Tag Archives: stocks

The Complete Idiot’s Guide to Being an Idiot, by MN Gordon

MN Gordon instructs how to make what will probably prove to be idiotic trades. From Gordon at economic prism.com:

There are many things that could be said about the GOP tax bill.  But one thing is certain.  It has been a great show.

Obviously, the time for real solutions to the debt problem that’s ailing the United States came and went many decades ago.  Instead of addressing the Country’s mounting insolvency, lawmakers chose the expedient without exception.  They kicked the can from yesterday to today.

Presently, there are no good options left to fix the mathematics bearing down on us all.  Hence, in the degenerate stage of an overburdened nation-state, style over substance is what counts.  Without question, Congress and President Trump played their parts to push the bill with much bravura.

On Tuesday, for example, President Trump, Senate Majority Leader Mitch McConnell, and House Speaker Paul Ryan held a White House meeting with two empty chairs.  Apparently, Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi didn’t want to participate in a “show meeting.”  Thus, they made a spectacle of themselves and ditched the meeting.

Indeed, their absence was all part of the show.  Moreover, the entire episode was show; nothing more.  At the time of this writing (Thursday night), the show continues on.  The last we heard, the Senate vote had been delayed until Friday.  By the time you read this it may be a done deal – or maybe not.

Regardless, the tax bill is all quite meaningless when you have a fiat currency that’s been stretched out like silly putty.  No doubt, this has propagated immense financial speculation while outrunning actual economic growth.  The effect has manifested in strange and unexpected ways.

Decentralized Cryptocurrencies

Incidentally, following Fed Chair nominee Jay Powell’s confirmation hearing before the Senate Banking Committee on Tuesday, Senator Elizabeth “Pocahontas” Warren remarked that the Fed had the same regulatory attitude going into the crash of 2008 because they haven’t intervened in bitcoin.

Naturally, it never occurred to Warren that bitcoin could be a barometer of the Fed’s extreme intervention into credit markets.  Without artificially suppressed interest rates and Fed asset purchases, bitcoin would’ve never become the recipient of such speculative fervor.  Attempting to regulate it now is like assigning price controls by edict to address a Fed induced bout of consumer price inflation.

To continue reading: The Complete Idiot’s Guide to Being an Idiot

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The Delirious Dozen of 2017, by David Stockman

There’s a 1999 tang in the stock market air. From David Stockman at davidstockmanscontracorner.com:

Yesterday we noted the massive market cap inflation and then stupendous collapse of the Delirious Dozen of 2000. The latter included Microsoft, Cisco, Dell, Intel, GE, Yahoo, AIG and Juniper Networks—plus four others which didn’t survive (Lucent, WorldCom, Global Crossing and Nortel).

Together they represented a classic blow-off top in the context of a central bank corrupted stock market. When the bubble neared its asymptote in early 2000, the $3.8 trillion of market cap represented by these 12 names was capturing most of the oxygen left in the casino. That is, the buying frenzy had narrowed to a smaller and smaller group of momo names.

That severe concentration pattern was starkly evident during the 40 months between Greenspan’s December 1996 “irrational exuberance” speech and April 2000 (when he told the Senate no bubble was detectable). In that interval, the group’s combined market cap soared from $600 billion to $3.8 trillion.

That represented, in turn, a virtually impossible 75% per annum growth rate for what were already mega-cap stocks. As it happened, in fact, $2.7 trillion or 71% of the group’s bubble peak market cap vanished during the next two years.

What we didn’t mention yesterday, however, is that this bubble top intumescence never really came back. In fact, the market cap of the eight surviving companies—all of which have continued to grow—-today stands at just $1.3 trillion or 34% of the 17-years ago peak.

Needless to say, that’s because the market no longer affords the Delirious Dozen of 2000 valuation multiples that are even remotely in the same bubblicious zip code.

Thus, the eight survivors posted combined net income of $52.3 billion during the LTM period ending in September 2017. On the far side of the 1999-2000 tech bubble, therefore, current earnings turn out to be worth 25X—not the 75X recorded back then.

We revisit the rise and fall of these turn of the century high flyers because we believe the same process of market narrowing into a diminishing number of momo names is exactly what is happening again as we reach the asymptote of this latest and greatest central bank fueled bubble.

To continue reading: The Delirious Dozen of 2017

 

Into the Cold and Dark, by James Howard Kunstler

The fake reality so much of Washington and the media is caught up in can’t obscure actual reality: we’re on track for a prodigious fiscal train wreck. From James Howard Kunstler at kunstler.com:

It amuses me that the nation is so caught up in the sexual mischief of a single Hollywood producer when the nation as a whole is getting fucked sideways and upside down by its own political caretakers.

