Financial Sarcasm Roundup for 06/08/15

I played the role of catalyst tonight in a meeting with two San Francisco leaders who can really leverage each others' organizations.  That's more than I can say for the sorry parade of Wall Street executives and central bankers who keep blasting garbage into the world economy.  I am here to catalyze some sarcasm.

American CEOs aren't so bullish on the US economy's growth prospects after all.  More top honchos are waking up to the looming peak of record high corporate earnings.  That's still a tiny fraction of the collective C-suite.  The other chiefs are out playing golf, drinking, or nailing their secretaries.  Expect another survey revealing CEOs' opinions of themselves to be at record highs, with big bonuses to follow.

Extortionist cyberattacks are way up.  Adobe will face serious brand damage if it can't secure its Flash tech.  Good cyberdefense sleuths can trace the attacks back to Fu Manchu's terracotta army.  The folks on the other side of the Great Wall are plotting their next intrusion as we speak.  Lock your Google Wallet into your chastity belt.

San Francisco real estate is so pricey that even the slums should be getting rich.  I passed some boarded-up storefront in the Tendernob tonight.  It would probably rent for some gawd-awful sum to a VC-backed startup if the absentee landlord had the sense to convert it.  The dumbest startup ideas are still getting funded and they're blowing through cash like there's no tomorrow.

The weather in San Francisco was nice enough today that plenty of hot babes decided to wear revealing clothing.  Women around here have a high level of physical fitness.  That's something I really like about this town.  Keep those short sundresses coming, ladies.  I'll be around all summer.

The Haiku of Finance for 05/29/15

Economy shrank
First quarter revision down
Stimulus failure

The Haiku of Finance for 09/07/14

Hard Japan quarter
Everyone cut back a lot
Shocking therapy

The Haiku of Finance for 08/28/14

Four point two percent
Fake economic growth rate
Hard to believe it

Stocks Ignore Shrinking US GDP

The first quarter decline in the US's GDP has barely made a ripple in the national news cycle.    I think this is because the stock market's continued upward climb allows Americans the luxury of ignoring deteriorating economic fundamentals.  Those Americans who are not invested in equities have their EBT cards, entitlement checks, and mortgage relief programs to keep them happy.  The BEA news release page describes it as a second estimate.  Revisions wouldn't be so necessary if the BEA used a simpler methodology devoid of hedonic adjustments and double-counting entertainment expenses.

I also think a second quarter of declining GDP will trigger alarm at the Fed.  Two consecutive quarters of declining GDP are the textbook definition of a recession.  The Fed will have to revisit its rationale for tapering its purchases of US Treasuries and agency paper.  This won't happen right away, but we also won't have to wait until August to see whether the Fed is anticipating a second quarter GDP decline.  Chair Yellen and her allies in the FOMC have shown the intellectual flexibility to turn on a dime.  Stanley Fischer's swearing-in as the Fed's newest governor comes just in time.  I expect him to do exactly what he did at the Bank of Israel when the next US crisis hits, until the crisis overwhelms the Fed's management tools and the US is forced to devalue its currency.

Meanwhile, the DJIA and S&P 500 are hitting record highs.  The rah-rah crowd ignores mean reversion, but it's going to hurt when stocks return to their historical long term average of a P/E ratio at 14.  Don't count on earnings climbing to make these elevated equity valuations look like a new normal.  Incomes are stagnant and young people can't spend on household formation when they carry enormous college loan debts.  Consumers simply will not be able to spend at levels that keep corporate earnings elevated.

I expect more bad GDP news, more Fed overreaction with stimulus, and more financial problems for Americans regardless of whether they own stocks.  Nothing has changed the Alfidi Capital basic investment thesis.  

