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Economic, Financial And Political Fundamentals Continue To Deteriorate

I’ve been writing about the rising consumer debt delinquency and default rates for a few months.  The “officially tabulated” mainstream b.s. reports are not picking up the numbers, but the large credit card issuers (like Capital One) and auto debt issuers (like Santander Consumer USA) have been showing a dramatic rise in troubled credit card and auto debt loans for several quarters, especially in the sub-prime segment which is now, arguably the majority of consumer debt issuance at the margin.  The rate of mortgage payment delinquencies is also beginning to tick up.

Silver Doctor’s Elijah Johnson invited me onto his podcast show to discuss the factors that are contributing to the deteriorating fundamentals in the economy and financial system, which is translating into rising instability in the stock market:

If you are interested in learning more about my subscription services, please follow these link: Mining Stock Journal / Short Seller’s Journal. The next Mining Stock Journal will be released tomorrow evening and I’ll be presenting a junior mining stock that has taken down over 57% since late January and why I believe, after chatting with the CEO, this stock could easily triple before the end of the year.

“Thanks so much. It was a pleasure dealing with you. Service is excellent” – recent subscriber feedback.

Short Sell Ideas: Will Overstock.com End Up At Zero?

Overstock’s attempt to capitalize on “blockchain mania” appears to have fallen flat. The SEC is investigating it ICO fund-raising scheme and a class-action lawsuit has been filed in connection with the deal. OSTK finally announced today that it was pulling its attempt to unload 4 million shares on the public. This is after a failed effort to sell its e-commerce business. Meanwhile, OSTK’s operating losses are mounting, including a big loss in Q4, a period in which retailers can put on a blind-fold and make money.

I believe OSTK can be profitably shorted at its current price of $33 if you are willing to endure periods in which the stock might respond to highly promotional announcements from the Company that would cause the stock to spike up temporarily. My ultimate price target is below $10.

As I write this (Thursday, March 29th), CNBC is reporting that Overstock has canceled its 4 million share offering, though the Company has not issued a formal press release to that effect. The reason given is “market conditions.” If this is true, in my view, it means that a lack of demand at the current stock price – $37 – would have necessitated pricing the deal significantly lower in order to place the shares. I would suggest that this indicates that OSTK stock is headed lower anyway.

Seeking Alpha published my anlysis on OSTK, you can read the rest of here: Overstock.com: An Epic Short Opportunity

You can learn about short ideas in the Short Seller’s Journal, a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here: Short Seller’s Journal information.

2008 Redux-Cubed (at least cubed)?

There is plenty of dysfunction in plain sight to suggest that the financial markets can’t bear the strain of unreality anymore. Between the burgeoning trade wars and the adoption in congress this week of a fiscally suicidal spending bill, you’d want to put your fingers in your ears to not be deafened by the roar of markets tumbling – James Kuntsler, “The Unspooling

Many of you have likely seen discussions in the media about the LIBOR-OIS spread. This spread is a measure of banking system health. It was one of Alan Greenspan’s favorite benchmark indicators of systemic liquidity. LIBOR is the London Inter-Bank Offer Rate, which is the benchmark interest rate at which banks lend to other banks. The most common intervals are 1-month and 3-month. LIBOR is the most widely used reference rate globally and is commonly used as the benchmark from which bank loans, bonds and interest rate derivatives are priced. “OIS” is an the “overnight indexed swap” rate. This is an overnight inter-bank lending benchmark index – most simply, it’s the global overnight inter-bank lending rate.

The current 1-month LIBOR-OIS spread has spiked up from 10 basis points at the beginning of 2018 to nearly 60 basis points (0.60%). Many Wall Street Einsteins are rationalizing that the LIBOR-OIS spread blow-out is a result of U.S. companies repatriating off-shore cash back to the U.S. But it doesn’t matter. That particular pool of cash was there only to avoid repatriation taxes. The cash being removed from the European banking system by U.S corporations will not be replaced. The large pool of dollar liquidity being removed was simply masking underlying problems – problems rising to the surface now that the dollar liquidity is drying up.

