Category Archives: U.S. Economy

Fundamentals Supporting Stock Market Further Deteriorate

The Bureau of Economic Analysis calculates and publishes an earnings metric known as the National Income and Products Accounts which presents the value and composition of national output and the types of incomes generated in its production. One of the NIPA accounts is “corporate profits.” From the NIPA handbook: “Corporate profits represents the portion of the total income earned from current production that is accounted for by U.S. corporations.”

The BEA’s measurement of corporate profits is somewhat similar to using operating income from GAAP financial statements rather than net income. The BEA is attempting to isolate “profits from current production” from non-production noised introduced by GAAP accounting standards. “Profits from current production provide a comprehensive and consistent economic measure of the net income earned by all U.S. corporations. As such, it is unaffected by the changes in tax laws, and it is adjusted for non-reported and misreported income” (emphasis is mine).

Why do I bring this up – what is the punch line? Because the NIPA measurement of corporate profits is currently showing no growth. Contrast this with the net income “growth” that is generate from share buybacks, GAAP tax rate reductions and other non-cash GAAP gimmicks used to generate GAAP net income on financial statements. This does not surprise me because I use operating income when judging whether or not companies that are reported as “beating” estimates are “beating” with accounting gimmicks or actual products derived from the underlying business.

It’s quite easy for companies to manufacture net income “beats.” But it’s more difficult – though possible – to manipulate operating income. The deferment of expenses via capitalizing them (taking a current cost incurred and sticking it on the balance sheet where the cost is amortized as an expense over time) is one trick to manage operating income because expense capitalization reduces the quarterly GAAP expense that is connected to that particular expenditure (capex, interest, etc).

The point here is that corporate operating profits – or “profits from production” per the BEA – are not growing despite the propaganda from Wall Street and the President that the economy is “booming.” Furthermore, if we were to adjust the BEA numbers by a true inflation number, the resulting calculation would show that “real” (net of price inflation) corporate profits have been declining. Using this measure of corporate profitability as one of the measures of economic health, the economy is not doing well.

August Auto Sales – August auto sales reported the first week of September showed, on a SAAR (Seasonally Adjusted Annualized Rate basis), a slight decline from the July SAAR. The positive spin on the numbers was that the SAAR was 0.4% percent above August 2017. However, recall that all economic activity was negatively affected by the two huge hurricanes that hit south Texas and Florida. The SAAR for this August was reported at 16.5 million. This is 11.2% below the record SAAR of 18.6 million in October 2017. It was noted by LMC Automotive, an auto industry consulting firm, that “retail demand is deteriorating” (“retail” is differentiated from “fleet” sales). Sedan sales continue to plummet, offset partially by a continued demand for pick-up trucks and SUVs.

Casting aside the statistically manipulated SAAR, the industry itself per Automotive News reported 1.481 million vehicles sold in August, a number which is 0.2% below August 2017. In other words, despite the hurricane-depressed sales in August 2017, automobile manufacturers are reporting a year over year decline in sales for August. This was lead by a stunning 12.7% drop in sales at GM. I’ll note that GM no longer reports monthly sales (only quarterly). But apparently an insider at GM fed that number to Bloomberg News.  Automotive News asterisks the number as “an estimate.” Apparently GM pulled back on incentives. On a separate note, I’m wondering what will happen to consumer discretionary spending if the price of gasoline continues to move higher. It now costs me about 35% more a year ago to fill the tank in my car.

The commentary above is an excerpt from the latest Short Seller’s Journal.  I  recommended shorting GM at $42 in an early November 2017 issue of the Short Seller’s Journal. It hit $34 earlier this past week. That’s a 19% ROR over the time period. In the last issue of the Short Short Seller’s Journal, I recommended shorting Wayfair (W) at $149.92, last Friday’s close. W is down $3.50 – or 2.3% – despite the rising stock market. My recommendation include put option ideas You can learn more about this newsletter here:  Short Seller’s Journal Information

Silver, Trump’s Trade War, Mining Stocks And The Fed’s Gold

If you have gold, you have money – If you don’t have gold, you have a problem – Alisdair Macleod

With the massive net short position in both gold and silver Comex paper precious metals, offset by the historic net long position of the “commercials” (banks, mining companies, users, hedgers), numerous rumors are swirling around the precious metals market. For certain, the availability of physical gold bars in London that can be delivered to the large eastern hemisphere buyers who demand delivery is growing tight.  Apparently the retail silver coin/bar market is starting to feel supply strains.

