Salient to Investors:

David Stockman writes:

  • The bull market is dead, yet stock option addicted corporate executives are buying their own drastically over-priced shares hand-over-fist. Corporate stock buybacks and dividends are back to late 2007 levels of all of net income, lured by 80 months of ZIRP and $3.5 trillion of debt monetization by the Fed.
  • Q2 S&P 500 reported earnings are down 5.6% from the prior year and 8.2% since the cycle peak in Q3, 2014. GAAP earnings are rolling over. The S&P500 is at 2100, 35% above its October 2007 high, despite earnings growth over the last 8 years averaging only 1.72% per annum.
  • The market is expensive at 22 times trailing earnings given tepid earnings growth, the very long-in-the-tooth domestic business cycle, and global deflation gathering momentum, triggered by China’s meltdown following its 25-year credit binge.
  • China cannot bailout the world economy this time around because of the short-term dollar debts of Chinese companies and speculators, now at near 10% of GDP, versus 3% at the 2008 financial crisis. China, whose capital outflows during the last 6 quarters have totaled nearly $850 billion, is for the first time in more than 2 decades being forced to shrink domestic credit, sending shock waves through commodity markets, which are down 50% from their 2011 recovery peak and more than 65% from their pre-crisis peak.
  • Fixed investment in industrial capacity and public infrastructure in China reached $5 trillion in 2014, equal to Europe and North America combined and which has inflated the Chinese economy to dangerously unstable levels.
  • The coming deflationary cycle will erode corporate profits for years to come, with central banks now out of ammunition. China’s 20-year boom based on a 56 times explosion of fiat credit has caused unprecedented overcapacity worldwide across the board, and it is only a matter of time before price cutting destroys the profits of global corporations.
  • Massive monetization of the public debt does not jump-start growth in an environment of peak debt.

Hans Redeker at Morgan Stanley said short-term dollar debt of 9.5% of Chinese GDP is a level that in emerging markets is a perfect indicator of coming stress, viz the Asian crisis in the 1990s.

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