Keep in mind that the effect of potential financial crisis trigger events as reflected by the LIBOR-OIS spread since 2009 has been hugely muted by trillions in QE, which have kept the banking system liquefied artificially. Think of this massive liquidity as having the effect of acting like a “pain killer” on systemic problems percolating like a cancer beneath the surface. The global banking system is addicted to these financial “opioids” and now these opioids are no longer working.

Before the 2008 crisis, the spread began to rise in August 2007, when it jumped from 10 basis points to 100 basis points by the end of September. From there it bounced around between 50-100 basis points until early September 2008, when it shot straight up to 350 basis points. Note that whatever caused the spread to widen in August 2007 was signaling a systemic financial problem well in advance of the actual trigger events. That also corresponds with the time period in which the stock market peaked in 2007.

What hidden financial bombs are lurking behind the curtain? There’s no way to know the answer to this until the event actually occurs. But the market action in the banks – and in Deutsche Bank specifically – could be an indicator that some ugly event is percolating in the banking system, not that this should surprise anyone.

The likely culprit causing the LIBOR-OIS spread is leveraged lending. Bank loans to companies that are rated by Moody’s/S&P 500 to be mid-investment grade to junk use banks loans that are tied to LIBOR. The rise in LIBOR since May 2017 has imposed increasing financial stress on the ability of leveraged companies to make debt payments.

But also keep in mind that there are derivatives – interest rate swaps and credit default swaps – that based on these leveraged loans. These “weapons of mass financial destruction” (Warren Buffet) are issued in notional amounts that are several multiples of the outstanding amount of underlying debt. It’s a giant casino game in which banks and hedge funds place bets on whether or not leveraged companies eventually default.

I believe this is a key “hidden” factor that is forcing the LIBOR-OIS spread to widen. This theory is manifest in the performance of Deutsche Bank’s stock:

DB’s stock price has plunged 33.8% since the beginning of January 2018. It’s dropped 11.3% in just the last three trading days (thru March 23rd). There’s a big problem behind the “curtain” at Deutsche Bank. I have the advantage of informational tidbits gleaned by a close friend of mine from our Bankers Trust days who keeps in touch with insiders at DB. DB is a mess.

DB, ever since closing its acquisition of Bankers Trust in the spring of 2000, has become the leading and, by far, the most aggressive player in the global derivatives market. During the run-up in the alternative energy mania, DB was aggressively underwriting exotic derivatives based on the massive debt being issued by energy companies. It also has been one of the most aggressive players in underwriting credit default swaps on the catastrophically leveraged EU countries like Italy and Spain.

DB is desperate to raise liquidity. Perhaps its only reliable income-generating asset is its asset management division. In order to raise needed funds, DB was forced to sell 22.3% of it to the public in a stock deal that raised US$8 billion. It was originally trying to price the deal to raise US$10 billion. But the market smells blood and DB is becoming radioactive. The deal was floated Thursday (March 22nd) and DB stock still dropped 7% on Thursday and Friday.

Several U.S. banks are not far behind in the spectrum of financial stress. Citigroup’s stock has declined 15.1% since January 29th, including a 7.5% loss Thursday/Friday. Morgan Stanley has lost 11.8% since March 12th, including an 8.8% dive Thursday/Friday. Goldman Sachs’ stock has dumped 11% since March 12th, including a 6.3% drop on Thursday/Friday. JP Morgan dumped 6.7% the last two trading days this past week (thru March 23rd).

If Deutsche Bank collapses, it will set off a catastrophic chain reaction of counter-party defaults. This would be similar to what occurred in 2008 when AIG defaulted on counter-party derivative liabilities in which Goldman Sachs was the counter-party. While it’s impossible to prove without access to the inside books at DB and at the ECB, I believe the primary driver behind the LIBOR-OIS rate spread reflects a growing reluctance by banks to lend to other banks for a duration longer than overnight. This reluctance is derived from growing fear of DB’s deteriorating financial condition, as reflected by its stock price.

