Monday, January 6, 2014

3 Billionaires Are Rapidly Dumping Their U.S. Stocks — What They Know Should Scare Us

3 Billionaires Are Rapidly Dumping Their U.S. Stocks — What They Know Should Scare Us

John Giokaris's avatar imageBy John Giokaris  6 hours ago
As noted this week, a handful of billionaires are quietly dumping their American stocks ... and fast.
Notable Forbes 400 billionaires Warren Buffet, John Paulson, and George Soros are drastically reducing their exposure to U.S. companies (primarily dependent on consumer purchasing habits) and banks like JPMorgan Chase, Citigroup, and Goldman Sachs against the backdrop of the recent announcement from the Federal Reserve of “the taper off.”
The reason: it’s very likely that these professional investors are aware of specific research that points toward a massive market correction in the near future – something that should have the rest of us worried.
The markets have been hitting historic highs, but unlike previous all-time gains, this trend is almost entirely because of the Fed’s quantitative easing efforts (printing money out of thin air) and purchasing $85 billion a month (over $1 trillion total in 2013), divided between $40 billion of mortgage bonds and $45 billion in Treasury securities. In other words, all that money pumping has been going straight to the banks and very little of it is being lent out. Unless the banks lend those deposits, or invest them, they don’t get into the economy, they don’t enter the money supply, and they don’t contribute to inflation.
But if banks aren’t lending, there’s no boost to the economy either – which is probably why most Americans aren’t feeling this “recovery.”

The Fed announced in December that it would be reducing its buy-back efforts from $85 billion to $75 billion a month, but that’s only the start of why billionaires like Buffett, Paulson, and Soros are selling out.
Some economists are predicting that it may be a signal that banks will start lending again, inevitably causing huge inflation in the wake of printing all that new money.
“These funds haven’t made it into the markets and the economy yet. But it is a mathematical certainty that once the dam breaks, and this money passes through the reserves and hits the markets, inflation will surge,” said Robert Wiedemer, an esteemed economist and author of the New York Times best-selling book Aftershock. “Once you hit 10% inflation, 10-year Treasury bonds lose about half their value. And by 20%, any value is all but gone. Interest rates will increase dramatically at this point, and that will cause real estate values to collapse. And the stock market will collapse as a consequence of these other problems.”
“Companies will be spending more money on borrowing costs than business expansion costs,” explains Wiedemer. “That means lower profit margins, lower dividends, and less hiring. Plus, more layoffs.”
In other words, no investors, let alone billionaires, will want to own stocks with falling profit margins and shrinking dividends. If that’s why Buffett, Paulson, and Soros are dumping stocks, that means they have decided to cash out early and leave Main Street investors holding the bag.
But the real question after that then becomes how bad will the ripple effects in an already weak job market become?
While the official unemployment rate dropped to 7% at the end of 2013 – primarily due to more and more job seekers giving up looking for work and switching to food stamps, Medicaid, and disability (all still at historic highs) – the real unemployment rate remains at 11.5% when you include those on welfare as well. Additionally, most of the job creation since the recession has been in part-time employment – which hit a new record high in 2013. In fact, Kelly Services – a temp agency – closed out 2013 as the second largest employer in the U.S., behind only Walmart.

The reasons for this are numerous. To businesses, the benefits associated with employing part-time workers are countless: avoiding substantial benefits-related costs, evading long-term job contracts, hourly basis wages, etc.
In fact, as long as the Obama administration’s aggressive regulatory policies prevent strong economic growth (and they will for quite a while according to the non-partisan CBO, which concludes that any signs of strong economic growth aren’t visible for the remainder of this administration’s term and a weak job market is looking to be the new normal), employers will have even more leverage, while workers have less and are forced to agree to any employment terms, as long as they get some paycheck at all.
While GDP growth for Q3 hit an unexpected 4.1%, primarily driven by strong consumer spending, the fact that even Buffett and Soros – both cheerleaders and financial supporters of the Obama administration – are showing little faith in future consumer spending should grab everyone’s attention. A heavy 70% of the U.S. economy depends on consumer spending.
Both Paulson and Soros could also be anticipating that the dams are about to break in the near future and that all that money the Fed has been printing will finally hit the streets with surging inflation.

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