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In recent weeks, JPMorgan has turned decidedly sour on the US equity market: one month ago, on March 3, JPM announced that “for the first time this cycle”, it has gone underweight stocks.

Equities, credit and commodities have all rallied in the last three weeks, as some of the immediate threats to the world economy have faded from attention, possibly only because the bad earnings season has wound up. But, to us, the fundamentals of growth, earnings and recession risk have not improved, and if anything have worsened. We remain wary of the near-empty ammo box of policy makers.

 

Our 12-month-out US recession odds have risen to 1/3, while equity-implied odds have instead fallen to near 1/5. But even with no recession this year or next, we see US earnings rising only slowly by low single digits and see little to boost multiples. The eventual recession should bring US stocks down some 30%, creating a strong downward risk skew to returns over the next few years.

 

We use the rally in stocks to sell it and go underweight stocks, versus HG corporate bonds and cash. The strong rebound of the past few weeks does create near-term momentum, and thus keeps our first UW small.

To be sure, the continued bounce since the JPM call has not been exactly reassuring of the forecast’s accuracy. However, what is surprising is that when faced with unpalatable price action, sellside researchers usually flip their call quickly.

Not in this case, because in a surprisingly candid piece released overnight, JPM’s Jan Loeys doubles down, and after asking rhetorically “Can central banks really save the day, or cycle?”, his answer is no. In fact, after saying now is the time to sell stocks, JPM’s head of global asset allocation is now even far more concerned about the over economy where his biggest concern is that central banks are powerless to stop the “collapsing productivity growth.”

Loeys begins as follows:

Equities and bonds are both up on the week, fueled by supportive central bank talk. Commodities and the dollar are down, with EM asset classes continuing to outperform. Our overall strategy remains on the defensive side. We started a year ago to dollar-average from the long risk positions we have held over the past seven years towards a more defensive one where we finally arrived last month.

 

The main drivers of this year-long process are the sense that the cycle in economic and earnings growth is maturing, leading us to the eventual recession, as well as the more structural force of the global collapse in productivity growth. Of the two, we view the latter one as the more ominous, as it is potentially much longer lasting, with no obvious force driving it, nor a policy solution in sight to reverse it.

 

Both of these negatives to world economies and risk markets have in common that they are of uncertain timing. Hence, our use of the time-honored strategy is going slowly by dollar averaging. Over the past month, data are tracking our economic forecasts, and have kept our global projections on net unchanged.

 

That is good news after the steady drip-drip of downgrades of the past two years. It has allowed us to reduce our 12-month US recession risk to 28%, even as it keeps us with a view that the US economy is more likely than not to contract over the next 2-3 years in response to falling profits.

And here is why JPM’s explanation why central banks are now powerless to stop the ongoing global contraction: 

We are not getting any solace on our fears over collapsing productivity growth, though. Investors have been happy to see the 628K rise in US payrolls in Q1, but at that pace, jobs are growing faster than the economy, implying that GDP per worker/hour, which is productivity, is actually falling. US companies are hiring people frantically as they are unable to get more product and services out of their existing workforce. This is not a good omen for future growth in the economy and earnings, in our view.

This is something we noted last night when we noted the increasing prevalence of warnings about an upcoming US stagflation. It is also what is most troubling to JPM.

Without real upgrades to earnings or growth forecasts, we think that the recent rally in risk assets gained much from dovish actions and messages from central banks, in particular the ECB, Fed and the PBoC. One can only applaud the seriousness and pro-activeness that central banks apply to their mandates. But aren’t investors counting too much on central banks carrying the day if not the cycle?

 

This analyst thinks so, without disparaging their efforts, as central banks are almost out of ammo, and their tools are not well suited to handle the problems of slowing company profits and productivity.

 

It is our perception that much of the weaker than expected growth over the past 4 years results from a supply side problem. Lower rates can boost spending, but are not much of a solution to falling productivity growth. The latter needs greater innovation, competition, globalization, and capital investment, in our view. Low rates can boost the latter, but have not helped enough, as rising capex over recent years did not prevent falling productivity growth.

* * *

But perhaps most amusing was the following Freudian slip in the JPM piece:

“We do not see easy money as a bait to lure unsuspecting investors into risky assets.”

Then why bring it up… and if you don’t, who does?

via Zero Hedge http://ift.tt/1RwlksD Tyler Durden

Submitted by Mac Slavo via SHTFPlan.com,

Not only does President Obama refuse to join the words “Islam” and “terrorism,” but the White House won’t let anyone else do it either.

