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Business/Finance See other Business/Finance Articles Title: On The Impossibility Of A Soft Landing While the robo-traders play tag with the chart points, it is worth considering how it will all end. After all, at today’s close the broad market (S&P 500) was valued at 24.3X LTM earnings per share. That is, valuations are in the nosebleed section of history, but financial history has tumbled into the sub-basement of future possibilities. Stated differently, every first-year spreadsheet jockey knows that what drives LBO models and NPV calculations is the assumed terminal year growth rate. Get imaginative enough about the possibilities out there, and you can come up with a swell return on today’s investment even if the next few years look a little rocky—-or even a lot so. So never mind that earnings have fallen five straight quarters and at $86.53 per share are now down 18.5% from their September 2014 LTM peak. Also, ignore the fact that this quarter will be down 10% and that there is no rational basis for a rebound any time soon. But somewhere behind the robo-machines which line the casino, there is a corporals guard of carbon units buying what Wall Street is dumping. And whether they know it or not, at 24.3X they are betting on one whopping big terminal growth rate on the far side of the deflationary turmoil now afflicting the global economy. Here’s the thing, however. The current deflationary wave is not a one-time detour which will pass in due course. Per the above analogy, we do not have merely two years of bad numbers in a 10-year LBO model with a robust terminal value at the end. What we have, instead, is merely the initial shock waves from the actions of central banks which are trashing the joint. Lurking on the other side, therefore, is an unfathomable risk, not extraordinary growth. In a word, the stock market is not worth even 15X its current earnings or 1300. At length, the carbon units out there catching today’s bouncing dead cats will thank their lucky stars if their losses are only 40% from here. The historical dead-end ahead is dramatically evident in the case of the BOJ and its lunatic detour into NIRP. And Japan is only following central bank policies recommended by Keynesians from the West and which are being followed, except for small nuances of degree, by the ECB and the Fed as well. The very last place on earth that can afford negative interest rates, however, is Japan. It’s an old age colony lapsing toward fiscal bankruptcy. In hardly a few years it will desperately need buyers for its government bonds who don’t count their wealth in yen. Yet Kuroda-san has just reiterated to the Japanese parliament that he can go deeper into NIRP if necessary or buy more securities under QEE——even if that turns out to involve upwards of $50 billion per year of ETFs in lieu of scarce Japanese government bonds. And “scarce” is hardly an adequate term. The BOJ is now buying more than 100% of Japan’s new fiscal debt issues, and those, in turn, account for nearly 50% of current spending. Yet after the madmen at the BOJ have purchased their monthly quotas, there are few bonds left to be found. Post Comment Private Reply Ignore Thread
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