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Thread: Elaine cuts through the bullS#!t like nobody else does ...

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    Default Elaine cuts through the bullS#!t like nobody else does ...

    (snip)"We are seeing this at home with negative savings rates that have been worsening steadily. The financial confusion sown by Greenspan when he dropped rates to a ridiculous level in 2002 still reverberate. Our banking system is out of whack, prices of assets rose much too high, all sorts of mischief is going on. I read in the Wall Street Journal today, much of the buying on Wall Street is actually big business buying not just each other but itself! Five years ago, buy-backs of stocks was only $25 billion. Today, it is $120 billion! Here is a thumbnail sketch of what is happening:



    Of course, Wall Street would love to see this go on forever. But they know it can't. I would sugggest we are about at the high point for this sort of mastrubatory fun. Of course, this should be headline news. Just like it should have been headline news that Japan goosed up its M1 rates by 40% at the beginning of this infamous 'liquidity' cycle. The TV talking heads have been screaming at the bears that they are stupid because proof that all is well is the fact that Wall Street's stocks are rising in value! But if even only 15% of this is due to record buy backs and another 50% is due to buy-outs, this is bad news. "(snip)

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    continued ...

    (snip)"o go back to the top here, if there is lots of money available because the Federal Reserve drops interest rates super-low and the Bank of Japan pumps half again more money into the banking systems, we get good times rolling. But this is now over. Unlike Japan, China has the ability to sponge up much of the wealth it creates. Indeed, it has soaked up so much liquidity from the US and Japan, it is growing much too fast and the Bank of China is trying to stop this flood of easy money. They even have taken some of it and are now using it to run hedge funds...here. This isn't to strengthen our economy, by the way. None of this strenghtens our economy.


    From Bloomberg:

    Federal Reserve Chairman Ben S. Bernanke said policy makers need more data to assure them that inflation is slowing before they can be confident that risks of faster price increases have subsided.

    ``The month-to-month inflation numbers are very noisy, and so a couple of good numbers does not by itself mean that the problem is solved and gone away,'' Bernanke told the Senate Banking Committee today. ``Part of it is simply seeing more data and getting a greater sense of assurance that the trend is really in the direction we would like to see it.''


    It irritates me that Bernanke and his gang will tell us, gas prices have nothing to do with inflation when these prices go up and up and up. The instant it drops even a penny, they rush out and crow that inflation is now undercontrol! It never fails to happen. Gas prices are not 'inflation'---they are whatever the Exxon/Mobile and the other giants say it is! And when the prices drop, inflation isn't banished. Gas prices do affect many things including our pocketbooks.


    But all the Fed has to do, if their job is to judge inflation's effect on us humans, is visit some people at the bottom half of our economic dogpile and go shopping with them and pay the rent, etc. Then they can track this every month for several years. Voila! Inflation figures!"(snip)

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    Enengy goods (i.e. gas) have been left out of the inflation indexes because they are much more volitile, and skew snap shot data significantly. The thought is that enegry prices will work their way into the cost of goods over time at a much more steady pace, creating a clearer picture of the trend in consumer prices. FWIW, rent is included in CPI.

    Thats been the philosophy. Im not sure i agree with it though.

    To Bernanke's credit, he has been an inflation hawk, and you can see that in his unwillingness to move interest rates down in the face of declining growth.

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    ^^^ Bernanke is no dummy, and knows that moving interest rates down would absolutely tank the US dollar ... and along with it the US stock and bond markets as foreign investors would run for the exits to avoid further exchange rate losses. On the other hand, Bernanke also knows that moving interest rates up would absolutely tank the US housing market and probably a majority of US financial institutions having exposure to 'subprime' real estate, auto, and credit card debt.

    As to the jiggering in the inflation indexes, there are far more sources out there that would tell you that the exclusion of energy as well as many other 'tweaks' to the index formula are done for far more nefarious purposes than producing a 'clearer picture' .... for example.

    In fact there is an entire website devoted to calculating the CPI (and other official statistics) by the 'old formula' used prior the days of hedonic adjustments, substitutions, including this but excluding that etc. Check out

    incidentally, this is their take on the reason for the changes in CPI methodology ...

    (snip)"In the early 1990s, press reports began surfacing as to how the CPI really was significantly overstating inflation. If only the CPI inflation rate could be reduced, it was argued, then entitlements, such as social security, would not increase as much each year, and that would help to bring the budget deficit under control. Behind this movement were financial luminaries Michael Boskin, then chief economist to the first Bush Administration, and Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System.

    Although the ensuing political furor killed consideration of Congressionally mandated changes in the CPI, the BLS quietly stepped forward and began changing the system, anyway, early in the Clinton Administration.

    Up until the Boskin/Greenspan agendum surfaced, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.

    The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

    The Boskin/Greenspan concept violated the intent and common usage of the inflation index. The CPI was considered sacrosanct within the Department of Labor, given the number of contractual relationships that were anchored to it. The CPI was one number that never was to be revised, given its widespread usage.

    Shortly after Clinton took control of the White House, however, attitudes changed. The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

    Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.

    The BLS publishes estimates of the effects of major methodological changes over time on the reported inflation rate (see the "Reporting Focus" section of the October 2005 Shadow Government Statistics newsletter -- available to the public in the Archives of . Changes estimated by the BLS show roughly a 4% understatement in current annual CPI inflation versus what would have been reported using the original methodology. Adding the roughly 3% lost to geometric weighting -- most of which not included in the BLS estimates -- takes the current total CPI understatement to roughly 7%."(snip)

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    Hence, why one should look at one's own life style costs to determine whether inflation is out there or not. It's like pornography - you know it when you see it.

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    I was looking at that graph... I have to disagree with Elaine that corporate buy backs are bad or are bouying our recent bull market more than any other reason. If corporate profits are high, a corporation can either dividend out the profits and the money gets double taxed, sit on the cash, or retire equity. Stock repurchases put value back in the hands of shareholders, where it belongs. Stock buy backs are a bullish signal, why would a company buy back it's own stock if they felt it was overvalued? Insiders would know more than anyone else if the price is good or not.

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    ^^^ if you had read more of Elaine's article re being 'awash in liquidity', you would see that in the majority of cases the stock buybacks are no longer being funded by corporate profits as they were ten years ago. Instead they are now being funded by corporations borrowing Japanese Yen at a very low interest rate, for example, and then using this borrowed money to buy back corporation stock shares. This increases the market price of that company's stock shares ... as well as increasing the net worth of corporate execs sitting on fat stock options for those shares. But it also saddles the corporation with additional debt (i.e. soaking up some of that 'liquidity'), it exposes the corporation to Yen vs US$ currency risk, etc. Ultimately this undermines the future long term performance / competitiveness of the corporation, which is not in the best interest of 'mom and pop' stockholders.

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    "Instead they are now being funded by corporations borrowing Japanese Yen at a very low interest rate, for example, and then using this borrowed money to buy back corporation stock shares."

    Sorry, my BS detector just went up. Name me one Fortune 500 that has initiated a major buy back program on the back of borrowing yen. Make sure to do your due diligence and check their latest 10k filing, then compute the D/E ratios before you drink Elaine's Kool aid.

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    Melonie, I may have spoken to fast... I found this article that is making me re-think this topic.. Taken from the WSJ, By PETER A. MCKAY and JUSTIN LAHART
    July 18, 2007.

    <snip>
    Companies are buying back their shares at a furious pace, one of the big reasons the Dow Jones Industrial Average is pushing toward 14000.

    The question is, how long can they keep it up?

    In recent weeks, companies as diverse as oil producer ConocoPhillips, health-care products giant Johnson & Johnson and discount retailer Wal-Mart Stores Inc. have announced ambitious buyback plans. In the first quarter alone, companies in the Standard & Poor's 500-stock index spent nearly $118 billion to repurchase their shares, more than in any previous quarter.

    Companies have increasingly resorted to buybacks -- which boost stock prices and per-share earnings by reducing the supply of stock in public hands -- as a way to return cash to shareholders. In doing so, they have supercharged the stock market's rally. (See related article.) <snip>

    <snip>
    Some companies are financing their share repurchases with borrowed money, which is likely to get more expensive if interest rates continue to rise. Meanwhile, corporate-profit growth has slowed this year, which will limit the cash available for buybacks.
    <snip>

    <snip>
    Federal Reserve figures show that nonfinancial companies took $128 billion worth of stock off the market in the first quarter. During the same period, they took on $130 billion in debt.

    Companies don't appear to be using those borrowings to finance new plants or equipment, says Northern Trust economist Paul Kasriel. "The data support the view that corporations are stepping up their credit-market borrowing in order to finance their share buybacks," he says.

    In some cases, companies may be doing so to keep themselves from becoming takeover targets for private-equity firms. In other cases, the strategy may merely reflect a view that the company can easily afford to carry more debt, and that using the cash raised to reduce shares outstanding benefits shareholders.

    For S&P 500 companies, the proportion of cash to debt on their balance sheets has held steady around 40% since 2003, about double the percentage in the late 1990s, according to S&P data.
    <snip>

    Ok, now my question for you is what do you personally think is drivng this? Fear of take over, insiders trying to pump up their stock to cash in on their options? I didn't read anything about foreign borrowing, but if you are going to borrow why not from the cheapest source? My mind is not made up yet, but its very interesting on many levels.

    Thanks for posting the article.

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    Quote Originally Posted by zach69 View Post
    "Instead they are now being funded by corporations borrowing Japanese Yen at a very low interest rate, for example, and then using this borrowed money to buy back corporation stock shares."

    Sorry, my BS detector just went up. Name me one Fortune 500 that has initiated a major buy back program on the back of borrowing yen. Make sure to do your due diligence and check their latest 10k filing, then compute the D/E ratios before you drink Elaine's Kool aid.
    Yen carry trade or not. Companies are using their debt to pay for buybacks, not profits. Largest example off the top of my head IBM, up over 10% since they announced the buyback.

    WAY TO DO YOUR PART WITH DOW 14,000 BIG BLUE!!!

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    This is because the way of money these days are debt and paper games. It sure isn't service (ask anyone who called customer service) nor is it products (not the poisonous shit coming out of China.)

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    Default Re: Elaine cuts through the bullS#!t like nobody else does ...

    bottom line is that the trillions of dollars that US consumers have spent on Japanese products have to get recycled back to the US somehow. If they can't be recycled, sooner or later the Japanese simply can't continue building an ever higher mountain of trade surplus US Treasury notes in order to prevent the yen from rising. For if the yen rises so do the prices of Hondas, Toyotas, Sonys, Panasonics etc., causing sales and profits to go *poof* and with them the Japanese economy.

    Up until 2 years ago, those same US consumers would wind up borrowing their own money back in the form of home mortgages which, at their root, were financed in large part by the yen carry trade. However, now that few homebuyers can still qualify for let alone afford mortgages, those trade surplus US dollars are being recycled into US corporate debt instead of US consumer debt, but via the same yen carry trade.

    a somewhat dated but very good explanation can be found at

    ~
    Last edited by Melonie; 07-23-2007 at 05:10 PM.

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