Tag Archives: stock bubble

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.

Gresham’s Law meets its Minsky Moment

There’s a reason that the Fed pursues these actions and it’s not a conspiracy theory. When unlimited cash hits a limited supply of assets, whether paper or hard, this inflationary deluge boosts taxable asset values by 100-1000%, fattening the coffers of the tax collectors. 

While it’s no secret that the Fed, along all global Central Banks, are supporting their respective financial systems by capping interest rates with “QE” (also known as “money printing”), the yield on the 10-yr Treasury has risen 36 basis points in two months from 2.04% in September to 2.40% currently. There have not been any Fed rate hikes during that time period. The yield on the 2-yr Treasury has jumped from 1.26% in early September to 1.66% currently. A 40 basis point jump, 32% increase, in rates in two months.

This is not due to a “reversal” in QE. Why? Because through this past Thursday, the Fed’s balance sheet has increased in size by over $7 billion since the Fed “threatened” to unwind QE starting in October. The bond market is sniffing hints of an acceleration in the general price level of goods and services, aka “inflation.”

I wanted to post this comment from my blog post the other day because this person uses an expressive writing style to convey incisively the uneasy truth about the financial and economic system in the U.S.:

Bankers are moral lepers, the financial equivalent of hookers and blow. You can never get enough of the moral debauchery in that world.

When a shit box tiny house, half the size of my man cave, goes for $50,000 less than my entire home in Reno, the end is nigh. $2,000 a square foot for a studio? What effing moron would pay that. Don’t answer. We know someone did. I pity the fool.

Bitcoin 7000, DOW 23,500, studios for $550,000 are all a result of the Greenspan /Bernanke/Yellen  QEpocalypse.

The flood of faux FIAT creates the same Cantillion effect as the flood of gold and silver from the new world that inflated the values of assets in the old world and decimated those outside the ring of prosperity created by that effect.

And that was when gold and silver were real money. But do you think gold and silver can catch a break today? Nope, not a chance.

There’s a reason that the Fed pursues these actions and it’s not a conspiracy theory. When unlimited cash hits a limited supply of assets, whether paper or hard, this inflationary deluge boosts taxable asset values by 100-1000%, fattening the coffers of the tax collectors. No accident there.

You would think this might solve some fiscal woes at the local and state level by boosting tax receipts by a few hundred percent. Nope, not happening there either.

The states and cities created their own PONZI schemes with underfunded overly generous pension plans. Even a moron could get a better return in those funds but now they are out there with their begging bowls.

The County of Maui just raised it’s property taxes 42% to pay for pension plan deficits. A senator from Ohio wants to use funds from treasury bonds to bail out their public pension deficits.

As we see asset prices sky rocket, the demands from the public sector grow even faster than tax revenues and asset inflation will handle. Gresham’s Law meets its Minsky Moment and none too soon.

And don’t even get me started about Social Security. Just let me get mine before the whole shit show collapses.

The Size Of The Financial Avalanche Coming Grows Larger

Inflation vs deflation. The true economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in wealth output. Inflation is monetary in nature. Rising prices are the manifestation of inflation. Someone I follow on Twitter posted an ingenious example from which to conceptualize the true concept of inflation using the game of Monopoly:

The players all start out with reasonable amounts of money to speculate on real estate. As the game proceeds, players collect $200 by simply passing Go and use this money to speculate on real estate. By the end of the game, only $500 dollar bills are worth anything, the whole thing blows up, and most players end up destitute. In a twist of irony, an original game board sells for about $50,000.

A fixed amount of real estate and continuously increasing money supply, with “passing Go” functioning as the game’s monetary printing press. The monopoly analogy is readily applied to the current real estate market. The Fed tossed roughly $2 trillion into the mortgage market, which in turn has fueled the greatest U.S. housing bubble in history. The most absurd example I saw last week is a 264 sq ft studio in Los Angeles listed on 10/26 for $550,000. The seller bought it a year ago for $335,000. This is the degree to which Fed money printing and easy access Government guaranteed mortgages have distorted the system.