The commentary above is from last week’s issue of the Short Seller’s Journal. In addition to well-researched insight into the financial system, the SSJ presents short-sell ideas each week, including ideas for using options. This week’s issue, just published, discusses why Tesla is going to zero and how to take advantage of that melt-down. You can find out more about this service here: Short Seller’s Journal information.

Tesla’s Irreversible Death Spiral Fait Accompli

The inevitable is finally starting to unfold. The downgrade to triple-C by Moody’s came as a surprise, at least to me. Historically Moody’s has been the last to downgrade collapsing companies. The most famous was its failure to downgrade Enron until about a week before Enron folded. Perhaps this time around it decided to get out in front of the obvious.

Tesla’s continued existence, despite obvious operational and financial problems that were growing in scale by the week, was enabled by the most lascivious monetary policy in U.S. Central Bank history. For me the coup de grace was the $1.5 billion junk bond deal floated last summer. It was emblematic of rookie money managers, unsupervised children in the sandbox, shoveling other people’s money into a cash-burning furnace.

Most managers running retail and pension money have no idea what a triple-hook rating means for any company with massive cash flow deficits operating in a financial environment in which the Fed is not printing trillions of dollars that can be recycled into bad ideas.

Even without the nearly $10 billion in debt on top of several billion in negative free cash flow, TSLA has billions in off-balance-sheet liabilities that don’t seem to exist as long as the Fed is injecting free cash into the financial system for inexperienced money managers to abuse.

All of that changes with a falling stock market and a triple-C credit rating. Now the obvious operational impossibilities and questionably fraudulent projections by Elon Musk will become quite relevant. If those don’t sink the ship, perhaps the SEC investigations, the ones that Musk forgot to disclose, will put an end to Tesla’s Waterloo. Unless the Fed reverses course and re-implements ZIRP and money printing, it will be next impossible for Tesla to raise the several billion it will need to keep its cancer-infested rodent moving its legs on the gerbil-wheel.

If you are invested in TRowe and Fidelity funds with large exposure to Tesla, I highly recommend selling them. At this point the only prayer the managers running those funds have is to throw more of other-people’s-money into Tesla’s furnace and pray for the Second Coming to save them.

Tesla is going to collapse. The collapse will likely occur in the next 12 months unless there’s some form of exogenous intervention. I doubt the Easter Bunny will deliver that sort of help this weekend. Moody’s “bold” downgrade to triple-C has sealed the fate.

It’s Not The Trade Wars That Should Worry You

Trade wars historically have been symptomatic of more profound underlying problems. Primarily economic in nature. Any big war in history can be tied to economic roots. The degree to which the U.S. financial and economic system is self-destructing varies inversely with the amplitude of the propaganda promoting the opposite.

Yet, in 2016 based on the latest annual W-2 numbers available (SSA.Gov), 55% of worker earn less that $34k per year; 80% of all Americans earn less than $63k per year. Based on the BLS’ labor force participation rate, 37% of all working-age Americans were not considered part of the labor force. But wait, you’re not considered part of the “labor force” if you have not actively looked for a job in the past four weeks.

Just based on these attributes, how is it all possible that the U.S. economy is “healthy and growing?” I’ve left out the fact that household debt hits a new record every month. The average car loan outstanding is $31k. How does that compare to the income numbers? This means that, on average, 80% with a car loan have an outstanding balance that is about 50% of their annual salary. What would happen to the economy if the Government were unable to issue more Treasury to fund the accelerating spending deficit? Sorry to break the news but the economy is collapsing…

Trump’s solution to this is to give us the three-headed neo-con monster called Bolton, Pompeo and Haspel. All three are drooling to drop nukes, spy on U.S. citizens and torture anyone who disagrees with U.S. imperialism.

