Are indexes really higher, or is it the investors who are high?

[EJ]

Gasoline and S&P 500 make new highs, China diversifies into Wally Bucks, REITs cave... finally

On my way back to Boston from NYC, while standing beside my fast, gas guzzling, politically incorrect Infiniti FX, I filled the tank with Premium. For the first time I watch This Sale tick past $70. That was last week. This week filling the tank will cost more than $75. Across the nation, consumers are filling their tanks and thinking, Wow! Of course, the difference between this spike in gasoline prices and the one that hammered the economy in the 1970s is that the banking system hadn't figured out yet how to expand credit to fill the gap in loss of purchasing power of wage income. So far, expanding credit allows consumers to keep the tank filled for the Summer vacation.

Gas made not only a nominal high but reached an inflation-adjusted (real) peak price as well.

Retail Gasoline Prices Set New Record
May 22, 2007 (Stan Choe - AP)

Gasoline Prices at the Pump Set New Record at $3.20 Per Gallon, Crude Futures Jump

Retail gasoline prices climbed to another record Monday, while crude oil futures jumped above $66 per barrel amid concerns about gasoline supply heading into the peak summer driving season.

Cost-push inflation has been in the pipeline for so long that central banks will, sooner or later, have to do something about it. The "something" that they eventually do is certain to have unintended consequences, as it always does as both inflation and debt peak at the top of a credit cycle.

The S&P 500 made a nominal high but remains shy of its real peak. Of course, the news is not reported that way, leaving our European and Asian visitors to wonder if Americans are even aware of how uninteresting the US markets look from overseas.

Stocks Mixed After Record S&P 500 Close
May 22, 2007 (Madlen Read - AP)

Stocks Finish Mixed After Lifting S&P 500 Past Closing High for First Time Since 2000

Wall Street reached another milestone during a muted session Monday, when the Standard & Poor's 500 index briefly passed its record close of 1,527.46 for the first time in more than seven years.

But priced in euros, the S&P 500 hit a peak of 974 euros in 2000 and trades around 780 euros now.

Meanwhile, REITs, which have remained levitated by sheer investor willpower in the face of continued decline in housing prices, have finally started to reflect the reality of many years of price declines to go.

Stocks Can't Fall? Check Out REITs' Retreat
May 21, 2007 (Doug Kass, Street.com)

Back in early February, the real estate investment trust sector was the cat's meow -- it could do no wrong. Despite my pooh-poohing the sector's seemingly ridiculous popularity (and valuations) on Street Insight and even in a Barron's editorial, the group marched ever higher. Premiums to net asset value were at all-time record highs, dividend yields were at all-time lows (seemingly disconnected from the level of interest rates), multiples to funds from operations hit historically high levels -- and the entire sector was seen as takeover fodder.

[snip]

I will never forget a glib Wall Street conference call at the height of the REIT industry's popularity in January (the firm is not being disclosed to protect the innocent!) in which the senior REIT industry analyst said the IYR could easily tack on another $10 to the upside (from the $92-$93 level) based just on the recycling of capital from the cash-out of the Equity Office Properties capital. Oops!

The similarities between the former popularity and momentum in REIT shares -- which has seemingly evaporated overnight -- could (and should) provide a lesson to investors in the (broader) equity market today. The conditions are eerily similar: the ready (and glib) acceptance of a new investment paradigm, massive liquidity, a bubble in credit availability and terms, a plethora of merger deals and the feeding frenzy of share price momentum -- all are contributing to a REIT-like orgy.

Everyone has their own "it's a top" story lately, such as this story sent to us by a reader.

China buys, I sell

May 22, 2007 (Robert Peston - BBC)

It is the totemic deal of our age: the Chinese government is buying 9.9% of Blackstone, the leading US buyout firm, for $3bn (£1.5bn).

The creator of the global financial boom, China, has formed a partnership with one of the great manifestations and beneficiaries of that boom.

But it’s also quite an unnerving event. China’s desire to enjoy the private-equity spoils that its behaviour has created may signal the peak of this phase of global financial mania.

The Chinese government is trading low return dollar denominated US treasury and agency securities for higher return dollar denominated equity securities. Note that common denominator: dollars. Fewer government issued bonars, more of Wall Street's Wally Bucks. Hats off to Henry Paulson for keeping the money in dollars. Who says making China safe for Goldman Sachs isn't good for the country?