In a video that appeared on the White House website this morning, the words of French President Francois Hollande were censored to remove the following segment:

Islamist terrorism, is in Syria and in Iraq. We therefore have to act both in Syria and in Iraq, and this is what we’re doing within the framework of the coalition.

Here’s the censored video that has since been taken down from the White House website.

Here’s a screenshot of the transcript that was published on the site, which contains President Hollande’s full statement.

You know it’s obvious that Obama is avoiding using the phrase “Islamic terror” when even the NY Post notices. Back in November, after the Paris attack, columnist Michael Goodwin called for the President’s resignation. Goodwin wrote:

President Obama has spent the last seven years trying to avoid the world as it is. He has put his intellect and rhetorical skills into the dishonorable service of assigning blame and fudging failure. If nuances were bombs, the Islamic State would have been destroyed years ago.

 

He refuses to say “Islamic terrorism,” as if that would offend the peaceful Muslims who make up the vast bulk of victims. He rejects the word “war,” even as jihadists carry out bloodthirsty attacks against Americans and innocent peoples around the world.

After the attacks in San Bernadino, California in December, we pointed out that Obama attempted to shift the blame away from radical Islam to…wait for it…workplace violence.

President Obama said that the San Bernardino terrorists had mixed motives for killing 14 people and injuring 17 others. He warned Americans not to draw any conclusions:

“At this stage, we do not yet know why this terrible event occurred.”

 

“We do know that the two individuals who were killed were equipped with weapons and appeared to have access to additional weaponry in their homes. But we don’t know why they did it.”

 

…

 

“It is possible that this was terrorist-related, but we don’t know. It’s also possible this was workplace-related.”

 

“We don’t know why they did it. We don’t know at this point the extent of their plans.”

Are you f*cking serious, Mr. President?

 

As we noted earlier, The Intent Here Was Jihad And It Was Carefully Premeditated And Planned. President Obama, his national security team and the FBI know this.

Maybe if we all hide under our blankies and refuse to say the words, we can pretend this threat doesn’t exist too.

via Zero Hedge http://ift.tt/1TrJhCK Tyler Durden

When we wrote earlier that based on a leaked Wikileaks transcript, which the Greek government interpreted “as revealing an IMF effort to blackmail Athens with a possible credit event to force it to give in on pension cuts which it has rejected“, the article promptly went viral. While it remains to be determined if the IMF indeed made such an implied threat, we attribute this spike in interest to the general public’s surprise that the IMF could stoop to such a low, even by its own standards, level as to use a nation of 11 million people as a lab rat on which to conduct policy experiments.

But why the surprise?

As the below transcript from a April 2012 interview given by Lagarde to the Wharton school at UPenn, none other than IMF president Lagarde herself admitted that for the IMF to “thrive”, the world has to “goes downhill“, and that the IMF “to be sustainable” it needs to be “very in touch with our client base.”

She added that “when the world goes well and we’ve had years of growth, as was the case back in 2006 and 2007, the IMF doesn’t do so well both financially and otherwise”

It goes without saying that Lagarde’s sole prerogative as the managing director of the IMF is to make sure it “does well.”

She concluded by saying that “we need to be able to invent and reinvent ourselves in many ways.” One such client-facing “reinvention” just happened to be caught on tape.

Here is the key section:

Knowledge@Wharton: Of all the things that you do here, what are you most passionate about? What would you really like to make sure happens? It could be a small thing, it could be a large thing. What is it that really has your heart?

 

Lagarde: That’s complicated. I think it’s this issue of relevance … that is of real concern to me. You see, this is a very fascinating institution because it’s completely counter-cyclical. When the world around the IMF goes downhill, we thrive. We become extremely active because we lend money, we earn interest and charges and all the rest of it, and the institution does well. When the world goes well and we’ve had years of growth, as was the case back in 2006 and 2007, the IMF doesn’t do so well both financially and otherwise.