Here is monetary inflation as it is showing up in the stock market and housing markets:

The graphic above shows rampant credit-induced monetary inflation. On the left, home prices nationally are measured by the Case Shiller index going back the 1980’s. On the right is the S&P 500 going back to 1930. According to the Fed, real median household income has increased 5% between 2008 and the present. In contrast, based on Case Shiller, home prices nationally have soared 34% in the same time period.  Expressed as a ratio of average price to average household income, home prices are, at all-time highs in the U.S. This is the manifestation of rampant inflation in credit availability enabled by the mortgage “QE.” This growth rate in money and credit supply has far exceeded the tiny growth rate in average household income since 2008.

The stock market reflects the monetary inflation of the G3 Central Banks, primarily, plus global Central Bank balance sheet expansion. Please note that “balance sheet expansion” is the politically polite term for “money printing.” The meteoric rise in stock prices have never been more disconnected from the negligible rate of growth in nominal GDP since 2008. Real GDP has been, arguably, negative if a realistic inflation rate were used in the Government’s GDP deflator.

Inflation is not showing up in the Government CPI report because the Government does not measure inflation. The Government’s basket of goods is constantly juggled in order to de-emphasize the rising cost of goods and services considered to be necessities. In addition to the increasing cost of necessities like gasoline, health insurance and food, inflation is showing up in monetary assets. This is because a large portion of the money printed remains “inside” the banking system as “excess reserves” held at the Fed by banks. This capital is transmitted as de fact money supply via the creation credit mechanisms in the various forms of debt and derivatives. The eventual asset sale avalanche grows larger by the day.

Do not believe for one split-second that the U.S. has reached some sort of plateau of economic nirvana that will self-perpetuate. To begin with, it would require another round of even more money printing just to sustain the current bubble level. Read the inflation example above if that idea is still not clear. In 1927, John Maynard Keynes stated, “we will not have any more crashes in our time.” In the October 16, 1929 issue of The New York Times, famous economist and investor, Irving Fisher, stated that “stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” Two weeks later the stock market crashed.

The above commentary is from last week’s Short Seller’s Journal. Speaking of the housing market, admittedly my homebuilder short positions are crawling up my pant-leg with fangs as the housing stocks have entered into the last stage of a parabolic “Roman candle” apex and burn-out. The homebuilders appear to be cheap relative to the SPX on a PE ratio basis – approximately an 18x average PE for homebuilders vs a 32x Case Shiller PE for the SPX.  However,  in relation to their underlying sales rate, earnings and balance sheet, the homebuilder stocks are more overvalued now than at the last peak in 2005.

While the homebuilders are are squeezing higher, I presented two “derivative” ideas in recent issues of the Short Seller’s Journal:  Zillow Group (ZG) at $50 in late June and Redfin (RDFN) at $28 in late September.  ZG just lost $40 today and RDFN is down to $21 (25% gain in 6 weeks). Both ZG and RDFN are “derivatives” to homebuilders because they derive most of their revenues from housing market-related ads, primarily real estate listings. Their revenues as such are “derived” from housing market sales activity. These stocks are overvalued outright. But as home sales volume declines, the revenue/income generating capability of the ZG/RDFN business model will evaporate quickly.  With home sales volume rolling over, the decline in the stock prices of ZG and RDFN relative to the “bubble squeeze” in homebuilder stocks validates my thesis.

If you want to learn more about opportunities to exploit this historically overvalued stock market and access fact-based market analysis, click here: Short Seller’s Journal info.

Amazon: The Devil Is In The Details

Jeff Bezos/Amazon is the poster-child for the degree to which this entire economic and political system is profoundly corrupt. – Investment Research Dynamics

Amazon stock made a big after-hours “shock and awe” move after it reported a huge headline “beat” of its Q3 earnings.  It’s a funny thing how the “beat the Street” game works.  Ninety days ago the consensus estimate for Q3 was $1.09, with one estimate as high as $1.59. The estimates were systematically “walked down” over the last 3 months to a mean estimate of 2 cents and a high-end estimate of 26 cents. This is how the game is played.

