The French Government Uses Free Speech as Pretext to Suppress Free Speech

At the Ron Paul Institute, Daniel McAdams comments that the French government has used the Charlie Hebdo incident as a convenient excuse to crack down on Free speech (“After Free Speech Rally, France Cracks Down on Free Speech”)

Well that didn't take long. Just three days after the French government hosted dozens of foreign leaders in a "unity rally" to defend free speech in the wake of last week's shooting at the Charlie Hebdo magazine, France has begun arresting its citizens for actually exercising free speech.

According to news reports, more than 50 French citizens were arrested today and charged with offensive speech — the same kind of speech that was the trademark of of the Charlie Hebdo publication. 

None of those arrested were charged with links to terrorism or any real crime. Instead, they are facing up to seven years in prison for making statements the French authorities claim are supportive of the shootings or are anti-Semitic.

New directives from the French Justice Ministry provided the legal basis for arresting those deemed "supportive" of the attacks or who express anti-Semitic or racist sentiment. Anti-Muslim sentiment was not included in the government's new arrest orders, despite a dramatic spike in actual attacks on French Muslims since the shootings. The justice ministry claimed the new anti-speech measures were necessary to protect freedom of expression.

Among those arrested is controversial French comedian Dieudonné M’bala M’bala, charged with being "an apologist for terrorism" and facing jail time over a Facebook post making fun of Sunday's "unity rally." Exercising free speech by making fun of the French government as it celebrates free speech is apparently a crime.

The French government has long banned Dieudonné's comedy performances over his controversial jokes, even as French authorities celebrate Charlie Hebdo's controversial jokes.

Those arrested for exercising free speech in France will be charged under "special measures" put into place after the shooting, which provide for immediate sentencing of the accused. Some 130,000 military and security forces have been deployed on the streets of France and ordered to keep a particular eye on incidents that could bring violence against the police.

Unreported in the US, Charlie Hebdo has long ties with the French Communist Party and after the shooting has moved its headquarters to the offices of Libération, a French newspaper with roots in the Communist Party-inspired unrest of May, 1968. One of most famous Charlie Hebdo cartoonists,Stéphane Charbonnier ("Charb"), was a long-time member of the French Communist Party. Currently the newspaper is considered "left wing" and is controlled by Edouard de Rothschild of the international banking family, which should provide some additional fodder for the conspiracy-minded.

France and Europe chokes under the noxious cloud of hypocrisy.

Judge Andrew Napolitano at the LewRockwell.com sees the same (bold mine)

The French government has prohibited speech it considers to be hateful and even made it criminal. When the predecessor magazine to Charlie Hebdo once mocked the death of Charles de Gaulle, the French government shut it down — permanently.

The theory of anti-hate speech laws is that hate speech often leads to violence, and violence demands police and thus the expenditure of public resources, and so the government can make it illegal to spout hatred in order to conserve its resources. This attitude presumes, as Wilson did when he prosecuted folks for publicly singing German songs during World War I, that the government is the origin of free speech and can lawfully limit the speech it hates and fears. It also presumes that all ideas are equal, and none is worthy of hatred.

When the massacres occurred last week in Paris, all three of the murderers knew that the police would be unarmed and so would be their victims. It was as if they were shooting fish in a barrel. Why is that? The answer lies in the same mentality that believes it can eradicate hate by regulating speech. That mentality demands that government have a monopoly on violence, even violence against evil.

So, to those who embrace this dreadful theory, the great loss in Paris last week was not human life, which is a gift from God; it was free speech, which is a gift from the state. Hence the French government, which seems not to care about innocent life, instead of addressing these massacres as crimes against innocent people, proclaimed the massacres crimes against the freedom of speech. Would the French government have reacted similarly if the murderers had killed workers at an ammunition factory, instead of at a satirical magazine?

And how hypocritical was it of the French government to claim it defends free speech! In France, you can go to jail if you publicly express hatred for a group whose members may be defined generally by characteristics of birth, such as gender, age, race, place of origin or religion.

You can also go to jail for using speech to defy the government. This past weekend, millions of folks in France wore buttons and headbands that proclaimed in French: “I am Charlie Hebdo.” Those whose buttons proclaimed “I am not Charlie Hebdo” were asked by the police to remove them. Those who wore buttons that proclaimed, either satirically or hatefully, “I am Kouachi” were arrested. Arrested for speech at a march in support of free speech? Yes.