 

For this institution, which is a fascinating mix of almost all countries of the world with a single objective that should transcend all their respective individual policies and strategies, for it to be sustainable, we need to be very agile, very in touch with our membership, with our client base, if you will. We need to be able to invent and reinvent ourselves in many ways. So, as I was explaining about going from bilateral to multilateral surveillance, from a narrow focus to something that is more holistic, that is exactly what is at stake

h/t @rudyhavenstein

via Zero Hedge http://ift.tt/1TrDRrd Tyler Durden

The social fallout from Trump’s rising popularity continues with the most disturbing event taking place recently when prominent Black Lives Matter activist and rapper Tef Poe tweeted a message for “white people”: if Donald Trump wins the presidency, “niggas” will ‘incite riots everywhere.’

“Dear white people if Trump wins young niggas such as myself are fully hell bent on inciting riots everywhere we go. Just so you know,” Poe tweeted. A screenshot of the tweet was captured below by the Daily Media.

He followed up with another promise: “Trump wins aint no more rules fammo. We’ve been too nice as is.”

As Daily Media adds, “Poe is by no means a nobody, he has appeared in innumerable articles charting the rise of ‘Black Lives Matter’ and was credited with coining the phrase, “This ain’t your grandparents’ civil rights movement.”

The rapper was one of the co-founders of Hands Up United, a “social justice” organization that emerged after the death of Michael Brown that was responsible for coordinating large BLM protests in the St. Louis area.

Ironically, as the website updates, Poe has since deleted his tweet and then claimed that he never made the comments, instead suggesting it was “slander.”

“He’s now whining about “slander”. Talk crap, then play the victim when you get challenged on your crap. Same process EVERY time with social justice warriors.”

This is shown in the tweet below:

@TefPoe Slander? you tweeted & deleted…now you cry slander? lol, typical false victim SJW. http://pic.twitter.com/sH9cAto7hK

— LucidHurricane™ (@_LucidHurricane) March 17, 2016

Unfortunately this kind of fallout continues with prominent movement leaders across all social groups becoming increasingly belligerent toward each other, which fundamentally is driven by one simple thing: the ongoing deterioration of the US economy. Recall from the post profiling the surge in Chicago shootings that even local Chicago citizens agrees that the root of America’s rising anger is the lack of economic opportunity.

 “I think it’s got something to do with economics,” Gabb says of the continued shootings. As CNN adds, most residents say communities continue to suffer from an economy that is nowhere strong enough to keep at-risk youths from looking for financial support in the wrong places.

 

The lament is one heard across most poor areas in the US: “I’m hoping that some money is invested in some job creation. We bailed out Wall Street, why not bail out Main Street? It would make a world of difference,” Acree says.

 

“If you really want to stop this epidemic of violence, the best way to stop a bullet is with a job.”

 

Which is odd, because according to the BLS, jobs across the US are growing at a brisk pace of over 200K per month.

Sadly, we expect this form of social devolution to continue no matter who is president in November because the underlying issue of most social problems in America, the withering economy, will will not only remain unaddressed – after all a Congressman once told Bernanke to “get to work”, which the Fed promptly did by further enriching the richest Americans at the expense of all other social tiers – but, worse, anyone who dares to point it out is promptly accused of “peddling fiction.”

via Zero Hedge http://ift.tt/1ZUgUxO Tyler Durden

Submitted by Paul Brodsky via Macro-Allocation.com,

The USS Perpetual Growth was picking up speed, steaming over calm seas despite a growing chorus of capital market Cassandras fearing trouble under the surface and further out at sea.

“Full speed ahead” Skipper Yellen barked to her economates, unperturbed by ominous radar images or the uselessness of econometric expertise at the zero bound, unmindful of passenger dysentery because 95.1% of the ship’s births were full.

“Look at all this liquidity!” she likely informed Captain Blithely, her commander in chief on shore, who had spent his presidency too disengaged of economic matters (or too politically astute) to have a cogent public thought on the matter, or perhaps smart enough to figure out everyone in Washington answers to the banks and that fixing their collateral damage social programs would be the best he could hope to do.

Indeed, the Fed Chair had gone rogue among her peers, charting her central bank’s shipping lane on a divergent path from her counterparts, Draghi and Kuroda, who were steering their monetary fleets to port. Captain Yellen seemed oblivious to the economic (and rhetorical) dangers of relying on consumption: an economy should not be beholden to eating its own productive cells.

We have argued there could be only one reason the Fed would want to hike rates: it is now responsible for US dollar policy and it wants a strong one to weaken other currencies, to prop up exporting economies, and to attract global capital and deposits to the US. Alas, the wind just died – not just for the US, but for all ships at sea.