Miles Franklin’s Chris Marcus invited me onto this podcast to discuss the precious metals markets, mining stocks, Trump’s Trade War and the status of the gold held in custody by the Fed on behalf of the American public:

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:  Short Seller’s Journal information and more about the Mining Stock Journal here:  Mining Stock Journal information.

Precious Metals, Mining Stocks, Housing Market – What’s Next?

“The housing market is 100% a function of the Fed’s money printing.  Half the money the Fed printed, $2.2 trillion, went directly into the housing market.”

Analysts and financial media meatheads look at the $4.5 trillion created by the Fed and truly believe that it wasn’t money printing because it’s “backed” by Treasury bonds and mortgages.  But this is pure ignorance.  Not taken into consideration is the amount of credit and debt issuance enabled by using the $4.5 trillion as the “reserve capital.”  It’s fractional banking on steroids.

As the U.S. financial system reaches its limit on the amount of debt that can be serviced from the current level of wealth output, what happens next?  We’re already seeing what happens in the housing market per the fact that the homebuilder  stocks are in an “official” bear market, with some of them down over 30% since late January.

Then what?  The Fed will have to print multiples of the original amount it printed or face systemic collapse. At that point the precious metals sector will soar beyond anyone’s imagination at this point in time.

Phil Kennedy (Kennedy Financial) invited me to discuss these issues on his podcast.  Phil’s podcasts blend truthseeking, facts, humor, humility and sarcasm.  It’s  well-worth the time spent to listen:

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If you are interested in ideas for taking advantage of the inevitable systemic reset that  will hit the U.S. financial and economic system, check out either of these newsletters:  Short Seller’s Journal information and more about the Mining Stock Journal here:  Mining Stock Journal information.

Will The Housing Market Fall This Fall?

“The number of homes on the market surged, the number of sales dropped, and price reductions were abundant last month, all signs that buyers are pulling back in metro Denver” – Denver Post (September 6, 2018) citing the Denver Metro Association of Realtors.

Buy a home now if you must if you manage to qualify for one of the de facto sub-prime mortgages sponsored by the Government Taxpayer. But I guarantee that if you wait 6-12 months, you’ll be able to buy the same home or a better home for a lower price…

Denver has been one of the top-10 hottest housing markets in the past few years, largely driven by an enormous inflow of households moving to Denver from California. However, I started seeing signs developing of a market top that were similar to the indicators I noticed leading up to the popping of the last housing bubble.

As reported by the Denver Metro Association of Realtors (NAR-affiliate) single-family home sales dropped 7.5% in August from July and were down 9.8% from August 2017.Condo sales dropped 5% in August from July and fell 15.6% year over year. At least 30% of the sales were below the original listing price. The inventory of listed homes rose at a record rate for the month of August. Normally inventory from July to August drops a small amount.

Based on articles I encounter in my research or sent to me by subscribers, most if not all of the hottest markets are experiencing a similar development. The spokesman for the Denver affiliate of the National Association of Realtors, like a good salesman, attributes the declining sales to “push-back” from buyers. But, as you might well have expected, I disagree with that assessment.

As I’ve discussed previously, the Government lowered the bar on mortgage qualification requirements for its mortgage programs starting in 2015 in order to counter, what was then, a deteriorating housing market. The Government has lowered the bar on its guaranteed mortgages each successive year since 2015. A growing portion of the home-buyers using Government guaranteed mortgages would have been considered “sub-prime” in the previous mortgage/housing bubble.

