Category Archives: Debt

An “Extreme Warning” From Our Doom Index, by Bill Bonner

Here’s another bearish prognostication, from Bill Bonner at bonnerandpartners.com:

BALTIMORE – When we left you yesterday, we were describing why the situation is getting dangerous for investors, and how the lessons learned over the last 30 years may backfire in the next crisis.

“Dow over 26,000… bitcoin under $10,000,” reports this morning’s news… “but could crypto panic spill over into stocks?”

Investors are accustomed to depending on the Greenspan-Bernanke-Yellen Put… which is to say, they are pretty sure that the feds will come in with more booze when the party starts to flag.

“Buy the dip,” they tell each other, confident that the feds can be counted on in a pinch.

Many think the recently passed tax bill is 80-proof, too – sure to rev things up by putting more money in the hands of shareholders and consumers.

Maybe it will raise stock prices. Or maybe it won’t. What it won’t do is make the next crisis disappear.

Bad Tidings

We hate to be the bearer of bad tidings, but bad tidings are all we have to bear.

Corporate America is already pretty flush. The price-to-earnings (P/E) ratio for the S&P 500 is now 70% above its long-term average.

In fact, the price of stocks relative to earnings has only been near this high three times in the last 118 years… each time caused by the aforementioned Fed party favors.

And if stocks go higher, it merely gives them further to fall.

In order to get back to more traditional levels, notes Martin Feldstein in yesterday’s Wall Street Journal, the next bear market would have to wipe out some $10 trillion of stock market wealth.

This, he says, would take 2% off annual GDP… tipping the country into recession.

Extreme Warning

How close is this crisis?

We turn to our Doom Index, put together by our ace researcher, Joe Withrow:

The Doom Index spiked back up to “7” this month – our extreme warning level.

After a surprisingly expansive third quarter in 2017, credit growth fell back to 1.6% in the fourth quarter. Paraphrasing your friend and economist Richard Duncan, bad things happen when credit growth falls below 2%.

Looking at the credit markets, corporate bond downgrades continued to come in at an elevated level last quarter. And junk bonds are starting to show some cracks, falling more than 1% on the quarter. That said, junk bonds still closed out 2017 in positive territory.

To continue reading: An “Extreme Warning” From Our Doom Index

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Punch-Drunk Investors & Extinct Bears, Part 1: by Pater Tenebrarum

The age old question: if everybody’s bullish (or bearish) who’s left to buy (or sell)? From Pater Tenebrarum at acting-man.com:

The Mother of All Blow-Offs

We didn’t really plan on writing about investor sentiment again so soon, but last week a few articles in the financial press caught our eye and after reviewing the data, we thought it would be a good idea to post a brief update. When positioning and sentiment reach levels that were never seen before after the market has gone through a blow-off move for more than a year, it may well be that it means something for once.

Sloshed as we are…   a group of professional investors prepares for a day of hard work on Wall Street. The tedium of a market that goes up a little bit every day, day in day out, is taking its toll.

Interestingly, the DJIA has fully participated in the blow-off this time, contrary to what happened at the end of the 1990s bull market and the first echo boom that ended in 2007. On the monthly chart the venerable Dow Industrials Average now sports on RSI of roughly 90, which is really quite rare.

 

The “slightly overbought” DJIA sports an RSI of 89.59 on its monthly chart in the wake of the blow-off move over the past year.

If you think this looks like the exact opposite of what we have seen at the lows in 2009, you are entirely correct – it is indeed the opposite in every conceivable respect. In 2009 the news were uniformly bad; nowadays, we are flooded with good news on the economy and corporate earnings. In 2009 stocks were cheap  – if not really historically cheap – now they are in many ways at their most expensive in history, particularly if one considers the median stock rather than  just the capitalization-weighted indexes.

Singing From the Same Hymn Sheet

We recall that the reading of the Daily Sentiment Index of S&P futures traders stood at just 3% bulls on the day of the March 2009 low. Looking at sentiment data today, there are probably 3% bears left. What prompted us to take a closer look at the data was an article at Marketwatch about the positioning of Ameritrade customers – in other words, self-directed retail investors. The article is ominously entitled “Retail investor exposure to stock market is at an all-time high”. An all time high? Isn’t this supposed to be the “most hated” bull market ever? That hasn’t been true for quite a while actually. Ameritrade helpfully provided a chart of its “Investor Movement Index” (IM Index), which measures the aggregate stock market exposure of its clients.