Leading up to her March 29 press conference, numerous Fed speakers had tried to jawbone the market into believing the Fed remained on track to hike rates more, maybe even in April. And yet the markets had entirely dismissed such a possibility, in fact betting the Fed would be lucky to hike rates again in 2016. One point four percent US GDP put a quick end to that. She’ll get her year over year inflation, but not growth.

And so the de facto captain of the US economic ship of state walked the Fed’s position back to better reflect market doubts. “Economic and financial conditions remain less favorable than they did back at the time of the December FOMC meeting” she offered. Well, okay, if you insist. Tell the market something it doesn’t know.

The Fed Funds rate is functionally pointless now that Interest on Excess Reserves are higher and deposit rates are zero. The bottom line is that the Fed must keep asset prices up because assets are collateral for potentially deflationary systemic debt.

 

Yes, the Fed can do this with a strong dollar, but it can also use talk therapy rhetorical warfare its communication policy. The great global monetary parlor game is navigating the rocky shoals of greater economic discontent.
 

via Zero Hedge http://ift.tt/1Rw923u Tyler Durden

How quickly the oil production freeze narrative has fallen apart.

Source: stockboardasset

Indeed, it’s been a tough two days for oil bulls holding on to hope that excess oil production will normalize in the near term and that the world’s oil suppliers would somehow manage to curb oil production in the aftermath of the OPEC’s November 2014 cartel collapse.

First it was yesterday’s Bloomberg story which cited the Saudi Deputy Crown Prince Mohammed bin Salman as saying that the Saudis would not participate in an oil production freeze unless everyone including Iran which has made it  joined  “If all countries including Iran, Russia, Venezuela, OPEC countries and all main producers decide to freeze production, we will be among them.“

The second one came overnight.

Recall that one month ago, just as Russia and Saudi Arabia were finalizing their “agreement” to freeze oil production which was the major catalyst for the oil surge from its 13 year lows hit in early February, we got the surprising news that far from throttling production, Russian crude and condensate production just set new post-Soviet daily record of 10.92 million barrels.

Well, overnight we got the latest update of Russian oil output, and according to Bloomberg it just set a new post-Soviet high in March “as the success of a proposed crude production freeze between OPEC members and other major producers appeared to be in doubt.”

Bloomberg reports that Russian production of crude and a light oil called condensate climbed 2.1 percent in March from a year earlier to 10.912 million barrels a day, according to the Energy Ministry’s CDU-TEK unit. That narrowly beat the previous high of 10.910 million barrels in January.

With most of the Organization of Petroleum Exporting Countries members, Russia and some others outside the group scheduled to meet in Doha this month to discuss an accord on capping output, Saudi Arabia’s Mohammed bin Salman signaled in an interview with Bloomberg that if any country raises output, the kingdom will also boost sales. Prices on Friday sank more than 4 percent after the comments. Iran previously said it plans to boost production after the lifting of sanctions following a deal to curb its nuclear program.

 

Saudi Arabia, Russia, Venezuela and Qatar in February first proposed an accord to cap oil output to reduce a worldwide surplus and boost prices. Brent prices in London have gained nearly 40 percent from the 12-year low reached in January.

But what was most notable is that Russian oil exports rose 10% to 5.59 million barrels a day, according to the Energy Ministry data. This is just the start because as we wrote two weeks ago, according to Reuters calculations based on Energy Ministry data, Russia will have as much as 4.3 million tonnes of idle refining capacity next month, more than twice the 1.9 million tonnes unused in March. Russian refineries traditionally have the largest offline capacity in April, as companies scramble to finish maintenance before consumption of oil products peaks in summer.

This forces producers to divert crude towards exports, because there is nowhere to store the oil that otherwise would have gone to refineries.

 

This means that as soon as next month, there will be an extra 2.4 million tonnes of extra oil being exported by Russia; how this oil will be sold to some willing end buyer without crushing oil prices in what is already a 3 million barrel/daily oversupplied market, is unknown.

The Russian export glut is already starting to be felt, and that may be just the beginning: two additional factors may push oil supply in the open market materially higher in the coming weeks. The first as we previously explained is that up to 30 million barrels in floating storage may soon come onshore as the sliding contango makes offshore storage no longer economical. The second as also previously discussed is that some shale oil producers, including Oasis Petroleum and Pioneer Natural Resources Co, are activating drilled but uncompleted wells (DUCs) in a reversal in strategy that threatens to bring more crude to a saturated market and dampen any sustained rebound in prices.

