All out of bubblegum

“I have come here to chew bubblegum and kick ass. And I’m all out of bubblegum.”

– ‘Nada’ (Roddy Piper) in the film ‘They Live’.


In memoriam: ‘Rowdy’ Roddy Piper, US professional wrestler and star of John Carpenter’s 1988 sci-fi satire, ‘They Live’.


‘They Live’ may not be John Carpenter’s best film, but over time it became a cult classic, in no small part due to a robust central performance by Roddy Piper, better known as a WWF wrestler. The plot, inspired by a Ray Nelson short story, ‘Eight O’Clock in the Morning’, has Roddy Piper as a drifter who comes across some special sunglasses. When worn, these sunglasses reveal the world for what it really is. Media and advertising extolling the virtues of conspicuous consumption are actually subliminal orders to obey and conform. Dollar bills, seen through the sunglasses, carry messages like ‘This is your god’. Society is split between an ever-widening underclass and a narrow, controlling elite – who just happen to be aliens in disguise. No, ‘They Live’ did not win any Academy Awards. The Chicago Tribune’s verdict is probably fair: “the looniest movie of the season and also one of the most engaging”.

Seen from the perspective of the financial markets in summer 2015, ‘They Live’ looks less like  dystopian science fiction and more like a state-of-the-art documentary on current western capitalism. ‘Developed world’-ers may chuckle at the antics of the Chinese authorities as they deploy ever more colossal kitchen sinks in their increasingly desperate attempts to keep their stock market afloat. The same western capitalists either wilfully ignore the artificially inflated asset markets pumped up by home-grown QE, or actively cheer them on. For anyone trying to invest unemotionally, objectively and scientifically, this is a treacherous market environment, in which pretty much all prices – equities, bonds, currencies – are being constantly distorted by the State.

Let’s assume, rather, that free markets of a sort are still operating across the world. In which case, price signals from two asset classes in particular – global commodity prices and emerging market share prices – should give western cheerleaders cause for concern. As Buttonwood in The Economist magazine points out, since the start of 2012, commodity prices have fallen by over 20%. Emerging market share prices, relative to developed markets, have fallen by over 30%. Combine these price movements with the near panic in China, and the outlook for world growth now looks somewhat less than buoyant. The word ‘deflation’ is now heard more often, with a sense of rising concern.

When you inhabit ‘Finance World’ you get a different perspective than the one from the real world, in which people create value, make tangible things and provide non-financial services to each other.  Doug Noland highlights the current trend of what he calls ‘Wealth illusion’:

“The U.S. economic structure remains viable – these days the “envy of the world” – only so long as perceived wealth from securities markets remains grossly inflated. The consumption-based U.S. economy requires record household sector perceived wealth (inflated Household Net Worth). And this requires ongoing loose financial conditions, strong Credit growth and buoyant financial flows..

“As a proxy for the “U.S. debt securities market,” I combine Fed data for outstanding Treasury, Agency, Corporate and muni debt securities. I then combine this with Total Equities to come to my proxy of the “Total Securities” markets. During Q1, Total Securities jumped $759bn to a record $73.195 trillion. Total Securities as a percentage of GDP jumped five percentage points to a record 414%. For perspective, this ratio began the nineties at 183%, concluded 1999 at 356% and then rose to 371% to end 2007.

“The value of U.S. Household (and non-profits) assets jumped $1.611 trillion during Q1. By largest categories, Financial Assets jumped another $1.07 trillion and Real Estate assets increased $500bn. And with Household Liabilities little changed for the quarter, Household Net Worth (assets minus liabilities) rose $1.6 trillion to a record $84.925 trillion. Over the past year, Household Net Worth inflated about $4.6 trillion, with a two-year gain of $12.6 trillion. Since the end of 2008, Household Net Worth has ballooned a stunning $28.4 trillion, or 50%.

“One cannot overstate the integral role the inflation in Household Net Worth has played in the Fed’s reflationary policymaking. Household Net Worth ended Q1 at a record 481% of GDP. This compares to 447% to end Bubble Year 1999 and 476% in Bubble Year 2007.”

Some of those figures are so staggering we feel obligated to republish them. US ‘Total Securities’ as a percentage of GDP now stands at a record 414%. Is there a risk that the US has become ‘oversecuritised’ ? That ‘Finance World’, especially in the US, has entirely subsumed the real economy ? Since the end of 2008, US Household Net Worth has grown by $28.4 trillion, or 50%. Did we ever have a financial crisis ? Did we ever have delevering ?

The US accounts for 57% of the MSCI World Equity Index. Any fund manager benchmarked against the MSCI is obligated to have at least half of his portfolio invested in US stocks no matter how expensive they are. Robert Shiller’s cyclically adjusted price / earnings ratio for the US stock market (CAPE) stands at roughly 27 times, versus a long run average of roughly 17. On this assessment, US stocks look very expensive. (Explicit Fed inflationism may yet drive them higher.)  Market breadth – or the lack of it – is a growing concern. Although the S&P 500 index is up by 2.2% year to date, the average S&P 500 stock is down by 0.7%. Just a handful of stocks are driving the US market higher. US stocks “feel” somewhat exhausted.

Ho-hum US economic growth – but with US stocks close to record highs. A slowdown in China (perhaps something worse). Falling commodities prices and falling emerging markets. What’s wrong with this picture ? It took special sunglasses for John Nada to see the world for what it really was. Today’s investor only has to open his eyes.