What’s going on here? What’s going on in France, and what might be the future in America, is the government defending the speech with which it agrees and punishing the speech with which it disagrees. What’s going on is the assault by some in radical Islam not on speech, but on vulnerable innocents in their everyday lives in order to intimidate their governments. What’s going on is the deployment of 90,000 French troops to catch and kill three murderers because the government does not trust the local police to use guns to keep the streets safe or private persons to use guns to defend their own lives.

Meanwhile former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal Paul Craig Roberts deems that the unfortunate Charlie Hebdo incident was instead a false flag

French Economy Slump on Hollande’s Rent Cap and Housing Sales Regulations

The interventionists’ short term nostrums fails once again.

Here is what I wrote last June on rent controls (bold original):

since rent controls preclude property owners from adjusting prices based on market realities (which essentially violates property rights of property owners), the economic outcome will be one of shortages in housing supply for these housing categories as depressed prices reduce the incentive to provide additional supplies.

Applied to France, this excerpt from Bloomberg:

French President Francois Hollande’s government may have made a housing slump worse, pushing the construction market to its lowest in more than 15 years.

Housing starts fell 19 percent in the second quarter from a year earlier, and permits -- a gauge of future construction -- dropped 13 percent, the French Housing Ministry said yesterday.

The rout stems from a law this year that seeks to make housing more affordable by capping rents in expensive neighborhoods.

So rent caps reduced the incentives for developers to build.

But there’s more. Well more than the rent cap, President Hollande also imposed new regulations on home sales…

To protect home buyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times. While the government is now adjusting the rules, the damage is done, threatening France’s anemic recovery that’s already lagging behind those of the U.K. and Germany.

“Construction is in total meltdown,” said Dominique Barbet, an economist at BNP Paribas in Paris. “It’s difficult to see how the new housing law is not to blame.”

Barbet says the drop in home building lopped 0.4 points off France’s gross domestic product growth last year and cut the pace of expansion by a third in the first quarter. Expenditure in the sector was at its lowest level ever as a portion of total real GDP in the first quarter at 4.7 percent, down from 6.3 percent in the first three months of 2007, he estimates.

So both interventions signifies a double whammy which took a severe toll on the French economy. Likewise both interventions has only aggravated the lingering bust cycle being endured by the French 

The bottom line is that there will hardly be any meaningful or real recovery when politics gets into the way of the markets.

Central Planning Failure: French state owned railway firm orders 2,000 trains “too wide” for platforms

Incredible moments of government failure. 

From Reuters

France's national rail company SNCF said on Tuesday it had ordered 2,000 trains for an expanded regional network that are too wide for many station platforms, entailing costly repairs.

A spokesman for the RFF national rail operator confirmed the error, first reported by satirical weekly Canard Enchaine in its Wednesday edition.

"We discovered the problem a bit late, we recognise that and we accept responsibility on that score," Christophe Piednoel told France Info radio.

This “broad modernisation effort” has been part of the French socialist government’s measure to boost statistical GDP. Instead, such flagrant costly error translates to a combination of bigger deficits, more debts, higher taxes, loss of purchasing power and greater risks to financial stability which ultimately entails a lower standard of living. This is a showcase of the government’s knowledge problem. 

And importantly this also exposes on the myth of the populist glamorization of centralized “infrastructure spending” elixir.

Along with the French, Chinese Police to Patrol Paris

From the Guardian

Paris police are to draft in reinforcements from China to help patrol the French capital during the summer tourist boom.

The foreign officers will be deployed to key landmarks to prevent Chinese visitors – around 1 million of whom come to France every year – being targeted by pickpockets and muggers.

A plan originating from the French Interior Ministry proposed that Chinese police officers would patrol with their French counterparts in Paris tourist spots. A ministry spokesperson refused to give details or numbers, but said their role would be preventative, and that they would operate as part of a global operation to protect tourists across the city.

Police say Chinese tourists often carry large amounts of cash, making them a target for attacks. Tourists from China are estimated to spend an average of €1,300 during their holidays, much of it on designer goods.

The move follows a rise in assaults by thieves on tourists from China. In March last year a group of 23 Chinese visitors were robbed in a restaurant shortly after arriving in Paris. The group was on a 12-day tour of Europe but stopped for dinner at Le Bourget in one of Paris's northern suburbs, where they were robbed of €7,500 cash, plane tickets and passports. The group leader was injured in the attack…

In central Paris, officers struggle to deal with organised gangs of thieves and pickpockets, many of them children, from the Balkans and eastern Europe, who harass tourists with fake "petitions" or demands for charity donations.

