Submitted by David Stockman – The Contra Corner Blog
David Stockman joined CNBC’s Fast Money to discuss why we are at peak debt, and are directly headed for a record recession. (click on image)
David Stockman joined CNBC’s Fast Money to discuss why we are at peak debt, and are directly headed for a record recession. (click on image)
This week brought another reason to get out of the casino, and to sell it short if you can tolerate some volatility.
On Friday the Japanese stock market ripped 6% higher and the European bourses were up 5% because their respective central bankers emitted some hints of more easing just ahead. Even the US market managed to find green for the week.
Apparently, the day traders and robo-machines think BTFD still works. But they are going to be sorely disappointed——just as they have been for nearly 700 days running.
Like the bloody trenches of World War I, the movement back and forth in “no man’s land” on the chart above has been pointless. At some juncture in the not too distant future, the stock averages are going to break this trading range, and plunge back down to earth.
In the meantime, you can’t blame the punters for trying. This week they succumbed once again to the BTFD delusion undoubtedly because the “moar money” chorus grew ever louder as Friday approached. Continue reading
A host on bubblevision this afternoon noted that the S&P 500 is now down $2 trillion for the year and wondered if his panel could explain “what’s happened since January 1st?”
The implication, of course, was that since no new recessions have started—- nor have any new wars been declared, polar glaciers melted or Wall Street banks gone down for the count——that the market’s worst ever start of the year was surely overdone. Maybe it was even BTFD time again.
Then again, maybe the outlook is just as bad as it was before January 1st, but that the outlookers have acquired a new outlook. Stated more baldly, perhaps the sleepwalkers have finally awakened.
That would certainly seem to be the case with the market’s high flyers. Most of this year’s spectacular flameouts have reported nothing new nor issued any disturbing 8-Ks. Amazon apparently had a swell Christmas, for example, but its share price is now down 19% from the bubblevision man’s line of demarcation.
Indeed, Amazon and its fellow FANGs (Facebook, Amazon, Netflix and Google) succinctly explain the pivot. They have actually been the canary in the coal mine all along; it just now that their warnings signals are being noticed. Continue reading
The robo-machines are now having a grand old time hazing the August lows at 1870 on the S&P, and may succeed in ginning up another dead-cat bounce or two. But this market is going down for the count owing to a perfect storm.
To wit, the global and US economies are heading into an extended deflationary recession; S&P earnings peaked at $106 per share more than a year ago and are already at $90, heading much lower; and the central banks of the world are out of dry powder after a 20-year binge of balance sheet expansion.
The latter is surely the most important of the three. It means there will be no printing press driven reflation of the financial markets this time around. And without more monetary juice it’s just a matter of time before a whole generation of punters and front-runners abandon the casino and head for the hills.
Even with today’s ragged bounce, the broad market has now gone sideways for nearly 700 days. The BTFD meme is loosing its mojo because it only worked so long as the Fed-following herd could point to more printing press cash flowing into the market or promises of “accommodation” that were credible. But that will soon be ancient history.
Indeed, it is already evident that “escape velocity” has again escaped. Q4 GDP growth is now running at barely 0.5%, and the current quarter could actually be negative for reasons we will analyze in the days ahead. Continue reading
Following an epic stock rout to start the year, one which has wiped out trillions in market capitalization, it has rapidly become a consensus view (even by staunch Fed supporters such as the Nikkei Times) that the Fed committed a gross policy mistake by hiking rates on December 16, so much so that this week none other than former Fed president Kocherlakota openly mocked the Fed’s credibility when he pointed out the near record plunge in forward breakevens suggesting the market has called the Fed’s bluff on rising inflation.
All of this happened before JPM cut its Q4 GDP estimate from 1.0% to 0.1% in the quarter in which Yellen hiked.
To be sure, the dramatic reaction and outcome following the Fed’s “error” rate hike was predicted on this website on many occasions, most recently two weeks prior to the rate hike in “This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession” when we demonstrated what would happen once the Fed unleashed the “Ghost of 1937.”
As we pointed out in early December, conveniently we have a great historical primer of what happened the last time the Fed hiked at a time when it misread the US economy, which was also at or below stall speed, and the Fed incorrectly assumed it was growing.
We are talking of course, about the infamous RRR-hike of 1936-1937, which took place smack in the middle of the Great Recession.
Here is what happened then, as we described previously in June.
[No episode is more comparable to what is about to happen] than what happened in the US in 1937, smack in the middle of the Great Depression. This is the only time in US history which is analogous to what the Fed will attempt to do, and not only because short rates collapsed to zero between 1929-36 but because the Fed’s balance sheet jumped from 5% to 20% of GDP to offset the Great Depression.Just like now.
According to Dante’s Divine Comedy the inscription on the gates to hell says, “Abandon hope all ye who enter here”.
That phrase should have been emblazoned on the entrance to the North Charleston Coliseum Thursday night, as well. In their lust for war, the GOP candidates to a man forgot why the Republican party even exists.
In remonstrating noisily for even more of Washington’s imperial overreach abroad, rather than attacking its bloated and intrusive aspect at home, they forced the American people to abandon any hope for the restoration of fiscal rectitude, sound money and free markets.
