Tag Archives: stock bubble

The U.S. (and Global) Economy Is In Trouble

Jerome Powell will deliver the Fed’s semi-annual testimony on monetary policy (formerly known as the Humphrey-Hawkins testimony)  to Congress this week.  He’ll likely bore us to tears bloviating about “low inflation” and a “tight labor market” and a “healthy economy with some downside risks.”  Of course everyone watching will strain their ears to hear some indication of when the Fed will cut rates and by how much.

But the Fed is backed into a corner.  First, if it were to start cutting rates, it would contradict the message about a “healthy economy.”  Hard to believe someone in control of policy would lie to the public, right?  Furthermore, the Fed is well aware that it has created a dangerous financial asset bubble and that price inflation is running several multiples higher than the number reported by the Government using its heavily massaged CPI index.

Finally, the Fed needs to keep support beneath the dollar because, once the debt ceiling is lifted again, the Treasury will be highly dependent on foreign capital to fund the enormous new Treasury bond issuance that will accompany the raising, or possible removal, of the debt ceiling.  If the Fed starts slashing rates toward zero, the dollar will begin to head south and foreigners will be loathe buy dollar-based assets.

However, if the Fed does cut rates at the July FOMC meeting, it’s because Powell and his cohorts are well aware of the deteriorating economic conditions which are driving the data embedded in these charts which show that US corporate “sentiment” toward the economy and business conditions is in a free-fall:

The chart on the left is Morgan Stanley’s Business Conditions index. The index is designed to capture turning points in the economy. It fell to 13 in June from 45 in May. It was the largest one-month decline in the history of the index. It’s also the lowest reading on the index since December 2008.

The chart on the right  shows business/manufacturing executives’ business expectations (blue line) vs consumer expectations. Businesses have become quite negative in their outlook for economic conditions. You’ll note the spread between business and consumer expectations (business minus consumer) is the widest and most negative since the tech stock bubble popped in 2000.

Regardless of the nonsense you might read in the mainstream media or hear on the bubblevision cable channels, the U.S. and global economies are spiraling into a deep recession.  Aside from the progression of the business cycle, which has been hindered from its natural completion since 2008 by money printing and ZIRP from Central Banks, the world is awash in too much debt,  especially at the household level. The Central Banks can stimulate consumption if they want to subsidize negative interest rates for credit card companies.  But short of that, the economy is in big trouble.

I publish the Short Seller’s Journal, which features economic analysis similar to the commentary above plus short selling opportunities to take advantage of stocks that are mis-priced based on fundamentals.  You can learn more about this weekly newsletter here: Short Seller’s Journal information.

ZIRP And QE Won’t Save The Economy – Buy Gold

It’s not that we’ll mistake them for the truth. The real danger is that if we hear enough lies, then we no longer recognize the truth at all…  – “Chernobyl” episode 1 opening monologue

I’ve been discussing the significance of the inverted yield curve in the last few of my Short Seller’s Journal. Notwithstanding pleas from the financial media and Wall Street soothsayers to ignore the inversion this time, this chart below illustrates  my view that cutting interest rates may not do much  (apologies to the source – I do not remember where I found the unedited chart):

The chart shows the spread between the 2yr and 10yr Treasury vs the Fed Funds Rate Target, which is the thin green line, going back to the late 1980’s. I’ve highlighted the periods in which the curve was inverted with the red boxes. Furthermore, I’ve highlighted the spread differential between the 2yr/10yr “index” and the Fed Funds target rate with the yellow shading. I also added the descriptors showing that the yield curve inversion is correlated with the collapse of financial asset bubbles. The bubbles have become systemically endemic since the Greenspan Fed era.

As you can see, during previous crisis/pre-crisis periods, the Fed Funds target rate was substantially higher than the 2yr/10yr index.  Back then the Fed had plenty of room to reduce the Fed Funds rate. In 1989 the Fed Funds Rate (FFR) was nearly 10%; in 2000 the FFR was 6.5%; in 2007 the Fed Funds rate was 5.25%. But currently, the FFR is 2.5%.