In effect, the Government has kept “juicing” the housing market by enabling a larger population of people to buy a home that they otherwise could not afford unless they could get a low-down-payment, rate-subsidized, sub-prime quality Government mortgage. At some point, the limit will be reached on the number of people who can qualify under the current requirements. I would argue that the system is approaching that point.

The second factor in reduced buyer demand is the potential buyers who can qualify for and afford a mortgage from any issuer (Government or private-label) are starting to see a lot more inventory come on the market accompanied by falling prices. Many will hold off on the decision to sell their existing home and “move-up” in order to see if prices come down. It doesn’t take a genius to understand that the prices are going to go lower when you drive around desirable neighborhoods and see a lot of “for sale” signs.

Once the buyers are in full-retreat, we’ll start to see sellers get more aggressive on pricing and we’ll see motivated sellers panic. Similar to the last bubble, the motivated sellers will primarily be “investors” who are stuck with a home they can’t rent at a rate that covers their expenses and flippers who can’t sell at a price that covers the costs of buying the home and preparing it to flip. Just like 2008, this is when the “price wars” will start (as opposed to the buyer “bidding wars” in a bull market) and prices spiral south.

This is why the stock chart of the Dow Jones Home Construction Index looks like this:

The homebuilder stocks have been in a bear market since the end of January. Many homebuilders are down over 30% since then. If that fact surprises you, it’s likely because you get your news from CNBC, Bloomberg, Fox Biz or the Wall St Journal, none of which have reported the bear market in home construction stocks. This is just like the mid-2000’s bubble leading up to the financial crisis. The homebuilders peaked in July 2005 and were in a full-fledged bear market before 2007.

The Employment Report Has Become Orwellian In The Extreme

“Today’s job numbers might be the biggest disaster I’ve ever seen reported. This Fall could get real ugly real fast. The deterioration of the participation rate is so big it makes me suspicious of earlier numbers.” – John Titus, producer of Best Evidence videos.

Titus goes on to say, “”The Household Survey” is showing a net loss of 1.47 million jobs year-over-year and a Labor Force reduction north of 2 million [YoY]. CNBC headline: ‘Economy adds more jobs than expected.'”

The employment report is unquestionably the most manipulated economic report issued by the Government. The content of the the headline on which the mainstream media bases its  broadcast and analysis of the report is entirely disconnected from the actual data contained in the report. The damning data that no one in the financial media or Wall Street seems to be able to find is at the top of the BLS’ report:

As you can see, the “civilian labor force”declined by 469,000 people in August from July. The number of “employed” dropped 423,000. The “not in labor force” increased by nearly 700,000. With these facts in mind (“facts” at least as far as the BLS numbers contain any shards of credibility),  how can the Government claim that 201,000 “jobs were created” in August? How can CNBC say the “economy created more jobs than expected?”  Based on the numbers in the details of the BLS report, it looks like, between the decline in the number of people employed and the decline in those not counted as part of the labor force, the economy shed over 1 million jobs.

Titus remarked to me that, in terms of manipulating the data to make the headline report look positive, this is the worst report he’s ever scrutinized: “In terms of people leaving the labor force, it sure looks like earlier data was was manipulated to hell and back and the BLS just couldn’t hide it any longer. The deltas are f—ing crazy.”

By the way, has anyone besides me noticed that the BLS calls this report the, “Employment Situation Report?”  What does that even mean?

On another note, my colleague and Mining Stock Daily collaborator, Trevor Hall, posted a fascinating interview with Scott Close and Dr. Eric Jensen of EMX Royalties.  EMX employs a project generator royalty  model and has 92 assets, three of which are current-pay royalty assets. One topic covered is what EMX will do with the cash proceeds from the sale of its giant Malmyzh copper-gold project in eastern Russia. EMX will receive a cash payment ($68 million) that is approximately two-thirds of EMX’s current market cap ($98 million).  You can listen this interview by clicking on the image below (or this link: MSD / EMX Royalty):

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The Mining Stock Journal has featured EMX Royalties as strong as recently as early May, when EMX was trading at 80 cents. You can learn more about this newsletter service here: Mining Stock Journal subscription information.