Taken together these factors perhaps explain why oil tumbled on Friday as stocks made another 2016 high.

via Zero Hedge http://ift.tt/1Y6Rdse Tyler Durden

Submitted by Carmen Elena Dorobat via The Mises Institute,

On the eve of World War II, Keynes delivered the following chilling address on the BBC, talking about the "grand experiment" of curing unemployment through war expenditure:

Two years later to the day, in a lecture delivered shortly after his arrival in the U.S., Mises described what the great experiment really looked like:

We are witnesses to the most frightful and phenomenal occurrence in human history: the decay of Western civilization.

 

London, one of the centers of this civilization… is almost completely destroyed. The buildings of the Parliament of Westminster are in ruins; the House of Commons holds its assemblies in the catacombs. […] 

 

The theater of war is spreading, and the day seems not distant when peace will have lost its last refuge. It is a moral and material collapse without precedent.

Are we really set to revisit this disgusting Keynesian Endgame once again?

A similar situation had occurred in the US in the 1930’s.

 

What solved the question? War! Because World War II had occurred during the 1940’s and that became the solution for the United States. So, let’s look at the entrepreneurs in Japan. They are stuck with the deflationary mindset.

 

They have to switch their mindset and should start making capital investments. We are looking for the trigger.

via Zero Hedge http://ift.tt/1REM72z Tyler Durden

While the Obama administration has been vocal about its intentions to limit access to guns for Americans across the nation, in the process achieving the opposite and leading to record gun sales, FBI firearm background checks that just hit an all time high for the month of March…

… and record stock prices of US gun makers such as Smith and Wesson, perhaps it should focus on what has become the epicenter of ground zero for violence and gun homicides in the US: Obama’s “home town” of Chicago.

According to a CNN report, gun violence in the windy city is on track to post its worst year in the 21st century, the result of an unprecedented surge in gun deaths in the first three months of the year.  By March 31, 141 people had been killed, according to the Chicago Police Department. On Thursday, eight were shot and two of them died in one hour alone, Chicago Police said.

The 141 deaths in the first three months of the year mark a 71.9% jump from the same period in 2015, when 82 people were killed. It’s the worst start to a year since 1999, when 136 people died in the first three months the year, according to the Chicago Tribune.

At that pace – an average of three killings every two days – Chicago would have 564 homicides by the end of the year. That would eclipse the 468 killings recorded in 2015 and 416 in 2014.

 

Overall, shootings have also skyrocketed. According to data provided by Chicago police, the number of shootings in the first three months of the year jumped from 359 in 2015 to 677 in 2016 – an 88.5% increase.

 

The result are countless stores of personal tragedy. For example, eighty-year-old Betty Johnson has lived in Chicago’s Roseland neighborhood since 1968. She raised two children and several grandchildren on the city’s far south side, where she has lived her entire life.

After her granddaughter Sabrina was killed in a car accident in 2008, Johnson gained full custody of her great-grandson Andre Taylor.

She looked on proudly as he busied himself with swimming, football and karate. She knew the dangers someone his age faced if he spent too much time on the streets of Chicago.

 

On a Sunday night in March, her worst nightmare was realized. Andre, 16, was shot in the head and killed just a block from his home.

 

“It has gotten much worse out here,” Johnson says, standing outside her home and looking out onto the streets she knows so well.

There was gang violence when Johnson was growing up, “but you never heard anything like what’s going on today,” she says.

And it’s getting worse. Another example is 14 year old Tyjuan Poindexter.

Michael Gabb knows the pain Betty Johnson feels all too well. He helped raise his grandson Tyjuan Poindexter. The 14-year-old had never been in serious trouble, and Gabb was raising him in his home in the Kenwood neighborhood.

 

He believes Tyjuan was mistaken for a gang member when he was killed in a drive-by shooting just a few blocks from his home. Gabb told CNN six months ago he was hopeful police would find the people responsible. Mayor Rahm Emanuel even paid a visit to Gabb’s home to offer his condolences.

 

Almost six months later, Gabb is still hopeful his grandson’s killer will be found. But he thinks it may only happen if someone steps forward with information.

 

He hopes things can change so others don’t suffer the same fate as his grandson. But how that change will occur and what’s causing the violence is something difficult to narrow down to one definitive explanation.