Some thoughts

Given how the Philippine government has been eager to embrace US bases, will the Philippine government do a copycat and ask US police to patrol the streets of Manila for the "protection of American tourists"?

Chinese cash rich tourists as targets by domestic thieves and Chinese police presence in Paris exude a crucial shift in the balance of economic and geopolitical power

The above also demonstrates the incompetence of centralized political institutions that are supposed to protect people within their defined political boundaries.

The French socialist government’s drafting of external police force exhibits such patent government failure.

If the French government “struggle to deal with organised gangs of thieves and pickpockets”, how will the Chinese police help solve such problems when the latter seems hardly familiar with the French geography, the political, legal and or cultural system?  

Yet the Chinese police seem to have a handful of domestic criminal issues to deal with.

The Chinese police may “help victims to make a police complaint” but farther than these they are unlikely to succeed, unless the French are convinced of a Jet Li solution.

Private Police anyone? 

 

Has the French Atlas Shrugged Moment Arrived?

In the dystopian classic one of the world’s best selling novel, Atlas Shrugged, written by the great philosopher, novelist and free market champion Ayn Rand, deepening government intervention in a society has led the wealthiest to refuse paying soaring taxes and to reject government regulations by shutting down vital industries and the economy.

It seems that we are witnessing a real time “Atlas Shrugged” moment in France such that even establishment media seem to acknowledge the gravely flawed political economic model.

The Newsweek recently published an article by Janine di Giovanni depicting the Atlas Shrugged moment entitled "The Fall of France".

Some excerpts (hat tip Cato’s Dan Mitchell)

Since the arrival of Socialist President François Hollande in 2012, income tax and social security contributions in France have skyrocketed. The top tax rate is 75 percent, and a great many pay in excess of 70 percent.

As a result, there has been a frantic bolt for the border by the very people who create economic growth – business leaders, innovators, creative thinkers, and top executives. They are all leaving France to develop their talents elsewhere…

This angry outburst came from a lawyer friend who is leaving France to move to Britain to escape the 70 percent tax he pays. He says he is working like a dog for nothing – to hand out money to the profligate state. The man he was pointing to, in a swanky Japanese restaurant in the Sixth Arrondissement, is Pierre Moscovici, the much-loathed minister of finance. Moscovici was looking very happy with himself. Does he realize Rome is burning?…

The curse of the welfare state…

But the past two years have seen a steady, noticeable decline in France. There is a grayness that the heavy hand of socialism casts. It is increasingly difficult to start a small business when you cannot fire useless employees and hire fresh new talent. Like the Huguenots, young graduates see no future and plan their escape to London.

The official unemployment figure is more than 3 million; unofficially it’s more like 5 million. The cost of everyday living is astronomical. Paris now beats London as one of the world’s most expensive cities. A half liter of milk in Paris, for instance, costs nearly $4 – the price of a gallon in an American store…

Part of this is the fault of the suffocating nanny state. Ten years ago this week, I left my home in London for a new life in Paris. Having married a Frenchman and expecting our child, I was happily trading in my flat in Notting Hill for one on the Luxembourg Gardens.

At that time, prices were such that I could trade a gritty but charming single-girl London flat for a broken-down family apartment in the center of Paris. Then prices began to steadily climb. With the end of the reign of Gaullist (conservative) Nicolas Sarkozy (the French hated his flashy bling-bling approach) the French ushered in the rotund, staid Hollande.

Almost immediately, taxes began to rise…

Productive citizens flee as the Santa Claus fund goes dry…

When I began to look around, I saw people taking wild advantage of the system. I had friends who belonged to trade unions, which allowed them to take entire summers off and collect 55 percent unemployment pay. From the time he was an able-bodied 30-year-old, a cameraman friend worked five months a year and spent the remaining seven months collecting state subsidies from the comfort of his house in the south of France.

Another banker friend spent her three-month paid maternity leave sailing around Guadeloupe – as it is part of France, she continued to receive all the benefits.

Yet another banker friend got fired, then took off nearly three years to find a new job, because the state was paying her so long as she had no job. “Why not? I deserve it,” she said when I questioned her. “I paid my benefits into the system.” Hers is an attitude widely shared.