Peston is right about the deal indicating a mania peak, but misses the boat on the prediction that mis-priced risk will end it. Peston continues:

And there would come a moment when the price of these riskier assets would be ludicrously high by comparison with the price of a low-risk, US government bond – and at that moment, the bubble would be pricked.

Bubbles are not pricked by increased prices, they are simply made larger. The circumstance that the writer refers to will simply add more fuel to the as-yet unlit fire. The fire will be lit by accident, as iTulip's Carol S. demonstrates. (Not really. She's perfectly safe, unlike the speculators, er, we mean the "investors" in the global speculative bubble.) After it starts, the Fed and global central banks have promised to put it out, no matter how big the fire gets. We shall see.

Got a call from a Dow Jones reporter today asking, "Ok, when?" The answer is that we don't know when, or who, or what will ignite the fire. But one fact is certain. The 1990s stock market bubble created $5 trillion in fictitious capital that burned when the stock market went up starting in April 2000. Today the amount of fictitious capital created by Bubbles in Everything is several times that, so the economy will experience several times the negative wealth effect of the 1990s stock bubble after it vanished.

How much, exactly? $20 trillion? $30 trillion? We're working up some estimates. Stay tuned.

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[bill]

Re: Are indexes really higher, or is it the investors who are high?

And there would come a moment when the price of these riskier assets would be ludicrously high by comparison with the price of a low-risk, US government bond – and at that moment, the bubble would be pricked.[/indent]Bubbles are not pricked by increased prices, they are simply made larger. The circumstance that the writer refers to will simply add more fuel to the as-yet unlit fire. The fire will be lit by accident, as iTulip's Carol S. demonstrates.

The China Blackstone deal was a 3 billion dollar entry ticket purchased by the Chinese to introduce themselves as a new type of asset buyer getting into the long term game of purchasing US assets not just IOU’s (treasury bills). Today inside the summit stadium the US and China had their opening ceremony with one of the largest Chinese delegations ever to visit the US and the US greeting their future asset purchasers with open arms. What a turn out, all kinds of hand shaking, picture taking, posturing, opinions, forecast, predictions, ect.ect. all for shaping future policy to benefit all parties involved.
The reporters are coming out with all kinds of after the fact predictions, like this one at Reuters http://www.reuters.com/article/funds...70307220070522predicting the Chinese will buy up all kinds of goodies as if they are drunken sailors with a fist full of 50’s.
I predict the Chinese will take their sweet time and wait for the opportunity when assets get cheaper and sellers are real sellers not just flippers. Sure they will throw a few billion here and a few billion there but what assets have the Chinese really lined up to purchase? The Chinese announcing the coming to America to invest today in times when things are rosy was not by accident it was planned with timing applied. They would have a very difficult time coming here say in a couple of years when the economy is down or a bubble pop and people had lost a lot of money. If they show up when things don’t look so good they may have a image of a liquidator. So you enter when the window is open with the least resistant to get your foot in the door and be accepted. Then you work your way into the assets you desired when capital is needed (after Carol S. lights the cigar) and long term deals are attractive, similar to the ones I have been predicting such as infrastructure using the PPP. http://www.fhwa.dot.gov/ppp/index.htm

Live cast 5-24-07 http://transportation.house.gov/

[GRG55]

Re: Are indexes really higher, or is it the investors who are high?

...Sure they will throw a few billion here and a few billion there but what assets have the Chinese really lined up to purchase?...

Bill makes a good point. The Chinese just spent $3 B buying a non-voting share of a black-box fee-generating machine. Blackstone's clients are the primary owners of the assets in the Blackstone deals; a distinction lost on most of the mainstream financial media. The LBO boyz are transaction junkies, and China may have bought into Blackstone's fee stream near the top of the biggest M&A mania in history.

As for the "stuff" that China really needs, surely it has not escaped their notice that energy and resources M&A is dominated by trade players using their accumulated cash, not the Blackstones of the world. If the Chinese expect to purchase at lower prices they may be waiting a long time. An illustration is Inco, a 100 year old company with assets that cannot be replicated today at any price. CVRD did not have to gear its balance sheet to acquire this trophy nickel producer, therefore it is unlikely the Chinese will ever have an opportunity to acquire these assets, and others like them, in some sort of distress situation in the foreseeable future.

$3 B is inconsequential for both the Chinese and Blackstone; what I don't understand is why Peterson and Schwarzman didn't sell them more...