Make no mistake, the Company knowingly “guides” analysts down in order to engineer a “headline” surprise. This is how absurd this game has become. The “beat the numbers” game is one of the many frauds connected with corporate earnings reports. That said, AMZN’s EPS in Q3 2017 were the same as Q3 2016 – zero EPS growth. Bear in mind that GAAP acquisition accounting manipulation is heavily at play here.  Acquisition accounting enables a company to boost revenues and hide expenses.

Here’s just a cursory look at the “Devil in the details” (Short Seller Journal subscribers will get the in-depth, eye-opening analysis in the next issue released Sunday afternoon).

Amazon’s headline revenue “growth” cost AMZN a lot money in terms of operating earnings.  Despite the “marquee” 34% sales “growth” rate, AMZN’s operating income plunged nearly 40% year/year for Q3.  This drop in operating income has accelerated, as YTD for the first 9 months of 2017, AMZN’s operating income has dropped 32%.

This should have been the quarter that AMZN literally “printed” GAAP income because the quarter included its highly touted “Prime Day” record sales.  Furthermore, AMZN should have been able to reap the benefits of merger/acquisition accounting from its Whole Foods acquisition.  M&A GAAP standards enable companies literally to manufacturer GAAP accounting profits.   I would suggest that Bezos’ price-cut strategy at Whole Foods has driven WFM’s operating margin toward zero (from 4% pre-acquisition) – like the rest of Bezos’ consumer sales businesses.  But there’s more…

AMZN’s GAAP net income showed no growth – literally in Q3.  In 2016 AMZN reported $252 million in net income for Q3.  In 2017 it reported $256 million.  EPS were flat at 53 cents (basic).  Zero growth.  For this, AMZN’s market cap after hours increased by $37 billion.  But there’s more…

Without going into the monotony of GAAP tax rate accounting, suffice it to say that anyone who has taken a basic accounting course knows that the GAAP tax rate is highly arbitrary and a major source of EPS manipulation.  Again, the Devil is in the details…

In Q3 2016, AMZN used a 47% GAAP tax rate.  This latest quarter, AMZN capriciously applied an 18% GAAP tax rate.  Had AMZN maintained the same GAAP tax rate used last year, its net income in Q3 2017 would have declined to $200 million, or 41 cents/share. For this, the last buyer after hours ($1,047) was willing to pay 266x trailing twelve month earnings.

This is just the beginning of an in-depth look at the rotting condition of the numbers buried in AMZN’s financial statements.  The next issue of the Short Seller’s Journal will pull back the curtain on areas of AMZN’s SEC-filed numbers where no Wall Street analyst or financial media cheerleader would ever dare venture.  AMZN’s cash flow is declining – and its true free cash flow – not the Bezos non-GAAP “free cash flow” – is negative.  I can prove it.

The highly-touted acquisition of Whole Foods could turn out to be Jeff Bezos’ “Wings of Icarus.”  He may have flown too close to the sun on this one.

The information I present in the Short Seller’s Journal is actionable.  The last two times AMZN’s stock shot up I put a short recommendation on AMZN’s stock (including put option ideas) which led to profitable short-covering opportunities.  In the last issue I advised waiting until after Q3 earnings, stating that a big gap-up in after-hours would lead to another opportunity to short the stock.  You can find out more about the Short Seller’s Journal here:  Subscriber Information link.

“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.

GE Brings Good Things To Short-Sellers

GE hit $8 in 2008. If you short the stock with some patience, this stock is, in my opinion, a low-risk bet that it will at least drop 50% over the next 12-18 months. – January 29, 2017 issue of  Short Seller’s Journal

General Electric has been a no-brain’er short this year.  I recommended it as short on January 29th.    The “legendary” Jack Welch practically invented corporate financial engineering and  accounting manipulation as we know it today (sorry if you are under 35 managing money and don’t know who Jack Welch or what accounting manipulation is).

So imagine my shock when GE has been reporting earnings “misses” for several quarters, including the most recent.  GE must be the only company in the S&P 500 that can’t seem to beat Wall Street’s quarterly ritual of essentially laying an earnings “bar” on the ground over which companies “proudly” step each quarter.  On the other hand, it’s likely an indicator of just how bad the real  numbers are at GE.  I guess Welch’s legacy is finally haunting the Company.  And for Halloween investors might be getting a dividend cut in their “treat bag” from GE.

Back at the end of January I said this in the Short Seller’s Journal:

For it’s latest quarter, operating earnings dropped year over year despite a slight year over year increase in revenues for the quarter. It’s operating earnings also dropped for the first nine months of 2016 vs. same period in 2015. For the first 9 months of 2016, GE’s operations burned cash, although they’ll attribute that to “discontinued” operations, which burned $5.3 billion for the period.

Companies often classify money-losing businesses as “discontinued” with the intent to sell them. But until the disco’d businesses are sold, GE has to live with them. This is yet another earnings management technique, as GE can then separate out the “discontinued” business numbers from the “continuing operations” for as long as GE still controls the disco’d businesses. This enables GE to present an earnings number that does not include the losses associated with the disco’d businesses. It thereby enables GE to present a managed “GAAP” earnings metric that is significantly higher than the true earnings of GE’s operations.

GE reported its Q4 earnings on January 20th. It has not filed a 10Q yet but it “met” earnings expectations and missed sales. The oil-related business is one of the heavy weights on GE’s operations. Despite “meeting” estimates and a rosy analyst spin on the earnings report, the stock dropped 4.7% over the next two days, diverging very negatively from the Dow, which moved higher, up and over 20k.

You can see from the chart on the previous page that GE plunged below its 50 and 200 dma’s and failed to trade back up to the 200 dma while the Dow was hitting 20,000. This is a very bearish chart and it looks like big funds are dumping their shares. This is a more “conservative” short-sell play but the stock could easily drop 50% over the next 12-18 months.

Wall Street has finally begun to downgrade its earnings forecasts and stock price targets on GE.  I guess better late than never but anyone who listened to Wall Street in January expecting GE to be at $40 now is having a hard time sitting down without pain.

On the other hand, GE brings good things to short-sellers.  There’s stocks that are falling out of bed every day.  In the latest issue released yesterday, I presented a home construction supply company who’s stock has gone parabolic that, based on the fundamentals, is more of a lay-up short than GE seemed back in January.  You find out more about the Short Seller’s Journal by clicking here:  Short Seller’s Journal info.

This was emailed to me yesterday from a subscriber: “Sometimes I grow weary about short selling in this market, and then you come up with one good one, that shows me it really can fall down. I almost gave up on FCAU [SSJ’s recommendation to short Fiat Chrysler in the Sept 24th issue], but did not. Keep up the good work!”

The Squeeze Is On

Has anyone besides me wondered what happened to the documented accusations about Ray Dalio and his Bridgewater fund management operation?  The allegations were out there and it was big news for about a day.  I would appear to have been quickly covered-up and the media has been given a “leave it alone” warning.

It’s been my view since circa 2003 that “they” would hold up the system with printed money and credit creation until every last crumb of middle class wealth was swept off the table and into the pockets of those in position to do the sweeping:  Corporate America, the very wealthy (“wealthy” = enough disposable cash to buy a few politicians and Federal judges) and the political elite – the latter of which are compensated pawns for the first two cohorts. You can call yourself a “one-percent’er.” But is you don’t have the kind of cash lying around that it takes to bribe high level politicians (i.e millions), you are middle class.  Who are “they?” Here’s a great description:

Look at Obama – perfect example. Obama delivered nothing on his original campaign promises. He was going to “reform” Wall Street.  But the concept of Too Big To Fail was legislated under Obama and Wall Street indictments/prosecutions fell precipitously from the previous Administration.  Obama was supposed to clean up DC. What happened there?

Obama left office and entered into a world of high six-figure Wall Street-sponsored speaking engagements and to live in a $10 million estate in Hawaii paid for by the Chicago elite (Pritzkers etc).  Now Obama will be paid off $10’s of millions for his role in aiding and abetting the transfer of trillions from the middle class to the elitists. Look at Bill and Hillary – need I say more?  Trump has reversed course on his campaign promises twice as quickly as Obama.  Almost overnight after his inauguration, Trump became a war-mongering hand-puppet for the Deep State’s “Swamp” creatures.

The media has been willingly complicit in this big charade. Much to my complete shock, Brett Arends has published a commnentary on Marketwatch which, from an insider, warns about the media:

Do you want to know what kind of person makes the best reporter? I’ll tell you. A borderline sociopath. Someone smart, inquisitive, stubborn, disorganized, chaotic, and in a perpetual state of simmering rage at the failings of the world. Once upon a time you saw people like this in every newsroom in the country. They often had chaotic personal lives and they died early of cirrhosis or a heart attack. But they were tough, angry SOBs and they produced great stories.

Do you want to know what kind of people get promoted and succeed in the modern news organization? Social climbers. Networkers. People who are gregarious, who “buy in” to the dominant consensus, who go along to get along and don’t ask too many really awkward questions. They are flexible, well-organized, and happy with life. And it shows.

This is why, just in the patch of financial and economic journalism, so many reporters are happy to report that U.S. corporations are in great financial shape, even though they also have surging debts, or that a “diversified portfolio” of stocks and bonds will protect you in all circumstances, even though this is not the case, or that defense budgets are being slashed, when they aren’t, or that the U.S. economy has massively outperformed rivals such as Japan, when on key metrics it hasn’t, or that companies must pay CEOs gazillions of dollars to secure the top “talent,” when they don’t need to do any such thing, and such pay is just plunder.

The News Media Is Worse Than You Think – This is good to read to because it confirms my worst suspicions: The system behind the “curtain” is more corrupt than any of us can imagine.

Get Ready To Party Like It’s 2008

Apparently Treasury Secretary, ex-Goldman Sachs banker Steven Mnuchin, has threatened Congress with stock crash if Congress doesn’t pass a tax reform Bill.  His reason is that the stock market surge since the election was based on the hopes of a big tax cut.  This reminds me of 2008, when then-Treasury Secretary, ex-Goldman Sachs CEO, Henry Paulson, and Fed Chairman, Ben Bernanke, paraded in front of Congress and threatened a complete systemic collapse if Congress didn’t authorize an $800 billion bailout of the biggest banks.

The U.S. financial system is experiencing an asset “bubble” that is unprecedented in history. This is a bubble that has been fueled by an unprecedented amount of Central Bank money printing and credit creation. As you are well aware, the Fed printed more than $4 trillion dollars of currency that was used to buy Treasury bonds and mortgage securities. But it has also enabled an unprecedented amount of credit creation. This credit availability has further fueled the rampant inflation in asset prices – specifically stocks, bonds and housing, the price of which now exceeds the levels seen in 2008 right before the great financial crisis.

However, you might not be aware that Central Banks outside of the U.S. continue printing money that is being used to buy stocks and risky bonds. The Bank of Japan now owns more than 75% of that nation’s stock ETFs. The Swiss National Bank holds over $80 billion worth of U.S. stocks, $17 billion of which were purchased in 2017. The European Central Bank, in addition to buying member country sovereign-issued debt is now buying corporate bonds, some of which are non-investment grade.

The table to the right shows the YTD performance of the US dollar vs. major currencies and the gold price vs major currencies. The dollar has appreciated in value YTD vs. alternative fiat currencies. More than anything, this represents the false sense of “hope” that was engendered by the election of Trump. As you can see from the right side of the table, gold is also up YTD vs every major currency. Note that gold has appreciated the most vs. the U.S. dollar. The performance of gold vs. fiat currencies reflects the fact that Central Banks globally are devaluing their currencies by printing currency and sovereign debt in increasing quantities. The rise vs. the dollar also reflects the expectation that the Fed and the Treasury might be printing even more currency and Treasury debt at some point in the next 6-12 months. This is despite the posturing by the Fed about “reducing” the size of its balance sheet, which is nothing more than scripted rhetoric.