When you retire, you are well cared for. There are 36 special retirement regimes – which means, for example, a female hospital worker or a train driver can retire earlier than those in the private sector because of their “harsh working conditions,” even though they can never be fired.

But all this handing out of money left the state bankrupt…

The most brilliant minds of France are escaping to London, Brussels, and New York rather than stultify at home. Walk down a street in South Kensington – the new Sixth Arrondissement of London – and try not to hear French spoken. The French lycee there has a long waiting list for French children whose families have emigrated.

Read the rest here

So no matter how mainstream media portrays improving statistics or rising financial markets as signs of recovery, in the real world, for as long as the government wages war on her productive citizens, real economic recovery will hardly materialize.

And considering France’s ballooning debt (measured by debt to GDP which stands at 90% as of 2012), soaring yields of French bonds (10 year as shown in the chart above from Bloomberg), which extrapolates to higher cost of servicing debt amidst economic stagnation, will equally make the highly levered French economy vulnerable.

Importantly, given the global dynamic of rising bond yields, France may serve as another potential trigger for a Black Swan event in 2014.

Regime Uncertainty: Why a French Economic Recovery is a Mirage

I recently pointed how France serves a critical example of the many parallel universes—or detachment between asset prices and economic reality—operating today, as consequence from the politicization of the markets.

Yet the mainstream rationalizes (or misrepresents) such dynamics as ‘economic growth recovery’.

While government statistics may show ‘growth’, real world developments in France suggests otherwise.

From this excellent article by Telegraph’s Anne Elizabeth Moutet (hat tip LewRockwell.com) [bold mine]

A poll on the front page of last Tuesday’s Le Monde, that bible of the French Left-leaning Establishment (think a simultaneously boring and hectoring Guardian), translated into stark figures the winter of François Hollande’s discontent.

More than 70 per cent of the French feel taxes are “excessive”, and 80 per cent believe the president’s economic policy is “misguided” and “inefficient”. This goes far beyond the tax exiles such as Gérard Depardieu, members of the Peugeot family or Chanel’s owners. Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes – of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year – now widen social inequalities instead of reducing them.

Three  observations here:  

One, taxes have begun to affect the public’s confidence level and opinion of policies. 

Second, taxes induce social inequalities rather than reducing them, which goes contrary to the outcome conceived by populist politics of 'social justice' redistribution. 

And third, the increasingly repressive  tax regime has forced many capitalist out of France or has turned them into ‘tax exiles’.

Why French politicians resort to increasingly repressive taxes? The article continues

By 2014, France’s public expenditure will overtake Denmark’s to become the world’s highest: 57 per cent of GDP. In effect, just to keep in the same place, like a hamster on a wheel, and ensure that the European Central Bank in Frankfurt isn’t too unhappy with us, Hollande now needs cash. Technocrats, MPs and ministers have been instructed to find every euro they can rake in – in deferred benefits, cancelled tax credits, extra levies. As they ignore the notion of making some serious cuts (mooted at regular intervals by the IMF, the OECD and even France’s own Cour des Comptes), the result can be messy.

The answer is that the French government has been growing immensely far faster than the real economy. 

And instead of promoting productive enterprises, the government has resorted to bigger confiscation of the resources from the private sector.

So the political class (parasites) benefits at the expense of their shrinking (private sector) hosts who are now pushing back.

And taxes influence people’s incentives and the corollary, people’s action. The article again gives a lucid example

Take last year’s famous 75 per cent supertax, on individuals earning over one million euros a month. This has still not been implemented. First, it got struck down by France’s Constitutional Council on a technicality. Leaks suggested the rate would fall to 66 per cent. They were confirmed, then denied. Hollande eventually vowed that the tax would be paid by the targeted individuals’ employers, for daring to offer such “obscenely” high salaries. This has just been approved by the National Assembly, and must still pass the Senate. So far, it is only supposed to apply to 2013 and 2014 income, but no one knows if the bill will be prolonged, killed or transformed.

What we do know is that this non-existent (so far) tax has been the clincher that sent hundreds, possibly thousands of French citizens abroad: not just “the rich”, whom Hollande, during his victorious campaign, said he personally “disliked”, and who now are pushing up house prices in South Kensington and fighting bitterly over the Lycée Charles de Gaulle’s 1,200 new places; but also the ambitious young, who feel that their own country will turn on them the minute they achieve any measure of personal success…

“It’s not only that people don’t like to be treated like criminals just because they’re successful,” says a French banker friend who has recently moved to London. “But this uncertainty in every aspect of the tax system means it is impossible to do business: you don’t know what your future costs are, or your customer’s. You can’t buy, you can’t sell, you can’t hire, you can’t fire.”

