{short description of image}  


David Hay


Evergreen - GaveKal, EVA, Friday, January 18, 2019


This is the weekly GaveKal report from Friday, January 18, 2019 and one of a series of such reports focused on the 'Bubble 3.0'. The others in this series are listed below. The GaveKal EVA reports are available by subscription from Evergreen and are provided in PDF as well as email format. In my summary I will insert my own comments about the text but of course I can only mention the highlights and hope you will study the full reports. This is titled Part II, Part I was published on January 11th and should be read with this one. My comment is linked below.


Mr. Hay begins by noting that the surprise election of the outsider, Donald Trump, "radically changed conditions overnight". The election and his tax policies rejuvenated the stagnant market which soon began "discounting a 20% rise in profits", which in tern led to a "21.8% annual return". But 2018 witnessed a reversal and market decline as the Fed began raising interest rates. The declines were not limited to the U.S. But in the U.S. the housing market and auto sales were declining. There was a recovery in September, but there were more warning signs. Our author notes that he was not the only one who was "questioning the wisdom of the budget busting Trump-engineered corporate tax cut." (1) He numbers Lacy Hunt in that category. Although the official data showed a federal budget deficit of $800 billion, Mr. Hunt calculates that the real deficit was near $1.3 trillion. The difference, as usual, was the 'creative budget methods by which Congress claims that some expenses are 'off budget'.
(This is the method that President Clinton's fans can still claim that there was a surplus during two of his years in office.)

Mr. Hay continues, "Validating his view the government sold approximately $1.3 trillion in debt to finance itself. "And he cites Jeff Gundlach, who commented that the deficit is running at "$1.3 trillion this fiscal year and might end up at $2 trillion..


He continues, "the synchronized expansion aspect quickly faded as one nation after another started reporting disappointing growth numbers". He notes that housing prices began to decline. (And now we see also declines in new home sales). Likewise auto sales were declining. (And now we see closure of auto manufacturing plants.) He continues with more examples of underlying market weakness throughout 2018. His assessment: these were "classic warning signs the bull market might not make it a record breaking 10 straight up years."
(Something he had hoped for in a previous EVA, and the result was that it did NOT.)


In the following paragraph he repeats the view about the "budget busting Trump engineered corporate tax cut" (1) Indeed, the official deficit for the ending fiscal year of 9/30/18 was about $800 billion, Lacy Hunt writes $1.3 trillion. (But due to excessive spending,) Trump actually did attempt to reduce spending.


I agree with the author's assessment that there are "shocking aspects to this". The inability of Congress to stop exchanging real goods and services it finances in government taking by issuing more and more credit via the banking system.
He rightly notes that this "means an 8% of GDP deficit is providing in excess of 100% of the overall growth rate of around 5% (in nominal terms meaning inflation). For emphasis, it's taking 8% deficits to produce 5% growth!"

Exactly, what I have been arguing for ages, each added $1.00 of credit issue can only create much less than a dollar of added economic activity generating additional production. Most of it goes into increasing the nominal price of financial assets.


Mr. Hay turns to the failure of the separate provision in taxation of assets held abroad to generate as much return as expected and to then expand capital spending. Quite right, but why? Actually, manufacturing has increased and unemployment has reached historic lows, so the complex causes may be in, among other things, the great increase in productivity (more for less investment) due to the various aspects of automation and IT.


He refers to David Rosenberg's comment, 'The fiscal recklessness' ... in not 'ensuring the tax reform would be 'revenue neutral'.
That is the typical demand of the tax and spend progressives. But what does a 'revenue neutral' federal budget actually mean? The government takes production from the private sector and consumes it, and in exchange it creates money (of two types, currency and credit) and gives that to the producers. Then it takes back that same money, or a portion of it, by calling it a tax (instead of the past term, tribute). A 'balanced budget - revenue neutral' means government takes back 100% of what it previously provided. The 'welfare state' cannot function with a 'balanced budget'.


Our author next writes that this "massive policy error" was responsible for the "last hurrah' of the 'late, great bull market" and that we are already "in now a bear market".

Well, I have been claiming that 'we' have been in a secular bear market since circa 2000 with several cyclical bull markets generated by wild credit expansion and that this latest cyclical change from bull to bear is due to the slow down of sufficient credit expansion noted above, and another effort by government banks to reduce over all liquidity. The author's identification of the repeated "bubbles" are indeed the result or symptom of cyclical credit expansion and curtailment. Since circa 2000 the central banks - at the behest of welfare state governments - have been desperately fighting the deflationary epoch so well predicted by Professor Fischer in - "The Great Wave'.


