Tag Archives: market crash

Insane Valuations On Top Of Insane Leverage

The recent stock market volatility reflects the beginning of a massive down-side revaluation in stocks. In fact, it will precipitate a shocking revaluation of all assets, especially those like housing in which the price is driven by an unchecked ability to use debt to make the “investment.” This unfettered and unprecedented asset inflation is resting precariously on a stool that is about to have its legs kicked out from under it.

The primary reason the U.S. is now holding a losing hand at the global economic and geopolitical “poker table” is that this country has been committing too many sins for too long for there not to be a price to be paid. With bankrupt Governments (State and Federal), a bankrupt pension system, a broken healthcare system, all-time high corporate and household debt levels and a broken political and legal system, the U.S. is slowly collapsing. This is the “perfect storm” for which you want to own plenty of gold, silver and related stocks.

Eric Dubin and I are producing a new podcast called, “WTF Just Happened?” The inaugural show discusses the topics mentioned above:

“WTF Just Happened?” w/ Dave Kranzer and Eric Dubin is produced in association with Wall Street For Main Street       –       Follow  Eric here: http://www.facebook.com/EricDubin

Why Trump Won: People Vote Their Wallets

This commentary is emphatically not an endorsement of Trump as President.  I have not voted since 1992 because, when the system gives the public a Hobson’s Choice, voting is pointless.

An  age-old adage states that “people vote with their wallets.”  The chart below suggests that this adage held true in 2016:

The graphic above (sourced from Northman Trader) was prepared by Deutsche Bank and the data is from the Fed. It shows that, since 2007 through 2016, U.S. median household net worth declined between 2007 and 2016 for all income groups except the top 10%.

Given that a Democrat occupied the Oval Office between 2008-2016, and given that the economic condition of 90% of all households declined during that period, it follows logically that empty promises of a Republican sounded better to the general population of voters than the empty promises of a Democrat.

In other words, the “deplorables” didn’t vote for Trump because they wanted a wall between the U.S. and Mexico or they wanted to nuke North Korea off the map, they voted for a Republican because the previous Democrat took money from their savings account.

The rest of the propaganda and rhetoric  connected to the 2016 election, which was elevated to previously unforeseen levels of absurdity, was little more than unholy entertainment that served to agitate the masses.  These two graphs explain a lot about the outcome of the 2016 “election.”

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.

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…

America’s Pension Crisis Is About To Detonate

Dr. Paul Craig Roberts sent me an article by Catherine Austin Fitts and asked if I had read it.  The article is titled, “The State of America’s Pension Funds.” The article is worth reading, though I believe Ms. Fitts underestimates significantly the degree to which political and Wall Street criminality – along with money management incompetence – has infected and destroyed the U.S. pension system – both public and private. Furthermore, I believe she errs in her believe that the pension crisis can be fixed.

I’ve re-posted below my view of the looming pension system melt-down that I shared with Dr. Roberts.

“My guestimate for the amount stolen or shifted illegally through these mechanisms is $50 trillion, although I can argue the number higher.” I agree with her assessment there.

Craig, I concluded in 2003 that the elitists would hold up the system with printed money and credit creation until they had swept every last crumb of middle class wealth off the table and into their own pockets. Back then, I said housing was next asset to be drilled and cored. Let’s review: The first bubble removed at least $5-10 trillion of wealth from the public via the bailout of the banks and the wealth lost by people who chased home prices higher and then lost those homes to foreclosure or short-sale. Most of those homes are now sitting in the rental portfolios of large Wall Street investment funds like Black Rock and Colony Capital.

I also concluded that the last remaining middle class asset was retirement funds (Pensions, 401k’s, IRAs) and that looting that asset class would be the elitists coup de grace. Retirement assets are by far the largest middle class asset in aggregate (something like $20 trillion now). Let’s review: Every dollar of under-funding is a dollar of wealth transferred away from the pension plan members to either current beneficiaries or the promoters of the fund investments. A lot of money is also paid to “professionals” who skim huge salaries and benefits to put money to work with hedge funds and private equity funds, most of which will be wiped out in the next big bear market.