This is a wonderful example of what Austrian economist Robert Higgs calls as the regime uncertainty or [bold mine]

a form of uncertainty related to the public’s—especially the private investors’—confidence in the future security of private property rights, which can be impaired by future regulatory changes (e.g., Dodd-Frank and Obamacare regulations), court decisions, administrative twists and turns, tax increases in various forms (e.g., Obamacare penalties enforced through the income-tax system), monetary-policy changes that threaten the dollar’s purchasing power and distort the allocation of credit, and personnel changes in the government’s corps of executives, judges, and assorted capos.

The likely effects of 84 new taxes and more coming plus a battery of regulations are...

First, these promotes insecurity of the French property rights regime “don’t like treated like criminals”, 

Second, such obscures economic calculation “you don’t know what your future costs are, or your customer’s” and 

Finally the same policies obstructs or impedes on the economic coordination process “You can’t buy, you can’t sell, you can’t hire, you can’t fire”

With an environment like this, real economic activities will shrivel as political consumption lords over private sector production. 

Diminishing real output means lesser taxes, bigger deficits (as above) and increasing reliance on more debt to fund current political spending programs

French government debt has now reached 93.5% of the statistical gdp according to countryeconomy.com. I suspect that this could be larger as statistical economy tends to inflate output.

So again while French politicians and their cronies benefits, the rest of the nation suffers—thus the wider incidence of inequality (as consequence of political inequality)

There will be a point where creditors will come to question on the quality of French debts, which I believe should be sooner than later. 

So no matter the recent 'sanguine' reaction by the French stock-bond market or how government statistics say “growth”, unless the French government realizes that economic growth emanates from productive enterprises, and not from confiscation, the French economy will remain in stagnation if not in depression.

Even ECB president Mario Draghi recently admitted of the limitations of central bank interventions. As quoted by Reuters:(bold mine)

The ECB has done as much as it can to stabilise markets and support the economy. Now governments and parliaments need to do all they can to raise growth potential.

Monetary policy cannot create real economic growth. If growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix.

Well said.

Phisix: US Debt Ceiling Deal and UNTaper Spurs a Global Melt UP

Melt Up!

Melt UP!

Suddenly stock markets metastasize into a frenetic melt-up mode.

In the US, the S&P 500, the S&P 400 Mid-caps and the small cap Russell 2000 set new record highs. 

The German Dax and the French CAC also carved fresh landmark highs. 

In Asia, Australia’s S&P ASX, and India’s Sensex shared a similar feat. Ironically just a few months back the Indian economy seemed as staring into the abyss—to borrow from German Philosopher Friedrich Nietzsche[1]. How confidence changes overnight

And knocking at the door of historic highs are New Zealand Exchange 50 Gross, South Korea’s KOSPI, Taiwan’s TWSE, Hong Kong’s Hang Seng, and Malaysia’s KLSE

Media explains the melt up as a function of the debt ceiling deal and extended US Federal Reserve ‘credit easing’ stimulus. From Bloomberg, “U.S. stocks rose, sending the Standard & Poor’s 500 Index to a record, as speculation grew that the Federal Reserve will maintain the pace of stimulus after Congress ended the budget standoff.”[2]

Thus the common denominator in explaining the melt-up has been the market’s worship of debt expressed via the orgy of the speculative hunt for yields in the asset markets, particularly the stock markets.

Will the global melt-up influence the Phisix, the likely answer is yes. But….

How the FED Alters the Priorities of US Corporations

Goldman Sach's chief US equity strategist, David Kostin has been quoted as attributing the current US stock market surge on P/E multiple expansion, “The S&P 500 has returned 22% YTD driven almost entirely by P/E multiple expansion rather than higher earnings.”[3]

 

This means record US stocks has hardly been about earnings growth but of the aggressive bidding up of the equities.

More signs of the yield chasing frenzy.

In addition, as pointed out above by Blackstone Group’s Byron Wien[4], S&P 500’s net income has been on a decline since 2010. This decline has been accompanied by a slowing of earning per share growth (y-o-y).

Yet, the modest gains in the growth rate of the S&P’s EPS have mainly been bolstered by share buybacks. 