Evaluating The "Warren Buffett Indicator"

There's a lot of nonsense flying around the Interwebs about the so-called "Warren Buffett Indicator."  This metric is derived from a comment Warren Buffett made years ago to the media.  He stated that the ratio of the total market capitalization of equities in the US divided by the US's annual GDP indicated whether the stock market was attractively valued.  A high ratio is supposed to mean overvaluation, and a low ratio means undervaluation.  I'm trying to decipher the Oracle's logic behind this belief.  This calls for some hard-core Alfidi Capital analysis.

The total market cap figure for the US at any given time is available in two places.  The first is the Federal Reserve's "B.102 Balance Sheet of Nonfinancial Corporate Business" from the Z.1 release, specifically line 36 for "Nonfinancial corporate business; corporate equities; liability."  The second is the St. Louis Fed's FRED data set "Nonfinancial Corporate Business; Corporate Equities; Liability, Level (MVEONWMVBSNNCB)," also from the Z.1 release.  They both reveal the same number for market cap in 2013 Q4:  US$21.36T.  The GDP is found in the BEA's news releases.  That figure for 2013 Q4 is US$17.08T.  Divide market cap by GDP and the ratio is 125.1% for the final quarter of 2013.

Knowing the construction of this ratio is not as useful as knowing whether it indicates a true valuation.  A Google search of this metric reveals that most of the financial press is guessing where the upper and lower bounds of this ratio belong.  Does 125% mean overvaluation?  Does 50% mean undervaluation?  There's little time series data showing where this ratio stood in comparison to its long-term average because Wall Street is too lazy to find it.  I can't find a reputable source that even calculated the ratio's long-term average.  Keep reading if you want to see my awesome solution.

The metric may be more useful as a comparison across geography rather than time.  The World Bank helpfully publishes the market cap to GDP ratio for many countries as series CM.MKT.LCAP.GD.ZS from its Financial Sector featured indicators.  The data for multiple countries leads me to some intriguing observations.  I looked at my preferred currency hedge countries:  Australia, Canada, and Switzerland.  Canada's ratio is pretty close to the US ratio as of 2012, the latest year for which data is displayed.  Switzerland's ratio is much higher, and Australia's is somewhat lower.  I am tempted to conclude that Australia's equity market was undervalued recently but that makes little sense as its currency was very strong in 2012.  Perhaps this ratio is just one of many metrics for international investors to display in a dashboard as they consider geographic diversification.

I downloaded the World Bank's entire multi-year, multi-country data set in MS Excel format.  This enabled me to calculate the long-term average ratio for the US, from 1988-2012, as 105.9%.  There are other group categories in the data set that allow for comparisons.  I selected the line for all "OECD members" and found the 1988-2012 average is 81.3%.  It is intriguing to see that the US's market cap trades at a premium to the OECD aggregate over the long term.  I wonder if the US's economic freedom and political stability confer structural advantages that entice investors to bid up its total market cap.  It's hard to draw such a broad conclusion from only one metric.  Other analysts are free to make their own country comparisons to the various regional aggregates.

Warren Buffett makes investments in companies that trade at a discount to their intrinsic value.  He dropped an offhand comment about how a country's market cap compares to its GDP and the financial press jumps on it as some kind of concurrent indicator.  I must be more circumspect in my own judgment of this valuation indicator.  Consider that this ratio absolutely cratered in 2008 for the US, dropping to 79.7% by the World Bank's data.  It stood at 104.5% in 2009 even though the US economy was still feeling the effects of the global financial crisis.  This metric is most useful in a time series that compares the US to its competitors and to global aggregates.  It is not some "fire and forget" trigger for action by itself.  

Financial Sarcasm Roundup for 03/03/14

Global tensions shall not deter me from being sarcastic about finance.  Conflicts aren't funny but the foibles of the finance sector provide comic relief.

The European Banking Authority is just now waking up to the risks of digital currencies.  Welcome to the party.  It took the Mt. Gox bankruptcy to alert regulators in the largest economies.  They should have paid attention since at least 2009 when it Bitcoin was obviously becoming a disruptive phenomenon in finance.  Now it's too late for the hapless suckers who used Mt. Gox to change real money into fake money.  It's not too late for "investors" in other non-coins once regulators decide that crypto-coins aren't real currencies.  The difference after regulation is that crypto-nerds will have to live with the reporting and taxation requirements they thought they could escape.  Techno-idiots can't get any dumber!  They should go back to playing video games.  