At the height of the Fed’s QE3 operation in 2014, retail investors were almost “pessimistic” compared to today. The Ameritrade IM Index is currently above 8, but it already established a new record high when it crossed 7.0 for the first time last summer.

To continue reading: Punch-Drunk Investors & Extinct Bears, Part 1:

Stock Buybacks Are Nothing but Margin Speculation, by Valentin Schmid

If you borrow money to buy stocks, you make more on the upside and lose more on the downside. If, by some weird chance, the downside has not been abolished, corporations who borrowed money to buy in their own stock may find themselves in a bind. From Valentin Schmid at theepochtimes.com:

Not only individual speculators are all-in the stock market; companies are, too

Let’s say you have $10,000 in an account with your stockbroker. Under normal circumstances, you could buy up to $30,000 worth of stock with a $20,000 loan from the broker. Let’s assume you are lucky and the stock goes up 50 percent. The position is now worth $45,000, and your equity has increased by $15,000 to $25,000. This means you can increase your position size again to $75,000 and buy more stock, because most brokers only require you to keep 30 percent of cash or stock as collateral.

This is why using margin is so powerful in a rising market and why margin debt in the accounts of the New York Stock Exchange (NYSE) has kept pace with the records in the S&P 500 and the Dow Jones industrial average, reaching an all-time high of $581 billion in November 2017.

In a falling market, the whole exercise becomes less fun, and speculators trading on margin were one of the reasons behind the vicious crash of 1929.

The biggest companies in the United States run the risk of ending up like speculators caught in a margin call.

Let’s assume you just bought more stocks and your total position in company A was $75,000 with your initial cash outlay, with profits totaling $25,000, as in the example above.

If the market moves 10 percent against you, your position is worth $67,500 and your equity is worth $18,500, but the loan is still worth $50,000 and you are supposed to keep $20,250 as collateral. In order to make up the difference between your collateral value ($18,500) and the margin requirement ($20,250) of $1,750, you can either deposit more cash or sell some securities to decrease the margin position.

To continue reading: Stock Buybacks Are Nothing but Margin Speculation

The Aristocratic Illusion, by Robert Gore

They’re not as smart as they think they are.

If you draw your sustenance from the government—as an employee, contractor, or beneficiary of redistributed funds—the money you receive comes from someone who had no choice whether or not you got paid. Except for those jobs the government mandates, private sector workers’ compensation comes from employers who have freely chosen to pay it. The jobs they perform are worth more to their employers than what they’re paid, or the jobs wouldn’t exist.

Here’s a new definition of aristocrat: a person legally entitled to take money from other people without their consent. This definition focuses on what aristocrats do and have done throughout the centuries, regardless of their labels.

If you’re an aristocrat, the thought that you’re living on somebody else’s dime may cause psychological stress. All sorts of rationales have been concocted to justify this privileged position. The most straightforward is the protection racket. In exchange for their subjects’ money, aristocrats protect them from external invasion and preserve domestic order. It’s not a voluntary trade—the subjects can’t say no—but at least both sides get something from it.

However, “protection racket” doesn’t have quite the moral gloss aristocrats crave. Deities may not have been an aristocratic invention, but they jumped on the concept of divine favor to justify their position. It makes it harder to oppose the rulers if authority is bestowed by the gods or the government is a theocracy. Ultimately, regardless of rationale, the ideology always come down to: The aristocracy is superior to those they rule. The aristocrats have no trouble believing it; they have to psychologically justify their positions to themselves. The trick is to get the subjects to buy in.

In America, the myth is that the aristocracy is a meritocracy. Merit, in this formulation, means degrees from top academic institutions, and employment with government-aligned private sector firms, nonprofit organizations, and the government itself. Those who emerge from these backgrounds and worm their way to the top are the cream…or so the aristocrats like to believe. It can’t be labelled exclusionary, they claim, because many who make it came from modest beginnings: Truman, Eisenhower, Johnson, Nixon, Ford, Carter, Reagan, Clinton, and Obama.

The best and brightest notion crested with John F. Kennedy’s administration, stacked with Ivy Leaguers and whiz kids. David Halberstam, in his book The Best and the Brightest, asked how all that brain power managed to get us into the Vietnam mess. Hubris was the easy answer: they were smart but too cocky. However, another explanation surfaced, one the aristocracy resisted. In 2016 and 2017 it exploded into the popular consciousness.

