Tag Archives: market crash

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

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.

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”

Mount Vesuvius Anyone?

“In the face of a shock, investors may be surprised to find themselves jammed running for the exit.” That quote is from Paul Tudor Jones, who was one of the pioneers of the modern hedge fund and is considered a brilliant investor and trader. He went on to say that things are “on the verge of a significant change” and that the current market reminds him of 1999.

The current market reminds me of the demise of Pompeii, which was destroyed by the massive volcanic eruption of Mt Vesuvius in 79 AD. Pompeii was a prosperous city of the Roman Empire on the coast of southwest Italy. It sits at the base of Mt. Vesuvius, a volcano that had been dormant for a long time. Earthquakes and seismic activity, scientists believe, began to “warn” the population of Pompeii roughly 17 years before the big eruption, when a massive earthquake largely leveled Pompeii. Shortly before the eruption more signs began occurring, hinting that something wasn’t right. Though some people evacuated the area, most of Pompeii’s populace was not worried. The rest is history.

Though there are many warning signs, similar to the citizens of Pompeii living at the base of an active volcano, the American public does not seem the least worried
about having their money in the stock market.  Retail margin debt, at 100% of market capitalization, is at its highest ever. The percentage of U.S. household wealth (not including home equity) invested in stocks in some form is in its 94th percentile. This is the highest allocation to equities since just before the tech bubble popped in 2000. In other words, despite the numerous warnings for those paying attention, investors have piled most of their savings/wealth into the stock market with complete disregard to the growing probability of a down-side accident.

Last Wednesday the tech stocks were clobbered, with the Nasdaq 100 index down 1.7% and the Nasdaq composite down 1.3%. The SOX semiconductor index was down 4.4%. The famed FANG stocks (Facebook, Amazon, Netflix and Google) lost a combined $60 billion in market cap. Interestingly, I could not find any specific event catalyst that triggered the sell-off. As I commented last week, while everyone is looking for a specific “black swan” event to take down the stock market, it’s quite probable that there will not be an specific event that causes the next stock market accident. Perhaps this was a warning “earthquake?”

This graphic shows the degree to which the “smoke” coming from the stock market should not be ignored (click to enlarge):  

Both graphs are from John Hussman, the highly respected contrarian money manager and one of few remaining market bears (along with me and SSJ subscribers). The graph on the left is a monthly plot of SPX futures from 1998 to present. The graph on the right is Hussman’s margin-adjusted Shiller CAPE ratio chart, which shows the SPX PE at an all-time high.  In the absence of meaningful real economic growth to justify the current level of the stock market relative to the two previous bubbles, the only logical conclusion is that the eventual stock crash will be twice as brutal as the last two.

Another plume of smoke billowing from the stock market is the market “breadth.” The number of stocks that are moving higher as the major indices hit new record highs almost daily continues to decline. Currently, 38% of the stocks in the S&P 500 are below their 50 dma and 30% are below their 200 dma. At the beginning of the year, only 20% of the S&P 500 components were below their 50 dma. In the Nasdaq, 40% of the stocks are below their 50 dma and 35% are below their 200 dma. At the beginning of 2017, less than 20% below their 50 and 200 dma’s.

The declining breadth reflects the fact that “investors” continue to chase velocity – i.e. blindly throw money at the fastest moving stocks. This is why the FANGs + AAPL and MSFT represent an absurdly disproportionate percentage of the total move higher in the stock market. Furthermore, the declining breadth of the market is now a function of the “greater fool theory.” This is an economic theory that states that the price of a stock is determined by irrational beliefs and expectations (e.g. “it’s different this time”) rather than fundamental valuation. The price paid for a stock is justified by the believe that someone else will be willing to pay a higher price.

Every week now there are stocks that that “get shot” and fall from the sky.  It’s typically because the company will “miss” earnings estimates.  But frequently a company will “beat” the Street – which is easy because analyst estimates are rigged for the easy “beat” – but warns about future expectations (“guide lower”).   In fact, this week started off with a drive-by-shooting of Toll Brothers (luxury homebuilders):

Toll reported a miss on Monday before the market opened. At the open Toll stock took back nearly the entire rise in its stock price over the trailing 30 days. Clearly no one saw this coming. Anyone who bought the stock on the previous Friday walked into an ambush and was down 10% on their Friday purchase at Monday’s open.

