. She apparently has no idea that a 38 bps money market rate is not a pump toggle on some giant bathtub of GDP; it’s an ignition fuse that is fueling the greatest speculative mania in modern history.
Janet and her posse of pettifoggers don’t even have the ‘Humphrey-Hawkins made me do it’ excuse any longer. The truth is, there is nothing in the act that says they must hit 2.00% inflation to the second decimal point or anything else more specific than ‘stable prices’. Nor is there any quantitative target for full employment, let alone something like 4.85% – – since we apparently are not there at 4.90%.

This post was published at David Stockmans Contra Corner by David Stockman ‘ March 21, 2016.

NIRP – No Need to Go There

A new acronym has entered the lexicon of central banking in recent months – NIRP, which stands for negative interest rate policy. If ZIRP, zero interest rate policy, won’t stimulate faster growth in nominal spending and faster growth in the prices of goods and services, then perhaps central bank-engineered negative short-term interest rates will do the trick. In June 2014, the European Central Bank (ECB) introduced NIRP and the central banks of Switzerland, Denmark, Sweden, and Japan have recently done so as well. For the most part, NIRP involves a central bank paying a negative rate of interest on a portion of reserves or deposits held by private depository institutions (mainly commercial banks) by the central banks. One purpose of NIRP is to encourage banks to make more loans by penalizing them with a negative nominal return on ‘excess’ reserves held by the central bank. Another purpose of NIRP is to achieve a lower structure of real (inflation-expectations adjusted) interest rates. After all, if the yields on short-maturity interest rates are at zero and investors expect deflation, then the real yields on these securities would be positive. (The real yield is the nominal yield minus inflation expectations. If the nominal yield is zero and inflation expectations are negative, i.e., deflation is expected, and then zero minus a negative number result in a positive number.) If nominal aggregate demand is growing at a sub-optimal rate, then a lower structure of real interest rates would likely cause the quantity of bank credit required to increase, which if the credit were granted would, in turn, cause growth in aggregate demand to increase. NIRP is a remedy for insufficient demand for bank credit.
Read Will the US Go Negative in 2017?
But if growth in nominal aggregate demand is sub-optimal because of an insufficient supply of bank credit, then NIRP will not be effective in remedying the situation. If banks do not have the capital to support their acquisition of more loans and securities with credit and interest rate risk, then charging these banks a ‘storage fee’ for reserves held at the central bank will not induce them to create more credit. It will do the opposite. The extra expense charged banks by the central bank for reserves storage will reduce bank profits, inhibiting growth in the bank capital necessary to allow banks to increase their acquisitions of loans and securities.

This post was published at FinancialSense on 03/08/2016.

Silver Linings: Keynesian Central Banking Is Heading For A Massive Repudiation

For several years now the small coterie of Keynesian academics and apparatchiks who have seized nearly absolute financial power through the Fed’s printing presses have justified the lunacy of unending ZIRP and massive QE on the grounds that there is too little inflation. The bureaucrats at the IMF even invented a lame-brained catch-phrase, calling the purported scourge of money which retains most of its value ‘lowflation’.
This whole consumer inflation targeting gambit, of course, is an inherently preposterous notion because there is not a scrap of evidence that 2% consumer inflation is better for rising living standards and societal wealth gains than is 0.2%. And there is much history and economic logic that points in exactly the opposite direction.
Between 1870 and 1913 in the United States, for example, real national income grew at 3.5% per year – – the highest gain for any 43 year period in history. Yet the average inflation rate during that long period of capitalist prosperity was less than 0.0%. That was real ‘lowflation’, and it was a blessing for the average worker, not a scourge.

This post was published at David Stockmans Contra Corner by David Stockman ‘ February 20, 2016.

Why The Keynesian Market Wreckers Are Now Coming For Even Your Ben Franklins

Larry Summers is a pretentious Keynesian fool, but I refer to him as the Great Thinker’s Vicar on Earth for a reason. To wit, every time the latest experiment in Keynesian intervention fails – – as 84 months of ZIRP and massive QE clearly have – – he can be counted on to trot out a new angle on why still another interventionist experiment or state sponsored financial fraud is just the ticket.
Right now he is leading the charge for the greatest stroke of foolishness yet conceived. Namely, negative interest rates based on the rubbish theory that the ‘natural’ money market rate of interest is at an extraordinarily low point. Accordingly, the central bank should drive the ‘policy rate’ to sub-zero levels in order to achieve the appropriate level of ‘accommodation’ in an economy that refuses to attain ‘escape velocity’.
As can’t be pointed out often enough, however, there is no such economic ether as ‘accommodation’. It’s just a blanket cover story for what Keynesian central bankers believe they are accomplishing by pegging interest rates below market clearing levels and by bending and mangling the yield curve to cause more investment.
But after 86 months it is evident that all of this putative monetary ‘accommodation’ has failed. Falsifying the cost of money and capital can only work if it causes households and businesses to borrow more than they would otherwise; and to then lay credit based spending for consumption and investment goods on top of what can be funded out of current production and income. Another name for that is leveraging private balance sheets and thereby stealing production and income from the future.
With $62 trillion of public and private debt outstanding, however, the US economy has hit a economic barrier called Peak Debt. For all practical purposes, it can be measured as the macroeconomy’s aggregate leverage ratio, which now stands at 3.5X national income. That represents fully two extra turns of debt on the economy relative to the stable 1.50X ratio that prevailed during periods of war and peace and boom and bust during the century before 1970.