[Sapiens]

Re: Are indexes really higher, or is it the investors who are high?

what I don't understand is why Peterson and Schwarzman didn't sell them more...

I don’t think the Chinese wanted more. This is a game of illusion and perception. $3B did the job, why pay more? In addition, this is the Grand Chess game for control of the whole world, nothing less.

[Tet]

Re: Are indexes really higher, or is it the investors who are high?

I don’t think the Chinese wanted more. This is a game of illusion and perception. $3B did the job, why pay more? In addition, this is the Grand Chess game for control of the whole world, nothing less.

Very under rated point. $3 billion to keep an eye on these moneychangers seems like a pretty good deal. Cheaper than over the horizon radar and over the horizon missiles, the damage these moneychangers do is about the same.

[c1ue]

Re: Are indexes really higher, or is it the investors who are high?

Don't forget that China has the example of Japan to go from:

Many, if not most, of the US "assets" purchased by Japan in Japan's bubble era wound up losing tons of money.

More importantly, rather than hedge against Japan's bubble popping, these assets actually did worse than most other forms of investment - although the recent commercial real estate spike has reduced the relative delta.

Unlike the US, the people in power in China now were also very high up in the power structure 20 years ago, they have accumulated experience to draw from.

[slackful]

Re: Are indexes really higher, or is it the investors who are high?

I found this series of articles to be an interesting theory of where the liquidity is coming from, why, and how long it's likely to last.

http://econ.ucsc.edu/~mpd/Int%20Fin%20Stab.pdf

Who knew? We're in a fixed exchange rate regime again!

[grapejelly]

Re: Are indexes really higher, or is it the investors who are high?

I found this series of articles to be an interesting theory of where the liquidity is coming from, why, and how long it's likely to last.

http://econ.ucsc.edu/~mpd/Int%20Fin%20Stab.pdf

Who knew? We're in a fixed exchange rate regime again!

would you mind summarizing? I just cannot get my arms around 140 pages this morning. Although it looks worthwhile.

[zoog]

Re: Are indexes really higher, or is it the investors who are high?

Hopefully slackful will chime in, but I skimmed some parts towards the end and offer some snippets that may be useful. Highlighting is mine. For the record, I am not endorsing their conclusions, and am interested to hear what the bright minds at iTulip have to say.

Not agreed and under vigorous discussion is how long this system can last. Will it be a meteoric flash with a spectacular end soon to come? Or will it last for the reasonably foreseeable future? We package these questions here in an analogous question: Is the Revived Bretton Woods system at the point in its development where the original Bretton Woods was in 1958 or 1968 or 1971?

In a series of publications we have provided a fundamental underpinning for why we believe the system will last—that the situation today is more like 1958. We argue that the gains to the players from continuing their actions outweigh the costs that many have argued will arise in an endgame asset price shift or in unexploited benefits of portfolio diversification.

We view the fact of unusually low long-term real interest rates for this stage of the business cycle as a direct challenge to those who, exaggerating the importance of rumors about central bank reserve management practices, claim that the end is near.

The widespread view that the surplus regimes at the core of the Revived Bretton Woods system will come to a quick and costly end has likely been inferred in part from the recent experience of debtor emerging economies. Our interpretation of the experience of these surplus regimes is that they have been and may well remain durable and immune from financial crises.

The opinion that the U.S. current account deficit is unsustainable flows from a conviction that private international investors will be unwilling to continue to accumulate net claims on the United States. In this view, moreover, either the official capital flows that have partly financed the U.S. current account deficit will be overwhelmed by private sector flows, or governments will come to their senses in time to avoid a crisis. The usual dark warning is that the longer it takes the official sector to realize the inevitable truth, the harsher will be the consequences.

We fully agree with half of this prediction. Two years ago we predicted that private investors would become more reluctant to finance the U.S. current account deficit as official sector capital flowed in. We also predicted the very large appreciation of the euro and other currencies whose trade in foreign exchange markets is dominated by private capital flows. This was not unusual in itself. But we also argued that governments of a group of what we called “trade account countries” (countries where repression of private financial flows determine the real exchange rate and the current account balance) had good reasons to continue to invest in the United States for an extended period and that this would keep U.S. interest rates low, contrary to then-prevailing opinion. The length of this period is derived from an optimal rate of absorption of those countries’ unemployed labor. In our view of the real forces behind this system, this suggests a decade at least.