None of this will matter as long as your trusty investment advisor or pension fund manager has your money in an SPX ETF, right?  Unfortunately, at some point, the entire market is going to fall from the sky. Like the citizens of Pompeii, most investors will end up casualties of a great stock market tragedy.  But like Mt. Vesuvius, warning signs abound for anyone willing to look for and accept them. Given the level of propaganda directed at convincing us that everything is great, “looking” for the warnings and “accepting” the warnings are two entirely different propositions.

Some of the commentary above was excerpted from my Short Seller’s Journal. One of the stocks I recommended as a short in the November 12th issue closed today down 20% from its closing price on Friday, November 10th. You can find out more about this weekly newsletter that presents the bearish case here:   Short Seller’s Journal

Buy Into An Asset Bubble Before It Becomes A Bubble

Let’s face it, the trillions of fiat currency printed by Central Banks globally, which has been compounded by an even greater amount of debt issuance derived from the printed currency, has fomented multiple assets bubbles of historic proportions. Bitcoin is a bubble. The FANG stocks plus Tesla, among dozens of other daytrader and hedge fund momentum darlings, are bubbles. Novo Resources, for now, is a bubble.

Rather than buying into today’s bubble valuations, real money can be made anticipating the next asset bubble sector. Please note that I consider cryptocurrencies to be de facto fiat currency because they share many similar attributes with electronically produced Central Bank currency. When the fiat currency experiment fails, which it will (please see Voltaire, et al), the next bubble will form from the race out of fiat money into real money – gold and silver. The bubble will not be gold and silver. The bubble will be the derivatives of gold and silver:  mining stocks.

William Powers, of MiningStockEducation.com, invited me onto to his program to discuss the precious metals market and investing in junior mining stocks. Junior mining stocks are extraordinarily undervalued and will likely be the next great asset bubble – Bill and I discuss why and several other topics:

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If you are interested in learning more about the Mining Stock Journal, please use this link: Mining Stock Journal information.

“Party Like It’s 1999” (or 2008 or 1987 or 1929)

To paraphrase the highly regarded fund manager and notable bear, John Hussman, you can look like an idiot before a Bubble pops or after it’s popped.

I guess I’m squarely in the camp of looking like an idiot before the bubble pops. I might watch “The Big Short Again” for some “moral fortitude.” With history’s stamp of approval on my side, all I can do is shake my head and chuckle. As soon as the Dow crossed over 23,000 on Wednesday, the “experts” on bubblevision began speculating how long it would take for the Dow to hit 24k. I was actively trading and shorting dot.com stocks in late 1999 and the curent environment feels almost exactly like it felt then. Wake up everyday and wait for Maria Bartiromo to breath the name of a dot.com stock you were short and watch it spike up 10-20% on her signal. The Nasdaq ran from 2,966 to 4,698 – 1,700 pts or 58% – in 4 months. It was painful holding shorts but very rewarding after the brief period of “suffocation.”

It feels like the market could go into a final parabolic lift-off to its final peak before the inevitable. The non-commericial (i.e. retail) short-interest in the VIX – meaning retail investors are “selling” volatility – hit another all-time high this past week. This a massive and reckless bet against any possibility of any abrupt downside in the market. It reflects unbridled hubris. Don’t forget, smart money and banks are taking the other side of this bet.

To think that any Trump tax reform bill that might get passed will improve the fundamentals of the economy and lead to higher corporate earnings is absurd. The tax bill proposal is nothing more than a huge windfall for the wealthy (as in, 8-figure net worth and above) and Corporate America. The plan is, on balance neutral to negative for the average middle class household. Although it doubles the standard deduction, it eliminates the deduction for state and local taxes, which means you’ll lose the deduction for property taxes. It also will steer a large portion of middle class homeowners away from itemizing deductions, which means it will marginalize or eliminate the ability to use mortgage interest as a deduction. Corporations of course will benefit the most – as the tax rate would be lowered from 35% to 20% – because they throw the most money at Congress.