 

Gabb, like many residents and advocates throughout the city, agree that there are several contributing factors; some old, some new.

What is perplexing is that even the ordinary people are getting it: “I think it’s got something to do with economics,” Gabb says of the continued shootings. As CNN adds, most residents say communities continue to suffer from an economy that is nowhere strong enough to keep at-risk youths from looking for financial support in the wrong places.

“There’s not enough money to sustain certain families and people go into drugs,” Gabb says.

However, and very sadly, it is none other than the president who insists that anyone suggesting the US economy is in dire shape is “peddling fiction.” In other words, classic denial of what is happening in his own back yard.

It’s hard for longtime community pastor Ira Acree to watch. He has been serving the Austin community on Chicago’s West Side for 26 years.

“It’s horrifying,” he says. “It’s horrifying to look at the numbers from this winter, because if it’s that bad in the winter, we better brace for a long, hot summer.“

And since it is indeed the economy’s fault, it is about to get much worse. Acree, like Gabb, believes the struggling economy in many communities is a big part of the problem.

“All of the violence is rooted in the illegal drug economy,” Acree says. “Many guys have allowed their economic desperation to cause them to resort to these measures. The economy is terrible, especially in African-American neighborhoods.”

Acree says the violence is the worst he’s seen since the 1990s, and he’d like to see a state of emergency declared for wide areas of the city by President Barack Obama, who called Chicago home for so many years.

The lament is one heard across most poor areas in the US: “I’m hoping that some money is invested in some job creation. We bailed out Wall Street, why not bail out Main Street? It would make a world of difference,” Acree says.

“If you really want to stop this epidemic of violence, the best way to stop a bullet is with a job.“

Which is odd, because according to the BLS, jobs across the US are growing at a brisk pace of over 200K per month.

What is rarely mentioned, however, is the true state of affairs even for those with jobs, according to which the net income of virtually every social group of Americans has devolved dramatically in recent years. As a recent Pew survey showed, by 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent. This change in the expenditure-to-income ratio in the years following the financial crisis is a clear indication of why and how households feel financially strained. 

 

But that will be ignored as the myth of a recovery has to be perpetuated at all costs.

Meanwhile Chicago is disintegrating and as long as the culture of denial persists, there is no hope. The local residents know it too.

Jahmal Cole, 32, grew up in the city of North Chicago, about 45 miles from Chicago’s South Side. But in 2007, he moved to the Chatham neighborhood on the South Side, one of the toughest, to help young kids most at risk of falling prey to gangs and drugs.

“I think that we’ve developed a mentality in Chicago — we see ourselves part of the North Side, South Side,” Cole says.

If they tried to learn from others, or immerse themselves in other opportunities, Cole believes lives could be changed. His nonprofit organization, My Block, My Hood, My City, is dedicated to providing young people with opportunities to see things they don’t even know exist.

“They don’t know what’s available,” he adds. “They don’t know the museum is open Tuesday nights. Many of these kids have never even seen the lakefront in their entire life.” Many will never see a lifestyle different from one where squad cars are part of the norm and the constant hovering of police helicopters is more known than a YMCA. It’s a way of life he views as “traumatizing” to the children and part of a cycle he is trying to break.

He knows there isn’t one easy fix: “I don’t think there’s a program a policy or a resolution that’s going to solve violence in Chicago,” Cole says. He believes many teens and residents suffer from what he calls “poverty of imagination.” Cole hopes to bring new experiences to one child at a time and hopes that will make a difference.

But for Betty Johnson, as she stands outside her longtime home, thinking about all of the years she’s lived in Chicago, there isn’t as much hope as there is sadness anymore.

“I feel sorry for all of these young kids coming up today,” she says. Johnson wishes she could do more to save her other grandkids from the streets of Chicago and from the same fate as her great-grandson Andre.

“If I wasn’t so old, I’d take the other grandkids that are living with me and go so far up in the country, it would take three hours to get to me,” she says. “It’s just so bad that this is the way we have to live.”

Meanwhile, anyone who dares to expose the naked, if heavily armed emperor, will continue to be accused by those tasked with fixing the economy for all, not just for the 1%, as perpetuating the peddling of fiction. Sadly, it may be the ultimate disintegration of this city that forces the administration, either the current one or the next one, to wake from its stupor.