He very loquaciously uses such terms as 'incredible fiscal profligacy" "monetary incontinence" "fiscal recklessness", "government stimulus run amok". Excellent.
He correctly points out "I would be remiss if I didn't point out how the concerted efforts of central banks to inflate the value of almost everything to dangerous dimensions has fed the worldwide populist backlash." The 'value' of almost everything is increased by the reduced 'value' of the metric by which it is measured, namely money. But in a fundamentally deflationary epoch the notional 'monetary measured' 'value of every thing historically (that is prior to the creation of central banks) did decline. The populist backlash has been generated because the population is smarter than the establishment elite believes.


He mentions the media phenomena known as AOC. She is another example of the typical 'elite' being more ignorant than the 'common people' and of the fawning effort of a major establishment media outlet to support establishment hegemony.


Next we read, "To his point, 80% of Americans live paycheck to paycheck and only 39% are able to cover a $1,000 unexpected expense out of savings."

First, how many Americans are instead living government supplied credit gift to credit gift since they do not receive a paycheck, as a result of having produced anything ?
Second, these above mentioned Americans are spending each week as if they were receiving larger paychecks. Why are they not saving? Because government policy and action, designed to increase dependency, discourages saving - both preventing it by taxation and discouraging it by assuring government support. Government wants and promotes consumption, not saving. (See Lord Keynes, for instance).
Third, as Frank Trentmann so vividly demonstrates in his book, Empire of Things: How we Became a World of Consumers, from the 15th Century to the 21st, Even the poorest citizens of the wealthy countries have become immensely wealthy in comparison with their ancestry and they hold their wealth in physical assets. (This is true to some extent also of the citizens of the poorest countries). The 'wealty' 10% that AOC and others denounce hold much of their 'assets' in the inflated financial paper that the central banks provide them.


Mr. Hay turns to the impact of the "pseudo-prosperity produced by gargantuan fiscal and monetary stimulus" on the housing market and the discouragement , if not prevention, of personal mobility, that is the ability to pack up and move, due to changes in housing prices.
So true, but the data he provides is misleading.


First he writes: "Homeowners with very low mortgage rates are understandably reluctant to pull up stakes and move if their monthly payment is going to rise by 40% (measured from the trough in mortgage rates to the recent peak)" Then, "'where the housing wealth is highly concentrated in the hands of the older generations while the young are largely priced out". ... And "the insanely low interest rates created by hyperactive central banks played a massive role in this triumph of inequity."

Lets' look at this. The 'low mortgage rates' of families 'reluctant' to move were those 'insanely low interest rates' the central banks created. So apparently these beneficiaries of the 'insanely low interest rates' are now being thwarted by a very small return toward historically higher rates. And those 'wealthy' older generation home owners DID pay very significantly Higher mortgage rates than either what the younger generation received from the 'insane' banks or what they might pay now if buying another home. I don't feel much sympathy. Plus, actually to a great extent the enormously high housing prices in the leading places such as San Francisco and Silicon Valley are related to the incredibly high incomes the younger generation computer whizzes are receiving in those locations.


Yes, as he notes, the monetary experiment has encouraged companies to join the leverage game to take advantage of the low interest rates they have been paying on selling debt - that is exchanging credit for cash - which they then use to buy back corporate shares and pay hidden option share price to executives. Someone will eventually pay the price for this game.


The author then rightly turns to the coming disaster in corporate and govenment pension plans (and union plans as well). He writes that, "It's my conviction that in the fullness of time we will learn how much wealth was destroyed by these retirement plans as they desperately seek to make up for the eradication of return on the crucial bond side of their portfolios."

That 'fullness' is rapidly approaching. Conditions are indeed "fragile". As I the author and I also note above the asset bubbles have indeed been 'serial".


Yes, many people, especially the young, are "losing faith in capitalism".

But this is not so much due to the actual economic reality - even with the real problems cited here - but due to their being taught that capitalism, and actually the entire hegemonic, masculine dominated, white rule on which it is based is immoral and must be overthrown. Yes, it is a "perverted form" - accurately termed 'finance capitalism'. The current radical progressive story about capitalism is just as erroneous and propagandistic as was Marx's story in the 19th century.