I have a close friend who works at a pension fund. It’s an off-shoot of a big State pension plan which happens to be one of the more underfunded pension funds in the country. My friend has to be a member of the pension fund as an employee of the fund he helps manage. He told me that as of Jan 1 he now has to contribute 12% of his pre-tax income to the pension fund. It’s criminal. That’s in addition to the amount his employer has to match. The money helps fund current beneficiary payouts. He needs his salary/job to support his family so he does not have a choice but to keep working at his current position unless he can find something else that pays equally as well. The job market for investment fund analysts is extremely difficult right now. His wife has to work for them to make ends meet (their kids are all under 12)

Based on a detailed study he did internally, he estimates the true underfunding of all public pensions in aggregate is at least $8 trillion. Not the $3.5 trillion referenced by Catherine Austin Fitts. He’s an insider and has access to better data than the outsiders and academics who have done studies that conclude $3-5 trillion of underfunding. THAT’s with the stock AND bond markets at all-time highs. How in the hell is that possible? The difference, or funding gap, is the wealth that is being confiscated.

The under-funding device is a very subtle and brilliant mechanism of wealth transfer. No one thinks about it that way but that’s what it is. A massive wealth transfer  mechanism.

I worked for some of these insiders at Bankers Trust. I can tell you first-hand, for a fact, that these people will do ANYTHING to take money from ANYONE, legally or illegally. I saw this first-hand. They are all very bright, well-educated and completely devoid of morals or ethics.  My direct boss was like that and everyone above him was even worse. They hate nothing more than leaving, literally, even dimes and nickels on the table.

That’s why the system is doomed.

But, What About The Housing Market?

A colleague of mine pointed out that Trump has not been tweeting his flatulence about the economy recently.  This thankful hiatus is after he just passed a tax cuts and a spending budget that is supposed to be stimulative.  As it  turns out, the economy is hitting the headwinds of marginally higher interest rates and a consumer that is bulging from the eyeballs with debt.   Windfall tax rebates to large corporations will not fix this nor will rampant Government deficit spending.

This leads us to the housing market. Mortgage originations were down 5.6% in Q4 from Q3. This is not a result of seasonal bias. Q4 mortgage originations in 2017 were down 26.7% from Q4 2016. One caveat is that the Fed does not breakout the numbers between purchase mortgages and refinancing. But higher rates are starting to affect all mortgage applications. According to the latest data from the Mortgage Bankers Association, mortgage purchase applications dropped 6% two weeks in the row. Declines in purchase apps should not happen moving from January to February, as February is statistically a seasonally stronger month for home sales than January.

Moreover, existing home sales for January were released this morning. To the extent that we can trust the National Association or Realtor’s Seasonally Adjusted Annualized Rate statistical Cuisinart, existing home sales plunged 3.2% in January from December and nearly 5% from January 2018. Decembers headline report was revised lower. I’m sure the King of Spin, Larry Yun, will blame it on “low inventory.”  But this is simply not true:

If Yun’s thesis were true, the chart above would be inverted. Instead, going back to j1998, there is a definitive inverse correlation between inventory and home sales.  Curiously, when attempted to run the numbers to the present, I discovered that the Fed removed the data series I had used to create the chart in in 2015.  Mere coincidence, I’m sure…

The mortgage rate for a 30-yr fixed rate conventional mortgage at Wells Fargo, the  country’s second largest mortgage originator, is now 4.5% with an APR of 4.58%. As recently as September, the rate for a 30yr mortgage was 3.87%. At current rates, the monthly payment for a home purchase with a $400,000 mortgage has increased $187. It may not sound like much, but for many first-time buyers that small jump in monthly payment can mean the difference between buying and not buying.

Since the Fed began printing money and the Government knocked the down payment requirement to 3% on a Government-backed mortgage, homebuyers have based the amount they are willing to pay for a home on determining the highest possible monthly payment the mortgage underwriter will allow. In the example above, the monthly payment on a $400k mortgage at 3.78% is $1,857. At 4.58%, the same payment only “buys” a $363,000 mortgage. This is nearly a 10% decline.

The same math applies to flippers/investment buyers, who pay an even higher rate for an investment purchase. One of the SSJ subscribers is a real estate professional here in Denver. She emailed to tell me that, “it doesn’t take much for interest rates to change Investors ideas.” She has a client who wants to buy an investment home for around $350000. Since investor rate loans are at least a quarter of a point higher than an owner-occupied mortgage, the client’s purchase with 20% down goes up $161 a month from the from the recent jump in mortgage rates. This means he now needs the rent to go up by that much to work on the purchase-decision formula he is using.” I believe that a lot of flippers are going to be stuck with homes they can’t re-sell at the price they paid.

The average price the average-income homebuyer can afford has declined nearly 10% as a result of just a 75 basis point rise in mortgage rates. What happens when rates go up another 50-75 basis points? This fact has not been reflected in the home price data that is released every month from Case-Shiller and from the Government. This is because those surveys have a 3-6 month lag built into the methodology of calculating their respective home price indices.

As it becomes obvious that the price the average potential homebuyer can pay has been reduced from $400k to $363k, it will trigger a price decline cycle similar to 2007-2009. Flippers will be the first to fold just like during the mid-2000’s housing bubble. That housing market crash was triggered by the collapse of subprime lenders, which removed a key source of funding used by flipper and for end-user home purchases from flippers. This time around it will be triggered by a lack of buyers who are able to pay the same price now that they could have paid in September when rates were 80 basis points lower. Soon rates will be 180 basis points higher than in September and home values will be crushed.

The analysis on the housing market 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 Fed’s “Catch 22”

Before diving into the topic, let’s be clear about one thing:  The economic definition of “inflation”  is the increase in money supply relative to the marginal increase of wealth output (GDP) in the economic system for which money supply is created. This is differentiated from “price inflation,” which is “a general rise in prices.”

Money and credit creation in excess of wealth output causes currency devaluation.  It is this currency devaluation that arises from money and credit printing that causes “price inflation.”  More money (and credit) chasing a relatively less amount of “goods.”

Furthermore, the commonly used price inflation reference is the Government’s CPI.  The CPI measurement of inflation has been discredited ad nauseum.  And yet, 99% of analysts, commentators, bloggers, financial media meat-with-mouths, etc uses the CPI as their inflation trophy.   But the CPI has been statistically manipulated to mute price inflation since the early 1970’s, when then-Fed Chairman, Arthur Burns, correctly understood that the currency devaluation that was going to occur after Nixon closed the gold window would have adverse political consequences.  Today, the CPI measurement of price inflation is not even remotely close to the true rise in prices that has occurred over the last 8 years. Over the last 47 years, for that matter.

This notion of rising inflation seems to be the en vogue “economic” discussion now.  But the event that causes the evidence of currency devalution – aka “inflation” – has largely occurred over the past 8 years of global money printing.  If your general basket of expenditures for necessities – like housing, healthcare, food, energy,  and transportation – has risen by a considerable amount more over the last 5-7 years than is reflected in the CPI, ask either the Bureau of Labor Statistics, which publishes the  CPI report – or the moronic analysts who insist erroneously on using the CPI as the cornerstone of their suppositions – why that is the case.

The Fed’s Catch 22 – It’s been estimated that the Treasury will need to sell $1.4 trillion new bonds this year to cover the spending deficit that will result from the tax cuts combined with the record level of Government spending just approved by Congress and Trump. With the dollar declining, foreign Treasury buyers are sitting on significant losses on their Treasury holdings. As an example, since March the dollar has dropped 16% vs. the euro. Add this to falling Treasury bond prices (rising yields), and European holders of Treasuries, especially those who have to sell now for whatever reason, have incurred a large drop in the euro-value of their Treasury bonds. The same math applies to Japanese Treasury bond investors, as the dollar has fallen nearly 9% vs. the yen since March.

One of the primary fundamental factors causing the dollar decline is the continuously deteriorating fiscal condition of the U.S. Government. If the Fed continues hiking interest rates at the same pace – 1.25% in Fed Funds rate hikes over two years – the dollar will continue declining. The pace of the rate hikes is falling drastically behind just the official measurement of inflation (CPI). Imagine the spread between the real rate of inflation (John Williams estimates actual inflation to be at least 6%) and the Fed funds rate, also known as “real interest rates.” Real interest rates using a real measure of inflation are thus quite negative (6% inflation rate minus 1.25% Fed funds = negative 4.75% real rate of interest). As negative real rates widen, it exerts further downward pressure on the value of the dollar.

The Fed could act to halt the falling dollar by hiking rates at a faster pace and actually sticking to its stated balance sheet reduction schedule. But in doing so, the Fed risks sending the economy into a rapid tail-spin. Higher rates and less banking system liquidity will choke-off the demand for the low-cost credit – auto, credit card and mortgage loans – that has been stimulating consumer spending. In fact, I have made the case in recent SSJ issues that the average household is now near its limitations on taking on more debt. Consumer borrowing, and thus consumer spending, will decelerate/decline regardless of the cost of borrowing. We are seeing this show up in retail sales (more on retail sales below) and in stagnating home sales.

As it stands now, based on its reluctance to reduce its balance sheet at the $10 billion per month rate initially set forth by Janet Yellen, it appears that the Fed is fully aware of its Catch 22 predicament. Last week, in response to the nearly 10% plunge in the Dow/SPX, the Fed actually increased its QE holdings by $11 billion. It did this by adding $11 billion in mortgages to its SOMA account (the Fed’s QE balance sheet account). This is an injection of $11 billion in liquidity directly into the banking system. This $11 billion can, theoretically, be leveraged into $99 billion by the banks (based on a 10% reserve ratio). The dollar “saw” this move and dropped over 2.2% in the first four trading days this past week before experiencing a small technical bounce on Friday. The 10-yr Treasury hit 2.93% last week before settling Friday at 2.87%. 2.87% is a four-year high on the 10-yr.

Do Bona Fide Financial Markets Still Exist?

Paul Craig Roberts, Dave Kranzler, Michael Hudson

For many decades the Federal Reserve has rigged the bond market by its purchases. And for about a century, central banks have set interest rates (mainly to stabilize their currency’s exchange rate) with collateral effects on securities prices. It appears that in May 2010, August 2015, January/February 2016, and currently in February 2018 the Fed is rigging the stock market by purchasing S&P equity index futures in order to arrest stock market declines driven by fundamentals, and to push prices back up in keeping with a decade of money creation.

No one should find this a surprising suggestion. The Bank of Japan has a long tradition of propping up the Japanese equity market with large purchases of equities. The European Central Bank purchases corporate as well as government bonds. In 1989 Fed governor Robert Heller said that as the Fed already rigs the bond market with purchases, the Fed can also rig the stock market to stop price declines. That is the reason the Plunge Protection Team (PPT) was created in 1987.

Looking at the chart of futures activity on the E-mini S&P 500, we see an uptick in activity on February 2 when the market dropped, with higher increases in future activity last Monday and Tuesday placing Tuesday’s futures activity at about four times the daily average of the previous month. Futures activity last Wednesday and Thursday remained above the average daily activity of the previous month, and Friday’s activity was about three times the previous month’s daily average. The result of this futures activity was to send the market up, because the futures activity was purchases, not sales. http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_quotes_volume_voi.html

Who would be purchasing S&P equity futures when the market is collapsing from under them? The most likely answer we can come up with is that the Fed is acting for the PPT. The Fed can actually stop a market decline without purchasing a single futures contract. All that has to happen is that a trader recognized as operating for the Fed or PPT enters a futures bid just below the current price. The traders see the bid as the Fed establishing a floor below which it will not let the market fall. Expecting continuing declines to make the bid effective, they front-run the bid, and the hedge funds algorithms pick it up, and up goes the market.

Is there another explanation for the shift in the market from decline to rise? Are retail investors purchasing dips? Not according to this report in Bloomberg — https://www.bloomberg.com/news/articles/2018-02-12/record-23-billion-flees-world-s-largest-etf-as-panic-reigns — that last week a record $23.6 billion was removed from the world’s largest ETF, the SPDR S& 500 index fund. Here we see retail investors abandoning the market.

If central banks can produce zero interest rates simultaneously with a massive increase in indebtedness, why can’t they keep equity prices far above the values supported by fundamentals? As central banks have learned that they can rig financial asset prices to the delight of everyone in the market, in what sense does capitalism, free markets, and price discovery exist? Have we entered a new kind of economic system?

How Long Can Fed Keep The Stock Market Propped Up?

Is the Stock Market Rigged?

Paul Craig Roberts, Dave Kranzler, and Michael Hudson

On February 6 PCR asked if the Plunge Protection Team had stepped in and prevented a stock market correction by purchasing equity index futures. https://www.paulcraigroberts.org/2018/02/06/another-arrested-equity-correction-paul-craig-roberts/ Sure enough, the daily exchange volume chart shows an increase in futures activity on February 2 with sharp increases on Feb. 5th and 6th. Those are the days when the stock market averages were experiencing large point drops. So, ask yourself, would you purchase equity futures while experiencing cumultive stock market drops? One can understand shorting a dropping market, but not buying futures.

Unless this is what happened. Seeing the beginning of a correction, the Plunge Protection Team placed a futures bid just below the existing price. Traders saw the bid, recognized that the government was intervening to support the market, and the bid was front-run with the hedge fund algorithms automatically picking up the action.