It started with Senator Cruz who ignored the first question entirely and launched off into an utterly gratuitous exercise in rank demagoguery about the US sailors held for 16 hours by Iran. Said the candidate who is supposed to be talking about the Fed’s brutal war on savers and Washington’s burial of the nation’s taxpayers in public debt:
“Today, many of us picked up our newspapers, and we were horrified to see the sight of 10 American sailors on their knees, with their hands on their heads,” Cruz said. “I give you my word, if I am elected President, no serviceman or servicewoman will be forced to be on their knees, and any nation that captures our fighting men will feel the full force and fury of the United States of America.”
Oh, c’mon, Senator. This incident happened because two US riverine patrol boats, which specialize in coastal landings, wandered into Iranian territorial waters and at the very worst place imaginable. That is, about 1.5 miles from Farsi Island, which is a major base of the Iranian Revolutionary Guard Corps (IRGC)—-the very reactionary force in Iranian politics that wants to sabotage the nuke deal and stop normalization of relations with the US no less than do Washington’s neocons.
So if someone needed to be called on the carpet by the GOP debaters, it should have been General Joseph Dunford, Chairman of the Joint Chiefs of Staff. The lapse of command and control in the instance was inexcusable. Continue reading
At year end we posted a rant about the “Brobdingnagian” bubble embedded in Amazon’s market cap. On December 29th it was valued at $325 billion and had gained $180 billion or 55% of that towering figure in just the previous 12 months.
Self-evidently this was a flashing red warning signal that the end of the third great central bank fueled financial bubble of his century was near. AMZN and its three other FANG amigos had accounted for a $530 billion gain in market cap while the other 496 stocks in the S&P 500 had declined by an even larger amount.
That is, the apparently flat S&P 500 index of 2015 was hiding an incipient bear—–owing to a market narrowing action like none before. Compared to the Fabulous FANGs (Facebook, Amazon, Netflix and Google), the early 1970s Nifty Fifty of stock market lore paled into insignificance.
After the worst start to a year in history, some of the air has now been let out of the bubble. Amazon’s market cap is now down by $53 billion or 16% and the story has been roughly the same for the rest of the FANGs.
After Wednesday’s plunge, Goggle is now also down by $52 billion or 10%; Facebook is lower by $33 billion or 10%; and Netflix is off by $6 billion or 11%. In all, the FANGs have given back in eight trading days about $144 billion or 28% of their madcap gains during 2015.
The hordes of Washington politicians promising to boost the nation’s economic growth rate and the posse of monetary central planners and their Keynesian economists (excuse the redundancy) lamenting that “escape velocity” appears to have gone MIA have one thing in common. To wit, they have never looked at the chart below, or don’t get it if they have.
Plain and simple, the sum of Washington policy is to induce the business economy to eat it seed corn and bury itself in debt. Capitol Hill does its part with a tax code which provides a giant incentive for debt finance, and the Fed completes the job through massive intrusion in the money and capital markets. The result of systemic financial repression is deeply artificial, subsidized interest rates and free money for carry trade gamblers—–distortions which have turned the C-suites of corporate America into stock trading rooms.
As a case in point, the $46 billion of bonds sold by the owners of Budweiser last night where priced at a ten-year yield of 3.67%, which means that after taxes and inflation, the company’s borrowing cost was hardly 1%. Yet, as explained more fully below, the only point of this massive offering was to fund with nearly free long-term capital the huge payday for speculators in SABMiller stock that will result from the $120 billion Anheuser-Busch InBev (BUD) takeover transaction. Continue reading
As the Fed’s third and last bubble of this century heads for its splatter spot, the stench of desperate crony capitalism fills the air. You can count hedge fund mogul and Billary Buddy, Marc Lasry, among the upchucking financiers.
A few months back I heard him say on bubble vision that energy debt was a “once in a lifetime opportunity”. My thought was good luck with that, but even better luck to your investors—–who will need to get out of Dodge fast.
The truth is, Lasry had it upsidedown. Energy prices over the last 15 years were carried skyward by a once in a lifetime central bank driven credit explosion. The latter fueled a surge of phony demand and a tidal wave of malinvestment——not only in oil and gas, but practically everything else in the material and manufacturing economy of the world.
The reason that 2016 will prove to be a great historical inflection point is that the central banks of the world have finally run out of dry powder. After a 20 year spree in which their balance sheets exploded by nearly 11X—–from $2 trillion to $21 trillion—-they are being forced to shutdown their printing presses.
China has to stop because it has been slammed with a $1 trillion capital flight in the last year, and it’s accelerating. The BOJ and the ECB have already shot their wad and it’s done no good at all. The Fed spent 84 months dithering on the zero bound and now it has no dry powder left as the US economy slides into recession.
Accordingly, the great global credit bubble has finally run out of new central bank fuel. It has now surely reached its apogee at about $225 trillion compared to only $40 trillion back in 1994 when oil prices were still well under $20 per barrel. And soon the world’s mountain of debt will be falling in upon itself—–starting with the cratering Red Ponzi of China.