“We have the worst revival of an economy since the Great Depression. And believe me: we’re in a bubble right now.” Donald Trump, from a Presidential campaign speech

Margin debt is at a record high. At $551 billion, it’s double the amount of margin debt outstanding at the peak of the tech bubble in 2000. It’s 45% greater than the amount of margin debt outstanding at the peak of the 2007 bubble.

Stock investors and house-flippers in the U.S. now make investment decisions based on the premise that, no matter what fundamental development or new event occurs, the market will always go up. “It’s different this time” has crept back into the rationale. The markets are particularly dangerous now. The concept of “risk” has been completely removed from investment equation.

This dynamic is the direct result of the money printing and credit creation which has enabled the Fed to keep interest rates near zero. The law economics tells us that increasing the supply of “good” without a corresponding increase in demand for that good results in a falling price. This is why interest rates are near zero. The Fed and the Government have increased the supply of currency via printing and issuing credit. Investors , in turn, are taking that near-zero cost of currency and credit and throwing it recklessly in all assets, but specifically stocks and homes.

Currently, anyone who puts their money into the stock, bond and housing markets in search of making money is doing nothing other than gambling recklessly on the certainty of the outcome of two highly inter-related events: 1) the willingness of Central Banks to continue pushing the price of assets higher with printed money; 2) the continued participation of investors who are willing to pay more than the previous investor to make the same bet. Most asset-price chasing buyers have no idea that they are doing nothing more than sitting at a giant casino table game.

The current bubble has been created by a record level of money printing and debt creation globally. Unfortunately, the upward velocity of rising asset prices has seduced investors to recklessly abandon all notion of risk. Based on several studies on investor cash holdings as a percentage of their overall portfolio (cash on the sidelines), investors are “all-in.” One would have to be brain-dead to not acknowledge that global Central Bank money-printing has caused the current “everything” asset bubble. But it’s a “fear of missing out” that has driven investors to pile blindly into stocks with zero regard for fundamental value. Even pensions funds, according to someone I know who works at a pension fund, have pushed equity allocations to the limit.

For the most part, Central Banks are now posturing as if they are going to stop printing money and, in some cases, “shrink” the size of their balance sheet (i.e. reverse “quantitative easing”). To the extent that the first chart above (SPX futures) reflects a combination of Central Bank money printing and investors going “all-in” on stocks (record low cash levels), IF the Central Banks simply stop printing money and do not shrink their balance sheets, who will be left to buy stocks when the selling begins?  If they do shrink their balance sheets, the central banks will start the selling as they have to sell their holdings in order to shrink their balance sheets.

Is The World About To Take A “Gold Shower?”

The 1944 Bretton Woods international monetary system as it has developed to the present is become, honestly said, the greatest hindrance to world peace and prosperity. Now China, increasingly backed by Russia—the two great Eurasian nations—are taking decisive steps to create a very viable alternative to the tyranny of the US dollar over the world trade and finance. Wall Street and Washington are not amused, but they are powerless to stop it…Now, ironically, two of the foreign economies that allowed the dollar an artificial life extension beyond 1989—Russia and China—are carefully unveiling that most feared alternative, a viable, gold-backed international currency and potentially, several similar currencies that can displace the unjust hegemonic role of the dollar today.

The above is an excerpt from William Engdahl’s essay, “Gold, Oil, Dollars, Russia and China.” The essay is a must-read if you want to understand how the dollar was cleverly forced on the world as the reserve currency and how it is about to be cleverly removed and replaced with a trade system that reintroduces gold into the global monetary system.

Unfortunately, the U.S. educational system presents a fraudulent account of world financial and economic history from Bretton Woods to present.  Fed on a steady educational diet of U.S. propaganda, anyone raised and educated in the U.S. will wake up one day to an economic cold shower and eventual poverty unless they’ve taken the steps necessary to protect their savings (if they have any).

Let’s face it, the entire western monetary system is basically a fraud. It is privately made and privately owned, with the entire international payment system being controlled by the FED – which is totally privately owned – and the BIS (Bank for International Settlement, in Basle, Switzerland – also called the central bank of centrals banks).from an interview with Peter Koenig, geopolitical analyst and a former staff-member of the World Bank

Without a doubt, the Russia-China led BRICS axis is working toward a “reset” of the U.S.-centric dollar reserve global currency system: “Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”

That quote was delivered by Putin at the annual BRICS summit in Xiamen, China.  I don’t know how Putin could have more plainly, yet diplomatically,  laid out the inevitable demise of the dollar’s status as the world’s sole reserve currency.

The news report from the Nikkei Asian Review of a gold-backed yuan oil futures contract to be traded in Shanghai was treated with predictable skepticism from the those who require an event to have already occurred in order to “see it.”

That report surfaced shortly after the BRICS summit in China.  I suspect China intentionally has made the world aware of its plan to roll out this contract eventually well ahead of the actual event.  China is imminently launching a yuan-denominated crude oil contract on the Shanghai Futures Exchange.  Please note, for anyone skeptical of this event, that  the announcement came from the vice chairman of the China Securities Regulatory Commission.  I suspect that once this contract is trading smoothly with a high level of liquidity, the next logical step would be to enable the users of this contract  to convert the yuan received for oil into gold.  The gold-backing would be an incentive “sweetener” to use this contract instead of dollar-settled futures contracts.

A gold-backed, yuan-denominated oil futures contract makes sense certainly from the perspective that Russia and China are already settling Russian energy sales to China in yuan.  They have also set up a mechanism by which Russia can convert the yuan received into gold.  Furthermore, the Central Banks of Russia and China combined, are  by far, the two largest buyers of gold in the world.  Why else would Russia/China accumulate a massive Central Bank gold reserve other than to eventually reintroduce gold as a currency stabilizer and a trade settlement “equalizer”  into the global monetary ?

Introduction of an oil futures contract traded in Shanghai in Yuan, which recently gained membership in the select IMF SDR group of currencies, oil futures especially when convertible into gold, could change the geopolitical balance of power dramatically away from the Atlantic world to Eurasia. – William Engdahl, ibid.

The consequences for America as a whole will be catastrophic. Currently the parabolic issuance of U.S. Treasury debt is funded primarily by a recycling of dollars used to settle the majority of global oil trades. Once a dollar-alternative for settling oil trades is established, the amount of dollars available to finance U.S. debt-fueled consumption will rapidly decline. But it’s the ability of the U.S. to issue debt unfettered right now that keeps the U.S. economic system from collapsing. The Fed’s printing press will be the only alternative to immediate collapse. History has shown us what the end of that pathway looks like. It’s far worse than waking up and stepping into an ice-cold shower.

The Daily Coin has published a fascinating interview with William Engdahl:   Gold, China and The Deep State.

“Things Have Been Going Up For Too Long”

I have to believe that the Fed injected a large amount of liquidity into the financial system on Sunday evening. The 1.08% jump in the S&P 500, given the fundamental backdrop of economic, financial and geopolitical news should be driving the stock market relentlessly lower. The amount of Treasury debt outstanding spiked up $318 billion to $20.16 trillion. I’m sure the push up in stocks and the smashing of gold were both intentional as a means of leading the public to believe that there’s no problem with the Government’s debt going parabolic.

Blankfein made the above title comment in reference to all of the global markets at a business conference at the Handlesblatt business conference in Frankfurt, Germany on Wednesday. He also said, “When yields on corporate bonds are lower than dividends on stocks – that unnerves me.” In addition to Blankfein warning about stock and bond markets, Deutsche Bank’s CEO, John Cryan, warned that, “We are now seeing signs of bubbles in more and more parts of the capital market where we wouldn’t have expected them.”

It is rare, if not unprecedented, the CEO’s of the some of the largest and most corrupt banks in the world speak frankly about the financial markets. But these subtle expressions of concern are their way of setting up the ability to look back and say, “I told you so.” The analysis below is an excerpt from the latest issue of the Short Seller’s Journal. In that issue I present a retail stock short idea plus include my list of my top-10 short ideas. To learn more, click here: Short Seller’s Journal information.