US GDP growth is getting another downward revision.  Those of you who follow Shadow Government Statistics, like me, would not be surprised.  Investors who do not understand the extent to which statisticians adjust official economic results deserve to get smacked upside the head really hard.  I'd be happy to smack them but I'll let the markets do my dirty work for me.  Market analysts react with a yawn because they know the numbers are gamed and that the slow US recovery is driven by exceptional forces - monetary stimulus, share buybacks, and other steroid effects.  These forces are unsustainable.  Analysts can't get any dumber!  They should go back to goofing off during office hours.  

One ECB board member is waking up to the risk in sovereign debt.  It's too bad no one will listen.  The phantom recovery in some parts of Europe tempts big banks to underwrite more government bond issues.  Refusing to hold excess capital against these increasingly risky assets exposes European banks to destruction.  The ECB's stress tests were designed to ignore sovereign credit risks.  European bankers can't get any dumber!  They should go back to drinking espresso, or whatever European folks drink these days.  

European bankers should underwrite a Bitcoin-denominated sovereign debt issue that analysts could rate without even understanding it.  Such a development would provide me with the ultimate basis for sarcasm.  Lots of stupid people would lose money, but those idiots are losing money anyway betting on those constituencies separately.  Rolling them all together into a big nonsensical blob just makes sense.  

Financial Sarcasm Roundup for 01/06/14

The first Monday of a new year means the grind starts afresh for cubicle wage-slaves.  I celebrate my freedom from such drudgery by unleashing sarcasm tinged with LOL photos.  Taste the rainbow of sarcasm.  Taste the flavor of Alfidi Capital.

A bunch of washed-up economists are mouthing off about rosy economic growth.  Any economist who anticipates continued US growth in 2014 is either incompetent or on the Fed's payroll.  I anticipate the US falling off a cliff at some point for several reasons.  Corporate earnings are at all-time highs and must revert to mean.  Personal indebtedness sustains consumer spending and uncontrolled government spending sustains the rest of the economy.  The US's official GDP reached a new level of absurdity last year after the BEA recalculated it to include money already spent.  Puh-leeze.  Magical thinking about markets won't make them levitate in the face of reality.

Central banks will have trouble keeping a unified consensus for more stimulus.  The developed nations' central banks have stimulated themselves into a corner, and everyone knows it.  "Decoupling" was a big financial meme a couple of years ago when asset managers started worrying about which global sector would head down first.  They all headed down more or less together in 2008 until central bank stimulus  propped them back up.  Now with competitive currency devaluation they all face variations on the Prisoner's Dilemma.  The first one to defect from monetary stimulus will reap a more valuable currency, should they wish to attract FDI, and will set off a shockwave roiling currency markets.  I'm hedging this madness with positions in currencies I trust not to play the game.

China faces a double-whammy.  Western multinationals are moving production away from China and back to their home countries.  Chinese local governments have rising default risk due to their reliance on the shadow banking system.  This means that China's goose is cooked, so the only question is whether they'd like it medium rare or well done.  China's perma-bulls still claim that learning Mandarin is a smart educational move.  I hope they learn to file bankruptcy claims in Mandarin.  I blogged a log time ago that China's rare earth element export quotas were set disingenuously low.  Beijing's central planners can look forward to revising other data down from politically-determined highs.

My new year is getting off to a nice little sarcastic start.  I am confident that the human race, and the finance sector in particular, will keep me supplied with amusing news items.