Behind all the smoke, mirrors, Trump bluster, Schumer fog, and media mystification about the vaudeville act known as The Budget and The Tax Cut, both political parties are fighting for their lives and the Deep State knows that it is being thrown overboard to drown in red ink. There’s really no way out of the financial conundrum that dogs the republic and something’s got to give.

Many of us have been waiting for these tensions to express themselves by blowing up the artificially levitated stock markets. For about a year, absolutely nothing has thwarted their supernatural ascent, including the threat of World War Three, leading some observers to believe that they have been rigged to perfection. Well, the algo-bots might be pretty fine-tuned, and the central bank inputs of fresh “liquidity” pretty much assured, but for all that, these markets are still human artifacts and Murphy’s Law still lurks out there in the gloaming with its cohorts, the diminishing returns of technology (a.k.a. “Blowback”), and the demon of unintended consequences.

Many, including yours truly, have expected the distortions and perversions on the money side of life to express themselves in money itself: the dollar. So far, it has only wobbled down about ten percent. This is due perhaps to the calibrated disinformation known as “forward guidance” issued by this country’s central bank, the Federal Reserve, which has been threatening — pretty idly so far — to raise interest rates and shrink down its vault of hoarded securities — a lot of it janky paper left over from the misadventures of 2007-2009.

I guess the lesson is that when you have a pervasively false and corrupt financial system, it is always subject to a little additional accounting fraud — until it’s not. And the next thing you know, you’re sitting in the rubble of what used to be your civilization.

To continue reading: Into the Cold and Dark

Tales from a Late Stage Bull Market, by MN Gordon

“Late Stage” implies the bull market will be over soon, which is SLL’s prognostication as well. From MN Gordon at economicprism.com:

An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.

Last week, for instance, there was a Bigfoot sighting near Avocado Lake in Fresno County, California.  But it wasn’t just one Bigfoot.  According to a local farmer, there was a family of five or six Bigfoot running across his ranch in the middle of the night.  Paranormal expert Jeffery Gonzalez offered the following Bigfoot sighting anecdote:

“One of them, which was extremely tall, had a pig over its shoulder.  And the five scattered and the one with the pig was running so fast it didn’t see an irrigation pipe and it tripped, with the pig flying over.”

What to make of it?

Bigfoot sightings, no doubt, are pro-growth.  They’re bullish for stock prices.  So, too, are warnings from North Korea that nuclear war “may break out at any moment.”

How do we know these two unrelated events are bullish?  Because if you plot the S&P 500’s price movement since their occurrences, you’ll find that the market is up.  There is a direct – albeit false – correlation.

And these days a correlation of any kind is what matters.  No one cares that correlation does not imply causation.  Such a pesky detail doesn’t matter to Phillips Curve adherents.  Why should it matter for anything else?

Indeed, there are plenty of things that used to matter, which no longer matter.  For example, stock valuations don’t matter.  Profits don’t matter.  Most of all, deficits don’t matter.

To continue reading: Tales from a Late Stage Bull Market

 

Pentagon Worried about Hackers Causing Stock Market Crash, by Wolf Richter

Governments and central banks are fine with equity markets being manipulated upward. However, manipulation downward would be a national emergency. From Wolf Richter at wolfstreet.com:

The Pentagon?! But no one’s worried when stocks get manipulated higher.

It’s funny, the all-out government effort to prevent a major decline of the stock market, or of individual stocks, via manipulation or hacking. Now even the Pentagon is looking into it.

What’s funny is that everyone cheers when manipulation, hacking, and other shenanigans cause the market or individual stocks to soar. It’s just declines they’re worried about at these precarious levels.

Manipulating stocks higher is a time-honored game that routinely receives kudos from all around. The Fed printed nearly $4 trillion and cut rates to zero for eight years – no matter what the damage to the real economy – for the sole purpose of manipulating up asset prices including stock prices. “Wealth effect,” Ben Bernanke called it. Corporate executives and analysts exaggerate future earnings only to deflate them at the last minute, because stock prices are “forward looking” and fake future earnings is all that matters, even if reality now sucks. And on and on. Whatever it takes to push stock prices up, by hook or crook, is cool. These are our heroes.

But when some lonely dude might hack into high-speed stock trading systems or spook the trading algos, quant-fund managers, and high-speed traders and throw algorithmic trading off track to where prices might actually fall in a major way, all heck breaks loose, and the Pentagon feels empowered to step in.

Trading by automated systems, such as used by quant funds and high-speed traders, is beginning to dominate stock trading. The risk of hacking into those systems or manipulating those systems in other ways is a real issue – but it should cut both ways. And the systems themselves are designed to manipulate prices, so….

Nevertheless, the Pentagon’s research arm, the Defense Advanced Research Projects Agency (Darpa), is working with “dozens” of high-speed traders, quant-fund managers, “people from exchanges and other financial companies,” executives, and “others” from Wall Street to figure out how hackers “could unleash chaos in the US financial system.”