See the problem? The Fed has very little room to take rates lower relative to previous financial crises. Moreover, each successive serial financial bubble since the junk bond/S&L debacle in 1990 has gotten more severe. I don’t know how much longer the Fed and, for that matter, Central Banks globally can hold off the next asset collapse. But when this bubble pops it will be devastating. You will want to own physical gold and silver plus have a portfolio of shorts and/or puts.

The Fed is walking barefoot on a razor’s edge with its monetary policy. Ultimately it will require more money printing – with around $3.5 trillion of the money printing during the first three rounds of “QE” left in the financial system after the Fed stops reducing its balance sheet in October – to defer an ultimate systemic collapse.

But once the move to ZIRP and more QE commences,  the dollar will be flushed down the toilet. This is highly problematic given the enormous amount of Treasuries that will be issued once the debt ceiling is lifted (oh yeah, most have forgotten about the debt ceiling limit).  If the Government’s foreign financiers sense the rapid decline in the dollar, they will be loathe to buy more Treasuries.

The yellow dog smells a big problem:

It’s been several years since I’ve seen gold behave like it has since the FOMC circus subsided. To be sure, part of the move has been fueled by hedge fund algos chasing price momentum in the paper market. But for the past 7 years a move like the last three days would be been rejected well before gold moved above $1380, let alone $1400, by the Comex bank price containment squad.

While the financial media and Wall Street “experts” are pleading with market participants to ignore the warning signals transmitted by the various yield curve inversions (Treasury curve, Eurodollar curve, GOFO curve) gold’s movement since mid-August reflects underlying systemic problems bubbling to the surface. The rocket launch this week is a bright warning flare shooting up in the night sky.

…What can we do then? What else is left but to abandon even the hope of truth, and content ourselves instead…with stories. (Ibid)

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a miniumum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

“Dave mate. You’re making me rich. I don’t know what’s going on with Gold Fields but they’ve spiked up 33% and my calls are going ballistic.” – Mining Stock Journal subscriber in Australia

Something May Have Blown Up Already In The Financial System

The price of gold ran higher eight days in a row before today’s interventionist price smack. Technically, whatever that means, the gold price was likely due for a healthy pullback anyway. The price of gold is responding to what appears to be the Fed’s decision to begin cutting interest rates, though maybe not at the June meeting. Also, the Fed’s Jame Bullard commented that a $3 trillion Fed balance sheet should be considered the “new normal.” This means that close to 75% of the QE program was outright money printing.  Hello Weimar-style printing, so long U.S. dollar…

In 2007 the Eurollar futures curve was steeply inverted by late summer 2007. Back then Ben Bernanke assured the world that “subprime debt was contained.” In truth, it was already blowing up. Currently, the Eurodollar futures curve inversion is steeper now than it was in 2007 (graphic from Alhambra Investments, with my edits).

Silver Doctor’s James Anderson invited me to be his debut guest from his new perch in Panama. He had just set up his office rig and the internet connection was a bit choppy.  But we chatted about why the various inverted yield curves and the recent rise in the price of gold may be telling us that the brown stuff could already be connecting with the fan blades in the financial system. Here’s the link: Something Has Blow Up In The Financial System or click on the video below:

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You can learn more about  Investment Research Dynamics newsletters by following these links (note: a minimum subscription period beyond the 1st month is not required):  Short Seller’s Journal subscription information   –   Mining Stock Journal subscription information

Sorry Permabulls, It’s Not Different This Time – Got Gold?

An inverted yield curve has historically been the most accurate indicator of an impending or concurrent recession. The inversion during late 2006 and most of 2007 is a good example. Studies have shown that curve inversions precede a recession anywhere from 6 months to 2 years. I would argue that, stripping away the affects of inflation and data manipulation, real economic activity has been somewhat recessionary for several years.