Measure the Wage-Price Spiral and Economic Growth Discrepancies During Hyperinflation

There will be little warning in the event hyperinflation begins in the US.  There aren't many real-time tracking tools that function well during hyperinflation besides the prices of food and energy in your local neighborhood.  I expect the federal government to continue to rely upon the Employment Cost Index (ECI) to track wages and the Consumer Price Index (CPI) to track prices.  Economists traditionally regard a wage-price spiral as a hyperinflationary phenomenon.

I believe it will also prove worthwhile to track the difference between Gross Domestic Product (GDP) and Gross Domestic Income (GDI).  They are theoretically supposed to be equivalent but the BEA has revised the calculations behind GDP so much that there is now a noticeable statistical discrepancy between the two figures.  Here's the BEA's 2010 explanation for its preference of GDP over GDI as a reporting metric.  I can live with the preference for more timely data sources, but the ideal solution would be an interagency effort to get the GDI source updates more frequently.  Here's the BEA's regular update of differences between GDP and GDI.  If you get lost, just go to the BEA's website and find this info on the page for GDP, or use that site's search function that we paid for with our taxes.

Here's the FRED chart for GDP.

Compare it to the FRED chart for GDI.

They compare pretty darn well according to my eyeballs.  I'll perform more robust statistical comparisons if they start seriously diverging.  I expect the statistical discrepancy between GDP and GDI will describe the nature of any stagflation period during the early onset of hyperinflation.  If the discrepancy grows rapidly, it will indicate a rapidly stagflating economy that will tempt policymakers (specifically the Federal Reserve) to increase any hyperinflationary stimulus.  Comparing the discrepancy to ECI and CPI will indicate how quickly the hyperinflationary response takes effect.  Rapid rises in ECI and CPI will show the wage-price spiral taking effect.  This is all Alfidi Capital theory at this point.  Time will tell whether my expectations prove correct.

These statistics won't be useful as triggers for investment decision points once hyperinflation really gets roaring.  Their monthly and quarterly updates won't be frequent enough for a wage-price spiral that adjusts daily in the real world.  They will instead be useful as integrity checks for policymakers.  Any attempt to suppress knowledge of deteriorating economic conditions will reduce policymakers' credibility in the eyes of the public.  

Americans Really Can't Afford to Drive Cars

CNBC via Yahoo says Americans are driving less.  I looked for the claimed source of this data at the Federal Highway Administration's Office of Highway Policy Information.  The OHPI publishes monthly Traffic Volume Trends and the June 2013 report does show a -0.1% cumulative decline in vehicle-miles of travel (VMT) for 2013.  I don't know where CNBC is referencing a report "released this week" because no such report is mentioned among the FHWA's press releases for August.  I'm assuming they mean the monthly trends report.  Journalists need to start using hyperlinks to data sources, just like us bloggers.

CNBC/Yahoo also mentions a John A. Volpe National Transportation Systems Center study showing a decline in driving.  They don't link to the report in the article.  I found that Volpe report myself.  My readers gain intelligence when they follow the links to source material I diligently assemble.  The report's PDF version does indeed show that the relationship between real GDP and VMT is breaking down.  I read this data as another indicator that the QE-driven fake growth in GDP does not reflect the real economy.  Driving ability is a measure of quality of life.  Helicopter Ben can print money but he can't print cheaper fuel.

The crux of the CNBC/Yahoo article and the government's data is that Americans don't drive as much as in years past.  The root cause is something that the Fed's QE cannot mask.  Americans are getting poorer and are unable to afford historical driving habits.  The Volpe report mentions several factors:  people lack jobs, cars and gas are more expensive, higher debt burdens prevent car purchases.  The Fed's monetary easing has not created real wealth to solve these problems.  Median household income is lower now than it was at the beginning of the recession in 2007.  Americans are owning their cars longer, and there is evidence that the higher quality of US-made cars means they need not be replaced as often.  Those higher-quality cars are still more expensive now than in years past.

I think it would be more fruitful to compare VMT to trends in household income rather than GDP if the longstanding correlation between driving and the national economy is breaking down.  The automobile industry needs to figure out how poor Americans will afford the cars they produce.