And as previously pointed out[5], a substantial portion of corporate share buybacks has been financed by bonds which remains a present dynamic[6]. 

In other words, the FED’s easy money policies, including the “UNTaper” have been prompting many publicly listed companies to shore up or ‘squeeze’ earnings growth via debt-financed corporate buybacks meant to raise prices of their underlying stocks.

Share buybacks has essentially substituted the capital or investment based expansion or the organic earnings growth paradigm. Said differently, publicly listed corporations have joined the herd in the feverish speculation on stocks rather than investing in the real economy.

This also means that the yield chasing mentality has infected the corporate board rooms, where corporate models appear to have been reconfigured to focus on the immediate attainment of higher share prices. 

And a recent research paper has underscored such changes. Stern School of Business John Asker, Harvard’s Joan Farre-Mensa and Stern School of Business Alexander Ljungqvist finds[7], (bold mine)

Listed firms invest substantially less and are less responsive to changes in investment opportunities compared to matched private firms, even during the recent financial crisis. These differences do not reflect observable economic differences between public and private firms (such as lifecycle differences) and instead appear to be driven by a propensity for public firms to suffer greater agency costs. Evidence showing that investment behavior diverges most strongly in industries in which stock prices are particularly sensitive to current earnings suggests public firms may suffer from managerial myopia.

So short-termism, mainly brought about by the Fed’s policies, has afflicted many of the publicly listed firm’s priorities. Many executive officers and shareowners have presently elected to use the unsustainable speculative financing model of boosting earnings that yields temporal benefits for them.

This essentially defies Ben Graham’s 1^st rule of margin of safety where companies should stick to what they know or ‘know your business’ and to avoid to making ““business profits” out of securities—that is, returns in excess of normal and dividend income” as I showed last week[8].

Yet all these will depend on the persistence of easy money regime, the suppression of the bond vigilantes and the sustainability of debt financed buyback model.

So while most publicly listed US companies have yet to immerse themselves into Ponzi financing, sustained easy money policies have been motivating them towards such direction.

A Dot.com Bubble Déjà vu? Google as Symptom?

The scrapping for yields has impelled many to jump on the IPO bandwagon despite poor track record of newly listed companies. 

According to the Wall Street Journal, 19 out of 28 or 68% of the technology issues which debuted this year has been unprofitable over the last fiscal year or during the past 12 months, which has been the highest percentage since 2007 and 2001. Yet punters wildly piled on them.

The same article notes of intensifying signs of mania “The excitement over companies’ potential rather than their present results is the latest sign in the stock markets of a rising tolerance for risk. The U.S. IPO market, often seen as a gauge of risk appetite because the stocks don’t have a track record, is on pace to produce the most deals since 2007, according to Dealogic”[9]

And Art Cashin UBS Financial Services director of floor operations at a recent CNBC interview expressed worries over a remake of the dotcom bubble, “The way people are treating technology companies, it's starting to feel a bit too much like 1999 and 2000”[10]

1999, 2000 and 2007 signifies as the zenith of the dotcom (1999-2000) bubble and the US housing bubble (2007)

Has Google been leading the way?

Google’s [GOOG] stock breached past the US$ 1,000 levels (particularly $1,011.41) with a breath-taking 13.8% gap up spike last Friday.

At market cap of over $335 billion, Google surpassed Microsoft [MSFT] and is now the third largest company after Apple [APPL] and Exxon Mobile [XOM][11].

Since Google is a member of the S&P 500[12], Friday’s quantum leap materially contributed to the new record of the major S&P bellwether (SPX). 

And as shown in the same chart, the S&P 400 mid cap and the small cap Russell 2000 flew to the firmament last week.

Three of the 5 largest S&P companies are from the information technology. In addition, technology comprises the largest sectoral weighting at 17.7% on the S&P, followed closely by financials 16.5%, and from a distance, Healthcare 13.2%, consumer discretionary 12.3% and the others. 

Should the technology mania persist, this will be reflected on the relative strength of sector, as well as, through a bigger share of the same sector in the S&P 500’s sectoral weighting.

Surprise 3rd quarter revenue growth of 23% from advertising part of which came from the mobile platform and Wall Street “emotion” has been attributed to Google’s spectacular price spike.