Why Are The Banks Long Gold And Silver Futures?

“The banks are very net long gold and silver futures. To the extent that banks can peer at what’s going on behind the proverbial ‘curtain,’ they must see something that has inspired them to take long position in the precious metals.”

Gold is behaving the same way it was behaving in the months leading up to the 2008 financial crisis.  Emerging markets are melting down and transmitting a financial and economic virus that infect the entire world.  The coming financial collapse will be magnified by the enormous amount of visible and hidden debt, the worst perpetrator of which is the United States.

Elijah Johnson invited me onto his Silver Doctors podcast to discuss the bullish set-up for gold and silver, along with the underlying factors that will lead to problems which have motivated the banks to go long gold and silver:

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You can learn more about this newsletter here:  Short Seller’s Journal information and more about the Mining Stock Journal here: Mining Stock Journal information.

A Coming Flood Of Treasuries And An Epic Gold Rally?

“When it starts to happen, I think it could happen a lot more quickly than people realize.” The rest of the world is methodically “weaning” itself off its dependence on the U.S. dollar. Perhaps the latest EM collapse will accelerate this reset. At the same time, the U.S. Government is on track to issue a record amount of Treasury bonds to fund its rapidly expanding spending deficit. Who is going to buy these Treasuries? When the bid for Treasuries disappears, the dollar will begin to collapse, gold will soar. Demand will far exceed supply as the price rises and the paper gold shorts will be slaughtered.

My colleague Chris Marcus invited me on to his Miles Franklin podcast to discuss what appears to be an extreme version of the 2008 de facto financial system collapse and a likely “reset” of the global monetary system:

In the next issue of the Mining Stock Journal, I analyze the latest COT report and present the price-point at which hedge funds will start to cover their large short position.  I also update my favorite junior mining stock ideas and present my favorite shorter term trading plays. You can learn more about this here:   Mining Stock Journal information.

The Economy Is Collapsing Under The Unbearable Weight Of Debt

“Those who see no Lehman-like episode on the horizon did not see the last one.” – highly regarded writer, George Will, in a National Review article titled, “America Is Overdue For Another Economic Disaster”

Lost in the largely meaningless political Kabuki theatre being staged on Capitol Hill is the fact that the economy is deteriorating. Real average weekly earnings in July declined for production and non-supervisory workers. It was down 0.01% from June to July and down 0.22% from July 2017. For all employees, real average hourly earnings declined 0.20% from June to July but was flat year over year.

Real earnings is not a statistic discussed in the mainstream financial media, but it reflects the ability of the average household to consume non-discretionary goods and services. It also reflects the ability and willingness of the average household to borrow.

The U.S. economy’s appearance of wealth creation and economic growth has been fully dependent on debt creation since 2009. As the graphic from John Williams’ Shadowstats.com shows, the rate of growth in real consumer credit outstanding is approach zero (no growth):

The chart above shows the year-over-year growth rate of real consumer credit outstanding with and without student loans. As you can see, ex-student loans (blue line) the rate of growth in outstanding consumer debt (not including mortgage debt) is close to zero. The increase in consumer credit reported for June (the latest month for which data is available) was $10.2 billion vs $16 billion expected. It was down from May’s increase of $24.6 billion. The perceived growth in GDP is inextricably tied to the growth rate in the use of debt. The near-zero growth rate in consumer credit is thus consistent with the view that the U.S. economy is weaker than the promotional propaganda flowing from Wall Street and DC.

“Student Loans Are Starting To Bite The Economy” – That was title of a Bloomberg article last week. With $1.4 trillion outstanding, student loans are the second largest category of household debt after mortgages. 22.4% of all households carry student debt. 44.8% of households in the 18-34 age demographic carry student debt – that’s up from 18.6% in 2001.

