Tag Archives: tax cuts

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.

Insanity Prevails In The Stock Market

The Dow and the S&P 500 stock indices are emblematic for the degree to which the U.S. economic, financial, political and social system has dislocated from reality.  Insanity prevails in a system that is corrupted to the core.   “Going down the rabbit hole” is a popular allusion in reference to the surrealism that has enveloped the American system.   I’d hazard to assert that it would take a few tabs of LSD to make today’s world believable. The fact that Donald Trump is President says it all…

With regard to the stock market, if you studied finance anytime from the 1950’s until the mid-1990’s, fell asleep for 20 years and woke up to today, you would conclude that the opposite of everything you learned is now the truth. It started in the late 1990’s when Greenspan coined the “new economy” mantra and scam artists like Henry Blodget got everyone to believe that “new economy” stock valuations could be derived from the number of “clicks and eyeballs” received by a company’s website. And I thought that was insane.

The market has never been more dislocated from fundamentals than now. Since when do stocks spike up on the threat of a rate hike?  Pretend rate hikes are now great for stocks and bad for gold even though historical evidence suggests that actual rate hikes have just the opposite effect on both asset classes.

I’m wondering if the hedge fund algos are already pricing in the move higher in stocks that occurs when the Fed fails to follow-thru on rate hike threats…While the Dow hits a new record every day, the amount of Government spending and debt hits a new record every 60 seconds. The rate of debt creation, public and private, dwarfs the rate of appreciation in general stock prices.

At the risk of being labeled a “conspiracy theorist,” it’s quite probable that the inside elite are gunning this stock market in order to bail out. Evidence? Insider selling has reached epic proportions. At some companies I analyze, the insider sell to buy ratio is over 1000:1. But the “purchases” are stock options exercised and then later sold. The purchases from cash out of pocket tend to be directors buying the gratuitous odd lot for sake of appearance.

One of my subscribers commented that, “I heard a guy on Fox Business say that Macy’s was a real estate play. As if re-purposing their real estate would happen and all would be wonderful.”  That’s the classic apology for a company sitting on a plethora of empty mall anchor space when big retailers start collapsing. Macy’s has been called a “real estate play” since the 1990’s. What is the actual value of empty mall anchor retail space? What do you put in there? Eventually they’ll be converted to homeless shelters and those are worth nothing other than “good will.”  Even this stock market doesn’t believe that one.  Here’s Macy’s stock:

Based on the graph above, the value of Macy’s “real estate” is about the same as the previous peak in real estate prices in 2007.   But real estate prices have been inflated to all-time highs on top of a helium-filled bubble of debt.  Macy’s certainly has more than its fair share of debt.  If this buffoon on Fox is correct, how come Macy’s stock is not at an all-time high?

A lot of eyeballs are fixated on March 15th, when the Treasury’s $20 trillion debt-ceiling limit becomes law.  But no one seems concerned other than those waiting for a Black Swan to appear and reset the system.  The reason no one on Wall Street or DC cares is that the solution simple.  Trump will sign an Executive Order mandating more Government borrowing.  With the stroke of a pen, Trump will obliterate the law.  Executive Orders will become the new de facto fiat currency that “backs” Treasury bonds and the dollar. Certainly a Trump EO is not any different than the current “full faith and credit” of the U.S. Government supported by the Fed’s de facto negative net worth.

The stock market is going parabolic on the back of the ideas Trump presented for making America great again.  Or at least so it seems.  But Trump’s plans do not have a snowball’s chance in hell of ever actually being implemented.  The country is already hopelessly broke – even pension funds are now starting to collapse (link) – and I doubt the entities designated to fulfill Trump’s spending dreams will accept Trump Executive Orders as payment in kind.

The entire system needs to be reset. The political system needs to be burned to the ground and rebuilt starting with the original Bill of Rights.  A good friend of mine told me that he was not buying stocks because the “forward ROR” when you buy stocks at a 30 p/e is 2%. But what is he using for “e” in the “p/e” equation:  adjusted-GAAP, non-GAAP or today’s fantasy GAAP?  The forward ROR for a system as corrupted and broke as the current one is zero.

When the elitists are done picking meat off the carcass, when the last crumbs of citizen wealth has been swept off the table, the  financial system will be reset and everyone will be starting from “ground zero.”    Until then, it’s unfortunate that only a few can see down into the deep abyss that has formed beneath the United States.  The rest have crawled down into that abyss and accept it as reality.