It’s estimated that the tax plan would cost the Government $6 trillion in revenues over the next 10 years. At $600 billion per year, this would have doubled the “official” spending deficit for FY 2017 (Note: if you include the debt issuance that was deferred until the debt limit ceiling was suspended – a little more than $300 billion – the amount debt that would have been issued by the Government in FY 2017 would have been about $1 trillion. This number is the actual spending deficit).

In short, even if some sort of “compromise” legislation is passed, the tax “reform” would do little more than shift trillions from revenue going to the Government to cash flow going into the pockets of Corporate America and the upper 1% (and really the upper 0.5%). That said, any notion that the stock market melt-up this past week is connected to the tax reform effort is idiotic. This is because it will add $100’s of billions per year in Government debt issuance requirements and will do little, if anything, to stimulate economic activity.

On the contrary, the stock market behavior is attributable to the last-gasp capitulation that characterized the coup de grace phase of any previous stock market bubble. This includes the re-surfacing of phrases like, “it’s different this time,” “it’s a new economic paradigm,” “stocks have reached a permanent plateau,” etc. CNBC even featured a graphic last week which showed Bitcoin as having a P/E ratio. Sheer madness.

It’s different this time? – As much as I hate to listen to radio ads when I’m driving (I listen to the local sports talk-radio programming and normally switch to music during the 5 min ad breaks), in the past several weeks I’ve been listening to the commercial breaks. The reason for this is that radio ads often reflect the current local trends in demand for services /products. Starting in late summer, frequent ad spots have been occupied by: 1) a service that offers IRS back-tax settlement services; 2) numerous mortgage brokers pitching “use your house as an ATM and take-out home equity loans to pay-down credit card debt and have money for the holidays;” 3) “make fast money” home-flipping seminars.

In terms of middle-class demographic trends, Colorado has always been regarded as a leading indicator for most of the country between the coasts. The IRS tax settlement service ads tell me that the middle class has run out of disposable income: can’t pay taxes owed, credit card debt is too high, and is worried about holidays. I’ve been discussing this development for quite some time. The tax thing is self-explanatory. There’s likely similar companies/law firms all over the country running ads pitching tax settlement services. Wage-earners will under-withhold their paycheck taxes to help cover current spending and hope that year-end bonuses, or whatever luck fate might have in store, will enable them to pay what they owe when they file.

The “use your house as an ATM” ad is disturbing. This was an idea originally proposed by Greenspan in 2002 and put aggressively into action from 2004 to 2008. In 2004 Greenspan advocated using adjustable rate mortgages. How did that end up? The reason it won’t go on for another four years is that households are stretched on their Debt-To-Income profile (pretax income to debt service ratio) relative to the 2004-2008 period. Household debt – auto/credit card/student loan + mortgage – already exceeds the 2008 peak. Back then, home values were rising right up until late 2007/early 2008. Currently, in most markets home prices are starting to drop (this was occurring by late summer, so it’s not just “seasonal,” which is an argument you might hear). I’m starting to get email notices of homes listed in every price segment that are dropping their offer price up to and over 10%. This includes apartments in the under $400k price-segment (according to the NAR, the average price of existing home sales declined 2.7% from August to September – more on existing home sales below).

As enough home sales are closed with price drops greater than 10%, the fun begins. As I’ve detailed in previous issues, an increasing percentage of buyers right now are flippers (those radio ads are occurring for a reason). Enough people have decided that they “don’t want to miss out” on the “easy money” being made flipping homes. Guess what? They’ve missed out. The majority of flippers who have purchased in the last 3-6 months that have not been listed or are listed but just sitting are soon going to be looking for buyer bids to sell into. The problems will start when the flippers who used debt to buy their “day-trade” discover that the current “bid side” for their home is below the amount of debt used to buy the house.

Just like upward momentum in stock and home prices induces daytraders and flippers respectively to chase prices up in anticipation that someone will readily be willing to pay them even more, falling prices in stocks and homes generates motivated selling and scares away buyers. With homes it’s slightly different. Falling stock prices tend to generate selling volume that “forces” the market lower quickly. With stocks, there will be short-sellers who provide some liquidity to sellers as the shorts cover on the way down.

Housing, on the other hand, goes from a “liquid market” in rising markets to an ‘illiquid market” in falling markets. A home is a “chunky, high-ticket” item that takes time to close. In falling markets, the value of a home declines measurably before the buyer closes. Because of this, buyers will disappear until the market appears to have stabilized. Unlike stocks, homes can’t be shorted, which means there are no buyers looking to take a profit on a bet the market would fall. Often price falls in a “step function.” By this I mean there will be price-gaps to downside in the market as buyer “bids” disappear completely (i.e. bid-side volume vanishes).

I’m seeing this dynamic in the over $1,000,000 market in Denver. I have friend who lives in a high-priced neighborhood in south Denver (Heritage Hills). He had his house on the market for close to a year and couldn’t move it at a price that was in-line with comps (he’s a licensed real estate agent). The problem is that homes were not selling in his ‘hood. I told him if he marked it down $100k he could probably move it. He said he would wait for the market to improve and took it off the market. That was in July. It’s too late. Homes over $1mm are being reduced in price in $100,000 “chunks” now. I’ve gotten several “price change alerts” for homes around Denver listed during the summer that are lowering their offer in $100k steps. Some of them have been lowered already 15-20% from their original listing price. It gets worse.

One of the Short Seller Journal subscribers who lives in the south Denver metro area sent me a note about a home he has been watching in Castle Rock, which is about 35 minutes south of downtown Denver in a very pretty area along the foothills. The area ranges from cookie cutter middle class neighborhoods to a high-end, exclusive country club community. It was one of the hottest bubble areas in the mid-2000s bubble. He showed me a home that was listed in May for $1.39 million. Since then it’s been taken down $400k in four price changes. The last price cut was $200k.

This is an example of extreme “step function” price drops. Maybe the house was over-priced to begin with, but not by nearly 30%. The original offer price has to be based loosely on comps or no listing broker would touch it. It’s on its fourth listing agent. Last summer (2016) it’s quite likely this house would have moved somewhere near the offer price. He also told me that he’s seeing more pre-foreclosure and foreclosure activity in the homes around $1,000,000 in that area. This is how it starts and I’m certain this is not the only area around the country where this is starting to occur.

Make America Great Again: Buy Extremely Overvalued Stocks

Key Economic Data Continues To Show A Recession

The stock market assumed a decidedly bearish tone last week, in the face of apparent domestic political instability, increasing geopolitical tensions and, most important, a continued flow of hard economic data reflecting an economy that is in recession (click image to enlarge).

The SPX declined 3 out of the 4 trading days this last week to close down 1.1% from the previous Friday’s close. It’s down nearly 3% from the all-time high it hit on March 1st. Thursday’s big red bar took the SPX below the 50 dma. On all four days the SPX closed well below its intra-day high. This indicates to me that, at least for now, stock market traders are better sellers. Also of interest, for the first time in seventeen years, the stock market declined the day before the Good Friday market holiday.

The growth in loan origination to the key areas of the economy – real estate, general commercial business and the consumer – is plunging. This is due to lack of demand for new loans, not banks tightening credit. If anything, credit is getting “looser,” especially for mortgages. Since the Fed’s quantitative easing and near-zero interest rate policy took hold of yields, bank interest income – the spread on loans earned by banks (net interest margin) – has been historically low. Loan origination fees have been one of the primary drivers of bank cash flow and income generation. Those four graphs above show that the loan origination “punch bowl” is becoming empty.

HOWEVER, the Fed’s tiny interest rate hikes are not the culprit. Loan origination growth is dropping like rock off a cliff because consumers largely are “tapped out” of their capacity to assume more debt and, with corporate debt at all-time highs, business demand for loans is falling off quickly. The latter issue is being driven by a lack of new business expansion opportunities caused by a fall-off in consumer spending. If loan origination continues to fall off like this, and it likely will, bank earnings will plunge.