Needless to say, the latter amounts to a sword of Damocles hanging over the world’s massively deformed and dangerously unbalanced energy markets. To wit, almost all of the increase in global oil demand since the 2008 crisis has been in China and its caravan of EM suppliers and fellow travelers.
Total global demand in 2015, in fact, averaged about 92.6 mb/d per day (liquids basis)—–up nearly 7.0 mb/d since 2008. But 4.0 mb/d of that growth was attributable to China and another 6.0 mb/d to Brazil, Korea, the petro-states and the balance of the EM economies. By contrast, oil demand in the US, Western Europe and Japan is actually down by about 3.0 mb/d since the 2008 peak, as shown below:
Here’s a newsflash that CNBC didn’t mention. According to the BLS, the US economy generated a miniscule 11,000 jobs in the month of December.
Yet notwithstanding the fact that almost nobody works outdoors any more, the BLS fiction writers added 281,000 to their headline number to cover the “seasonal adjustment.” This is done on the apparent truism that December is generally colder than November and that workers get holiday vacations.
Of course, this December was much warmer, not colder, than average. And that’s not the only deviation from normal seasonal trends.
The Christmas selling season this year, for example, was absolutely not comparable to the ghosts of Christmas past. Bricks and mortar retail is in turmoil and in secular decline due to Amazon and its e-commerce ilk, and this trend is accelerating by the year.
So too, energy and export based sectors have been thrown for a loop in the last few months by a surging dollar and collapsing commodity prices. Likewise, construction activity has been so weak in this cycle—-and for the good reason that both commercial and residential stock is vastly overbuilt owing to two decades of cheap credit—–that its not remotely comparable to historic patterns.
Never mind. The BLS always adds the same big dollop of jobs to the December establishment survey come hell or high water. In fact, the seasonal adjustment has averaged 320,000 for the last 12 years!
For crying out loud, folks, every December is different—–and not just because of the vagaries of the weather. Capitalism is about incessant change and reallocation of economic activity and resources. And now the globalized ebbs and flows of economic activity have only accentuated the rate and intensity of these adjustments.
Yet the statistical wizards at the BLS think they can approximate a seasonal adjustment factor for December that at +/- 300k amounts to just 0.2% of the currently reported 144.2 million establishment survey jobs, and an even smaller fraction of the potential adult work force which is at least 165 million.
But that’s a pretentious stab in the dark. The December seasonal adjustment (SA) could just as easily be 0.3% of the job base or 0.1%, depending upon the specific point in the business cycle and structural trends roiling the economy.
Indeed, these brackets alone would vary the headline SA number by 150k to 450k. The fact that the seasonal adjustment factor for December has oscillated tightly around 300,000 for the last 12 years proves only one thing—–namely, that the bureaucrats at the BLS have chosen to invent the same guesstimate year after year; its not science, its political fiction. Continue reading
During the 150 days since August 4th, Chipotle’s share price has plunged by 45%. Nearly $11 billion of market cap has been obliterated——including $4 billion in the last three weeks.
Accordingly, its market value has now retraced back to March 2012 levels. The hyperventilating CMG bulls who rampaged for 1250 days in the interim have now been taken out back and summarily shot.
Stated differently, what had been $12 million per copy burrito shacks are now on sale for just $6.5 million each and are heading far lower, very fast. But the culprit in this stunning markdown is not the alleged once-in-a-blue-moon outbreak of E. coli, as CMG’s apologists claim.
Chipotle’s recent $24 billion market cap, in fact, is the bubble in extremis which explains the entire financial bubble at large. It is surely the poster boy for the manner in which the Fed-sponsored Wall Street casino has hyped the mundane into the miraculous; and substituted paint-by-the-numbers hockey sticks for substantive analysis and judgment. Continue reading
The attached column by Pat Buchanan could not be more spot on. It slices through the misbegotten assumption that Saudi Arabia is our ally and that the safety and security of the citizens of Lincoln NE, Spokane WA and Springfield MA have anything to do with the religious and political machinations of Riyadh and its conflicts with Iran and the rest of the Shiite world.
Nor is this only a recent development. In fact, for more than four decades Washington’s middle eastern policy has been dead wrong and increasingly counter-productive and destructive. The crisis provoked this past weekend by the 30-year old hot-headed Saudi prince, who is son of the King and heir to the throne, only clarified what has long been true.
That is, Washington’s Mideast policy is predicated on the assumption that the answer to high oil prices and energy security is deployment of the Fifth Fleet to the Persian Gulf. And that an associated alliance with one of the most corrupt, despotic, avaricious and benighted tyrannies in the modern world is the lynch pin to regional stability and US national security.
Nothing could be further from the truth. The House of Saud is a scourge on mankind that would have been eliminated decades ago, save for Imperial Washington’s deplorable coddling and massive transfer of arms and political support.
At the same time, the answer to high oil prices is high oil prices. Could anything not be more obvious than today when crude oil is hovering around $35 per barrel notwithstanding a near state of war in the Persian Gulf? Continue reading
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