Not discussed by the article is the estimated that 40% of borrowers will default on their loans by 2023. The current 90-day “official” delinquency rate is 11.2%. But this number is highly deceptive because 30% of all student loans are in deferment or forbearance. These loans are put into “remission” for many reasons but the most common is that it enables the borrower who can’t make payments to defer the stopwatch on delinquency/default.

While it’s possible that the student loan problem is affecting potential demand from potential homebuyers, most people who have student debt also have credit card and auto debt. So it’s not clear that student loan debt alone has affected the ability of first-time buers (18-34 age cohort) to buy a home.

Rather, I would argue that it’s the accumulation of debt since 2012 that is affecting all areas of the economy:

As you can see in the chart above, total household debt through the end of March 2018 – which means the debt level is even higher now – is considerably higher than the previous peak at the end of Q3 2008. Not shown is a graph I constructed on the FRED site that added nominal GDP. The rate of growth in household debt has sharply surpassed the rate of growth in GDP since Q3 2015.

This is why the economy is stalling. This is why the housing and auto markets are now in definitive contraction. It has nothing to do with the trade war or low housing inventory. It has everything to do with an economic system that is losing its ability to support the massive amount of debt that has been issued since the last financial crisis (de facto collapse).

The weekly economic reports – both Government and private sector – continue to reflect a downturn in economic activity. Moreover, the reports almost always are below the hyped-up expectations of Wall Street’s brain trust. The chart below reflects the irrational optimism of anyone chasing stocks higher (primarily hedge fund algos):

As you can see, since the middle of August, the 30-yr Treasury yield has negatively diverged from the S&P 500 after being tightly correlated for the first two weeks of August. The spread between the 2yr and 10yr treasury is at its lowest since August 2007.

The Treasury curve “flattens” when the short end of the curve rises relative to the long end. The curve flattens when the market has decided that the Fed is wrong on its policy of raising the Fed Funds rates because the economy is slowing down. Large Treasury buyers pile into 10yr and 30yr Treasuries on the expectation that a deteriorating economy will force the Fed to reverse course and lower rates again. The chart above reflects the market reacting to the steady flow of negative economic reports.

If the Fed is right, we should see the 30yr yield “catch up” to the SPX. Conversely, if the market is right, the chart above is yet another warning sign of an eventual stock market “accident.” I have no doubt that the Fed is wrong. That said, the Fed has painted itself into a corner on rates. Contrary to the Fed’s public propaganda of “low inflation,” the Fed is well aware of the true rate of inflation – inflation created by the Fed’s monetary policy since 2008. If the Fed does not act to tighten monetary conditions, price inflation will continue to accelerate and inflict serious damage to the U.S. economy.

The commentary above is from the latest issue of the Short Seller’s Journal. I explain why the housing market is heading south quickly, update my homebuilder short ideas and discuss Tesla. You can learn more about this newsletter here:  Short Seller’s Journal information

Bad News For The Housing Market Continues To Pile Up

I remember vividly the scene in The Big Short when a housing broker was driving the “Steve Eisman” group around California’s “Inland Empire.”  Home prices were dropping and the vista was littered with “for sale” signs.  The broker remarked awkwardly, “the market is going through small valley right now.”  Successful realtors can look anyone in the eyes and present a small nuclear bomb as a box of Godiva chocolates.

The National Association of Realtors’ chief “economist,” Larry Yun, has been pleading for more than a year that declining existing home sales is caused by low inventory. But this is mere propaganda.  I’ve presented a chart more than once on this site from the Fed’s database (FRED) which shows that sales volume and inventory is inversely correlated.

Redfin released its”Housing Demand Index” through June on August 1st. It fell nearly 1% from May and was 9.6% lower in June 2018 than 2017. The number of people requesting tours fell 6.1% compared to June 2017 and 15% fewer made offers on homes. This is despite noting that inventory levels surged in the hottest markets in which RDFN operates. This index is representative of demographic trends nationwide, as RDFN operates in the largest metropolitan areas outside of New York City. The Index covers 15 metropolitan areas.