To continue reading: Pentagon Worried about Hackers Causing Stock Market Crash

Hard Core Doom Porn, by Robert Gore

It will be a crash like we’ve never seen before.

SLL has been accused of trafficking in “doom porn.” Guilty as charged. If you don’t like doom porn, don’t read this article, it’s hard core. If you prefer feel good and heartwarming, there are plenty of Wall Street research reports and mainstream media stories about the economy available. Enjoy!

In 1971, President Nixon closed the “gold window,” which allowed foreign governments to exchange their dollars for gold. This severed the last link between any government and central bank-created debt and the real economy. Debt could be conjured at whim, and governments and central banks have done so for the last 46 years.

Not surprisingly, credit creation without restraint has papered the globe with the greatest pile of debt mankind has ever amassed, measured in nominal terms or relative to the underlying economy. A measure of how extraordinary this situation is: most people regard it as normal, if they think of it all. Debt is a first mover, a financial constant. Any exigency small or large can be met from an unlimited credit pool that will always be with us. How to rebuild Houston, Florida, and Puerto Rico? No problem, borrow.

Although fiat credit creation by governments and central banks is unconnected to the real economy, its effects are not. Their debt becomes an asset within the financial system. Through fractional reserve banking, securitization, and derivatives it become the basis for a multiplication of the original debt. That multiplication is many times the multiplier (the reciprocal of the reserve requirement) taught in introductory macroeconomics classes whereby the debt is contained within the banking system.

Nominal global debt is reckoned at between $225 and $250 trillion, or about three times global GDP. Financial, debt-supported derivatives (financial instruments whose prices are derived from the prices of other financial instruments) are estimated at anywhere from $500 trillion to $1 quadrillion notational, or six to twelve times global GDP.

Overpriced houses did not cause the last financial crisis and almost bring down the world’s financial system, securitized packages of mortgages and their associated derivatives did. The Panglossian view of derivatives is that most of them can be netted out against offsetting derivatives, thus actual exposures are far less that notational amounts. The real world view is they can only be netted out as long as all counterparties remain solvent. As we learned in 2009, that is not always a correct assumption.

Globally, unfunded old age pension and medical liabilities, not counted as debt but still promises made that often have the force of law, sum to another $400 trillion. In the US, they are about $210 trillion, or about 11 times US GDP. Demographics amplify the liability: across the developed world, declining birth rates and extensions in life expectancies mean a shrinking pool of workers supports an expanding pool of beneficiaries. In the last month, SLL has posted four excellent articles by John Mauldin for those who want all the gruesome details. (Just enter John Mauldin in SLL’s search box and they’ll pop right up.)

This doom porn, the skeptics will say, is almost as old as Deep Throat (released in 1972). Markets crash from time to time, but they always bounce back. Central banks and governments come to the rescue with fiscal stimulus (increased government debt) and unlimited fiat debt. Why should we worry now?

There are a number of reasons. When the world was less indebted, a fiat currency unit’s worth of debt produced more than a fiat currency unit’s worth of expanded output of goods and services. Sometime within the last year or two, the marginal economic effectiveness of all that government and central bank debt reached zero, and is negative after debt service.

With the world saturated in debt, another fiat currency unit of debt produces no increase in output. Kick in the costs of servicing and repaying that debt, and increasing debt is actually retarding economic growth. It accounts for the long-term slowing growth trend, flat incomes, and “secular stagnation” that puzzle so many economists.

It also accounts for the lack of inflation that puzzles so many central bankers, at least in the price indexes they look at. They are looking at the wrong indexes. The relevant indicia are stock, high-grade bond, real estate, and cryptocurrency prices, still at or close to record highs, and corporate and securitized-debt credit spreads to treasury benchmarks at record lows (indicating massive complacency about corporate credit risk). Here inflation—the speculative kind that blows bubbles—is alive and thriving.

With the Federal Reserve now taking steps to shrink its balance sheet and other central banks making noises about doing the same, global fiat debt creation may go into reverse for the first time in many years. Brandon Smith at Alt-Market.com argues that this is part of plan leading to a crash and global, centralized monetary control.

He may or may not be on to something, however, valuation extremes and sentiment indicators point to the same conclusion concerning a crash. SLL maintains financial markets are exercises in crowd psychology, impervious to government and central bank efforts to control them, designed to separate the maximum number of speculators from a maximum amount of their money.

Robert Prechter, of Elliott Wave International, has written the chapter and the verse on markets and psychology. (SLL reviewed his groundbreaking tome, The Socionomic Theory of Finance.) Consider the following from Elliot Wave International’s October “Financial Forecast.”