Paul Craig Roberts posted a must-read article by Stephen M. Walt:

[T]he departures of Tillerson and McMaster and the arrivals of Bolton, Pompeo, and Haspel herald the ascendance of a hawkish contingent that will tear up the Iran deal, reinstate the torture regime, and eventually start a war with North Korea that goes way beyond a simple “bloody nose.” And with Bolton in the White House, Trump is going to be advised by a guy who never saw a war he didn’t like (when observed from a safe distance, of course)…Let me be clear: Bolton’s appointment is on par with most of Trump’s personnel choices, which is to say that it’s likely to be a disaster

You can read the rest of this here: Welcome To The Dick Cheney Administration

Upon reading that commmentary, you’ll understand why it’s not the trade wars that keep up at night…

The Mining Stocks Do Not Want To Go Any Lower

It feels like were at the point in the “correction” cycle in which the mining stocks are reluctantly going lower. I also believe that aggressive hedge funds looking to buy at this level are trying to push the stocks down in early trading in order to induce remaining weak hands to sell in their bids. Tuesday (March 20th) is a perfect example. Several of the stocks I own were hammered early and then snapped-back during the course of the day. As an example, USAU opened at US$1.84 but was slammed down to $1.75. It rebounded to close down only 2 cents at $1.80. This was despite sideways movement in gold after gold was hit in early morning trading.

The graph above is a 1-yr daily of the GDX. You can see that it’s been trending sideways since early February this year. You can see also that it’s managed to hold the 52-week lows on several occasions. It just “feels” like the miners do not want to get lower. Similarly, the sentiment regarding, and interest in, the mining stocks is at a low level seen at cyclical bottoms in the precious metals sector (Oct 2008, Dec 2015):

I sourced the chart at the bottom of the previous page from Turd Ferguson (TF Metals Report). It shows a timeline of Google searches on “gold mining stocks” over time.

The trading patterns and sentiment indicators are thus at levels that is typically associated with market bottoms. The best time to buy into a stock sector is when it’s at its most unloved. I would argue that were are at that point right now.

As far as the timing on when the sector will begin to take-off again, I’m loathe to assign a time-frame other than that I expect a big move to begin before the end of the summer. A subscriber emailed me to discuss the sector and expressed frustration over the fact that the enormous physical off-take in the eastern hemisphere has not stimulated a big move in gold. I responded by explaining that I’m not relying on the Chinese to squeeze the market.

I think the market will move higher on its own accord. As things fall apart more quickly in the west, gold will soar. Look at Wednesday’s FOMC rate hike event. Gold’s response to the Fed’s rate hike completely surprised me. We put on a trading hedge this morning thinking that gold would get hammered when the rate hike news hit the tape. Gold did just the opposite. This is bullish.

The commentary above is from the latest issue of the Mining Stock Journal. My goal is to find junior mining stocks with huge upside potential before the get discovered by the “heard.” You can learn more about the MSJ using this link:   Mining Stock Journal.

MSJ to the rescue! (of my mining stock portfolio). I’m up 198% currently on a significant stake @ .18 cents.
Thank you for all you do!
– Subscriber “Phil,” in reference to Mineral Mountain Resources, which I presented July 7, 2016

“The Don And Larry Show”

Just when you think it would be impossible for the Trump Presidency to become any more of a tragi-comedy, Trump manages to turn the volume up to eleven by appointing Larry Kudlow as his chief economic hit-man. In 1999, Kudlow predicted that the Dow would hit 50,000 by 2020:

To direct his National Economic Council, meanwhile, Trump has nominated Larry Kudlow, who also proposed a wildly optimistic take on stock prices back then, in his case a prediction that the Dow Jones Industrial Average would go to 50,000 by 2020…Kudlow, the more interesting of Trump’s Dow dreamers, didn’t seem to be chastened by this experience; he went on to a career as a TV business commentator, delivering an amazing series of bum steers as the years rolled by. And now, as if in recognition of his dreadful lifetime achievements, he is to be appointed director of the National Economic Council. He has failed about as far as one can fail…”

The quote above is from an article published in The Guardian today by Thomas Frank: Dow dreamers show Trump’s war on elites is pure fantasy.  Frank goes on to warn:   “The real danger in elevating Kudlow to a position of such great public authority, I think, is not that he will continue to misapprehend the world (though of course he will), but that he will be in a position to put his destructive ideology into effect.”