Who but the Federal Reserve with its unlimited ability to create money would take the risk of buying futures in the face of a falling market. Moreover, such an infusion of money into the market does not show up in the money supply figures.

The futures purchases prevented margin calls and stop/loss orders in a heavily leveraged equity market that would have collapsed the market.

What are the pros and cons of this kind of intervention (which might have occurred also in May 2010 and August 2015)? By stopping a correction, the intervention prevented a pension fund collapse, both private and state. However, by propping up over-valued equities that the Federal Reserve’s quantitative easing created, the intervention rewarded over-leveraged speculative risk-taking and prevented price discovery. We still have an equity market whose values rest on record margin debt, stock buy-backs, and prices pumped up by money-printing. The problems waiting to come home continue to build.

The question is: can intervention prop-up over-valued, problem-ridden markets forever?

After today’s drop, we will see what happens tomorrow.

“Mother Of All Blow-Offs?”

People who look for easy money invariable pay for the privilege of proving conclusively that it cannot be found on this earth. – Jesse Livermore

Boeing’s stock has gone parabolic. It’s doubled since April 2017:

The stock now trades at a 31x PE ratio, for whatever that’s worse. I’m sure if I went through the numbers closely, I could find numerous accounting manipulations which added a copious amount of non-cash income to BA’s numbers. BA’s revenues on a trailing 12 month basis are flat. From 2015 to 2016, its revenues declined 1.7%. On a trailing twelve month basis vs. 2016, its revenues have dropped 3.2%.

Historically paying a nose-bleed PE ratio for a company with deteriorating revenues and an enormous amount of debt does not produce a good result. Chasing the price-momentum higher and waiting for a bigger idiot to buy shares from you works well until the music stops. Then everyone gets hurt.

The Dow moved up an average of 120 pts per day in the nine trading days since the end of 2017. This includes one day in which the Dow dared to close 12 pts lower. That one day felt like a bear market. Over this entire period the Dow has appreciated 4.4%. Since the election, including the 1,000 pt plunge in the Dow futures that occurred when it was apparent Trump would win, the Dow has soared nearly 50%.

What’s driving this? Since late August, the public has literally thrown money blindly into passively managed ETFs which automatically distribute the cash inflow by market cap weighting into the stocks in the index that underlies the ETF. This means that most of the gains are concentrated in the stocks in the Dow/SPX with the largest market caps, which then drives the Dow/SPX higher. For instance, last Friday, the Dow was up 0.89% but AMZN was up 2.2%, Netflix was up 1.8%, GOOG was up 1.5% etc.

There’s no telling how much longer this can persist without some type of accident. Judging by the data on cash in customer brokerage accounts at the big online brokers , I would have to believe that this last push from the retail investor is nearing its completion. Data from the fund industry has shown a massive migration of investor cash moving out of actively managed mutual funds and into passive index funds. This would include money managed on behalf of individuals by registered investment advisors.

Most investor sentiment indicators are showing extreme levels of bullishness – historically unprecedented levels.  The short interest on the NYSE has melted down nearly to zero.   The Acting Man blog has written an excellent post which details the sentiment indicators flashing bright red warning lights – I recommend a perusal:   Mother Of All Blow-Offs

For now, the raging bulls chasing momentum conveniently ignore  the deterioration in “new orders” and “employment” numbers in deference to the statistically manipulated headline reports that purport to show economic growth. Most of the bullish reports are overweighted with “sentiment” and “hope” metrics that offset declining real economy statistics.  Credit card and auto loan delinquencies – both subprime and “prime” –  continue to increase a double-digit rates (see WFM or COF’s latest quarterlies, for instance).  As for the “prime” credit rating designation of 2017, it’s not your mother’s “prime” credit rating.

At this point I don’t want to speculate on how much longer that Dow/SPX/Naz can go straight up. Historically this is the type of market behavior which has marked the blow-off top of speculative manias and has preceded serious market accidents.

Is this the “Mother Of  All Blow-Offs?” Probably.

Part of the commentary above was excerpted from the last issue of the Short Seller’s Journal. Believe it or not, there’s 100’s of stocks that declining or have set-up short-sell opportunities.  Long term puts are historically cheap and shorting certain companies is a no-brainer.  I had my subscribers short Sears at $12.   Last week I presented homebuilder to short that is down 6.7% on the week, so far.  To learn about about this newsletter, click here:  Short Seller’s Journal information