The game is up for central banks, financial markets, and the global economy. From David Stockman at davidstockmanscontracorner.com:
The robo-machines and perma-bulls are at it again, delivering another volumeless dead-cat bounce in a market that has churned sideways for 600 days now.
That’s right. The S&P 500 first crossed the 2060 threshold around mid-November of 2014, and has made upwards of 40 attempts to rally since then—-all of which have failed to be sustained.
Nevertheless, there is a reason for the churn and there is a culprit behind the abortive rallies.
As to the former, it’s all about the cycle peak. The profits cycle peaked six quarters ago when S&P 500 reported earnings came in at $106 per share for the LTM period ended in September 2014. For the LTM ending in March 2016, by contrast, reported earnings were $87 per share.
So profits are down by 18%, and even that has been flattered by upwards of $700 billion of share repurchases in the interim.
Likewise, almost every measure of the real business economy peaked at about that time, too. For instance, non-defense CapEx orders are down 12% since September 2014, rail and trucking shipments are off by 21 and 6%, respectively, and export shipments are down by 13%.
But the most comprehensive measures of economic activity—total business sales and the inventory/sales ratio—– tell the real story. Total sales are down by nearly 5% from their August 2014 peak, and the inventory sales ratio has climbed steadily higher into what historically has been the recession zone.
Moreover, not only is the current 84 month-long simulacrum of a domestic business cycle expansion coming to an end, but so is the global super-cycle.
We are referring here to the unprecedented central bank fueled credit boom of the past two decades, which elevated the world’s debt mountain from $40 trillion to $225 trillion.Not only has that become a tremendous burden on current activity, but it also caused a massive spree of wasteful, inefficient capital spending and infrastructure building which can’t be sustained and which will eventually generate staggering losses of real capital.
The heart of this super-cycle, of course, was China’s Red Ponzi and the monumental digging,building, investing, borrowing and speculating campaign that was unleashed by the People’s Printing Press of China after 1994. But the incendiary hot house economy which resulted is now pinned under $30 trillion of unserviceable debt and the greatest eruption of malinvestment, excess capacity and sheer investment waste in recorded economic history (the Pharaohs perhaps wasted more building the Pyramids).
It was all fueled by endless state supplied credit and a build it and they will come predicate. As noted in a nearby post, for example, it appears that China even built massive wind farms on that predicate. But, alas, the winds didn’t come.
In short, the world economy is fundamentally changing gears. A two-decade long credit-fueled crack-up boom which was centered in China and which cascaded throughout its EM supply chain and its DM base of capital equipment and luxury goods suppliers, such as Germany and the US, is coming to an end. We are now entering the crack-up phase and a long twilight era of deflation, liquidation, stagnation and payback.
To continue reading: The Curse Of ‘Wealth Effects’ Central Banking