This post was published at David Stockmans Contra Corner on February 17, 2016.

Why Keynesian Market Wreckers Are Now Coming For Even Your Ben Franklins

Larry Summers is a pretentious Keynesian fool, but I refer to him as the Great Thinker’s Vicar on Earth for a reason. To wit, every time the latest experiment in Keynesian intervention fails – – as 84 months of ZIRP and massive QE clearly have – – he can be counted on to trot out a new angle on why still another interventionist experiment or state sponsored financial fraud is just the ticket.
Right now he is leading the charge for the greatest stroke of foolishness yet conceived. Namely, negative interest rates based on the rubbish theory that the ‘natural’ money market rate of interest is at an extraordinarily low point. Accordingly, the central bank should drive the ‘policy rate’ to sub-zero levels in order to achieve the appropriate level of ‘accommodation’ in an economy that refuses to attain ‘escape velocity’.
As can’t be pointed out often enough, however, there is no such economic ether as ‘accommodation’. It’s just a blanket cover story for what Keynesian central bankers believe they are accomplishing by pegging interest rates below market clearing levels and by bending and mangling the yield curve to cause more investment.

This post was published at David Stockmans Contra Corner by David Stockman ‘ February 17, 2016.

How ZIRP Warps The World – -Oil Giants Plan To Borrow Heavily To Pay Dividends

The world’s largest oil companies have a plan to weather the worst market in over a decade: borrow more money.
Major oil companies faced with the lowest crude prices since 2003, capital spending budgets with little left to cut and strong commitments to their dividends will have to take on billions in debt this year as they await a market rebound.
Take BP Plc, whose net debt rose by almost $5 billion in 2015. After reporting a record annual loss on Tuesday, Chief Executive Officer Bob Dudley said he would borrow billions more if it was needed to sustain investor dividends. ‘We know how important the dividend is to our shareholders,’ he told analysts in London. ‘We’re not going to drop the company off a cliff. But I think the balance sheet is strong right now.’

This post was published at David Stockmans Contra Corner on February 3, 2016.

“Liar Loans” Are Back In 2007 Housing Bubble Redux

In the leadup to the financial crisis, lenders did some pretty silly things.
The securitization bonanza and the attendant proliferation of the ‘originate to sell’ model drove lenders to adopt increasingly lax underwriting standards.
Put simply, the pool of creditworthy borrowers is by definition finite. That’s a problem because the securitization machine needs feeding. So what do you do if you’re a lender? Why, you expand the pool of eligible borrowers by making it easier to get a loan.
And we’re not talking about a giving would-be buyers a few FICO points worth of leeway here. We’re talking about the infamous ‘liar loans’ which produced myriad tales of a market run horribly amok as everyone from maids to strippers could buy a McMansion with little to nothing in the way of documentation.
Well don’t look now, but the infamous Alt-As are making a comeback thanks to ‘big money managers including Neuberger Berman, Pacific Investment Management Co. and an affiliate of Blackstone Group LP [who] are lobbying lenders to make more of these ‘liar’ loans – or even buying loan-origination companies to control more of the supply themselves,’ WSJ reports.
Once again, it’s the same old story. ZIRP has left investors starved for yield and that’s herding money into riskier and riskier assets and creating demand for paper backed by everything from subprime auto to P2P loans. Alt-As can carry rates as high as 8% which obviously looks great to anyone who’s stuck squeezing 300 bps out of something you picked up during last year’s IG issuance bonanza.

This post was published at Zero Hedge on 02/02/2016.

Death Throes Of The Bull

The fast money and robo-machines keep trying to ignite stock rallies, but they all fizzle because bad karma is beginning to infect the casino. That is, apprehension is growing among whatever adults are left on Wall Street that 84 months of ZIRP and $3.5 trillion of Fed balance sheet expansion, aka money printing, didn’t do the trick.
Not only is the specter of recession growing more visible, but it is also attached to a truth that cannot be gainsaid. Namely, having stranded itself at the zero bound for an entire business cycle, the Fed is bereft of dry powder. Its only available tools are a massive new round of QE and negative interest rates.
But these are absolutely non-starters. The former would provoke riots in the financial markets because it would be an admission of total failure; and the latter would provoke a riot in the American body politic because the Fed’s seven year war on savers and retirees has already generated electoral revulsion. Bernie and The Donald are not expressions of public confidence in the economic status quo.

This post was published at David Stockmans Contra Corner by David Stockman ‘ January 28, 2016.