This Yahoo article[13] says that part of adrenaline rush on Google’s share prices has been to due low exposure on stocks by institutional investors (bold mine)

Google is higher today because it reported strong numbers, but it's not a 10% better company today than it was 24 hours ago. Wall Street is in a manic phase at the moment. For all the terrific things about Google's third-quarter, the best thing about the report was that it came on a day when institutional investors are feeling like they have far too little exposure to stocks. The average hedge fund was up less than 10% through September and there weren't many people expecting this race to new highs on the S&P500 (^GSPC) on the heels of debt ceiling debacle.

In short, more signs of frantic yield chasing.

Google’s reported 3rd quarter earnings of $10.74 per share[14], which came ahead of consensus estimates of $10.34.

While I am a fan of Google’s products, I hardly see value in Google’s stocks. 

Yahoo data[15] shows that Google has a trailing PE (ttm or trailing twelve months intraday) at 27.52, forward PE (fye or fiscal year end: December 2014) at 19.42, Price/book (mrq or most recent quarter) 3.75 and enterprise multiple of enterprise/ebitda (ttm or trailing twelve months) at 16.14.

The above multiples exhibit how richly priced GOOG has been

The same applies to the general stock market

Based on the prospects of continued declining earnings growth rate and based on the trailing PE[16], as of Friday’s close, the Dow Industrials has a ratio of 17.24, from last year’s 14.47, the S&P 500 at 18.32 from 17.03 a year ago and the Nasdaq 100 at 20.88 from last year’s 15.24. 

Most shockingly, the small cap Russell 2000 has a PE ratio of 86.58 from 32.69 a year ago! The Russell PE ratio more than doubled this year. Wow.

While I have not encountered GOOG resorting to share buybacks yet, GOOG’s increasing recourse to debt to finance[17] her operations has hardly been an attraction.

What perhaps may justify GOOG’s current prices is the prospect of success from its upcoming products such as the driverless cars, Google Glass and the cloud based planning applications called the “Genie” targeted at the construction industry[18].

But this would be audacious speculation.

And overconfidence has become a dominant feature.

Aside from stock market bulls brazenly hectoring and scoffing at the bears, market participants have been conditioned to see stock markets as a one way street.

For instance, record stocks which brought about the biggest single-day decline in U.S. equity volatility since 2011 rewarded the bullish option traders who aggressively doubled down on bets that the bull market in stocks would survive the default deadline[19].

The consensus has been hardwired to see any stock market decline as opportunity to “double down”.

For the bulls, risks have vanished. The stock market’s only designated direction seems up, up and away.

Yet the bullish consensus seems oblivious to the reality of the deepening dependence the stock market (and even housing) has been to the Fed’s credit easing measures. They are ignoring the fact that corporate business models have been evolving towards speculation, rather than to productive investments. Expanding price multiples, declining net income and EPS growth rate, increasing dependence on buybacks and debt financing for speculation are symptoms of such transition.

Aside from corporations, the convictions of bullish market participants are being reinforced by evidences of more aggressive actions.

While I don’t expect the FED to take the proverbial punch bowl away, everything depends on the actions of the bond vigilantes. For now, the bond vigilantes have been in a retreat. The hiatus by the bond vigilantes provides room for the bulls to magnify on their advances. Question is for how long?

If QE 3.0 in September of 2012 pushed backed the bond vigilantes for only 3 months, will the euphoric effects of the UNtaper, Yellen as Fed Chairwoman, debt ceiling deal last longer?

The French Disconnect

As I pointed out above, the UNtaper-debt ceiling deal has incited many markets to a melt-up mode which media rationalizes as “recovery”.

The French stock market, which is also at record highs, serves as an example.

The CAC 40 has been rising since the last quarter of 2011. Yet during 2012-2013, as the CAC rose, the French economy vacillated in and out of negative growth rates or recessions. While economic growth statistics reveal of a recent recovery, sustainability of the recovery is unclear.

French industrial production was down 1.6% in August[20], Unemployment rate is at the highest level since 1998 at 10.9% at the second quarter[21]. August loans to the private sector have been trending downwards since May[22]. Fitch downgraded France last July[23]. [note to the aficionados of credit rating agencies, French downgrade coincided with higher stocks]

Yet the CAC continues to trek to new highs. What gives?

Notes on the Debt Ceiling Deal

Furloughed Federal employees will receive a back pay[24]. This means government shutdown for furloughed employees extrapolates to a paid vacation.

