There is the fantasy of the mainstream media’s earnings puffery, and then there is the reality of the Chart of Truth. The chart tracks negative to positive earnings and revenue guidance released by S&P 500 companies. As the bull market wears on, the ratio of negative to positive guidance in both areas has been rising.
What is particularly troubling is the rise in negative revenue guidance. Revenues are much harder to sandbag than profits, and US corporate revenue is basically stagnating while profits continue to grow at a slower pace. Moreover, P/E ratios have almost reached the peak achieved before the onset of the GFC in 2007.
The fundamentals indicate a range-bound indices, but it always takes time for the market to catch up with economic reality. In this time, we can all go bust shorting the thing.
Greece has no hope of ever exiting its depression unless large amounts of its government debt are written off by its Eurozone partners. Everybody involved in the bailout knows this but dare not say it out loud until after German elections. The 3rd bailout was constructed late last year to ensure that Greece would not require any more money before 2014, but Greece is always full of surprises. The country is behind on its privatization schedule and is running a health system deficit of over €1 billion more than projected resulting in yet another larger than projected deficit.
A 4th bailout is currently out of the question, but it will appear as if by magic shortly after German elections. In the meantime, the troika will keep Greece on life support by approving the next precious tranche:
But a week of talks in Athens, culminating in promises to reform the public sector, appeared to convince the troika of international lenders – the International Monetary Fund, the European Commission and the European Central Bank – that Greece is committed to rebuilding its economy.
By the way, read that last phrase. Is that what Greece is doing? It is actually destroying its economy by slavishly adhering to the euro. Let’s rewrite the passage above so that accurately reflects the facts:
But a week of talks in Athens, culminating in yet more Greek promises, appeared to give the troika of international lenders, the IMF, the EC and the ECB, the political cover necessary continue payments.
China is desperately attempting to slowly deflate its credit bubble so that it does not burst. A bubble has never exhibited this behavior. They always burst, but the mainstream media has a severe case of this-time-is-different:
As long as policy makers cushion the impact through fiscal and exchange-rate measures, the damage to the economy could be quite modest.
Economists are predicting that amidst this credit market turmoil, China managed to grow 7.5%. Now, that is the official number. In reality, China probably grew less than 5% based on exports, rail traffic and electricity usage.
The reality should not be surprising. China has relied on a massive credit binge since 2008 to maintain the growth necessary for it to avoid a Chinese Spring, but this cycle is coming to an end.
In Friday’s edition of Around the Globe we asked who will buy all of those German exports, and now we have our answer: nobody. Exports to the Eurozone in particular plummeted. Germany’s stagnating economic growth does not bode well for the Eurozone’s future prospects. It may be time to change the economic forecast and push the Eurozone’s recovery into 2014.
The rupee is off 20% from its peak in October, and this does not bode well for the Indian economy. India imports everything, and this stunning fall in its currency will raise the inflation rate. With relatively mild inflation, India has been able to lower interest rates for the last two years or so. These low rates have provided ample credit for the economy to grow, but this trend is set to change. The weakening rupee will force India to choose between stable prices and economic growth, and there will be political consequences no matter the choice.
There will be continued delays in restructuring Cyprus and its banks. The €10bn pledged is insufficient for the task, and completing the bank restructuring will reveal this truth. Hence, the restructuring will take place in the fall after a certain country has elections. Only when Merkel is safely reelected will she be able to continue throwing money into the widening maw of the periphery.