The person who sent me the article wrote in the subject line of the email: “we are so economically f*cked.”  What’s even more amusing about that preface is that most Americas already are economically f*cked.   They just don’t realize it yet because up until now, the Fed and the Government gave the average American enough rope in the form of easy access to debt to hang himself.   As an example, the average car loan balance outstanding is $31,000.  Yet, according to the Social Security Administration, in 2016 (the most recent annual data available from W2’s) 55% of all wage-earners made less than $34,000.

Good luck with that.  The trade war initiated by Trump is little more than the symptom of a collapsing economic system.  The stock market is warning us that something ugly is on the horizon.  The middle class supporters are screwed. Watching them cheer for Trump is analogous to watching chickens in the barnyard cheer for Colonel Sanders…it is indeed one big tragi-comedy…

Is It The Trade War Threats Or Extreme Overvaluation?

The stock market is is more overvalued now than at any time in U.S. history. Sure, permabulls can cherry pick certain metrics that might make valuations appear to be reasonable. But these metrics rely on historical comparisons using GAAP accounting numbers that simply are not remotely comparable over time. Because of changes which have liberalized accounting standards over the last several decades, current GAAP EPS is not comparable to GAAP EPS at previous market tops. And valuation metrics based on revenue/earnings forecasts use standard Wall Street analyst “hockey stick” projections. Perma-bullishness in Wall Street forecasts has become institutionalized. The trade war threats may be the proverbial “final straw” that triggers a severe market sell-off, but the stock market could be cut in half and still be considered overvalued.

The market action has been fascinating. I noticed an interesting occurrence that did not receive any attention from market commentators. Every day last week the Dow/SPX popped up at the open but closed well below their respective highs of the day. Each day featured a pre-market ramp-up in the Dow/SPX/Naz futures. However, the Dow closed lower 3 out of the 5 days and the SPX closed lower 4 out of 5 days. All three indices, Dow/SPX/Naz, closed the week below the previous week’s close.

My point here is that the stock market is still in a topping process. The 10% decline that occurred in late January/February was followed by a rebound that seems to have sucked all of of hope and bullishness back into the market. This is reflected in some of the latest sentiment readings like the Investors Intelligence percentage of bears index, which is still at an all-time low. I also believe that some hedge fund algos are being programmed to sell rallies and buy dips. We’ll have a better idea if this theory is valid over the next couple of months if the market continues to trend sideways to lower.

Deteriorating real economic fundamentals – The most important economic report out last week was retail sales for February, which showed at 0.1% decline from January. This was a surprise to Wall Street’s brain trust, which was expecting a 0.4% gain. Keep in mind the 0.1% decline is nominal. After subtracting inflation, the “unit” decline in sales is even worse. This was the third straight month retail sales declined. The decline was led by falling sales of autos and other big-ticket items. In addition, a related report was out that showed wholesale inventories rose more than expected in January as wholesale sales dropped 0.2%, the biggest monthly decline since July 2016.

Retail and wholesale sales are contracting. What happened to the tax cut’s boost to consumer spending? Based on the huge jump in credit card debt to an all-time high and the decline in the savings rate to a record low in Q4 2017, it’s most likely that the average consumer “pre-spent” the anticipated gain from Trump’s tax cut. Now, consumers have to spend the $95/month on average they’ll get from lower paycheck withholdings paying down credit card debt. As such, retail sales have tanked 3 months in a row.

In fact, the consumer credit report for January, released the week before last, showed a sharp slow-down in credit card usage. In December, credit card debt jumped $6.1 billion. But the January report showed an increase of $780 million. Yes, this is seasonal to an extent. But this was 16.4% below the January 2017 increase of $934 million.