But it gets worse. As the economy falls further into a recession, banks will get hit with a double-whammy. Their interest and lending fee income will decline and, as businesses and consumers increasingly default on their loans, they will be forced to write-down the loans they hold on their balance sheet. 2008 all over again.  (The commentary above is an excerpt from the latest Short Seller’s Journal).

Despite the propaganda coming from the media, the housing market is in trouble.  37% of all transactions in 2016 were flips.  A flip double-counts a sale because the house trades twice before it ends up with the end-user.  I would bet that in the $300-$600k price-bucket that close to 50% of all transactions YTD in 2017 have been flips.  This is how the mid-2000’s housing bubble ended.

Today the housing starts report for March registered the biggest drop in four months.  Single family starts plunged 32% in the midwest and 16% in the west.   Both multi-family and single-family starts dropped.  Multi-family is going to be a big problem.  Prices in NYC and Miami are dropping like a rock and vacancies are soaring because of oversupply – just like in 2007.  Apartment rental rates are falling quickly and vacancy rates soaring across all the major MSA’s.   Manufacturing  output plunged in March, likely reflecting bulging car inventories at auto dealers, which are at  a post-2009 high.   OEM auto manufacturers are closing plants and laying off workers.  The latter, no doubt, will miraculously fail to register in the Governments next employment report.

Meanwhile, the stock market continues disconnect from underlying economic reality. Auto, retail and restaurant sales are plunging. The explanation for falling retail sales is simple: real average weekly earnings have dropped two months in a row. The consumer, as I’ve been suggesting, is tapped out on two fronts: disposable income and the capacity to take on more debt.

Despite the obvious intervention in the stock market by the Fed and the Government, via the Treasury’s Exchange Stabilization Fund, plenty of stocks are tanking. As an example, I recommended shorting Kate Spade (KATE) to my Short Seller Journal subscribers about a month ago at $23.50. The stock is trading at $18 this morning – 23% gain if you shorted the stock and even more if you used puts. You can get in-depth economic and market analysis plus ideas for taking advantage of the most overvalued stock market in U.S. history via IRD’s Short Seller’s Journal. For more information, click here:  Short Seller’s Journal Subscription Information.

Fake Economic News + Overvalued Stocks = Recipe For Market Disaster

Think you know what will happen this year?  What would you have said to me on January 1st last year if I told you:  ” the S&P 500 would hit several new all-time years this year and Donald Trump will be elected President?”

Craig “Turd Ferguson” Hemke invited me on to his “A2A” webinar with his subscribers last week.  We had a spirited and (I think) entertaining discussion about abundance of fake economic news that permeates the financial media, the true state of the U.S. economy and the growing risks to the stock market.  And of course we chatted about precious metals an mining stocks.

And of course his subscribers had some interesting and thought-provoking questions. You can listen to our conversation here:  A2A with Dave Kranzler and you can access Turd’s webite here:  TFMetals Report.

The Fed’s Final Solution

Today is Bastille Day in France which celebrates the overthrow of the French feudal monarchy and the establishment of a Constitutional Monarchy.   The storming of the Bastille was a key event in the French Revolution.

It’s ironic that the course of the U.S. Government, and it’s original “Bill of Rights” foundation upon which the French “Declaration of the Rights of Man and of the Citizen” was based, is going in the opposite direction of the gift given to us by the Founding Fathers.

The 3rd massive stock market bubble in 16 years is emblematic of the fraudulent Ponzi scheme that has engulfed the United States political, economic and financial system.   The Fed now as much as openly admits that it is driving the stock market higher, ostensibly with the goal of stimulating economic growth.

However, I the elitists who control the Fed are not stupid.  They have ignited the third stock market bubble specifically for purpose of a final effort to confiscate public wealth and destroy the middle class.  For purposes of this discussion, “middle class” is defined as anyone not in upper .5% (point five percent) of wealth in the U.S.

In today’s episode of The Shadow Truth, we discuss the stock bubble as a wealth confiscation mechanism and explain why we believe an explosive move in gold and silver is going to occur this  year.

Give me control of a nation’s money and I care not who makes it’s laws — Mayer Amschel Bauer Rothschild