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Institutionalized Lying - Why Central Bankers Never See Bubbles

Every day there is more confirmation that the casino is an exceedingly dangerous place and that exposure to the stock, bond and related markets is to be avoided at all hazards. In essence the whole shebang is based on institutionalized lying, meaning that pronouncements of central bankers, Wall Street brokers and big company executives are a tissue of misdirection, obfuscation and outright deceit.

And they are self-reinforcing, too. As we indicated in our post over the weekend (The Keynesian House Of Denial), it's all definitional by the lights of today's central bankers and their Wall Street camp followers. Since the former are busy "accommodating", massaging and "stimulating" economies all around the world-- bad things like recessions and stock market busts just can't happen.

At the same time, the narrative from the casino always points to opportunity today and even better prospects tomorrow (i.e. in the second half and next year). Thus, S&P 500 earnings on an ex-items basis for Q4 2016 are projected to come in at $32 per share or up by 39% from the $23 posted for Q4 2015; and by year-end 2017, the patented Wall Street hockey stick points to a gain of 57%.

At Monday's market close of 2094, therefore, what's not to like about valuation levels and PEs? After all, the full-year hockey stick points to $119 per share in 2016 and $136 in 2017. The implied PE multiples are a modest 17.3X and 15.3X, respectively.

Except they aren't even remotely so. S&P 500 earnings on a GAAP basis came in at $86.47 for the LTM period just ended, and the current quarter is already conceded to be down by upwards of 10%.

In fact, the stock market is now valued at 24.2X - in the nosebleed section of history - at a time when the global growth cycle is reversing, the US business expansion at 82 months is long in the tooth and actual GAAP earnings that you don't go to jail for reporting are down 18.5% from the September 2014 LTM peak, and heading lower.

Inside that yawning gap lies the pattern and practice of institutionalized lying. And to start the week we had another batch of whoppers.

Over the weekend the money-printing lunatic who heads the ECB, Mario Draghi, pronounced that there are no bubbles in sight on his watch - notwithstanding the obvious fact that he has turned the European bond market into a monumental bubble.

Likewise, before the markets opened Monday morning we had two fine examples of the same delusional prevarication. Both PepsiCo (NYSE:PEP) and Morgan Stanley (NYSE:MS) reported disastrous results for Q1, but in utterly shameless fashion these were spun by company spokesmen and reported by the media as "beats". Naturally this caused their stock prices to shoot into the green, and in the case of Pepsi to nearly an all-time high.

As to Morgan Stanley, it's hard to imagine how its results could have been much worse. Non-interest revenues were down 26% over prior year, including drops of 18% and 43% for its core business of investment banking and trading, respectively. Overall, total revenues plunged by 21% versus prior year, and net income dropped by a staggering 54%.

That's right. Compared to net income of $2.4 billion last year, its bottom line for Q1 came in at just $1.1 billion, while return on common equity plummeted from 14.1% to just 6.2%.

In an honest free market, Morgan Stanley would have been sent deep into the penalty box, but not in today's casino. It was actually up because reported income of 55 cents per share "beat" the consensus expectation of 46 cents.

But then again, the "consensus" was for earnings of $1.00 per share as recently as last October. In the interim, there was a frenetic lowering of estimates that did not stop - as is evident in the red line below - until the very eve of its Q1 release.

Pretending that this is a "beat" is not only an insult to 9th grade intelligence, but actually emblematic of the institutional lying that has become built into the fabric of reporting and communications in the casino.

Indeed, the whole "beat" syndrome has now reached a ludicrous extreme. The only rational meaning for "beat" would be to describe results that actually improved upon previous performance and came as a genuine upside surprise to investors. By when results have been blatantly manipulated lower by the trained seals who pose as equity analysts, the few pennies per share gain over the latest pre-release "consensus" is not a beat; it's a scam!

So is the "earnings ex-items" gambit that logically has no other purpose than to make PE multiples look lower and over-priced shares more attractive than the actually are. In that regard, the claim that companies are attempting to remove "noise" owing to one-time charges from their reports doesn't cut it.

For one thing, one-timers go both ways, as in the case of capital gains from the sale of an asset. Beyond that, corporate write-offs of soured goodwill from deals gone bad, charges for plant and store closures owing to the termination of loss-making operations and expenses for severance and stock options - all represents the consumption of real corporate resources and value.

If CFOs really wanted to be helpful in "normalizing" their lumpy quarterly GAAP numbers there is a far better way to do it. To wit, they could pool their non-recurring charges and present "adjusted" numbers based on smoothing or averaging these recurrent "non-recurring" losses over a multi-quarter...


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