These last two years have revealed a simple truth: regardless of résumés, the aristocrats are nowhere near as bright as they think they are. For instance, the identity politics so many have fecklessly pushed completely undermines their own meritocracy myth.

Barack Obama became president because he was black, not because of anything he had done in academia, as a community organizer, or in politics. Hillary Clinton was next in line because she was a woman. Without her husband, the world would have never heard of her. How, as an aristocrat, can you argue for your own special merit when you’ve replaced the idea of merit with race, gender, and ethnicity? An aristocracy that no longer has its mythical basis is left with the blandishments of power and treasure—and the armed might of the state—and is on its way out. The Divine Right of Kings notion died before Europe’s absolute monarchies crumbled.

In their self-congratulatory isolation, enjoying only the support which they had bought and paid for (with other people’s money), America’s aristocrats had no idea that millions of America’s had rejected their pompous posturing. Hillary Clinton couldn’t convincingly answer why she was running for president, yet she was presented as an exemplar of merit and ability. Even many of her own supporters didn’t buy it, but the aristocrats shut their eyes and foisted her on the voters.

Donald Trump’s greatest achievement has been his exposure of the hypocrisy, corruption, and stupidity of America’s aristocrats. Even as he mowed down Republican contenders and it was clear his message was resonating with substantial numbers of voters, they dismissed him. November 8, 2016 shattered for good the myth—in force since Franklin Roosevelt and his New Deal whiz kids—of the exceptional aristocracy.

If the aristocracy is unexceptional, it has no basis for its pretension and condescension. It takes smarts to graduate from Harvard Law School. But it also takes smarts—which the aristocrats either don’t recognize or disparage—to run a business, operate complicated machine tools, fly a jet, harvest crops, design a semiconductor, or build office towers.

The elite don’t even acknowledge that their sustenance comes from the entrepreneurs, builders, and doers they deride. Nothing could have been more symbolically appropriate than the aristocracy’s take down by a businessman who had never held a government job. Most of the aristocracy knows very little about actual business and the world of real work. (Cocktail parties with Silicon Valley CEOs don’t count.) Trump, on the other hand, has had extensive dealings with politicians, bureaucrats, and the government.

Compounding stupidity, the aristocracy bet on Russiagate in a vain attempt to drive out the interloper and preserve its position. The story was so transparently thin that nobody really believed it, but it was all they had and they were desperate. It has boomeranged disastrously, giving Trump ample ammunition for counterattack. It has also destroyed the credibility of the FBI and the Department of Justice.

Even if the aristocracy recovers and drives Trump from office, there’s no going back. The aristocratic illusion has been shattered. Their claims of superiority are nothing more than self-serving screeches of denial. Contempt has replaced whatever respect Americans once had for their rulers. The bought-and-paid-for’s loyalty extends only to the next payday. When the payola ends, chaos begins. Funded as it is by debt and taxes on increasingly restive producers, the payola will end.

A ruling class that has lost its last vestige of legitimacy has nothing but force and fear to perpetuate its rule. The nation will grow more bitterly fractured as the skims and scams fall apart. The American aristocracy had better be sure its surveillance apparatus is in order, that it has the wherewithal to pay the military and police, and that it has infiltrated the populace with trustworthy informants and quislings, if that’s not a contradiction in terms.

Even with all those “assets,” the aristocracy is vastly outnumbered and has no moral force against the disgusted and the enraged, who every year have less to lose. Force and fear are the last refuges of doomed regimes. It all may collapse of its own unsustainable weight or there may be chaos and bloodshed, but regardless of the ultimate outcome, the aristocracy’s days are numbered.

And after the downfall, mercy will be in short supply.

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I Have A Dream! by Karl Denninger

Karl Denninger imagines a better world, at theburningplatform.com:

That we live in a world where every single move you made was tracked by the government and big corporations. 

There are cameras at every street corner, in every building and even in your own home, all connected to a gigantic cloud that was intentionally compromised by the government so it could see everything you did.

I have a dream!

That in exchange for silently cooperating with the government in putting those cameras and microphones everywhere huge corporations worth hundreds of billions of dollars would be given a pass from privacy laws and allowed to tap into that information too, both to sell you things and to screw you out of thousands of dollars every year by perverting the so-called market.

I have a dream!

