Best of the Week
Most Popular
1.UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - Nadeem_Walayat
2.Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - James_Quinn
3.UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - Nadeem_Walayat
4.Billionaire Investors Backing A Marijuana Boom In 2017 - OilPrice_Com
5.Emerging Markets & Basic Materials Stocks Breaking Out Together - Rambus_Chartology
6.Global Currency Reserve At Risk - Jim_Willie_CB
7.Gold and Silver: Your Stomach Is Probably Wrenching Right Now - The_Gold_Report
8.Warning: The Fed Is Preparing to Crash the Financial System Again - Graham_Summers
9.Basic Materials and Commodities Analysis and Trend Forecasts - Rambus_Chartology
10.Discover Why A Major American Revolution Is Brewing - Harry_Dent
Last 7 days
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17
Gold Stocks Coiled Spring - 12th Aug 17
Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - 12th Aug 17
How to Alton Towers Half Price Discount Entry 2017 and 2018, Any Time, No Pre-Booking! - 12th Aug 17
Top 3 Technical Trading Tools Part 2: Relative Strength Index (RSI) - 11th Aug 17
What Makes Women Better Investors - 11th Aug 17
Crude Oil Price Precious Metals Link in August - 11th Aug 17
Influencer Marketing Predictions All Businesses Should Take Into Account - 11th Aug 17
Really Bad Ideas - Government Debt Isn’t Actually Debt - 10th Aug 17
Gold Sees Safe Haven Gains On Trump “Fire and Fury” Threat - 9th Aug 17
Why Is The Stock Market Not Trading On Fundamentals Lately? - 9th Aug 17
USD/CAD - Can We Trust This Breakout? - 9th Aug 17
New Monthly Rebate to Help Reduce Your Trading Costs - 9th Aug 17
Stock Market Divergences Are Now Appearing! - 9th Aug 17
Is Inflation an issue or did the Fed Mess Up? - 8th Aug 17
Top 3 Technical Trading Tools Part 1: Japanese Candlesticks - 8th Aug 17
Researchers Find $10 Billion Hidden Treasure In A Dead Volcano - 8th Aug 17
What Happened to Thousands of Sheffield's Street Trees 2017 - Fellings Documentary - 8th Aug 17
Solar, Bubble, Banks, War, and Legal Tender: Five Reasons Why You Should Buy Silver Now - 7th Aug 17
CRASH - If Some People Do It, Nothing Bad Happens, But If Everyone Does It, All Hell Breaks Loose - 7th Aug 17
Gold and Silver : The Battle for Control - 7th Aug 17
Precious Metals Sector is on Major Buy Signal - 7th Aug 17
Stock Market - Has Time Run Out? - 7th Aug 17
Get Ready for an Historic Upside Gold and Silver Run - 7th Aug 17
BOOM! Bitcoin Rockets To New All-Time High As Cryptocurrencies Surge Higher! - 7th Aug 17
U.S. Dollar: This Crash Signals the End - 6th Aug 17
Predicting The Price Of Gold Is A Fool’s Game - 6th Aug 17
Asda Sales Collapse and Profits Crash! UK Retailer Sector Crisis 2017 - 6th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Chronicle Of A Debt Foretold - When Central Banks Buy Equities

Stock-Markets / Stock Markets 2016 Jan 23, 2016 - 03:17 PM GMT

By: John_Rubino

Stock-Markets

Critics of today’s fiat currency/fractional reserve banking world have (for what seems like forever) made the common sense point that when debt rises faster than cash flow, bad things are bound to happen. In every cycle since 1980 this has been dismissed by the vast majority who benefit from inflating bubbles — until the bubble bursts.


And here we go again. The following chart from Stock Traders Daily shows the relationship between margin debt (money borrowed by investors against existing stock positions in order to buy more stock) and cash on hand in brokerage accounts. The idea is that when investors hold lots of cash they’re pessimistic, and when they borrow a lot they’re optimisitc. Extremes of either tend to signal changes in market direction. At the end of 2015 investors were even more excited than at the peak of the housing bubble, indicating that there’s not much retail money left to be tossed at US stocks.

Margin debt vs free cash Jan 16

China, being a little more bubbly than the US, is a good indicator of where US margin debt might be headed:

China margin debt Jan 16

Another red flag is being waved by corporate debt, much of which is being taken on to fund share repurchase programs. These tend to benefit shareholders in the moment but at the cost of higher leverage and less flexibility in the future. Where in the past net debt has tended to track EBITDA (a broad measure of earnings). starting in 2014 the former has soared beyond the latter. Just as a spike in margin debt implies a lack of retail stock buying in the future, soaring corporate debt implies limited borrowing power and a scale-back of share repurchases going forward.

Corporate debt vs EBITDA

Based on both history and common sense, we should expect not just a slowdown, but a cratering of equity demand from both individuals and corporations in the year ahead. What happens then? Either the market crashes and prices go back to levels that attract wiser capital, or a new source of dumb money emerges.

And that would be government. Already, the Bank of Japan owns more than half of the Japanese stock market. And now China — displaying its customary cluelessness about what markets are and how they work — is countering the recent bear market with public (which is to say borrowed) funds:

China Vice President Vows to ‘Look After’ Stock Market Investors

(Bloomberg) – China is willing to keep intervening in the stock market to make sure a few speculators don’t benefit at the expense of regular investors, China’s vice president said in an interview.

Calling the country’s market “not yet mature,” Vice President Li Yuanchao said the government would boost regulation in an effort to limit volatility.

“An excessively fluctuating market is a market of speculation where only the few will gain the most benefit when most people suffer,” Li told Bloomberg News after arriving at the World Economic Forum’s annual meeting in Davos, Switzerland. “The Chinese government is going to look after the interests of most of the people, most of the investors.”

Li, 65, is the most senior Chinese official yet to underline the government’s readiness to intervene should the market turmoil of last summer and the start of 2016 continue. So far this year, the Shanghai Composite and the Hang Seng China indexes have both lost more than 15 percent, even as the central bank injects cashinto the system to drive down borrowing costs and boost the economy.

Companies exchanging long term bonds for equities and individuals using equities as collateral to buy more tend to distort equity valuations, but only temporarily, as the players’ finite borrowing capacity is eventually maxed out and the buying has to stop.

Governments are a different story, since they can create trillions of dollars with a mouse click. Their ignorance is thus a lot more dangerous because it short-circuits price disclosure on a vast, potentially open-ended scale.

When a central bank buys equities, it doesn’t have teams of analysts running valuation studies and creating model portfolios. Presumably it just makes across-the-board purchases, which tends to float all boats. So the wheat doesn’t get separated from the chaff and capital has no idea where to flow. Malinvestment becomes rampant and the result is, well, what we have today: Chinese ghost cities, Japanese zombie companies and US tech unicorns worth billions before generating their first dollar of earnings. And that’s before the Fed and European Central Bank really get going.

By John Rubino

dollarcollapse.com

Copyright 2016 © John Rubino - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife