Tag Archives: credit bubble

Toxicity Plus Toxicity Does Not Equal Purification

Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.’ – Francisco’s “Money” Speech – from “Atlas Shrugged”

You have to love it – the City of Houston issues $1.01 billion  “pension obligation” bonds to “ease” the underfunding of the underfunded public pension fund.  “Pension underfunding”  is the politically acceptable euphemism for “debt obligation.”  Underfunding occurs when a pension investment returns PLUS future beneficiary contributions are not enough to cover current beneficiary payments.

Some might say it’s the difference between the NPV of future payouts and the current value of the fund. But that’s horse-hooey. Houston had a cash flow deficit it had to address and it did that by issuing taxpayer obligation debt – $1.01 billion dollars of taxpayer debt.  Furthermore, let’s use a realistic NPV and ROR assumption on any pension fund plus throw-in a real mark to market of illiquid assets like PE fund investments.  Every pension fund in the U.S. is tragically underfunded.

The rational remedy would be to cut beneficiary payments or force larger contributions from current working stakeholder or both.  The problem is that implementing either or both of those remedies might cost elected officials their jobs in the next election.

Instead, the proverbial can is kicked further into the sewage ditch by issuing more debt and using the the proceeds to help the pension fund cover current cash outflows to beneficiaries.  Regardless of what you call it, an underfunded pension liability is simply “debt”.  This bond issue might ensure that Houston’s retired public employees will continue, for now, to receive their expected flow of monthly pension payment, but this bond deal in no way whatsoever “eases” the debt burden of the pension fund.  Rather, it shifts wealth from the taxpayers to the retired public employees.

Similarly, the Trump Tax Cut does nothing more than shift the distribution of wealth from 99.5%’ers to the 0.5%’ers plus big corporations.  In this case, it’s not wealth per se.  Rather, it’s shifting the burden of supporting the Government’s spending deficit from the tax cut beneficiaries (billionaires and big corporations) to the rest of the population.

I could care less what CBO projections show – CBO forecasts are always appallingly inaccurate – the Government’s spending deficit is going to accelerate next year.   Between the cut in tax revenues from Trump’s Tax Cut and the big jump in spending built into the budget for defense and re-paving the roads that were paved during the Obama era, total spending will soar.  The gap between inflows and outflows will be bridged with more Treasury bond issuance.

Remember the narrative about systemic “deleveraging” after the great financial collapse crisis? Turns out that story-line was a fairy-tale.  Treasury debt hits a new all-time everyday  and has more than doubled since the end of 2008.  Non-financial corporate debt hits a new all-time high every and is 71.4% higher than it was at the end of 2008.  Auto debt hits an all-time high every day;  credit card debt is close to an all-time high and student loan debt hits an all-time high every day.  Household debt not including mortgage debt hits an all-time everyday and is 43% higher than at the end of 2008.   The household numbers do not include NYSE margin debt, which is at at all-time high and an all-time high as percent of GDP.

The stock market is impervious to the accelerating level of debt at all levels of the U.S. financial system – at least for now.  At least until enough households and businesses get a message that says “account overdrawn,” like this person received directly from the bank teller last week (from a reader):

Great post Dave, Had a bit of a real world experience on this yesterday. Heading out to make the last biz deposit yesterday and met the mailman end of driveway and got another check. No deposit slip so asked the drive-in teller to just use my account number on the checks to deposit this. He left the intercom on. In rolls one of those massive bubba-mobiles big enough to blot out the sun..it looked like a pretty/very new one but could be wrong. I hate these loud diesel stinking machines. Anyway Bubba was trying to make a withdrawal out of his home equity credit line for $300. The teller came on and told him he was maxed. He fumed how can it be maxed?…”Well” he said “there have been 3 withdrawals in the last 2 weeks for $2200.” He whips out his phone and calls his wife (?) Raises his voice, guns the engine and off he goes…..with no cash. How often is this being repeated around the country every day…

Is Sub-Prime Auto Loan Armageddon Coming?

I experienced a real eye-opener this past week. The lease on my fiance’s Audi A3 terminates soon. I was scanning the “pre-owned” inventory at the two largest Audi dealers in Denver expecting to see some good deals on 2013/2014 Audi A4’s that had come off lease. Instead, I was shocked to see at both dealers a large selection of 2016/2017 A4s with less then 20k miles. Some under 10k miles. I even saw a 2018 with something like 6k miles on it.