In the final three years of net reserve accumulation, the currency typically appreciates in real terms each year. ... in the average case, the government retreats from the market, the currency depreciates in real terms in the following year by 1.2 per cent, and the depreciation continues for two more years.

We find almost no support for the standard model, which predicts an eventual speculative attack on a strong currency. Episodes of net reserve accumulation coincide with growing current account surpluses. Reserve accumulations end when the current account surplus declines or (as often happens) swings all the way into deficit. Most important, the real exchange rate weakens at the end of accumulation episodes, and there is generally a small downturn in economic activity. Such a sequence is consistent with a variety of real and financial shocks to the surplus economy. But a real depreciation following the authorities’ decision to stop accumulating reserves is not consistent with a speculative capital inflow or a successful speculative attack. Recall that, in the standard model, the regime ends with a burst of inflation or a forced nominal appreciation of the currency, either of which would be associated with a real appreciation. We do observe “sudden starts” of private capital inflows to finance a current account deficit, but these are associated with a falling real value for the currency, presumably to generate increases in expected yields that draw private capital into the economy.

Let us reemphasize what we did not find in the data. We did not find sequences of reserve accumulation followed by revaluations that generated capital losses for the government. We did not find sequences of reserve accumulation followed by recessions generated by a real appreciation of the currency. This history suggests to us that the contemporary pattern of current account surpluses can continue in these economies until there is a major negative shock to demand for their exports. A cyclical downturn in the United States might be a likely candidate.

[Finster]

The New Communism

...

Everyone has their own "it's a top" story lately, such as this story sent to us by a reader.

China buys, I sell

May 22, 2007 (Robert Peston - BBC)

It is the totemic deal of our age: the Chinese government is buying 9.9% of Blackstone, the leading US buyout firm, for $3bn (£1.5bn).

The creator of the global financial boom, China, has formed a partnership with one of the great manifestations and beneficiaries of that boom.

But it’s also quite an unnerving event. China’s desire to enjoy the private-equity spoils that its behaviour has created may signal the peak of this phase of global financial mania.

The Chinese government is trading low return dollar denominated US treasury and agency securities for higher return dollar denominated equity securities. Note that common denominator: dollars. Fewer government issued bonars, more of Wall Street's Wally Bucks. Hats off to Henry Paulson for keeping the money in dollars. Who says making China safe for Goldman Sachs isn't good for the country?

Peston is right about the deal indicating a mania peak, but misses the boat on the prediction that mis-priced risk will end it. Peston continues:

And there would come a moment when the price of these riskier assets would be ludicrously high by comparison with the price of a low-risk, US government bond – and at that moment, the bubble would be pricked.

Bubbles are not pricked by increased prices, they are simply made larger. The circumstance that the writer refers to will simply add more fuel to the as-yet unlit fire. The fire will be lit by accident, as iTulip's Carol S. demonstrates. (Not really. She's perfectly safe, unlike the speculators, er, we mean the "investors" in the global speculative bubble.) After it starts, the Fed and global central banks have promised to put it out, no matter how big the fire gets. We shall see...

For all the commentary on this story we've seen, one omission is notable for its absence. Are we missing the Big Story?

This is state ownership of the means of production. And not confined to a "communist" country, but in the once-free United States of America. This is outright communism, folks. And this before we even get into the issue of it being ownership by a foreign government. What is being flown in here under the guise of the new "global economy"?

Where is this going?

Where are we going to draw the line?

[grapejelly]

Re: The New Communism

For all the commentary on this story we've seen, one omission is notable for its absence. Are we missing the Big Story?

This is state ownership of the means of production. And not confined to a "communist" country, but in the once-free United States of America. This is outright communism, folks. And this before we even get into the issue of it being ownership by a foreign government. What is being flown in here under the guise of the new "global economy"?

Where is this going?

Where are we going to draw the line?

The US government incurs increasing debt to finance its empire. The debt is then repatriated in return not just for US agency paper, but (surprise!) also for US companies and US real estate and US commodities (corn, beans, meat).

I have been reading Hans-Hermann Hoppe, and I highly recommend his books. He points out that a liberal economy can best fund wars, empire and expansion of its borders (either in reality or through influence and control). But that leads to less liberalism of course as taxes and the government parasitically absorb a greater and greater proportion of goods and services.

Where will it end? I think it will end in a complete collapse of the economic order. The rebirth will then happen, with free flow of people and capital across world borders made possible by the Internet and necessitated by a multitude of states that must compete through higher quality and lower costs ("taxes").