The bi-partisan horse trading resulted to insertions of various goodies (Pork) for politicians. This includes $174,000 death benefit for Sen. Frank Lautenberg’s widow[25]

The US treasury will be authorized to suspend the debt ceiling as I earlier posted[26]. A limitless borrowing window will be extended until February 7, 2014[27].

This marks the second time when the debt ceiling has been unilaterally suspended. The first occurred this year from February 4, 2013 to May 18, 2013[28].

What seems as an increasing frequency of the suspension of the debt ceiling (twice this year) may presage a permanent one.

A day past the US debt ceiling deal, US debt soared by a record $328 billion. This has shattered the previous high of $238 billion set two years ago as the US government reportedly replenished its stock of “extraordinary measures” used to keep debt from going past he mandated level[29]. This brings US debt to $17.075 trillion Thursday.

Two days after, US debt further expanded by $7 billion to $17,082,571,268,248.24[30].

Debt levels growing at a rate far faster than the rate of economic growth is simply unsustainable.

Since 2008, US Federal has grown past $ 7 trillion whereas the economy grew by nearly $1 trillion[31].

There is always a consequence to every action, so will the above.

Yet this is what equity market praises.

---

[1] Friedrich Nietzsche CHAPTER IV: APOPHTHEGMS AND INTERLUDES Beyond Good and Evil, p 107 planetpdf.com

[2] Bloomberg.com S&P 500 Surges to Record on Fed Bets After Debt Deal, October 18, 2013

[3] Zero Hedge Goldman: Entire S&P Move Higher Is Due To Multiple Expansion; Shiller P/E Says 30% Overvalued So... Buy

[4] Business Insider Net Income is Actually Declining even as Earnings Rise, Wall Street's Brightest Minds Reveal THE MOST IMPORTANT CHARTS IN THE WORLD, October 9, 2013

[5] See Phisix: Rising Systemic Debt Erodes the Margin of Safety October 14, 2013

[6] Reuters.com Bond-backed stock buybacks remain in vogue September 6, 2013

[7] John Asker, Joan Farre-Mensa and Alexander Ljungqvist Corporate Investment and Stock Market Listing: A Puzzle? April 22, 2013 Social Science Research Network

[8] See Phisix: Rising Systemic Debt Erodes the Margin of Safety October 14, 2013

[9] The Wall Street Journal Market Pulse In Latest IPOs, Profits Aren’t the Point October 11, 2013

[10] CNBC.com Cashin: Tech valuations remind me of dot-com bubble October 17, 2013

[11] FoxNews.com Boom: Google Zooms 13% to a Record High; Market Cap Tops $335B October 18, 2013

[12] S&P Dow Jones McGraw Hill Financial S&P 500 Indices Fact Sheet

[13] Jeffe Macke Is Google Worth $1,000 a Share? Yahoo.com October 18, 2013

[14] Google Investor Relations Google Inc. Announces Third Quarter 2013 Results

[15] Yahoo Finance, Google Inc. (GOOG) Key Statistics

[16] The Wall Street Journal Market Data Center US Stocks

[17] 4-traders.com Google Inc (GOOG)

[18] Businessinsider.com Google's Secret Project 'Genie' Could Transform The Construction Industry October 18, 2013

[19] Bloomberg.com VIX 21% Tumble Means Shorts on Volatility Double Money October 17, 2013

[20] Tradingeconomics.com FRANCE INDUSTRIAL PRODUCTION

[21] Tradingeconomics.com FRANCE UNEMPLOYMENT RATE

[22] Tradingeconomics.com FRANCE LOANS TO PRIVATE SECTOR

[23] Bloomberg.com France Loses Top Credit Rating as Fitch Cites Lack of Growth July 13, 2013

[24] Fox News.com Senate budget deal provides back pay for furloughed federal workers October 16, 2013

[25] Abcnews.com $174,000 to a Senator’s Widow and Other Surprises in the Fiscal Compromise Bill October 16, 2013

[26] See Quote of the Day: There is now No Limit in government borrowing October 18, 2013

[27] US Congress H.R.2775 - Continuing Appropriations Act, 2014

[28] The Foundry Debt Ceiling with $300 Billion in New Debt, Heritage Foundation, May 19, 2003

[29] Washington post U.S. debt jumps a record $328 billion — tops $17 trillion for first time October 18, 2013

[30] Brilling.com U.S. NATIONAL DEBT CLOCK

[31] Lance Roberts The Long Game Of Hiking The Debt Ceiling STA Wealth October 11, 2013