Double Whammy Eh Hoser? Part II
Today's "healthy" corporate balance sheets are actually being propped up by currency devaluations and Forex manipulation, amongst other things.
The money "locked up" in "healthy" corporate balance sheets is being committed to valuation propping mechanisms such as stock buybacks, LBO and M&A activity.
Q206 set a record $116B in repurchases, announcements through only August totaled $507B, shattering last years record $470B and posting an 88% increase YOY.
This does not qualify as capital business investment in long term durable economic activities. Such a massive misallocation of capital can cause a nasty chain reaction.
The root cause of this financial misbehavior has been the central banks misapplication of "industrial capitalism" economics to the new finance "money shuffler capitalism".
Since 2001, central bank loose money policies havs caused a tidal wave of global liquidity. Current money supply growth rates: Euro +8%; UK +14%; Australia +10%; India +20%; China +18%; South Africa +21%; Russia +45%.
During this period commodities soared, gold set a 25 year high, crude oil an all time high and US home median prices increased 57%. But to truly put the situation in perspective, one must observe 10 year US treasury bond yields.
In mid June 04 when the Fed begin raising rates the 10 year bond yield was 4.80%. Today after raising 400bps in 24 months, the 10 year yield is 4.62, 18 basis points LESS!!!
If PPI numbers are to be believed, Fed Funds @ 5.25% and PPI @ 4.5% gives a 0.75% rate. Europe and Japan have -3% repo rates with their rates 3% below their PPI. This loose money is what is fueling commercial lending, M&A and LBO's.
We now believe that any potential chain reaction may play out differently than previously expected. ANY combination of layoffs, pullback in demand or higher interest rates would exacerbate the situation, but NONE are required for this scenario to play out.
The mere fact that demand was artifically created combined with the lack of a durable economic base, and asset price levels that are no longer supportable, is enough. More to come in Part III next week.
The money "locked up" in "healthy" corporate balance sheets is being committed to valuation propping mechanisms such as stock buybacks, LBO and M&A activity.
Q206 set a record $116B in repurchases, announcements through only August totaled $507B, shattering last years record $470B and posting an 88% increase YOY.
This does not qualify as capital business investment in long term durable economic activities. Such a massive misallocation of capital can cause a nasty chain reaction.
The root cause of this financial misbehavior has been the central banks misapplication of "industrial capitalism" economics to the new finance "money shuffler capitalism".
Since 2001, central bank loose money policies havs caused a tidal wave of global liquidity. Current money supply growth rates: Euro +8%; UK +14%; Australia +10%; India +20%; China +18%; South Africa +21%; Russia +45%.
During this period commodities soared, gold set a 25 year high, crude oil an all time high and US home median prices increased 57%. But to truly put the situation in perspective, one must observe 10 year US treasury bond yields.
In mid June 04 when the Fed begin raising rates the 10 year bond yield was 4.80%. Today after raising 400bps in 24 months, the 10 year yield is 4.62, 18 basis points LESS!!!
If PPI numbers are to be believed, Fed Funds @ 5.25% and PPI @ 4.5% gives a 0.75% rate. Europe and Japan have -3% repo rates with their rates 3% below their PPI. This loose money is what is fueling commercial lending, M&A and LBO's.
We now believe that any potential chain reaction may play out differently than previously expected. ANY combination of layoffs, pullback in demand or higher interest rates would exacerbate the situation, but NONE are required for this scenario to play out.
The mere fact that demand was artifically created combined with the lack of a durable economic base, and asset price levels that are no longer supportable, is enough. More to come in Part III next week.
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