Just Plain Pathetic
by David Stockman • September 21, 2016
We are speaking, of course, of the Fed’s decision to punt yet again, and for a reason that is not mysterious at all. To wit, our financial rulers are petrified of a stock market hissy fit, and will go to any length of dissimulation and double-talk to avoid triggering a crash of the very bubbles their policies have inflated.
So now the money market rate will be pinned to the zero bound for 96 months running—–through at least December. Indeed, hell itself could freeze over before these cowardly fools would raise rates at their next meeting a week before the elections—–and most especially not when the Donald is remonstrating loudly and correctly that the whole thing is rigged.
Not that any more evidence was needed, but today’s decision surely proves that our financial rulers have wandered so deep into their monetary puzzle palace that they have now lost touch with every vestige of the real world. That’s because there is not a shred of evidence that more free money for the Wall Street gamblers will do anything except further inflate financial asset values that are already tottering in the nosebleed section of history.
So the entirety of what they are doing is simply paving the way for an even bigger crash. Yet to hear Janet Yellen tell it, they decided to keep their Big Fat Thumb on money market rates because “there is still slack coming out of the labor market” and because the Fed is still “undershooting our inflation goals”.
But so what!
There is not a single thing the Fed can do about either of these macroeconomic conditions. The massive amount of true slack in the US labor market is owing to structural, not cyclical factors, and is powerfully impacted by global wage rates and domestic welfare and regulatory policies over which the Fed has no sway whatsoever.
Likewise, what in the world is Yellen’s beef about undershooting inflation? The core CPI was up 2.3% on a Y/Y basis during the most recent month, while the headline undershoot is due to deflationary pressures arising from the world oil and commodity markets which are actually a boon, on net, to the US economy.
Besides that, Flyover America doesn’t need any help on the “moar inflation” front from the Fed, even if it could deliver it, which it self-evidently can’t. To wit, the cost of shelter as measured by asking rents is up by 5.6% during the past year; and on top of that you have medical services up by 5.1%—-along with a 6.3% rise in prescription drugs and 9.2% gain in the cost of health insurance.
Yet, Yellen rattled on repeatedly during her presser about deferring a rate increase for the Wall Street gamblers on the grounds that inflation has been insufficient. As we said, the Eccles Building morphed into a monetary puzzle palace cut off from the real world long ago.
So what our dithering money printers are actually doing is fueling a monumental orgy of corporate bond issuance. Yet it serves no purpose other than to enable companies to speculate in their own stocks with borrowed money, while heaping windfall gains on the fast money traders who hound corporate boards into strip-mining their own balance sheets.
As shown below, the level of high grade corporate debt outstanding has gone nearly parabolic in the last few years and now stands at more than 2X its pre-crisis peak. Yet even Yellen admitted during her mindlessly meandering presser that business CapEx has been extraordinarily weak.
In fact, non-defense CapEx orders excluding aircraft peaked in mid-2104 and are now down by 10%. Even more to the point, real net fixed business investment after depreciation is still 20% below the level it each way back in early 2000. That is, two bubbles ago.
Perhaps the question about where all this hand-over-fist corporate borrowing is going might have occurred to at least one of the nine geniuses who voted to stand pat. But apparently it didn’t because once again Yellen insisted that despite constant surveillance no one in the Eccles Building has spotted any sign of bubbles, and that “valuations are largely in line with their historical trends”.
What in the world is our clueless school marm talking about? At the closing price today, the S&P 500 traded at 25X the $87 per share reported for the LTM period ending in June. And that was in the face of earnings that have plunged 19% since peaking in the September 2014 LTM period.
Yellen is right about the historical trends, of course, but not at all in a good way. In fact, on the eve of the last crash when the market peaked in October 2007 at about 1550, S&P 500 earnings during the most recent LTM period had posted at $79 per share, meaning that the peak pre-crash multiple was substantially lower than today at 19.7X.
Even when S&P earnings peaked at $54 per share in September 2000, the trailing multiple was only a tad higher than today at 26.5X. So, yes, the market is in line with history. That is, the history of crashes!
Then again, Yellen is undoubtedly getting her “normal” valuation nonsense via the Wall Street two-year forward ex-items hockey sticks. At the present time, for example, the “operating earnings” consensus for CY 2017 is about $133 per share, implying a PE multiple of 16.3X. Apparently, there is nothing bubbly about that.
There is nothing credible about it, either. Back in March 2014, the two-year forward ex-items estimate for 2015 was also $135. It actually came in a $100 per share or 25% lower.
Likewise, in March 2015, the two-year forward ex-items estimates was, yes, also $135 per share. By contrast, the actual number for the June 2016 LTM period was just $98.33.per share. Even if S&P 500 earnings grow by 10% in each of the next two quarters—–which is wholly improbably given current guidance and recent profits warnings—-CY 2016 would come in at just $103 per share on an ex-items basis—or about 24% below the year ago hockey stick.
It would also amount to a PE multiple on the broad market of 21X, and that’s anything but historically normal.
So is Janet Yellen professing a capacity to see way out to the end of 2017 and divine that the third time is a charm for profits? Has she even fathomed that to be “normal” at the 16.3X PE multiple cited above, 2017 operating earnings would have to rise by 36% from the level they posted for the June LTM, and in a purportedly 1.8% growth full employment economy, at that?
The truth is, the Fed is inherently, relentlessly and radically in the financial bubble business, but the Keynesian school marm who runs it wouldn’t know a bubble if one transported her to the moon and back...........