Why was I shocked? Because most of these vehicles had to have been repossessed. If there were only a couple almost brand new Audi A4s with very low mileage on them, it’s plausible that the buyers/lessee’s traded them in because they didn’t like them. The bigger dealer of the two had six 2017’s, all of them with 11k or less miles. Most if not all of these cars had to have been repo’d because of lease/loan default. We plan on waiting a couple more months because her lease expires in March and I suspect that the inventory of near-new Audis will be even larger and the prices will be even lower.

My theory was confirmed when I came across a blog post from a blogger (Cold War Relic) who is a car salesman (What’s Going On?): “People are buying cars they can’t afford or shouldn’t even have been able to buy.” He goes on to explain that: “I went to my buddy Paris’ repo lot. He called me to check out a 2016 BMW 435i he jacked for BMW Financial Services…as we walked through [the lot] I noticed all of the cars seemed to be nearly new. Paris confirmed my fears when he told my about nine-out-of-ten vehicles he’s repossessed in the last few months were model year 2016 or newer” (emphasis is mine).

Here’s the coup de grace: “To make matters worse Paris only does work for prime and a few captive lenders, meaning a majority of these cars went out to consumers with good credit.” In a past Short Seller’s Journal issue in which I discussed the rising delinquency and default rates on auto loans, I suggested that, in addition to the already soaring default rates on subprime auto loans, I believed the default rate on “prime” auto loans would soon accelerate. This is in part because a lot of prime-rated borrowers would have been considered subprime a decade ago. But it’s also in part due to the fact that the average household’s disposable income is getting squeezed and what might seem affordable in the present – e.g. an brand new Audi or BMW lease/loan payment – can quickly become unaffordable.

A recent article from Bloomberg discussed “soaring” subprime auto loan defaults in connection with the fact that several Private Equity firms bought out subprime auto lending companies starting about six years ago. The investment rationale was based on expanding the loan portfolios and cashing out the “value” created in the IPO market. One company, Flagship, was bought out by Perella Weinberg in 2010. It took the loan portfolio from $89 million 2011 to nearly $3 billion. Bad loan write-offs have soared. PW tried to IPO the company in 2015. It’s still trying. Based on the two anecdotes of new car repossessions described above, it’s a good bet that the investments in most subprime auto lenders will eventually have to be written-off entirely.

The total amount of subprime auto loans outstanding is nearly $300 billion. This number is from the NY Fed. I would argue that, in reality, it’s well over $300 billion. If you add to that the amount of subprime credit card debt outstanding, the total amount of “consumer” subprime debt is in excess of the amount of subprime mortgage debt ($650 billion) at the peak of the mid-2000’s credit bubble. This is not going to end well. In fact, I suspect the eventual credit implosion will be much worse than what occurred in 2008.

A Collapsing Dollar Will Trigger The Next Big Move In Gold And Silver

When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed. – from “Atlas Shrugged”

Sorry MAGA-enthusiastics, it’s all a lie.  The tax legislation just passed will lead to higher Government spending deficits, a near-parabolic acceleration in Government debt issuance and a possible collapse of the dollar.  The U.S. is in systemic collapse.  Perhaps the biggest manifestation of this is the grand money-grab by the elitists enabled by blatant political corruption.

Alasdair Macleod published an essay that I highly recommend reading as you gather together your thoughts heading into 2018. 2018 will possibly see the next stage in the collapse of the dollar. I disagree with Alasdair’s attributing the control over the formation and implementation of economic and geopolitical policy to Trump. Notwithstanding this disagreement,  I believe Aladair’s analysis of monetary events unfolding during 2018 deserves careful perusal.  This includes his delineation of the rise in the petro-yuan as a precursor to the demise of the dollar, an acceleration of dollar-derived price inflation and an escalation in the price of gold.

The general public in the West is hardly conscious of these developments, only being vaguely aware that more and more products seem to be imported from China. They are certainly not aware that America has already lost its position as the world’s policeman, the guarantor of economic freedom and democracy, or whatever other clichés are peddled by the media. And only this week, President Trump in releasing his National Security Document, and pledging “America would reassert its great advantages on the world stage”, showed the American establishment is similar to a latter-day Don Quixote, unaware of the extent of change in the world and the loss of its power.

Like a monetary embodiment of Cervantes’ tilter at windmills, the world’s reserve currency is rapidly becoming an anachronism. And for China to realise her true destiny, it must dispense with dollars, and if in the process it crushes them, then so be it.

You can read the rest of Macleod’s brilliant essay here:   2018 Could Be The Year For Gold

Contrary to the views expressed by recent crypto-currency proselytizers, I believe that if gold heads higher in the next year then silver will soar.

For Clues On The Economy, Follow The Money

“There is nothing new on Wall Street or in stock speculation. What has happened in
the past will happen again, and again, and again. This is because human nature does
not change, and it is human emotion, solidly built into human nature, that always
gets in the way of human intelligence. Of this I am sure.” –Jesse Livermore

The profitability of lending/investing money is a function of both the rate of return on the money loaned/invested and the return (payback) of the money. The historically low interest rates are squeezing lenders by driving the rate of return on the loan toward zero (note: “lenders” can be banks or non-bank lenders, like pension funds investing in bonds).

As the margin on lending declines, lenders, begin to take higher risks. Eventually, the degree of risk accepted by lenders is not offset by the expected return on the loan – i.e. the probability of partial to total loss of capital is not offset by a corresponding rate of interest that compensates for the risk of loss. As default rates increase, the loss of capital causes the rate of return from lending to go negative. Lenders then stop lending and the system seizes up. This is what occurred, basically, in 2008.

This graphic shows illustrates this idea of lenders pulling away from lending:

The graph above from the St Louis Fed shows the year over year percentage change in commercial/industrial loans on a monthly basis from commercial banks from 1998 to present. I have maintained that real economic growth since the initial boost provided by QE has been contracting for several years. As you can see, the rate of growth in lending to businesses has been declining since 2012. The data in the chart above is through October and it appears like it might go negative, which would mean that commercial lending is contracting. This is despite all of the blaring media propaganda about how great the economy is performing.

The decline in lending is a function of both lenders pulling back from the market, per reports about credit conditions in the bank loan market tightening, and a decline in the demand for loans from the private sector. Both are indicative of declining economic activity.

This thesis is reinforced with this graphic:

The chart above shows the year over year percentage change in residential construction spending (red line) and total construction (blue line). As you can see, the growth in construction spending has been decelerating since January 2014. Again, with all of the media hype about the housing market, the declining rate of residential construction suggests that the the demand side of the equation is fading.

The promoters of economic propaganda have become sloppy. It’s become quite easy to invalidate Government economic reports using real world data. Using the Government-calculated unemployment rate, the economic shills constantly express concern about a “tight labor market.” Earlier this week, Moody’s chief economist Mark Zandi asserted that (after the release of the phony ADP employment data) the “job market feels like it might overheat.” The problem with this storyline is that it is easy to refute:

The graph above is from the Bureau of Labor Statistics productivity and costs report. The blue line shows unit labor costs. As you can see, unit labor costs have been decelerating rapidly since 2012. In fact, labor costs declined the last two months. The last time labor costs declined two months in a row was November 2013.

See the problem? If labor markets were “tight” or in danger of “overheating,” labor costs would be soaring, not falling. This is why I say the shills are getting sloppy with their use of manipulated Government economic reports. It’s too easy to find data that refutes the propaganda. I remember Mark Zandi from my junk bond trading days in New York. He was an “economist” for a fixed income credit analysis service (I can’t remember the name). I thought his analytic work was questionable at best back then. I continue to believe his analysis is highly flawed now. Recall, Moody’s is the rating agency that had Enron rated triple-A until shortly before it collapsed. That says it all…

Speaking of the labor market, I wanted to toss in a few comments about November’s employment report. The BLS headline report on Friday claims that 255k jobs were created in November. However, not reported in any part of the financial media coverage, “seasonal-adjustment gimmicks bloated headline payroll gains, where unadjusted payrolls were revised lower but adjusted levels revised higher” (John Williams’ Shadowstats.com).

The point here is that, in all likelihood, most of the payroll gains in the BLS report were a product of the mysterious “seasonal adjustment” model used. Per the BLS report, another 35k were removed from the labor force as defined. Recall that anyone who has not been looking for a job in the previous four weeks is removed from the labor force statistic. Furthermore, and never mentioned by the media/Wall St., the BLS report shows the number unemployed increased by 90k in November.

I don’t know when the stock market bubble will lose energy and collapse.  What I do know is that each time the U.S. stock market disconnects from reality, there’s a period of “it’s different this time,” followed by the crash that blind-sides all of the so-called “experts” – most of whom like Dennis Gartman do not have their own money in the stock market (it’s well-known that Jeremy Siegel invests only in Treasuries).  The retail lemmings who think they’ll be able to get out before the crash will see their accounts flattened like a Japanese nuclear power plant.

Most of the commentary above is from my Short Seller’s Journal, in which I present stocks  to short every week (along with options suggestions).  You can learn more about this newsletter here:   Short Seller’s Journal subscription info.

I’ve been a subscriber for a good part of the year and really enjoy my Sunday evening read. Thank you – received sent this morning from “William”

America’s Supernova: The Final Stage Of Collapse

I started observing the slow-motion train-wreck in process in 2001 – a year removed from my perch as a junk bond trader on Wall Street and living several thousand miles away from NYC and DC in the Mile High City, where the view is a lot more clear than from either coast.

The United States has been in a state of collapse for several decades.   To paraphrase Hemingway’s flippant description of the manner in which one goes bankrupt, it happens in two ways:   slowly then all at once (“The Sun Also Rises”).

The economic decay was precipitated by the advent of the Federal Reserve;  then reinforced by FDR’s executive order removing gold from the citizenry’s ownership, the acceptance of Bretton Woods, and the implementation of what is capriciously termed “Bretton Woods Two” – Nixon’s disconnection of the dollar from the gold standard.  If you study the monetary and  debt charts available on the St. Louis Fed’s website, you’ll see that post-1971 both the money supply and the amount of debt issued at all levels of the system (public, corporate, household) began gradually to go parabolic.

I would argue the political collapse kicked into high-gear during and after the Nixon administration, although I know many would argue that it began shortly after the Constitution was ratified in 1788.  At the Constitutional Convention, someone asked Ben Franklin if we now had Republic or a Monarchy, to which Franklin famously replied, “a Republic, if you can keep it.”

Well, we’ve failed to keep the Republic.  Now the political, economic and financial system is controlled by a consortium of big banks, big corporations, the Department of Defense and a handful of very wealthy individuals, all of which are ruthlessly greedy and misanthropic.

The current political and social melt-down is nothing more than a symptom of the underlying rot – rot that was seeded and propagated by the implementation of fiat currency and a fractional banking system.  The erection of the Fed gave control of the country over to those with the authority to create paper money and issue debt.

And now the political and social clime of the country has gone from ridiculous to beyond absurd.  James Kunstler wrote a must-read piece which captures the essence of the Dickensian  societal caricature that has sprung to life before our very eyes (Total Eclipse):

What do you know, long about Wednesday, August 16, 2017, House Minority Leader Nancy Pelosi (D-Cal) discovered that the United States Capitol building was infested with statues of Confederate dignitaries. Thirty years walking those marbled halls and she just noticed? Her startled announcement perked up Senator Cory Booker (D- NJ) who has been navigating those same halls only a few years. He quickly introduced a bill to blackball the offending statues. And, of course, the congressional black caucus also enjoyed a mass epiphany on the bronze and stone delegation of white devils…

…Just as empires tend to build their most grandiose monuments prior to collapse, our tottering empire is concocting the most monumentally ludicrous delusions before it slides down the laundry chute of history. It’s as if the Marx Brothers colluded with Alfred Hitchcock to dream up a melodramatic climax to the American Century that would be the most ridiculous and embarrassing to our posterity.

I would urge everyone to read the entire piece, which I’ve linked above.   And now for America’s coup de grace, it has offered up “president Trump,” which by the way not any worse than the alternative would have been.  Rather, it’s another symptom of the cancer beneath the skin.

Empires in collapse are at their most dangerous to the world when they are on the brink of imploding.  I was discussing this with a good friend the other day who was still clinging to the brainwashing we received in middle  school history classes that “America is different.” This just in:  America is not different.

The Financial Times has written a disturbing – yet accurate – accounting of the current turmoil facing the White House and the world (America Is Now A Dangerous Nation):

The danger is that these multiple crises will merge, tempting an embattled president to try to exploit an international conflict to break out of his domestic difficulties…Mr Gorka’s flirtation with the idea that the threat of war could lead Americans to rally around the president should sound alarm bells for anyone with a sense of history…Leaders under severe domestic political pressure are also more likely to behave irrationally.

In commentary which reinforces my view presented above, the FT article closes with:

A final disturbing thought is that Mr Trump’s emergence increasingly looks like a symptom of a wider crisis in American society, that will not disappear, even when Mr Trump has vacated the Oval Office. Declining living standards for many ordinary Americans and the demographic shifts that threaten the majority status of white Americans helped to create the pool of angry voters that elected Mr Trump. Combine that social and economic backdrop with fears of international decline and a political culture that venerates guns and the military, and you have a formula for a country whose response to international crises may, increasingly, be to “lock and load”.

The current “everything bubble,” fueled by the creation of massive amounts of fiat money and debt issuance is America’s “supernova.”  It’s the final explosion of fraudulent currency printing and credit creation.   I sincerely hope that when the pieces hit the ground, there will be enough material with which the original Republic can somehow be reconstructed.

 

Western Central Bank Fear Of Gold Is In The Air

Ballooning open interest, heavy fix selling, aggressive post-settlement selling, flash crashes – this all seems a lot of bother. Perhaps the Other Side is afraid of something. – John Brimelow from his Gold Jottings report

Wednesday  evening at 7:06 EST, at one of the least liquid trading periods of the 23 hour trading day for Comex paper gold, a “motivated” seller unloaded 10,777 August gold contracts into the CME’s Globex trading system, knocking the price of gold down $9 in 25 minutes.  There were no obvious news or events reported that would have triggered any investor to dump over 1 million ozs of gold with complete disregard to price execution.

Rather, the selling was the act of an entity looking to push the price of gold a lot lower in “shock and awe” fashion.  The 10.7k contracts sold were just the August contracts.   There was also related selling in several other contract months.  To be sure, the total number of contracts unloaded included  hedge fund selling from stop-losses triggered in the black boxes of momentum-chasing hedge funds.

In addition to the appearance of frequent, strategically-timed “fat finger” flash crashes, the open interest in paper gold on the Comex has soared by 23,000 contracts since last Friday. This added 2.3 million paper gold ounces to the Comex open interest, which represents nearly 27% of the total amount of alleged physical gold ounces sitting Comex vaults.   In fact, the total paper gold open interest on the Comex is 455,605 contracts, or 45.5 million ounces of gold. This is 530% more paper gold than the total amount of gold reported to be sitting in Comex vaults.

The dramatic rise in open interest accompanied gold’s move in price above the 50 dma.  It’s typical for the bullion banks on the Comex to start flooding the market with additional paper contracts in order to suppress strong rallies in the price of gold.  Imagine what would happen to the price of gold if the regulatory authorities forbid the open interest in Comex gold contracts to never exceed 120% of the total amount of gold in the Comex vaults.  This is unwritten “120% rule” is de rigeur with every other commodity contract except, of course, silver.

The “flash crash” and “open interest inflation” are two of the obvious signals that the western Central Banks/bullion banks are worried about the rising price of gold.  The recent degree of blatant manipulation reflects outright fear. I suspect the fear is derived from two sources.  First is a growing shortage of physical gold that is available to deliver into the eastern hemisphere’s voracious import appetite.  Exports from Swiss refineries have been soaring.   India’s appetite for gold has not been even slightly derailed by the 3% additional sales tax imposed on gold.

Speaking of India, the World Council has put forth a Herculean effort to down-play to amount of gold India has been and will be buying.  After India’s 351 tonnes imported in Q1, the WGC tried to shove a 90 tonne per quarter forecast down our throats for the rest of the year. India’s official tally for Q2 is 167.4 tonnes.  Swing and a miss for the WGC.  Now the WGC  is forecasting  at total of 650-750 tonnes for all of 2017.

The WGC forecast is idiotic given that India officially imported 518.6 tonnes in 1H and 2H is traditionally the best seasonal buying period of the year AND a copious monsoon season means that farmers will be flush with cash – or rupees, rather – which will be quickly converted into gold.  Two more swings and misses for Q3 and Q4 and the WGC is out of excuses for why India likely will have imported around 1,000 tonnes, not including smuggled gold, in 2017.  This aggressive misrepresentation of India’s gold demand reeks of propaganda.  But for what purpose?

Back to the second reason for the banks to fear a rising price of gold:  the inevitable collapse of the largest financial bubble in history inflated by Central Bank money printing and credit creation.   The trading action in the gold and silver markets resembles the trading activity in 2008 leading up to the collapse of Lehman and the de facto collapse of Goldman Sachs.

One significant  difference is the relative effort exerted to keep a lid on the price of silver.   In early 2008, with the price of silver trading between $17 and $19, the open interest in Comex silver peaked at 189k contracts (Feb 29th COT report).   Currently the open interest is 206k contracts and it’s been over 240k.    In late 2008, the Comex was reporting over 80 million ozs of “registered” silver in its vaults. “Registered” means “available for delivery.” There were thus roughly 3 ozs of paper gold for every reported ounce of physical gold available for delivery.  Currently the Comex is reporting 38.5 million ozs of registered silver. That’s 5.3 ozs of paper silver for every ounce of registered silver.

As you can see, the relative effort to suppress the price of gold and silver is more intense now than in 2008.   Given what occurred in 2008, I have to believe that fear emanating from the western banks currently is derived from events unfolding “behind the curtain” that are worse than what hit the system in 2008.

Orwell’s Theorem: The Opposite of Truth Is The Truth

All propaganda is lies, even when one is telling the truth. – George Orwell

A reader commented that the number of corporate lay-offs in America is escalating, yet the unemployment rate seems to keep going lower.  Part of the reason for this is that the 2008 collapse “cleansed” corporate america’s payrolls of a large number of workers who are eligible to file for unemployment benefits.

The Labor Force is derived from the number of people employed + the number of people looking for work.  To continue receiving jobless benefits during the defined period in which fired workers can receive them, they have to demonstrate that they are looking for work.  Ergo, they are considered part of the Labor Force.  Once the jobless benefits expire, they are removed from the Labor Force unless an enterprising Census Bureau pollster happens to get one on the phone and they answer “yes” when asked if they are/were actively looking for work.   Those who do not qualify for jobless benefits more often than not are removed from the Labor Force tally.  This is why, last month for example, over 600,000 people were removed from the Labor Force.

Reducing the Labor Force de facto reduces the unemployment rate.  Thus, there’s an inverse relationship between layoffs and the unemployment rate.  It’s an Orwellian utopia for the elitists.

Today’s stock market is a great example of the “opposite of truth is the truth” theorem.   It was reported by Moody’s that credit card charge-offs have risen at to their highest rate since 2009 – LINK.  This means that defaults are rising at an even faster rate, as finance companies use accounting gimmicks to defer actual charge-offs as long as possible.  A debt that is charged-off has probably been in non-pay status for at least 9-12 months.

The same story has been developing in auto loans. The 60+ day delinquency rate for subprime auto loans is at 4.51%, just 0.18% below the peak level hit in 2008. The 60+ day delinquency rate for prime auto loans is 0.54%, just 0.28% below the 2008 peak. In terms of outright defaults, subprime auto debt is just a shade under 12%, which is about 2.5% below its 2008 peak. Prime loans are defaulting at a 1.52% rate, about 200 basis points (2%) below the 2008 peak. However, judging from the rise in the 60+ day delinquency rate, I would expect the rate of default on prime auto loans to rise quickly this year.

Now here’s the kicker: In Q3 2008 there was $800 billion in auto loans outstanding. Currently there’s $1.2 trillion, or 50% more. In other words, we’re not in crisis mode yet and the delinquency/default rates on subprime auto debt is near the levels at which it peaked in 2008. These numbers are going to get a lot worse this year and the amount of debt involved is 50% greater. But the real problem will be, once again, the derivatives connected to this debt. It would be a mistake to expect that this problem will not begin to show up in the mortgage market.

Amusingly, the narrative pitched by Wall Street and the sock-puppet financial media analysts is that the credit underwriting standards have only recently been “skewed” toward sub-prime. This is an outright fairytale that is accepted as truth (see Orwell’s Theorem). The issuance of credit to the general population has been skewed toward sub-prime since 2008. It’s the underwriting standards that were loosened.

The definition of non-sub-prime was broadened considerably after 2008.  Many borrowers considered sub-prime prior to 2008 were considered “prime” after 2008. The FHA was the first to pounce on this band-wagon, as it’s 3% down-payment mortgage program enabled the FHA to go from a 2% market share 2008 to a 20% market share of the mortgage market.

Capital One is a good proxy for lower quality credit card and auto loan issuance. While Experian reports an overall default of 3.3% on credit cards, COF reported a 5.14% charge-off rate for its domestically issued credit cards. COF’s Q1 2017 charge-off rate is up 48 basis points (0.48%) from Q4 2016 and up 100 basis points (1%) from Q1 2016. The charge-off rate alone increased at an increasing rate at Capital One over the last 4 quarters. This means the true delinquency rates are likely surging at even higher rates. This would explain why COF is down 17% since March 1st despite a 2.1% rise in the S&P 500 during the same time-period.

To circle back to Orwell’s Theorem, today the S&P 500 is hitting a new record high. But rather than the FANGs + APPL driving the move, the push higher is attributable to a jump in the financial sector. This is despite the fact that there were several news reports released in the last 24 hours which should have triggered another sell-off in the financial sector. Because  the stock market has become a primary propaganda tool, it’s likely that the Fed/Plunge Protection Team was in the market pushing the financials higher in order to “communicate” the message that the negative news connected to the sector is good news.  Afer all, look at the performance of the financials today!

Days like today are great opportunities to set-up shorts. Most (not all) of the ideas presented in the Short Seller’s Journal this year have been/are winners.  As an example Sears (SHLD) is down 39% since it was presented on April 2nd.   I’ll present two great short ideas in the financial sector plus a retailer in the next issue.  You can learn more about the Short Seller’s Journal here:  SSJ Info.

An Impending Economic And Financial Disaster


You’ve probably heard/read a lot lately about the VIX index. The VIX index is a measure of the implied volatility of S&P 500 index options. The VIX is popularly known as a market “fear” index. The concept underlying the VIX is that it measures the theoretical expected annualized change in the S&P 500 over the next year. It’s measured in percentage terms. A VIX reading of 10 would imply an expectation that the S&P 500 could move up or down 10% or less over the next year with a 68% degree of probability. The calculation for the VIX is complicated but it basically “extracts” the implied volatility from all out of the money current-month and next month put and call options on the SPX.

The graph above plots the S&P 500 (candles) vs. the VIX (blue line) on a monthly basis going back to 2001. As you can see, the last time the VIX trended sideways around the 11 level was from 2005 to early 2007. On Monday (May 8) the VIX traded below 10. The last time it closed below 10 was February 2007. The VIX often functions as a contrarian indicator. As for the predictive value of a low VIX reading, there is a high correlation between an extremely low VIX level and large market declines. However, the VIX does not give us any information about the timing of a big sell-off other than indicate that one will likely (not definitely) occur.

In my opinion, an extremely low VIX level, like the current one, is signaling an eventual sell-off that I believe will be quite extreme.

The true fundamentals underlying the U.S. economy – as opposed the “fake news” propaganda that emanates from uncovered manholes at the Fed, Wall Street and Capitol Hill – are beginning to slide rapidly.   The primary reason for this is that the illusion of wealth creation was facilitated by the inflation of a massive systemic debt and derivatives bubble.  Government and corporate debt is at all-time highs.  The rate of debt issuance by these two entities accelerated in 2010.  Household debt not including mortgages is at an all-time high.  Total household debt including mortgages was near an all-time high as of the latest quarter (Q4 2016) for which the all-inclusive data is available.  I would be shocked if total household was not at an all-time high as I write this.

The fall-out from this record level of U.S. systemic debt is beginning to hit and it will accelerate in 2017.  In 2016 corporate bankruptcies were up 25% from from 2015.   So far in 2017, 10 big retailers have filed for bankruptcy, with a couple of them completely shutting down and liquidating.    Currently there’s at least 9 more large retailers expected to file this year.   In addition to big corporate bankruptcies, the State of Connecticut is said to be preparing a bankruptcy filing.

The household debt statistics show a consumer that is buried in debt and will likely begin to default on this debt – credit card, auto, personal, student loan and mortgage – at an accelerated rate this year.  The delinquency and charge-off statistics from credit card and auto finance companies are already confirming this supposition.

In the latest issue of the Short Seller’s Journal, I review the VIX and the deteriorating consumer debt statistics in detail and explain why the brewing financial crisis will be much worse than the one that hit in 2008.  I also present a finance company stock and a housing-related stock as ways to take advantage of the crumbling consumer.   You can find out more about subscribing to the Short Seller’s Journal here:  Subscription information.   There’s no monthly minimum require and subscribers have an opportunity to subscribe to my Mining Stock Journal for half-price.

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K. and in the U.S.  – U.K. subscriber, James

 

Is Gold Signaling The Next Financial Crisis?

Gold and silver have been sold down pretty hard since April 18th. But the structure of the weekly Commitment of Traders report, which shows the long and short positions of the various trader classifications (banks, hedgers, hedge funds, other large investment funds, retail) had been flashing a short term sell signal for the last few weeks. The net short position of the Comex banks and the net long position of the hedge funds had reached relatively high levels. Except Thursday (May 4th), almost all of the price decline action was occurring after the London p.m. gold fix and during the Comex floor trading hours, exclusively. This tells us all we need to know about the nature of the selling, especially given the enormous amount of physical gold currently being accumulated by the usual eastern hemisphere countries. The table to the right  calculates the Comex banks’ paper gold positioning going back to 2005.  As you can see, currently the net short position and the net short position as a percent of total open interest has reached a relatively high level. This typically happens when the banks engage in raiding the Comex by unloading massive quantities of paper gold in bursts in order to trigger hedge fund stop-loss selling. It serves the dual purpose of pushing down the price of gold and providing a relatively riskless source of profits for the banks.

This is the cycle that has repeated numerous times per year since 2001. This time, however, more than any other time since 2001, the sell-off in the price of gold is counter-intuitive to the collapsing financial and economic condition of the United States, specifically, and the entire world in general. The likely reason for the current price take-down of gold is an attempt by the elitists to remove the batteries from the “fire alarm” mechanism embedded in a rising price of gold. An alarm that lets the populace know that there’s a big problem that will hit the system sooner or later; an alarm that lets the public know systemic failure is beyond Government and Central Bank Control.

A similar manipulated take-down of the price of gold and silver occurred in the spring of 2008, ahead of the great financial crisis. Gold was pushed down to $750 from $1050 and silver was taken down from $20 to $10. This price decline was counter-intuitive to the collapsing financial condition of the U.S. financial system, which had become obvious to anyone not blinded by the official propaganda at the time. Of course, after the financial collapse occurred and was addressed with money printing, the price of gold ran up to an all-time high.