Demand is falling because pool of potential homebuyers who can qualify for one of the Government’s subprime mortgage programs has dried up like Lake Mead. This was evident in this week’s existing and new home sales reports, both of which showed home sales falling month to month and year over year. Both numbers were well below the expectations of Wall Street’s brain trust. Existing home inventory on an outright basis (not the highly massaged “months supply” basis) is 9% above the average inventory level in 2015 and 31% above the outright inventory for 2017. New home sales dropped “unexpectedly” from June to July despite the fact that June’s original headline report was revised lower. New home sales according to the Census Bureau have declined 3 out of the last 4 months.

The Dow Jones Home Construction Index is down 22.6% since mid-January. Some homebuilder stocks are down over 30% since then. The homebuilder stocks are in a bear market based on the “20%” decree. This is a fact that is not reported at all in the mainstream media. The homebuilder stocks peaked in July 2005 and were in a tail-spin well before it became obvious to all that the mid-2000’s bubble had popped. I doubt it will take 18-24 months from January 2018 before it becomes apparent to most that the housing market is in trouble.

My subscribers and I have been raking in easy money shorting the homebuilder stocks. I will be updating the my short ideas – including ideas for using puts – in Sunday’s issue after TOL’s numbers triggered a one-day spike up in the DJUSHB. I’ll also be updating the Tesla saga. You can learn more about this newsletter service here:  Short Seller’s Journal information.

The Comex Gold Short Position

I felt compelled to clarify the commentary out “there” discussing the non-commercial short position in gold.  An interviewee on one of the widely viewed precious metals and economic websites referenced the record “speculator” short position in Comex gold futures.

In my opinion this is misleading because it is the “managed money” segment of the non-commercial “speculator” trader category in the CFTC’s COT report that encompasses the entire net short position (click image to enlarge):

The image above shows the latest disaggregated COT report. The disaggregated COT report debuted in October 2009.  Disaggregated data was made available going back to June 13, 2006. Previously the report was separated into “Commericials, large speculators and non-reportables.” The large speculators were the “managed money and other reportables.” The “managed money” is primarily hedge funds. No one outside of the Comex operators can say exactly what the “other reportable” category is (many attempts have been made to get clarification over the years). It’s likely larger pools of non-institutional capital like family office money and wealthy foundations. The “non-reportable” category is retail accounts.

I will note that when JP Morgan was caught and fined for mis-reporting the Comex silver futures trades it clears, the bank was caught stuffing trades that belonged in the “swap dealer” account into the “other reportable” account.

This clarification is important to point out for two reasons. First, as you can see, in the non-commercial trader accounts,  the hedge funds comprise the entire amount of the non-commercial/non-bank net short position. The Other Reportables and Non-Reportables are net long. In fact, the Other Reportables increased its net long position last week.

Second, not only is the hedge fund net short position at a record level, the “Swap Dealer” (i.e. the banks) account is close to an all-time net long position at 31,259 contracts. Based on the historical disaggregated spreadsheet maintained by my business partner, the only time the bank net long position was larger was a two-week period in December 2015 (12/15 – 32,550 and 12/22 – 31,692) and a two-week period in July 2017.  However, during the July 2017 period, when the swap dealers were net long at a record level, it was also accompanied by a net long position by the hedge funds.   Overall the commercial category in mid-July 2017 was still short over 70,000 contracts (the “producer/merchant/processor/user” commercial category includes bank positions that are theoretically not used to hedge).

I wanted to clarify the issue with the COT report because it’s important to note that the banks are almost always right with their gold futures positioning and the hedge funds are almost always wrong. The implication of this is obvious.

I discuss the significance of the net long/net short positioning by the banks and the hedge funds in Comex gold futures with Trevor Hall of Clear Creek Digital in our collaborative project, Mining Stock Daily (click on image below to listen – this was recorded before Friday’s COT report was released):

Mining Stock Daily can also be accessed using Amazon Alexa, Google podcasts and Apple i-Tunes.