Royal Bank of Scotland to investors: 'Sell everything'

The build up in auto sales that peaked in 2000 were a parallel set of circumstances to what you are seeing the last few years. Do you remember what was going on in the late 1990s into 2000?

The dot-com bubble (which ran parallel to that auto sale "boom").

Alan Greenspan kept monetary policy extremely loose by the measures of monetary policy prior to 2008. He was busy causing the dot-com bubble -- even if what was going on then is nothing nearly extreme as the mess they have gotten into since 2008. Wherever interest rates were in 1999 or 2000, they were ridiculously low by historical standards given the economic growth of the time. ... he created a phony economy that was growing at 5 percent and never took his foot off the pedal. Even if much of that growth was being pulled forward artificially from the future -- you can't compare that kind of environment with the permanent low-growth we have ended up in (which is a consequence of what he did). You need to compare rates relative to where the economy is. And what Greenspan did was cause bubbles all over the place (a smaller scale version of now) -- from the stock market to the auto sales you are talking about that peaked in 2000. What you saw in 2000 was very similar to what you are seeing now.

That all popped, of course (what I am suggesting is the end result always). When Greenspan's relatively quaint little bubble popped in 2001, yeah, of course auto sales dropped off. The economy went into recession. The drop off, by the way, wasn't even what you would have expected from what was a pretty big bubble bursting -- which caused the economy going into the recession in the early 2000s. That is because the Federal Reserve never took its foot off the pedal -- they kept rates artificially low. Which of course kept auto sales artificially high through that period.. ... and led to the housing crisis. It wasn't until the bust in 2008 that auto sales really dropped off. Again, the inevitable end result of what I am talking about.

Comparisons like the one you are trying to make aren't really even possible on a 1-to-1 basis in the way you want to. ... because what we have seen since 2008 in terms of monetary policy -- them trying to juice the economy in phony, manipulative ways -- has been unprecedented. They aren't fiddling around with the overnight rate. They stepped in and intervened in the credit markets -- as in they have a trading desk in New York and they have bought up $4.5 trillion of debt to suppress rates -- because what Alan Greenspan was doing (to more significant effect than they having) is no longer enough to get the job done. Since 2008, they have done whatever it took to pin rates at 0 percent. And it has taken VERY extreme measures. ... and it hasn't resulted in the kind of growth Greenspan was able to pull forward. It is giving us a subpar growth environment -- with rates pinned even lower than in the early 2000s.

The fact that auto sales are currently anywhere near, let alone as high as they were in a 5 percent growth environment. ... should scare the hell out of you, even if the auto sales in that 5 percent growth environment were only as high as they were because of monetary manipulation. To achieve those same kinds of sales (even adjusting for things like demographic differences) in a 2 percent growth environment should have you stepping back and asking yourself how big a bubble is there. And trust me, the auto market doesn't even scratch the surface of it.

 

For you. I should just pick a story each day (now that there actually are the stories as things are starting to unwind) and you can ignore it . .. .and respond by telling me I am full of shit:

There's Only One Buyer Keeping S&P 500's Bull Market Alive

Profits are declining every quarter. Individuals have largely abandoned the equity market. And the the only thing propping up the stock market are share buybacks (something I pointed out to you over and over again as this has ramped up).

But that level of insanity -- corporations buying back their shares at record prices, while their profits are plunging, has nothing to do with a perverse set of credit conditions brought on by the Fed. I mean, there has been 7 years of ZIRP. And QE1. And QE2. And Operation Twist. And QE3. But why would that be responsible for most of corporate America engaging in the classic dumb money behavior of buying their own stock like mad at the top of the market. ... on margin?

 

The economy is in the crapper. Which is the point. Equity prices are example X of the distortions they have created -- distortions that are unsustainable.

When the economy languishes year after year, equity prices typically don't skyrocket -- not in a normal environment. And when corporate profits are plunging in that environment, and everyone else has begun to bail on equities, in a normal environment you don't see companies still borrowing to the hilt and using the money to buyback their stock (in an attempt to keep the price high).

Why would that be happening?

"Hedge-fund driven stock buyback schemes" is nonsensical blather. IBM running up more and more debt every quarter, and buying back its stock hand over fist (even as its earnings sink more each quarter) has nothing to do with a hedge fund or hedge funds. I know that sounded boogity boogity to you. ... but lhow about you try to use your own thoughts and explain the buyback phenomenon in terms OTHER than the ridiculous credit conditions the Fed has created -- that it explicitly has spent the last 8 years TRYING to create?

 

So monetary manipulation by central planning authorities has or hasn't created the conditions for trillions of dollars of stock buybacks (against all reason -- EXCEPT in a world in which a central planner is price fixing the credit markets)?

You told me that, "The Fed doesn't force anyone to do anything. It's not the Fed's job to manage risk for either companies or individuals."

Then explain just the buyback phenomenon (forget all the other examples of debt-laden public and private entities that I can document for you that has corresponded with extreme manipulation of the credit markets). ... in ANY TERMS other than than the obvious extreme manipulation of the credit markets that has created perverse incentives?

I don't do "I hate central bank" posts. I come on here and do, "I think central banks are hugely destructive BECAUSE. ..." posts. You never want to address the "because" part.

 

1) You are right about the short-sighted part.
2) Hedge Funds have largely bailed on equities over the last half year. I can document that for you, if you really want me to. Many large ones are net short equities -- at least were when they last reported holdings. ... Buybacks continue barely abated. As you saw in that link. So, nope.
3) Companies don't borrow money and invest in plant or equipment when their profits are stagnant (or as is the case now, declining). There is no business to support that investment. Which is kind of the point. When a central planner hijacks the debt markets and induces insane levels of borrowing in that environment, what you get are $2 trillion of stock buybacks designed to keep stock prices high (and executive bonuses coming -- all shareholders care about are rising stock prices. If you can't get that by growing the business, you will GLADLY avail yourself of free money being thrown at you, to financially engineer a higher stock price).
4) Thanks for at least answering.

 

My premise is borne out by reality. ... Most businesses (whether it is a small mom and pop business or a large one) don't invest in things blindly -- not without a plan for how that investment is going to lead to greater profits. In a no-growth environment, in which many companies are doing layoffs actually, they are not wondering how they can invest in NEW areas. That makes no sense. They see the areas they are already in shrinking right now, and if anything they are trying to jettison things to cut costs. CEOs of large companies have to answer for their stock prices. The world really is that simple. If they are levering up, they had better be making the stock price grow somehow for it. Because if they are levering up and spending money while their stock price is declining -- they are usually out on their asses. That isn't a premise or a theory. It is reality behind what is going on.

I know you want to believe that "greedy hedge funds" have somehow forced CEOs to do something that is against their own interests. Which is fine, even. It doesn't really matter. Let's look at the fact that we have trillions of dollars of stock buybacks that have in large part driven the stock market higher. Let's say that "greedy hedge funds" are the ones pulling the strings on the buybacks. .... At least now I have you acknowledging a substantial amount of debt that has been created (just one area I keep pointing to) and what just might be a serious misallocation of capital. I shouldn't have ever had to argue this -- not 2 years ago before it was reaching a peak, or now when you are seeing stories acknowledging it.

Under what conditions have the credit markets made that debt available? I mean the greedy hedge funds will gladly force CEOs to borrow like crazy and desperately try to financially engineer their stock prices. ... why is that money even available, let alone available at very little cost?