The shelf-life of financial topics is about as long as the lifespan of a mayfly (about 24  hours). Several months ago, a debate raged about the significance of the inverted yield curve (short term rates are higher than longer term rates). Most perma-bull pundits who populate mass financial media advised their minions to ignore the yield inversion because “it’s different this time.”

The inverted yield curve discussion disappeared soon after the stock market responded to the stock market intervention after the Christmas massacre. However, over the past  several days, the yield curve has “collapsed” in the sense that yields at the long end (10-years and beyond) have fallen more sharply than at the front end of curve, resulting in a yield curve inversion that is now at its steepest since 2007 (measured using the 3-month T-bill rate vs the 10-year Treasury yield).

The chart to the right was prepared by Phoenix Capital (with my edits). It shows the SPX from 1999 to present on a weekly basis vs the the yield curve (3-month T-bill minus the yield on the 10-yr Treasury bond). When the blue line in the bottom panel goes below the black line (the black line is my edit to clarify when the spread between the 3mo Bill and 10yr Treasury has gone negative), the yield on the 3-mo Bill is higher than the yield on the 10yr Treasury.

The chart must have been prepared prior to the holiday weekend because the 3-mo/10yr has been inverted since Monday. But more to the point, you’ll note that this particular “flavor” of inversion was accompanied by a sharp drop in the stock market from 2000-2003 and from 2007-2009. The yields have been inverted between other segments of the curve (1yr to 5yr, for instance) nearly continuously since last summer.  The curve is even more inverted now than when I wrote this commentary for my Short Seller’s Journal subscribers last week.  The 5yr Treasury is well below 2%.  The 3mo/5yr inversion is close to half a percentage point (46 basis points).

In addition, the upper bound of the Fed Funds rate “target” (2.25-2.50%) is now above the entire yield curve out to 10 years. The bond market is signaling to the Fed that the economy sucks and the Fed Funds rate needs to be reduced down to at least 2%. The term “bond market vigilantes” was coined originally by Ed Yardeni in the early 1980’s to convey the idea the bond market could be used to “guide” the Fed’s monetary policy implementation. The “bond vigilantes” right now are “screaming” at the Fed to reduce the Fed Funds rate and to ease monetary policy.

While the market can’t dictate the Fed Funds rate, big bond funds with a total rate of return mission will pile into the Treasury bonds at the longer end of the curve, driving down yields (bond prices rise) in the expectation that the Fed will have to cut rates sooner or later. This is the market dynamic that induces an inverted curve.

Whether or not the Fed will “listen” to the bond market and cut the Fed Funds rate at the midJune FOMC meeting remains to be seen. To be sure, the researchers at the Fed who advise on policy know that the real rate of inflation is significantly higher than CPI-measured inflation. They also know the economy is reeling. But the Fed has to balance easier monetary policy with setting policy that supports the U.S. dollar.

Maintaining a stable dollar is critical to inducing foreign money to buy Treasuries, the supply of which will soar once the debt ceiling is lifted. If the Fed cuts rates too soon or too quickly, especially relative to the ECB or PBoC, the dollar could experience a not insignificant sell-off. This in turn would cause further damage to the economy.

The above commentary is an excerpt from my latest Short Seller’s Journal. Each week I present detailed analysis of weekly economic reports. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

But We Were Told “It’s Different This Time”

“U.S. Officials Meet in Secret Over Junk-Loan Frenzy as Recession Alarms Flash”

U.S. Treasury Secretary Steven Mnuchin on Thursday led a secret meeting of top U.S. financial regulators on the risks to global markets from the recent surge in corporate borrowing…”No details were provided on the gist of the discussion, though according to the statement the panel heard an ‘update from Craig Phillips, a counselor to Mnuchin, on recent market developments involving corporate credit and leveraged lending'”. – Article link

Something(s) is(are) starting to melt-down “behind the scenes” in the global financial system.  The meeting referenced above is the “tell.”  Craig Phillips, “counselor to Mnuchin,” was formerly a managing director and member of the Global Operating Committee of BlackRock.   It’s quite likely that Phillips’ former colleagues have put Phillips on high alert about problems developing in the credit markets, both domestically and globally.

Even more interesting is that fact that Fed Chairman, Jerome Powell, gave a speech recently in which he denied that credits risks are mounting in the system:  “Business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate.”

Powell’s assertion eerily echoes a similar comment made by then-Fed Head, Helicopter Ben Bernanke in mid-2007 about subprime mortgage risk being “contained.”  But Powells’ statement followed by a meeting convened by Treasury Secretary Mnuchin under the advisement of a former BlackRock hatchet-man is the silent scream of insiders who see the probability of another financial system tsunami forming…

Of course, the yield curve has been sending these warnings for about a year.  But they keep telling us it’s different this time…

Utter Insanity…

That’s the only way to describe this stock market. It won’t end well for the hedge funds whose algos are chasing price momentum nor for the retail daytraders playing the game of “greater fool.” Apparently CSCO and WMT’s “beat” triggered a multi-hundred point spike in the Dow on Thursday. Funny thing about that. CSCO’s one-cent “beat” has been routine since the late 1990’s.

Walmart also “beat.” But for Walmart, the numbers below the headline sucked. The 1.1% revenue growth was well below 1% if you strip out gasoline price inflation from Sam’s Club numbers. Speaking of Sam’s, membership revenue was down 7.9% (these are FY Q1 vs Q1 last year). Operating income was down 4.1%. The “beat” was manufactured by one-time “other gain” that was not defined in the 8-K. This enabled WMT to generate the headline “beat.” Cash flow provided by operations dropped from $5.1 billion last year to $3.5 billion this year – not good. Despite the deteriorating financial fundamentals, the stock market added over $7 billion to WMT’s market cap.

But that’s a tempest in a teapot compared to the the IPO valuations of companies like Lyft, Uber and WeWork. These companies not only have never made a dime of profit, but they bleed billions negative cash flow. Yet, a $50 billion stock market valuation set by the underwriters is greedily bought into by hedge funds. That’s your pension money at work, folks. It’s amusing to watch the hand-puppets on financial cable tv frown when stocks like Uber and Lyft drop a quick 20% from the IPO date.

The prized “jewels” in the stock market – i.e. the stocks with the best performance over the last 4 months – are the ones with escalating operating losses on increasing revenues. But the stocks soar when the earnings announcement hits the tape with the phrase “beat estimates” – which means the company lost slightly less money than forecast by Wall Street’s brightest.

But these companies all share a common trait: a tragically flawed business model in which the only way to grow revenues is to charge the end user a price that does not cover the all-in cost of producing the product or providing the service but which attracts end-users because the price is lower than the competition. Despite eventual financial doom from the start, the stock market currently values this type of business model over companies that generate bona fide cash/economic profits.

I’m reviewing a company in my next issue of the Short Seller’s Journal which trades at a price/sales multiple that is 15-times higher than the industry average. Its operating losses grow at a double-digit rate every quarter sequentially and double every quarter year-over-year. We can’t use any of the other tradition valuation metrics because the company has negative cash flow, massive net losses and negative forward earnings. This is all nothwithstanding the fact it operates in a highly cyclical industry with declining sales.

I mention this to illustrate just how far off the rails the stock market has traveled. The current stock market bubble is at an historical extreme. It’s worse than 1999 or 1929 – I don’t care what the manipulated GAAP p/e ratio comparison shows. I was trading tech stocks in the late-90’s bubble and this current one is worse. IT’s utterly insane…

April Retail Sales Soiled The Bed Sheets

Perhaps the perma-bullish Wall Street analysts should contribute to retail sales by stocking up on Depends – like the Merrill Lynch analyst who forecast retail sales to climb 0.7% ex-autos. Retail sales, preliminarily, were said to have declined 0.2% from March.   The “core” retail sales group – retail sales not including autos and gasoline – were flat. Wall Street’s finest expected a consensus 0.4% gain.

I say “preliminarily” above because, if you scan the Census Bureau’s report you’ll note “asterisks” in several major line items.

This means that “advance” numbers were not available for those retail sales categories.  Thus, the CB guesstimates the number based on past numbers for that category.  It also means the Census Bureau can overestimate that category for headline purposes with the intent to revise lower in future reports.

Retail sales numbers are reported on a nominal basis.  If they were to be adjusted by a real rate of inflation, the month to month decline from April likely would have approached at least one half of one percent.

Funny thing about the guesstimate for new car dealer sales.  The OEM’s report actual deliveries to new dealers every month.  I would have to believe that new car dealers have highly automated sales tracking software. It would seem that the Census Bureau should be able to have a fairly accurate data sample and estimate for April new car dealer sales well before the middle of the following month. But using the (*) enables the Government to manipulate the number into a favorable outcome for the “advance” report.

We know that the average household – i.e the 80-90% of all households – are struggling under the weight of record monthly debt service requirements on a record amount of consumer debt. This plight is made worse by the fact that real wages are declining.  Not to judge Wall Street analysts harshly (said sarcastically), but it should be obvious that retail sales were going to show a decline in April.  Imagine how bad the actual number must be if the Government has to release a guesstimated report showing a nominal decline.

In my weekly Short Seller’s Journal, I present detailed analysis of weekly economic reports. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

Gold And Silver May Be Setting Up For A Big Move

The price of gold soared over $13 Monday as flight-to-safety money flowed into the precious metals sector while the stock market went into a downward spiral. I see Monday’s market action as a preview of what’s in store going forward as price discovery once again engulfs the stock market and causes the most extreme stock bubble in U.S. history to deflate.

Despite the fact that it seems to be taking forever for gold and silver to enter into a prolonged move higher, the chart below should offer encouragement.

Gold, silver and mining stocks are deeply oversold technically. It’s  obvious that the western Central Banks are throwing everything they can at the gold price via the paper derivative gold markets in London and NYC in an attempt to prevent a massive move higher.  The data for gold and silver futures on the Comex show that the banks are working hard to stunt any rally by unloading loads of paper gold on the market.

This effort is rewarding the large physical gold importing countries in the east. India’s net import of gold jumped by 27 per cent to 192.4 tonnes in the first quarter of calendar year 2019 from 151 tonnes in the same period last year. In April India unofficially imported 121 tonnes of gold, up significantly from April 2018. The increase in import activity is attributable to the lower gold price. Note that the official statistics do not include smuggled gold, which is thought to average around 25 tonnes per month. China also has stepped up its gold buying over the last several weeks.

At some point the Fed is going to be forced by the market to cut the Fed Funds rate, as the 1yr Treasury is now yielding less that the Fed Funds target rate. In addition, the yield curve is inverted from 1yr out to 7yrs, with a steep inversion between the 1yr and 3yr Treasurys. It won’t take much flinching from the Fed to ignite a rally in the metals. In addition, the investor sentiment as measured by MarketVane is about as low as I’ve seen it in a long time (34% bullish for both gold and silver).

Despite the 600 pt sell-off in the Dow today, complacency persists, along with an expectation that the Fed will continue to support wanton speculation in the stock market.  But the inverted yield curve, combined with an effective Fed Funds rate that is above the interest rate used to calculate the quantity of free money given by the Fed to the banks on excess reserves, is strong evidence that the Fed is losing its ability to control the financial markets.  At some point the Fed and its western Central Bank collaborators, led by the BIS, will also lose control of the gold price.

Massive Asset Bubbles And Cheap Gold And Silver

Notwithstanding today’s absurdly phony and propagandistic employment report, it’s becoming more apparent by the week that the Fed and the U.S. Government are once again preparing to print more money. I don’t know when the Fed will revert to more QE but I would argue that the intense effort by the banks to use the Comex as a conduit to control the price of gold is a probable signal – just like in 2008 from March to October. Several FOMC officials have already hinted at the possibility of employing “radical” policy measures to keep the system from falling apart.

Silver Liberties invited on its podcast to discuss the extreme overvaluation of financial “assets” and the extreme undervaluation of real money – gold and silver – and the related derivative of real money – mining stocks.

Semiconductor Chips Are The Modern Dutch Tulip Bulbs

The semiconductor stocks continued melting up last week until Intel threw some cold water on the Dutch tulip bulb price-chasing party. TXN reported Tuesday after the close. Revenues declined 5% from the year-earlier quarter. The management stated that “demand continued to slow across most markets. TXN then said Q2 revenues would drop 10% from Q2 2018. It said earnings would be down 13%. Management also explained that historically down-cycles last 4-5 quarters. With the Company 2 quarters into a down-cycle, it would seem that the “green shoots” sighted by some companies in Q1 are nowhere in sight. TXN insiders have been very heavy sellers of the stock.

The chart below is a good example of how the hedge fund algo and retail daytrader momentum chasers operate:

TXN closed around $116.50 before it reported. On the headline “beat,” TXN stock spiked up $6 almost immediately. Price-discovery then set in, as the after-hours traders dumped shares in response to the fundamental reality of TXN’s earnings report. The stock closed after-hours at $113.70, down nearly $9 from the initial reaction to the headlines.

But then on Wednesday Dutch tulip-mania gripped TXN’s stock price. TXN opened green from Tuesday’s regular close and traded as high as $118.99. This is despite the Company’s lowered guidance for the next few quarters. The last time TXN experienced a two-quarter sequential decline in revenues was in 2001 during a recession.

The only news that might have affected TXN’s stock price on Wednesday was a warning about possible further deterioration in its business that accompanied Amphenol’s Q1 earnings report. But Amphenol’s report should have affected TXN’s stock negatively. This market action is exactly like the price-chasing action in late 1999/early 2000.

Semiconductor stocks are the 2019 version of Dutch tulip bulbs. Recall the price of Dutch tulip bulbs rose to insanely high levels during the mid-1630’s, as people chased the price of Tulip bulbs higher, hoping to re-sell them for a profit. With no warning, the price crashed in February 1637.

That’s how the dot.com bubble behaved, including the sudden sell-off that began in March 2000 without any prior warnings other than common sense. I expect that is the same path that the chip stocks will follow. The chip stocks are melting-up in price in complete divergence from the underlying fundamentals. Whereas previously several companies expressed hope for green shoots in the second-half of the year, the last few companies to report (Siltronics, Nanya, TXN and Amphenol) have not mentioned the possibility of a recovery in the sector for the second half of the year.

Xilinx (XLNX) reported a “miss” on Wednesday after the close. Its stock plunged 17% on Thursday. Prior to that, the stock was trading at an insane 12x sales. XLNX’s data center business was down 12% sequentially and 7% yr/yr (the cloud growth is slowing).

Intel reported an obligatory revenue and EPS “beat.” But the market finally payed attention to guidance. INTC cut full-year and Q2 guidance. Management said customers were becoming more cautious, especially in China. Data center inventories are larger than was commonly thought. INTC also said it expected a much more difficult flash memory market. These are chips used in consumer electronics, scientific instrumentation, robotics and medical electronics. INTC stock dropped 9% on Friday.

The chip stocks are setting up for an epic sell-off. Trump can slap the Fed around like a race-horse’s ass while making juvenile demands for lower rates and more money printing all he wants. At some point the collapsing underlying economic fundamentals will remove the termite-eaten legs from beneath the market’s barstool.

The commentary above is an excerpt from the latest Short Seller’s Journal. To learn about the semiconductor stocks I’m shorting and recommending to my subscribers, please visit this link: Short Seller’s Journal information.