That “self-driving” cars will soon make their appearance on the roads, but will always be connected to said cloud by law, with disconnection or independent action being an absolute offense and subject to immediate fines and confiscations. These vehicles will communicate exactly who is in them, where they’re going and where they’ve come from, building an impenetrable and permanent dossier on every single movement everyone in the country makes from birth to death that cannot be evaded or avoided.

I have a dream!

That the people of this nation would be so stupid that they’d fail to recognize that spending money you don’t have is a bankrupt premise and can never work, as it robs the very people who you “give” the money to and drives them further into poverty every single time.

I have a dream!

That the people of this nation would be so easily seduced that they would pay money to buy a microphone that was always on and they did not control, willingly putting it in their living room and, for many, another in their bedroom so on command that examination of their lives could be conducted not only when on the public streets but when they were having their most-intimate moments.

To continue reading: I Have A Dream!

Collapse of Construction Giant with 43,000 Employees Globally Sparks Fear and Mayhem, by Don Quijones

If you’ve never heard of UK infrastructure group Carillion, you will. From Don Quijones at wolfstreet.com:

“The company that runs Britain”: profits were privatized, costs will be socialized.

The decline and fall of 200-year old UK infrastructure group Carillion was as spectacular as it will be costly. It was forced into compulsory liquidation this morning, following the breakdown of crisis talks with its banks and the government. The company, with global sales of £5.2 billion in 2016, has 43,000 employees, including 20,000 in Britain and 10,000 in Canada. It’s saddled with debts and an underfunded pension plan.

Its shares had plunged by 95% over the past 12 months, from £2.40 ($3.53) in January 2017 to as low as £0.12 ($0.17).

“We have been unable to secure the funding to support our business plan, and it is therefore with the deepest regret that we have arrived at this decision,” the company said in a statement. And the government is now forced to guarantee public services, ranging from school meals and hospital maintenance to roadwork.

Carillion’s problems began after a spate of contract delays and a decline in new business left it at the mercy of its lenders and battling a burgeoning debt pile. The rot became irreversible once the hedge fund community, scenting fresh blood, began shorting the stock en masse in November 2016.

In July 2017 a partial review by auditors KPMG identified £845 million of contract write-downs, sparking a massive rout in the shares. The finance director who helped unearth those problems, Zafar Khan, was duly fired by management in September, but the damage had already been done: Carillion shares were down 70% and the stock was the most shorted in Europe. As a leading City analyst told City A.M, the extent of the problems was “gobsmacking.”

Last week, senior government ministers held a crisis meeting to discuss further steps. The choice was stark: either bail out the firm or it let it fail, with ugly ramifications for its project partners, employees, creditors, including three lenders, HSBC, RBS and Santander UK, and UK public services as a whole.

The government chose the latter.

To continue reading: Collapse of Construction Giant with 43,000 Employees Globally Sparks Fear and Mayhem

Contemplations on America and 4% GDP Growth, by Chris Hamilton

Sustained 4 percent GDP growth in the US isn’t going to happen. From Christ Hamilton at economica.blogspot.com:

Economic prognosticators (Jamie Dimon, among them) suggest that 4% GDP growth is likely and that economic good times have returned.  I haven’t a clue what they are smoking.  I’ll lay out how the US economy has grown ever more reliant on cheap debt to buy ever more intangible services creating a decelerating number of full time jobs among a population that is growing ever more slowly (the basis of a growing consumer base).  And that’s just scratching the surface.

To provide some context, the chart below shows the Federal Funds Rate (black shaded area) versus the annual change in federal debt (red), consumption (yellow), government consumption (blue), and private investment (white).  Noteworthy since the GFC is the surging annual change in consumption versus tame growth in government spending and decelerating private investment.  BTW, since ’81, a rising FFR % coupled with decelerating federal debt growth (as we now have) has resulted in declining private investment and imminent recession.

America the Service Economy:  Since 1960, consumption as a percentage of GDP has risen from 60% to nearly 70%, as of 2017.  However, the make up of the three components that comprise consumption has drastically changed (chart below).  Durable goods (those deemed to last 3+ years) has been steady at about 8% of GDP while non-durable goods has nearly fallen in half.  Conversely, services have risen from just more than a quarter of the total economy to nearly half of total GDP!  A service is a type of economic activity that is intangible, is not stored, and does not result in ownership.  A service is consumed at the point of sale.

So America is an economy where nearly half of all spending results in nothing tangible or durable to show for it…except more debt to be serviced?!?

To continue reading: Contemplations on America and 4% GDP Growth