[Finster]

Re: The New Communism

The US government incurs increasing debt to finance its empire. The debt is then repatriated in return not just for US agency paper, but (surprise!) also for US companies and US real estate and US commodities (corn, beans, meat).

I have been reading Hans-Hermann Hoppe, and I highly recommend his books. He points out that a liberal economy can best fund wars, empire and expansion of its borders (either in reality or through influence and control). But that leads to less liberalism of course as taxes and the government parasitically absorb a greater and greater proportion of goods and services.

Where will it end? I think it will end in a complete collapse of the economic order. The rebirth will then happen, with free flow of people and capital across world borders made possible by the Internet and necessitated by a multitude of states that must compete through higher quality and lower costs ("taxes").

Ironic, isn't it? The US government's attempt to expand its power ultimately leads to loss of its own sovereignty. When you owe big time, your creditors have a say in just about everything you do. It's almost comical, for example, listening to the US administration lecture the Chinese on their currency - after having handed the Chinese all the cards. The ability of the Chinese to wreck our government bond market leaves it in the catbird seat. The solution? Sit tight while it gets control of our stock and real estate too.

I wish I could be as sanguine as you about the ultimate denouement of all this. The world has been busying itself with constructing a world government. Everything from the UN, to the WTO, to the IMF, to the World Bank seems aimed at erecting a government from which there will be no escape.

Or is it the same thing anyway? When everything and everyone flows freely across all borders, what borders do you have? You don’t. You have that one-world state from which there is no escape, that one-world government that rules all.

[bill]

Re: Are indexes really higher, or is it the investors who are high?

The China Blackstone deal was a 3 billion dollar entry ticket purchased by the Chinese to introduce themselves as a new type of asset buyer getting into the long term game of purchasing US assets not just IOU’s (treasury bills). Today inside the summit stadium the US and China had their opening ceremony with one of the largest Chinese delegations ever to visit the US and the US greeting their future asset purchasers with open arms. What a turn out, all kinds of hand shaking, picture taking, posturing, opinions, forecast, predictions, ect.ect. all for shaping future policy to benefit all parties involved.
The reporters are coming out with all kinds of after the fact predictions, like this one at Reuters http://www.reuters.com/article/funds...70307220070522predicting the Chinese will buy up all kinds of goodies as if they are drunken sailors with a fist full of 50’s.
I predict the Chinese will take their sweet time and wait for the opportunity when assets get cheaper and sellers are real sellers not just flippers. Sure they will throw a few billion here and a few billion there but what assets have the Chinese really lined up to purchase? The Chinese announcing the coming to America to invest today in times when things are rosy was not by accident it was planned with timing applied. They would have a very difficult time coming here say in a couple of years when the economy is down or a bubble pop and people had lost a lot of money. If they show up when things don’t look so good they may have a image of a liquidator. So you enter when the window is open with the least resistant to get your foot in the door and be accepted. Then you work your way into the assets you desired when capital is needed (after Carol S. lights the cigar) and long term deals are attractive, similar to the ones I have been predicting such as infrastructure using the PPP. http://www.fhwa.dot.gov/ppp/index.htm

Live cast 5-24-07 http://transportation.house.gov/

Perfect timing!
http://www.bloomberg.com/apps/news?p...eJw&refer=home

Morgan Stanley Said to Be in Talks With China's CIC (Update2)

By Christine Harper
Sept. 18 (Bloomberg)
China's state-controlled fund may buy as much as 49 percent of the New York-based investment bank, said the person, who declined to be identified because the talks aren't public and may end in no agreement. Morgan Stanley resumed its decline on the New York Stock Exchange, falling as much as 22 percent.

[GRG55]

Re: Are indexes really higher, or is it the investors who are high?

Perfect timing!
http://www.bloomberg.com/apps/news?p...eJw&refer=home

Perhaps "perfect" timing, but 49% says volumes. If that turns out to be the final interest, it means they haven't learned much from the Blackstone purchase (see my post earlier in this thread from that time).

[c1ue]

Re: Are indexes really higher, or is it the investors who are high?

You have that one-world state from which there is no escape, that one-world government that rules all.

I ain't volunteering to be Frodo.

I think EJ already has the Gandalf hat.

That'd make Jim Nickerson the grouchy dwarf.

Lukester the git.

Bernanke is Saruman.

King of of the Ring wraiths: Paulson

Sauron? Bodiless.

:eek: