Warren Buffett's Favorite Indicator Just Flashed a Major Warning

It is clear stocks are in a massive bubble based on their Price to Sale (P/S valuation). 

What about the economy?

Warren Buffett once famously stated that his favorite means of valuing stock was the stock market capitalization to GDP ratio.

Below is a chart for this metric. As you can see, the stock market today is as overvalued relative to the economy as it was at the peak of the 1999 Tech Mania.

So stocks are overvalued based on the most reliable corporate data point (revenues) and they are also overvalued relative to the economy. Scratch that, they're not overvalued… they're trading at 1999-Tech Bubble insanity levels.

We all remember what came after that...

Fed Cred Dead? From "Definitely Transitory" To "Imperfect Understanding" In One Press Conference

When Janet Yellen spoke at her regular press conference following the FOMC decision in September 2017 to begin reducing the Fed's balance sheet, the Chairman was forced to acknowledge that while the unemployment rate was well below what the central bank's models view as inflationary it hadn't yet shown up in the PCE Deflator.

Of course, this was nothing new since policymakers had been expecting accelerating inflation since 2014.

In the interim, they have tried very hard to stretch the meaning of the word "transitory" into utter meaninglessness; as in supposedly non-economic factors are to blame for this consumer price disparity, but once they naturally dissipate all will be as predicted according to their mandate.

That is, actually, exactly what Ms. Yellen said in September, unusually coloring her assessment some details as to those "transitory" issues:

For quite some time, inflation has been running below the Committee's 2 percent longer-run objective. However, we believe this year's shortfall in inflation primarily reflects developments that are largely unrelated to broader economic conditions. For example, one-off reductions earlier this year in certain categories of prices, such as wireless telephone services, are currently holding down inflation, but these effects should be transitory. Such developments are not uncommon and, as long as inflation expectations remain reasonably well anchored, are not of great concern from a policy perspective because their effects fade away.

Appealing to Verizon's reluctant embrace of unlimited data plans for cellphone service was more than a little desperate on her part. Even if that was the primary reason for the PCE Deflator's continued miss, it still didn't and doesn't necessarily mean what telecoms were up to was some non-economic trivia.

Over the past few years, consumers have been hit with almost regular (not "residual seasonality") shocks to incomes that seem to be increasing in intensity as well as duration. These are, in effect, downturns within a downturn; short run drops or contractions inside an already lost decade. Acceleration of cheap might actually be the most logical of outcomes.

Rather than dismiss these continued problems in favor of fanciful bias towards monetary policy, it was of a far more scientific basis to wonder whether the Fed knows anything about inflation.

A lot has changed in official terms between September and December, which is to say in terms of inflation nothing changed. There is as yet no acceleration in the PCE Deflator (or CPI) that isn't someway connected to oil price effects. In November 2017, the BEA calculates that consumer prices rose by 1.76% year-over-year, up from 1.59% in October as gasoline prices rose 131% (month-over-month, annual rate).

Core rates that strip out energy prices, such as the Dallas Fed's trimmed mean, continue to undershoot and therefore suggest no momentum and zero upon which to base expectations for acceleration. It's not nothing that monetary policy has missed its target for sixty-five out of the last sixty-seven months, and ninety of the past 110 months going back to October 2008 and the botched monetary response to Lehman and everything before it.

Because of all that within the realm of inflation, meaning the monetary system, it has been more than fair or reasonable to ask whether economists really know what they are doing. Up until 2016, that was a question you weren't allowed to consider unless well outside of the mainstream. Since then, more and more policymakers are actually asking of themselves the same idea.

Having failed all throughout 2017, the year almost completely over, Janet Yellen's final press conference for December, then, was subtly changed from the prior one to at least admit that maybe they really don't know – trying hard not to make too much of a big deal about it.

We continue to believe that this year's surprising softness in inflation primarily reflects transitory developments that are largely unrelated to broader economic conditions. As a result, we still expect inflation will move up and stabilize around 2 percent over the next couple of years. Nonetheless, as I've noted previously, our understanding of the forces driving inflation is imperfect.

As a final official act, Yellen downgraded from "definitely transitory" to "imperfect understanding." This matters a great deal, for if their grasp of basic economic factors is this flawed (just an 18% hit rate in nearly 10 years) there's likely far more gone wrong than just the price effects of unlimited wireless data.

Bubble Watch: The Fed KNOWS We're In a "1999" Type Mania

The Fed raised rates another 0.25% on the last FOMC meeting.

This marks the 5th rate hike since the Fed embarked on its policy tightening in December 2015 and the fourth rate hike in the last 12 months. The Fed's latest statement also indicates it plans on raising rates three more times in 2018.

It is easy to gloss over the significance of this, but the Fed's actions are indeed unusual; other major Central Banks (the Swiss National Bank, Bank of Japan, European Central Bank and Bank of England) are all currently running QE programs (the BoJ, ECB and BoE) or openly printing new money to buy stocks outright (the SNB).

What precisely is the Fed doing? Why the urge to tighten when other banks are all printing new money by the billions?

The following quotes from Fed offer us clues.

Fed Monetary Policy Report, June 2017:

"Forward price-to-earnings ratios for equities have increased to a levelwell above their median of the past three decades,

Fed minutes, July 2017:

"Since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets."

Janet Yellen response to question from IMF Panel, October 2017:

Market valuations "are at high level in historical terms" when assessed on metrics akin to price-earnings ratios,

Fed Minutes, October 2017:

"In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances,"

Janet Yellen during Fed presser December 13th, 2017:

Stock valuations are at high end of historical levels.

I want to be clear on the significance of these statements.

The Fed's primary role is to maintain financial stability. This means that the Fed will always downplay risks in its public statements. Indeed, former Fed Chair Ben Bernanke once stated that Fed policy is "98% talk, 2% action."

With that in mind, the above quotes are astonishing in their clarity: the Fed isexplicitly stating (in Fed terms) that the markets are in a bubble. And the Fed didn't just do this once, the Fed has been warning about asset valuations/froth in the system for six months straight.

So just how "frothy" are things that the Fed is being so explicit?

Try "1999-levels" frothy.

Perhaps the best means of measuring frothiness in stocks is the Price to Sales (P/S) multiple. Most investors prefer to use Price to Earnings (P/E), but I am wary of that method because earnings can easily be fudged via gimmicks (different methods of depreciation, write-offs, reducing loan loss reserves, tax loopholes, etc.).

Sales, on the other hand, are very hard to fudge. Either money came in the door, or it didn't. And if a company gets caught fudging its revenues, someone goes to jail.

With that in mind, consider that the S&P 500's current P/S multiple has surpassed its former all time peak from 1999: a period that is now widely considered to be the single largest stock bubble in history.

Put simply, stocks are extraordinarily overvalued by a reliable measure.

H/T Bill King

We all remember what came after that...

China and Russia Now Have CRITICAL MASS To Dethrone King Dollar

The link is integrated: The Oil-Yuan-Gold triangle signed the death warrant, and the Gold Trade Note will be the dagger to the heart…

The many new integrated non-USD platforms devised and constructed by China finally have critical mass. They threaten the King Dollar as global currency reserve. Clearly, the USDollar cannot be displaced in trade and banking without a viable replacement for widespread daily usage. Two years ago, critics could not point to a viable integrated system outside the USD realm. Now they can. The integration of commercial, construction, financial, transaction, investment, and even security systems can finally be described as having critical mass in displacing the USDollar. The King Dollar faces competition of a very real nature. The Jackass has promoted a major theme in the last several months, that of the Dual Universe. At first the USGovt will admit that it cannot fight the non-USD movement globally. To do so with forceful means would involve sanctions against multiple nations, and a war with both Russia & China. Their value together is formidable in halting the financial battles from becoming a global war. The United States prefers to invade and destroy indefensible nations like Libya, Iraq, Ukraine, Syria, and by proxy Yemen. The USMilitary appears formidable against undeveloped nations, seeking to destroy their infra-structure and their entire economies, in pursuit of the common Langley theme of destabilization. In the process, the USMilitary since the Korean War has killed 25 million civilians, a figure receiving increased publicity. The Eastern nations and the opponents to US financial hegemony will not tolerate the abuse any longer. They have been organizing on a massive scale in the last several years. Ironically, the absent stability can be seen in the United States after coming full circle. The deep division of good versus evil, of honest versus corrupt, of renewed development versus endless war, has come to light front and center within numerous important USGovt offices and agencies.

The shape of the US nation will change with the loss of the USDollar's status as global currency reserve. The starting point for the global resistance against the King Dollar was 9/11 and the onset of the War on Terror. It has been more aptly described as a war of terror waged by the USGovt as a smokescreen for global narcotics monopoly and tighter control of USD movements. Then later, following the Lehman failure (killjob by JPMorgan and Goldman Sachs) and the installation of the Zero Interest Rate Policy and Quantitative Easing as fixed monetary policies, the community of nations has been objecting fiercely. The zero bound on rates greatly distorted all asset valuations and financial markets. The hyper monetary inflation works to destroy capital in recognized steps. These (ZIRP & QE) are last ditch desperation policies designed to enable much larger liquidity for the insolvent banking structures. Without them, the big US banks would suffer failure. They also provide cover for the amplified relief efforts directed at the multi-$trillion derivative mountain. In no way, can the global financial system tolerate unbridled monetary inflation which undermines the global banking reserves.

 

The Eastern nations have been organizing to end the USDollar abuse, which has suffocated economic growth and financed regional wars with motive to sustain the USDollar dominance. Their many non-USD platforms finally can boast at having critical mass, and finally are integrated with the most important link of all. The Oil-RMB-Gold triangle is the death warrant to the USDollar, and the Gold Trade Note will be the dagger in its heart.

 

One Belt One Road Cornucopia

It is also known as the Belt & Road Initiative (BRI). China has been promoting infra-structure development, but with the BRI, they have coordinated the funding agents, the consulting groups, the construction firms, and more. They have built a gigantic table, acting as a cornucopia for funding and completing a very large group of massive projects, all over $1 billion in value. Almost none will use the USDollar except in dumped securities in order to cover the costs. It is commonly called Indirect Exchange, since no US-based party is in the mix. The many US-based firms are largely excluded from the BRI contracts. Look for European firms to clean up, especially the Germans since they make friends well and provide world-class technology. The Belt & Road Initiative can be considered the project development arena for the burgeoning newly forming Eurasian Trade Zone, often called the Eurasian Economic Union (EAEU). It will not use the USD.

Asian Infra-structure Investment Bank (AIIB)

The AIIBank serves as a gigantic funding agency among the community of nations. Their projects seem to be focused on SouthEast Asia, but not completely. The British deeply angered the Obama Admin by joining the AIIBank last year, against urgent pressure from Washington. Soon a global entity, not just Eastern. The London City (sovereign nation within England) did not wish to lose out in the financial traffic involved in the many projects. The projects will expand beyond Asia, in time to connect Europe. London strives to gain an RMB Hub for both currency exchange and bond trading. Think Panda Bonds, like for Italian Govt debt issuance in RMB terms without any currency risk for Chinese investors. The AIIBank makes the Intl Monetary Fund irrelevant. The Chinese have a newfound dominant role in the IMF, to shut it down as a funding arm, but to ensure the Chinese Yuan currency becomes a bank reserves basis. Together, the Belt & Road Initiative and the AIIBank are the most important investment platforms in retiring the USDollar from its global currency reserve status.

BRICS New Development Bank (NDB)

This platform went quiet in the last couple years, as the AIIBank took away the attention for development. However, the BRICS are organizing better in the last several months. Their projects are entirely focused on BRICS nations, plus their neighbors in connection. The Jackass theory was that South Africa was suffering from high level political corruption, while India was suffering from high level financial collusion. Expect the SA problem to continue, but the Indian independence to come forth in a survival gesture. The BRICS NDBank is pressing forward, with renewed emphasis given by Russia & China for the purpose of gaining momentum. Another Jackass theory is that the New Development Bank will become a primary center for conversion of Western sovereign bonds into Gold bullion for bank reserves purposes. Refer to USTreasury Bonds primarily, but also to EuroBonds, UKGilts, and Jap Govt Bonds. Imagine the power of a central window for conversion of fiat major nation bonds into gold, after the USDollar is well recognized as having lost its global reserve currency status. The implication would be for fast removal of the USTBonds in the global banking system, replaced by Gold bullion. The NDBank could become an important catalyst.

Asian Development Fund

This fund is small and new, but is gaining traction fast, run independently from the USGovt for the benefit of Asian nations, mostly in the SouthEast Asian region. It is competing directly with the Asian Development Bank, led by the USGovt. The Asians do not wish for the United States to run their business development any longer, since assistance comes with a stranglehold and considerable coercion. It is no longer wanted.

Cross-Border Interbank Payment System (CIPS)

This payment system is a direct frontal assault on the SWIFT transaction payment system, as in bank to bank transfers. The USGovt has abused this system for political purposes like a financial weapon, causing severe repercussions and backlash. The Society for Worldwide Interbank Financial Telecommunication has a new rival, a strong one with stress test success. The CIPS does not stand for Chinese Interbank Payment System, but it is led and run by the Chinese. It will feature lower fees, faster transfers, and no interference with political motive. It is ramping up in volume, with numerous commitments for its future usage. The USGovt will lose its financial weapon used and abused to isolate nations which do not wish to trade (primarily energy products) using the USDollar.

Shanghai Oil-Gold futures contract

This contract came into being last August, but has not really gotten off the ground yet. It needed a link to the RMB fortress. Now that link has arrived. This contract served as a harbinger of linkage of the two most important commodities for commerce and currency with existing systems. It served as notice for the planned imminent death of the Petro-Dollar. It required completion of the triangle for its full effect.

Shanghai RMB-Oil futures contract

This contract completes the triangle, and will serve as the executioner for the USDollar death warrant. With the triangle completed, nations like Russia can sell China its crude oil (by whatever path or delivery method), accept RMB in payment, then quickly convert to Gold bullion within the same city of Shanghai. Think one-stop shopping that undermines the Petro-Dollar system at its core. Expect China to require many of its oil suppliers to use the Shanghai system for managing the forward price contracts, with implicit pressure. The key region to watch is the Gulf Region where the Saudis and their neighbor oil monarchies will line up to use these contracts in oil sales and payment systems. Most assuredly, rival Iran will use the triangle with high volume oil sales to China, keeping the oil price down in the process. However, as important as this triangle is for displacing the King Dollar from the financial catbird seat, more lies ahead. The Oil-RMB-Gold triangle will in all likelihood be used as the foundation for the upcoming Gold Trade Note, which will remove the USTBill as standardized payment instrument for Asian trade. The Gold Trade Note will have an equity placement in gold, a promise of gold payment upon product delivery, and a net settlement feature. If the Oil-RMB-Gold triangle is the death warrant, the Gold Trade Note is the dagger in the USDollar heart with respect to the global reserve currency role. The role has two sides: trade payment (led by oil market) and bank reserves (led by USTBond).

BRICS Gold Platform

This platform has just recently been introduced, promoted for usage by the lead team of Russia & China. They have promoted their plans and objectives for running the platform. They openly deride the usage of paper price discovery methods, which have corrupted the COMEX beyond any recognition of a gold mart where metal is bought and paid for. The COMEX has no metal delivery, but the BRICS Gold Platform will indeed have direct metal delivery. The new platform will feature gold bullion sales with immediate delivery, and thus an honest price system. Expect the eventual merger with their New Development Bank, if their intention ever becomes realized to provide the fulfilled role in conversion of sovereign bonds to Gold bullion bars.

Russian Gold Exchange

Another gold exchange which will likely merge with the BRICS Gold Platform, it will be based in Moscow. Expect this exchange to connect with the Russian Sverbank, and in particular with the Shanghai gold market.

Holy Grail Energy Deal

In the year 2014, the Chinese cut a deal worth $250 billion for delivery of Russian oil & gas, including the construction of delivery pipeline systems. The deal is the largest in the history of the energy market and spans over 10 years in time. To label the deal in USD terms is fully legitimate, even though a bilateral Russia-Chinese contract, because China will pay the great majority of the bill for crude oil, natural gas, and pipeline construction in the form of USTreasury Bonds, in a grand dumping exercise. Yet more Indirect Exchange which will reduce the Chinese Govt official USD holdings. Expect to hear next that the Russians will use the USTBonds to buy RMB currency, and with it convert to Gold bullion in Shanghai in a sudden sequence. In doing so, the Russians will essentially be converting Chinese-held USTBonds into Gold bullion for reserves.

Shanghai Cooperative Organization (SCO)

The SCO is growing in membership beyond the Russia + Former Soviet Republics. The most recent member nation signed on is Iran, which had been given provisional status earlier. By taking its current form in 2001, the SCO organization is designed for cultural, political, economic, security, and other purposes. In 2017, SCO's eight full members account for approximately half of the world's population, a quarter of the world's GDP, and about 80% of the Eurasian landmass. Expect the SCO to rival NATO in an offsetting role toward pursuit of global balance.

Union Pay Credit Card

The Chinese credit card has more subscribers than MasterCard and Visa combined. Just as SWIFT has been sidestepped for any politically-based obstruction, Union Pay can sidestep any Western credit card abuse in obstructions across the Asian Economies. There is precedent for MC/Visa obstructions in Asian countries.

Dagong Credit Rating Agency

The Chinese have created an independent credit rating agency, free from the West, which will be used to provide ratings for bonds and firms. The Western credit agencies of Standard & Poors, Moodys, and Fitch have each become deeply politicized. They ignore the Third World nature of USGovt debt, which is actually worse than the Greek Govt debt. The USTreasury Bond still has a AAA rating, despite $trillion annual deficits without hope of remedy. In recent years, the Big Three Ratings firms have taken on a political motive in downgrades of Russia debt, despite the fact that Russia has exited its foreign-held debt and whose finances have never looked better.

IRONY ON DATES & GOLD RESERVES

Official gold reserves match important dates for Russia and China in their national history. The dates give a message which should be heard, since no such coincidences could have occurred with these important dates. Russia claims 1801 tons right now in their official gold reserves. The year 1801 in Russian history is when Alexander I took reign. He was one of the greatest czars in a millennium for their nation. He devoted himself to foreign policy, well known in the annals for defeating Napoleon. China claims 1842 tons right now in their official gold reserves. Note the irony in Chinese history for that year. The year 1842 marked a time of total embarrassment and weakness to China. In 1842, the Qing Dynasty was compelled to sign the Treaty of Nanking, the first of what the Chinese later called the unequal treaties. It granted an indemnity and extra-territoriality to Britain, opened five treaty ports to foreign merchants, and ceded the Hong Kong Island to the British Empire. The failure of the treaty to satisfy British goals of improved trade and diplomatic relations led to the Second Opium War (1856-1860) in disgusting vile retaliation. The Qing defeat resulted in social unrest within China. That ugly war is considered by the Chinese to the beginning of modern Chinese history.

Chinese Leaders Proclaim End To Government Bond Risk Backstop, Look To Detroit For Guidence

Xu Zhong, head of the People's Bank of China's research bureau, is in an unusual position. In a nation known for government intervention in free market forces, he recognizes the slippery slope of the moral hazard of the government bailing out risky lending practices. Looking at how local Chinese governments have become over-leveraged, he says the world's second-largest economy needs a bankruptcy process for local governments, using Detroit as an example. The central government needs to send a message that it will not give blanket bailouts for irresponsible practices, he says, amid mounting concern. The warning comes as the Bank of International Settlements and a wide variety of international finance organizations have been noting the fears.

China needs to change thousands of years of political history of central government backstopping market risk

The Chinese central government's "core proposition for the political and economic history "that has led to "thousands of years" of central government support for local government financing may be coming to a close.

In an editorial on the financial news website Yicai, Xu lamented to perverse incentives that have been created by a central government providing an unrequited risk backstop to local governments, who have issued bonds with little prospect of payback.

"There does not need to worry about local governments chaotically issuing debt," he wrote, pointing to "the immense risk of the local bond market and its negative impact on macroeconomic volatility have become China's 'gray rhinos' that are of global concern."

He pointed to 20 cities and counties that were "guilty of illegal debt guarantees" and a continued reliance on the central government backstopping bad bonds that, in a free market, never would have had much chance of success.

Xu is not the only one concerned.

When Chinese leaders all send the same message, it has added meaning

"Financial institutions must not provide financing to projects without a source of stable operating cash flow or that do not have compliant collateral," China's National Audit Office said in a report published Saturday. The report pointed to a controlled spending on new projects.

The report, which came days after Xu's public statement, pointed to the need to break the "illusion" that the Beijing will bailout local regions that engage in irresponsible debt practices.

Chinese President Xi Jinping had earlier called for effective control of leverage in the world's second-largest economy. In October, the nation's central bank governor, Zhou Xiaochuan, called on reforms to crack down on local governments obfuscating their financial reports "to disguise debts," a practice that made bond offerings riskier.

Local government financing vehicles (LGFVs), a primary method to market debt, have sold 1.7 trillion yuan ($259 billion) in onshore and offshore bonds markets in 2017: this represented a 23% drop from 2016's level, according to data compiled by Bloomberg, as investor concerns about a lack of support for such bond offerings reverberated to investors.

Fitch Ratings said in September that bond defaults from Chinese LGFV investment vehicles were becoming more likely. Moody's, for its part, has been warning about Chinese debt and their aging demographics for years.

The concern over Chinese debt is not new. Financial worries from Bank of America Merrill Lynch and legendary hedge fund manager George Soros have issued warnings that unsustainable debt underwriting practices and a blanket risk guarantee issued by central governments are a recipe for financial problems.

And it is here that Xu looks to Detroit, MI for answers.

"China must have an example like the bankruptcy in Detroit," he wrote, pointing to the 2013 $18 billion municipal bankruptcy, the largest in US history. "Only if we allow local state-owned firms and governments to go bankrupt will investors believe the central government will break the implicit guarantee." That said, Xu thinks the bankruptcies should not result in social services cuts, a delicate balancing act indeed.

This May Be Bitcoin's Moment of Truth

The market is at a crucial juncture in the waning days of 2017.

Bitcoin Has Had A Terrific Year Overall, Thanks To A Small But Dedicated Set Of Believers In The Disruptive Power Of Cryptocurrencies Who Have Also Enabled Many Other Individual Investors To Participate In The Eye-Popping Phenomenon. Yet After Bitcoin's Value Fell By More Than A Third In Just A Few Days Last Week, And As Exchanges Struggle To Cope With All The Investor Activity, The Market Finds Itself At An Important Juncture -- Perhaps Even A Defining One. Either This Sharp Price Correction Will Act As A Catalyst For Expanding What, Until Now, Has Been Quite Limited Institutional Involvement In This Market -- Or It Will Become A Stage In The Deflation Of A Remarkable And Historic Asset Bubble.

Bitcoin hit several milestones as it surged from around $1,000 at the beginning of the year to a record of nearly $20,000 last week -- from the introduction of bitcoin futures trading on the CBOE and CME to the emergence of specialized investment products. Most importantly, these events fueled a growing appreciation of the potential of blockchain technology, the innovation underlying bitcoin.

Also notable is what has failed to happen. At least until now, with the exception of China, bitcoins have yet to attract the type of government intervention and regulation you might expect on the basis of traditional concerns about consumer protection, money laundering and other criminal activity, and even financial stability.

Also absent is a significant erosion in what, as illustrated by recent data from the U.S. Commodity Futures Trading Commission, remains a notably segmented investor base. The "longs" -- that is, those who bought bitcoins outright, either as an investment or as a trade -- are dominated by individual ("retail") investors; the "shorts" -- those who sold in anticipation of covering their position profitably at a lower price -- are anchored by a more professional class of market participants. Meanwhile, large institutional investors (such as traditional mutual funds, Wall Street banks and established hedge funds) have generally remained on the sidelines, even though their involvement is key to bitcoin's sustainability. After bitcoin experienced one of the biggest roller-coaster weeks in its young history, the most important question facing it is whether the recent price correction will prove to be what market participants refer to as "healthy" -- specifically, one that serves to shake out excessive irrational exuberance, provides for the entry of institutional investors, encourages the development of market-deepening products, and widens and balances out the investor base and the product offering. Were this to occur, it would help bitcoin -- as well as its growing universe of cryptocurrency peers -- develop deeper structural roots, reduce the probability of a heavy-handed regulatory response, and lower the threat of a price crash. Absent this, not even the deep commitment of true believers will be enough to protect individual retail investors who would end up experiencing a price appreciation and collapse that would rival even the biggest investment bubbles in history.