Further reinforcing my thesis that the average household has largely reached a point of “saturation” on the amount of debt that it can support, the Federal Reserve reported that credit card delinquencies on credit cards issued by small banks have risen sharply over the last year. The charge-off rate (bad debt written off and sold to a collection company) soared to 7.2% in Q4 2017, up from 4.5% in Q4 2016. “Small banks” are defined as those outside of the 100 largest banks measured by assets. The charge-off rate at small banks is at its highest since Q1 2010.

Any strength in retail and auto sales related to the replacement cycle from the hurricanes last year are largely done. If you strip out “inconsistent seasonal adjustments,” the decline in February retail sales was 0.48% (John Williams, Shadowstats.com). Given the degree to which the Government agencies tend to manipulate economic statistics, it’s difficult for me to say that the three-month drop in retail sales will continue. However, I suspect that spending by the average household, strapped with a record level of debt, will continue to contract – especially spending on discretionary items.

A portion of the commentary above is an excerpt from the latest Short Seller’s Journal, a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here: Short Seller’s Journal information.

The Slow Death Of The U.S. Economy

Deteriorating real economic fundamentals – The most important economic report out last week was retail sales for February, which showed at 0.1% decline from January. This was a surprise to Wall Street’s brain trust, which was expecting a 0.4% gain. Keep in mind the 0.1% decline is nominal. After subtracting inflation, the “unit” decline in sales is even worse. This was the third straight month retail sales declined. The decline was led by falling sales of autos and other big-ticket items. In addition, a related report was out that showed wholesale inventories rose more than expected in January as wholesale sales dropped 0.2%, the biggest monthly decline since July 2016.

Retail and wholesale sales are contracting. What happened to the tax cut boost to spending? Based on the huge jump in credit card debt to an all-time high and the decline in the savings rate to a record low in Q4 2017, it’s most likely that the average consumer “pre-spent” the anticipated gain from Trump’s tax cut. Now, consumers have to spend the $95/month on average they’ll get from lower paycheck withholdings paying down credit card debt. As such, retail sales have tanked 3 months in a row.

Paul Craig Roberts published a must-read essay on the slow death of the U.S. economy:

As for the full employment claimed by US government reporting agencies, how does full employment coexist with this reported fact from the Dallas Morning News: 100k Applications For 1000 jobs.

Toyota Motor Company advertised the availability of 1,000 new jobs associated with moving its North American headquarters from southern California to Texas and received 100,000 applications. Where did these applications come from when the US has “full employment?”

Clearly, the US does not have full employment. The US has an extremely low rate of labor force participation, because there are no jobs to be had, and discouraged workers who cannot find jobs are not measured in the unemployment rate. Not measuring the unemployed is the basis of the low reported unemployment rate. The official US unemployment rate is just a hoax.

You can read his full commentary here:    America Is Losing Its Economy

Does Larry Kudlow Fear Gold?

One of the first comments about the economy from Larry Kudlow after his appointment as Trump’s chief “economic” advisor was to advise anyone listening to “sell gold.”   But why?  Gold is irrelevant in the United States.  Very few Americans care about silver and even less care about gold.  So why bring attention headline attention to gold?

The simple, if not obvious, answer is that gold is the number one threat to the U.S. dollar. It’s the antithesis of gold.  For a born again Catholic like Kudlow, gold is the anti-Christ.

Silver Doctors invited me onto its weekly Metals and Market Wrap show to discuss the February employment report, the appointment of Larry Kudlow and, of  course, gold and silver:

Use these links if you are interested in learning more about IRD’s   Short Seller’s Journal or Mining Stock Journal.   Many of my short sell and junior mining stock ideas have been successful despite the lofty stock market and sideways trending precious metals market. I review both short and longer term trading/investment ideas in each issue.

The supply of gold, unlike paper money, is limited. Alchemists have tried for centuries to turn other metals into gold — but have never succeeded. Gold is a beautiful metal on its own and the lust for gold seems to be built into the DNA of mankind. If you own ten thousand ounces of gold, you can say that you will ALWAYS be wealthy. – Richard Russell