It’s likely that a similar situation is taking place now. Only this time around all “assets” are in price-bubbles fomented by record levels of fiat money creation and the interminable expansion of credit. The debt portion of this equation is getting ready to hit the wall, the only question is timing. This explains the parabolic move in the price of Bitcoin. Bitcoin is nearly impossible to manipulate. Once the western Central Banks lose the ability to manipulate the price of gold in the derivatives markets, the price of gold and silver will go on their own parabolic price journey – one that will leave the price of Bitcoin in the rear view mirror.

If you are interested in getting unique, insightful gold/silver market analysis and mining stock investment ideas ahead of the market, subscribe to the Mining Stock Journal.  You can get more information about this here:  MSJ subscription info.

On The Home-Stretch To Collapse

The warning signs are there but very few look for them or want to see them. But it’s a dynamic in which once you see it you can’t “unsee” it. A teacher I know told me this morning that Colorado school districts are quietly cutting staff across all districts. The only reason this would be occurring is that the State is projecting a decline in tax revenues. The only reason tax revenues would be declining is because economic activity is slowing or contracting. And Colorado supposedly has one of the more “vibrant” State economies.

The soaring level of “hope” that, for some unexplainable reason, accompanied the election of Trump is now crashing. The so-called “hard data” which somewhat measures the level of economic activity never moved higher in order to justify the optimism – an optimism tragically seeded in ignorance. As an example, the Kansas City Fed released its economic survey today. The composite index crashed from 20 to 7. Not surprisingly, Wall Street snake-oil salesmen – otherwise known as “economists” – were expecting a reading of 17 on the index.

As for individual components of the index, the average workweek and number of employees dropped; the production component of the index fell precipitously; and new orders collapsed. In fact, new orders expectations fell below the pre-Trump level. The six-month outlook metric – aka the hope index – plunged to its lowest level since November.

The truth is that all of the regional Fed economic activity surveys were largely driven by “hope,” which registered in the form of new orders for goods that will sit on the shelves of car dealers and non-food retailers and in the form of “expectations” about the level of economic activity in six months.

But there has not been any follow-through in form of actual growth in economic activity to justify the unrealistic level of “hope.” Real disposable income and the real level of retail/auto sales have been declining on the way to a tail-spin plunge. Any pulsations in final retail sales and home purchases have been fueled by the parabolic issuance of sub-prime quality debt. In fact, an increasing percentage of home purchases are from aspiring flippers. We are at the point in the cycle, just like 2007-2008, in which many of these flipper purchases will never end up with end-users and instead will land on bank balance sheets.

Auto sales through the end of March were down 10% since the beginning of 2017, resulting in the steepest decline in auto sales since 2009.  New car inventory at some of the biggest auto dealers around Denver is spilling over into the giant parking lots at vacant malls as OEMs push overproduction onto the dealer network.   Once the debt capacity of those still buying pick-up trucks at record incentive pricing hits the wall, the auto industry will see a spectacular cliff-dive.  The Government is too broke to provide the “cash for clunker” safety-net put in place in 2010.

In addition to trillions in printed (electronically generated) currency, the Fed has been able to fabricate the illusion of economic growth with an enormous amount of credit creation.   Credit is debt-issuance.   The part about debt that is conveniently overlooked by economists is that borrowed money behaves like printed money until it has to be repaid. The problem is that most debt created in the U.S. is never repaid.  For instance, the level of outstanding Government debt has been increasing every day since before Nixon closed the gold window.  This is not “debt” in the traditional sense of a loan that gets repaid.  This is money printing.

Consumer  and corporate debt levels have been rising in parabolic fashion and are at all-time highs.  Given that large chunks of this debt will never be repaid, just like in 2008-2009, the issuance of this debt is the same as printed money.  Amusingly, though not surprisingly, the Fed stopped reporting the total amount of debt outstanding in the system (Government + Corporate + Household) on March 25, 2016.  On that day the total debt outstanding was $63.5 trillion.  It’s likely well over $65 trillion by now.   That debt, until it’s repaid, is no different that printed currency.

This would be great in a pretend world in which debt could be issued to borrowers ad infinitum.  It would be the proverbial money tree on which free lunches blossomed for everyone forever.  Unfortunately, debt can not be issued in increasing amounts to eternity. Currently it would appear as if the non-Government borrower segment of the debt statistic has reached its borrowing capacity.   It happens gradually then all at once.   The United States is getting close to the “all at once” stage.

This is why the Deep State has resorted to the last stage of history’s Empiric life-cycle curve:  when all else fails start a war…