Until then, thousands more will die.

via Zero Hedge http://ift.tt/1Rw0IRf Tyler Durden

Submitted by Jesse Felder via TheFelderReport.com,

Over the past few years I’ve written a fair amount about the record-high levels of corporate profit margins. I’ve been focused on this topic because corporate earnings are one of the most popular ways to value equities thus the sustainability of record-high profit margins should be an issue of great concern to investors. If profit margins revert to historical averages, earnings-based valuation measures investors are using to justify investment in equities today could quickly go against them making stocks appear much more expensive than they do currently. And this process may now be underway.

To the point of mean reversion in profit margins, in the past I have referenced the words of a pair of investment legends. Jeremy Grantham has called profit margins, “the most mean-reverting series in finance.” And back in 1999, Warren Buffett explained why:

In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well. In addition, there’s a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems—and in my view a major reslicing of the pie just isn’t going to happen.

Both of these two gentlemen clearly believe, and very strongly, that corporate profit margins have an equilibrium. They can rise above or fall below that equilibrium but the very nature of capitalism, along with its social contract, will force an inevitable reversion to the mean.

I believe there are three major factors behind the recent bubble in corporate profit margins.

First, and most obvious, is the simple trend in interest rates over the past 35 years or so. As rates have fallen to lows not seen in many generations, debt has become much less costly, especially when you also consider that corporate spreads on top of these ultra-low rates have also fallen to ultra-low levels.

Second, corporate taxes as a percent of income have been falling for a long time, as well. Recently, this may be due in large part to the growth of tax avoidance strategies, mainly those involving relocating corporate headquarters to tax havens.

Third, labor costs have also been falling for quite some time. Much of this may be due to the trend toward automation and, perhaps far more so, the offshoring of labor over the past several decades. This falling corporate cost is very apparent in the labor share of income numbers that many have discussed recently, including Paul Tudor Jones.

These three secular trends have provided a tailwind for profit margins for a long time now. However, they may be reaching, or have already reached, their full potential and begun reverting. In terms of interest rates, the Fed Funds rate has essentially been stuck at zero for seven years now. Corporate spreads hit rock bottom almost two years ago and have been reversing course ever since. Furthermore, after a long period of deregulation in the banking industry that saw lending standards loosen considerably, it appears that regulation is making a sustained comeback and the effect will likely be just the opposite.

Politically, corporations are finding it increasingly difficult to defend their use of tax avoidance schemes. Politicians have been squawking about this for a long time but it now appears as if they are ready to actually do something about it. More and more companies are reporting growing political risk in this regard as new legislation is being introduced in a variety of countries to combat it.

Finally, the trend toward offshoring looks to be in the process of reversing as overseas labor costs rise and companies focus more and more on the potential quality and branding benefits of, “reshoring.” Google trends shows a surge in the popularity of this search term in recent years.

So I agree with Grantham and Buffett that profit margins are very likely to continue to revert to their historical mean, driven by the natural forces of capitalism, and its social contract. And this will most likely be seen in either the rising cost of debt, taxes or labor, or perhaps all three.

In the short-term, history suggests the current profits recession very likely will lead to an economic recession accompanied by a bear market. In fact, profit margin peaks regularly lead major stock market peaks and profit margins peaked this cycle about four years ago already. In addition, the recent fall in earnings and profit margins is already beginning to damage those earnings-based valuation measures. The S&P 500 now trades at its highest price-to-earnings ratio since the bull market began even as the index remains well off its recent price highs. And profit margins still could have a long way to fall before even reaching their average level since 1950.

Longer-term, if these new secular trends working against profit margins are to remain in place, earnings growth will be much harder to come by for corporate America than it has been over the past few decades. And there are plenty of signs it is already becoming very difficult for them. Corporate cash flow has essentially been flat for the past five years. At the same time, more and more companies recently have resorted to financial engineering via buybacks, non-GAAP reporting and even outright fraud. My guess is this is all in an attempt to make up for broadly slowing organic profit growth due the these secular tailwinds shifting to headwinds.

Should these shifts actually turn out to be longer-term secular trends, they pose a great risk to equities in both the short-term and the long-term. Falling profit margins and rising valuations (as earnings fall) make for a pretty bearish one-two punch for the stock market. I can’t imagine investors being very eager to pay higher valuations for companies growing more slowly. That equation usually works in reverse. And there’s no reason I can see to expect these challenges to corporate profit margins to let up any time soon.

via Zero Hedge http://ift.tt/1RTIawg Tyler Durden