Mr. Hay notes his "high hopes that the current Fed chairman, Jay Powell" would act to correct the situation. And he has been disappointed.
Personally, I had no such hopes for two reasons. One, Powell's whole career and millions of net worth, are due to his insider position in banking and even hedge fund manipulation. He hardly wants to upset that gravy train. Second, the professional cadre of Keynesian economists in the Fed. will do everything to promote the establishment by monetary policy, just as the professional government department cadre will do everything they can to prevent President Trump from change in fiscal and executive branch regulation policy.


He comments on and cites the always cogent remarks of Danielle DeMartino Booth (required reading is her FEDUP and my review of same) in which she exposed the real Jay Powell. No one knows more about the real Fed, than she does.


He provides some relevant graphs at this point, which show the fallacy of Mr. Powell's assertions. And I should note that there are enlightening graphs supplied throughout this and the other EVA's.


Interestingly, at this point Mr. Hay notes that Evergreen has found some 'underpriced stocks' since the December 'decline'. But that there remain many that are still greatly over-priced. This was written prior to January 18, so, since the market appreciation since then, one must wonder if this is still so. Next, he notes that a "biggest bubbles is in profit margins" which will impact "earnings per share" which are also inflated.

Naturally, this is because all of these are calculated in the same false metric - the 'value' of money itself.


He informs the readers that Evergreen considers the metric - Price to Sales ratio - more useful (reliable) than the Price to Earnings ratio commonly cited by typical market analysts. That bit of information, by itself, is worth reading all the EVA's to find actionable recommendations.


He next cites the January 12th Barron's Round table, and its new member, Rupal Bhansali. I also was struck by her comments and recommendations in both of the articles. One of her valuable points is that just as there is 'fake news' today there also is 'fake earnings' reports. And, she advises, 'the US has the worst corporate governance' of the 50 countries she studies, when it comes to earnings reports.


I have read books in which the authors, professional accountants, claim that the entire structure of the US accounting standards which corporate accountants must follow are antiquated and drastically out dated because they do not include the real assets and liabilities of companies now in the knowledge based and fundamentally 'disruptive' economy in which we live.


Our perspicacious author concludes with an enlighteing (in a perverse way) quotation from Pocahontas Warren, who actually has the audacity to believe she should be President. She is fighting to avoid being outflanked on the left by AOC and Beto. She is promoting her Accountable Capitalism Act. An impossible to achieve pure example of public relations gameswomanship.



I disagree with the common notion, repeated here, that the reduction of the corporate tax Rate, was or is 'budget busting' actually total tax income has increased, as expected by dynamic accounting, and as it did with the initial Reagan tax rate reductions. Moreover, corporations do NOT pay taxes, all they do is collect the tax from their employees, owners, and customers. The corporate tax should be Zero. The budget deficit, as always, comes from excessive issue of credit in exchange for government confiscation of private sector production. -


The other GaveKal - EVA reports in this series: Note that the dates indicate they were published from time to time, in between Evergreen published its weekly reports on other subjects. They are all available at the Evergreen on line archive

{short description of image}

Biggest Bubble ever - Feb. 9, 2018

{short description of image}

Bubble 3.0 How Central Banks Created the Next Financial Crisis - April 27, 2018

{short description of image}

Bubble 3.0 How Did we Get Here Part I - June 1, 2018

{short description of image}

Bubble 3.0 How did we get Here Part II - June 8, 2018

{short description of image}

Bubble 3.0 A Fast and Furious Challenge - July 6, 2018

{short description of image}

Bubble 3.0 Up from the Ashes - August 24, 2018

{short description of image}
{short description of image}

Bubble 3.0 The Biggest Bubble Inside the Biggest Bubble Ever - Sept 21, 1018

{short description of image}
{short description of image}

Bubble 3.0 What Could Go Right _Oct 12, 2018

{short description of image}

Bubble 3.0 The Upside of Downside - Nov, 30, 2018

{short description of image}
{short description of image}

Special Edition EVA, The Stealth Bear Market - Dec 14, 2018

{short description of image}{short description of image}

What Price Prosperity? Part I, January 11, 2019

{short description of image}

What Price Prosperity? Part II, January 18, 2019


Return to Xenophon.