Every month another sentiment indicator seems to pop to a frothy new extreme. Last month it was the percentage of cash that members of the American Association of Individual Investors harbored in their investment portfolios. At 14.5%, it was the smallest allocation to this safe alternative since January 2000, the same month that the Dow Industrials began a 38% decline that lasted through October 2002. Last month, we also showed a new bullish extreme for the five-day average of Market Vane’s Bullish Consensus survey of advisors. On September 15, the average pushed to 71%, a new ten-year extreme.

The most recent Commitment of Traders Report shows that Large Speculators in futures on the CBOE Volatility Index (VIX) have amassed a record net- short position of 172,395 contracts.

This record bet on subdued volatility sets the stage perfectly for the period of “high volatility” that EWFF called for in August.

…Large Speculators in the E-mini DJIA futures have pushed their net-long position to 95,976 contracts, more than four times the number of contracts they held in January 2008, shortly after the Dow started its largest percentage decline since 1929. So, investors are betting to a record degree that the stock market will continue to rise and volatility will continue to remain subdued. Paradoxically, these measures indicate that exact opposite.

Various media accounts confirm that a rare complacency now dominates the stock market.

One doesn’t have to buy in to socionomics to realize that virtually everyone is now on the same side of the boat, a condition generally followed by the boat capsizing. Using conventional valuation measures, the only time stocks have been more highly valued is just before the tech wreck in 2000.

If one does buy into socionomics, the last few upward squiggles in the stock market will put the finishing touches on intermediate, primary, cycle, supercycle, and grand supercycle Elliot Waves dating back to 2016, 2009, 1974, 1932, and the 1780s, respectively. In other words, this is going to be a crash for the ages.

Given the unprecedented level of global debt, that appears to be the most likely scenario. Every financial asset in the world is either a debt claim or an even less secure equity claim—a claim on what’s left after debt is paid. Much of the world’s real, tangible assets are mortgaged.

When the debt bubble implodes, a global margin call will prompt forced selling, driving down all asset prices precipitously. Most of what is currently regarded as wealth will vanish. Opening up the world’s fiat debt spigots full force won’t stop this one. The notions that governments and central banks have speculators’ backs, that problems caused by excessive debt can be solved with more debt, will be revealed as monumental follies. And markets will not come back, at least in our lifetimes.

Long-time readers will point out that SLL has been issuing warnings for years. Again, guilty as charged. However, we’ll join Mr. Prechter and company in their prediction that US equity markets top out before the end of this year. (They called last year’s top in the government bond market, adding to an impressive list of correct calls.) If we’re wrong, it won’t be the first or last time. If we’re right, given the magnitude of what’s coming, being a few years early won’t matter at all. Our concluding clichés: fear is stronger than greed and markets go down much quicker than they go up.

Alt-Historical Fiction!

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Bull Trap: The False Promise Of Tax Cuts, by Lance Roberts

The bottom 80 percent of Americans by income pay only 36 percent of all taxes, which means a tax cut won’t put a lot of money in their pockets, stoking their consumption and the overall economy. From Lance Roberts at realinvestmentadvice.com:

Last week, I did a fairly extensive analysis on the release of the 9-page “Trump Tax Cut” plan. 

The most important aspect of that discussion was the difference between 1982, the last time there was permanent tax reform, as compared to today.

Comparing Trump’s economic policy proposals to those of Ronald Reagan. For those that deem that bullish, we remind you that the economic environment and potential growth of 1982 was vastly different than it is today.  Consider the following table:‘”

1982-today

The differences between today’s economic and market environment could not be starker. The tailwinds provided by initial deregulation, consumer leveraging and declining interest rates and inflation provided huge tailwinds for corporate profitability growth.

Most importantly, when tax cuts were implemented in the mid-80’s, the U.S. economy was just coming out of back-t0-back recession versus being in the third longest economic expansion on record to date.

However, besides the fact the economic backdrop is diametrically opposed to what is was during the “Reagan years,” we also need to look at the backdrop of who actually pays taxes to begin with.

Who Pays Taxes

While the current tax plan has not defined actual income levels as of yet, we can make some assumptions from previous iterations of proposals. The entire premise behind the tax cuts is that it will unleash economic growth, generate millions of jobs, bring back manufacturing to America and lead to higher wage growth.

However, given that roughly 70% of economy is driven by personal consumption, the tax cuts will need to increase the amount of disposable incomes available to individuals to expand consumption further, thereby increasing overall economic growth.

So, here is the issue of tax cuts for the middle class. The chart below shows “who pays what in Federal taxes.”

Look at that chart closely.

  • 50% of ALL taxes are paid by the top 10% of income earners.
  • The other 50% of ALL taxes are paid by remaining 90%.
  • The BOTTOM 80% only pay 36% of ALL taxes.

But it is even more glaring when we look at the taxes paid by just the top 20% of income earners.

To continue reading: Bull Trap: The False Promise Of Tax Cuts