Salient to Investors:

David Stockman writes:

Laszlo Birinyi says S&P 3200 will be reached by 2017 because there is no reason it cannot keep rising. Since first meeting Birinyi in 1986, I do not ever recall when he was not bullish on equities. His call is wrong because the central bank fed 30-year bull run is over.

The S&P 500 Index’s inflation-adjusted gain of 6.2% per annum since January 1986 compares to only a 2.2% annual gain in real GDP and therefore is unsustainable – two more decades at this spread and the stock market’s capitalization would be several hundred times larger than GDP. From 1956 through the eve of the Greenspan Fed, the Index’s inflation-adjusted gain rose by only 1% per year; while US GDP grew at 3.5% per annum, or 60% more than during the last thirty years.

From 1956-1986, real median family income rose from $36,000 to $60,000, or at 1.7% annually, but has risen less than $4,000 since, at only 0.2% per year. The reason the stock market has gained over the last 30 years in the midst of decelerating real GDP growth and stagnating family incomes is because the Fed’s balance sheet has expanded 22 times, or 11.5% per annum nominal, 9.2% real, and 4 times the growth rate of real output.

During this bull market run, household, business, financial and government debt outstanding has risen $50 trillion, versus only a $13 trillion gain in GDP. In the 100 years prior to 1971, debt rose at 1.5 times GDP growth in real terms: since then it has risen at 3.5 times real growth up to the financial crisis. This huge growth of debt and leverage has come despite the household savings rate declining since 1971, thus has not been funded from honest savings but from fiat credit. This would have caused consumer inflation but for China, the oil exporters and the Asia including Japan buying US dollars by printing huge amounts of their own money, thereby inflating their own currencies and suppressing their exchange rates, and flooding the world with artificially cheap goods. The tidal wave of wage compression flattened labor costs in the developed market tradeable goods industries and spilled over onto their suppliers.

In a world of honest money and credit funded from real savers, China’s exports could not have risen 40 times in less than 3 decades, or at 17% annually – China would have run out of capital to build cheap factories and would have suffered soaring exchange rate increases long ago.

East Asian central bank printing presses recycled the Fed’s monetary inflation back into US financial asset inflation, fueling a massive increase in stock market speculation, LBOs, stock buybacks, and M&A, and the real reason why US stock market capitalization has risen from 60% of GDP from Greenspan’s appointment to 200% today. The true rate of US productivity gain since the late 1980s is a small fraction of pre-1986 levels.

ZIRP, QE, and the Greenspan/Bernanke/Yellen “put” fuel a cycle of debt funded speculation that drives asset prices ever higher, which then become the collateral for an even bigger credit-funded bid for financial assets.

Since 1986, the sum of the market value of equities and credit market debt outstanding has risen from $12 billion to $93 trillion. This bubble cannot continue because the central banks have reached the limits of money printing.  When the Fed begins normalization later this fall, they cannot reverse course because a new round of massive balance sheet expansion would be a repudiation of the last 20-years of Fed policy and trigger a collapse of confidence and selling panic.

China built the biggest pyramid of credit and speculation in history – from a few hundred billion of domestic credit in the early 1990s to $28 trillion today – but capital is now fleeing, upwards of $800 billion in the last year alone. China’s central bank is having to sell its dollar liabilities and shrink the renminbi supply in order to keep its exchange rate from collapsing. The world’s central banks lack the firepower to keep inflating the global financial bubble.

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