In truth, it does not take a genius or an inside professional to see that the markets have bubbled up to unsustainable levels. One look at GS’ stock chart tells us why Blankfein is concerned (Deutsche Bank’s stock chart looks similar):

The graph above shows the relative performance of GS vs. the XLF financial ETF and the SPX. Over the last 5 years, GS stock has outperformed both the XLF and the SPX. But, as you can see, over the last 3 months GS stock not only has underperformed its peers and the broader stock market, but it has technically broken down. Since the 2009 market bottom, the financials have been one of the primary drivers of the bull market, especially the Too BIg To Fail banks. That’s because the TBTFs were the primary beneficiaries of the Fed’s QE.

The fact that the big bank stocks like GS and DB are breaking down reflects a breakdown in the financial system at large. DB was on the ropes 2016, when its stock dropped from a high $54 in 2014 to $12 by September. It was apparent to keen observers that Germany’s Central Bank, the Bundesbank, took measures to prevent DB from collapsing. Its stock traded back up to $21 by late January this year and closed Friday at $16, down 24% from its 2017 high-close.

This could well be a signal that the supportive effect of western Central Bank money printing is wearing off. But I also believe it reflects the smart money leaving the big Wall Street stocks ahead of the credit problems percolating, especially in commercial real estate, auto and credit card debt. The amount of derivatives outstanding has surpassed the amount outstanding the last time around in 2008, despite the promise that the Dodd-Frank legislation would prevent that build-up in derivatives from repeating. It’s quite possible that the financial damage inflicted by the two hurricanes will be the final trigger-point of the next crisis/collapse. That’s the possible message I see reflected in the relative performance of the financials, especially the big Wall Street banks.

This would explain why the XLF financials ETF has been lagging the broad stocks indices.  It’s well below its 52-week high and was below its 200 dma until today’s “miracle bounce” in stocks.

Again, I believe the really smart money sniffs a derivatives problem coming. Too be sure, the double catastrophic hurricane hit, an extraordinarily low probability event, could well be the event that triggers a derivatives explosion. Derivatives are notoriously priced too low. This is done by throwing out the probability of extremely rare events from the derivative pricing models. Incorporating the probability of the extremely rare occurrences inflate the cost of derivatives beyond the affordability of most risk “sellers,” like insurance companies.

Let me explain. When an insurance company wants to lay off some of the risk of insuring against an event that would trigger a big pay-out, it buys risk-protection – or “sells” that risk – using derivatives from a counter-party – the “risk buyer” – willing to bet that the event triggering the payout will not occur. If the event does not occur, the counter-party (risk buyer) keeps the money paid to it to take on the risk. If the event is triggered, the counter-party is responsible for making an “insurance payment” to the insurance company in an amount that is pre-defined in the derivatives contract.

Unfortunately it is the extremely low probability events that cause the most financial damage (this is known as “tail risk” if you’ve seen reference to this). Wall Street knows this and, unfortunately, does not incorporate the truth cost – or expected value – of the rare event from occurring into the cost of the derivative. Wall Street plays the game of “let’s pretend this will never happen” because it makes huge fees from brokering these derivatives. When the rare event occurs, it causes the “risk buyer” to default because the cost of making the payout exceeds the “risk buyer’s” ability to honor the contract. This is why Long Term Capital blew up in 1998, it’s why Enron blew up, it’s why the 2008 de facto financial collapse occurred. We are unfortunately watching history repeat. This is the what occurred in the “The Big Short.” The hedge funds that bet against the subprime mortgages knew that the cost of buying those bets was extremely cheap relative the risk being wrong.

If the hurricanes do not trigger a financial crisis, the massive re-inflation of subprime debt – and the derivative bets associated with that – are back to the 2008 levels.

The optimism connected to the stock market is staggering. According to recent survey, 80% of Americans believe that stock prices will not be lower in the next 12 months. This is the highest level of optimism since the fall of 2007. The SPX topped out just as this metric hit its high-point. The only time this level of optimism was higher in the history of the survey was in early 2000.