“Dave I got your emails – it’s over” – Good friend in NYC who called this morning, has worked on Wall Street for over two decades
All of the meaningful, least manipulated economic indicators are now collapsing at the rate at which they collapsed in 2008/2009. For instance this morning’s Empire State Fed manufacturing index:
The index itself is back to where it was in 2009. The new orders index – the best indicator for current wholesale demand – plunged to a level last seen in 2010, when the Fed was in the early stages of pumping nearly $4 trillion in fresh printed money into the financial system.
The collapse in commodity prices has been widely acknowledged, but the most important commodity barometer of economic activity is oil. The price of oil began to collapse in the middle of 2014, which is when I have suggested the U.S. economy started to hit a wall. After a dead-cat bounce, the collapse has resumed:
The big Wall Street banks have huge incentive to try and keep the price of oil propped up. Why? Because they are sitting $100’s of millions of unsold bank debt issued by rapidly collapsing U.S. oil shale companies. Sure, paltry fines levied by the SEC and CFTC for breaking the law and engaging in fraudulent activities is written off as the cost of doing business. But the prospect of losing $100’s of millions on senior “secured” bank debt is looked upon a “blood money.”
If the big Wall Street firms, with the help of Central Banks, can’t keep the price of oil propped up, it means there’s a big problem in the global economy, including and especially the United States – the world’s largest source of demand for oil.
Finally, perhaps the best overall indicator that the end to the insanity that has gripped the markets is over is the degree to which the Fed’s intervention in the markets has become so painfully obvious. Everytime the S&P 500 is on the verge of falling off a cliff – like today, for instance – a big bid miraculously appears – a big bid that the hedge fund HFT-driven algos embrace and front-run, driving the stock market away from the edge of that cliff. I know a lot of people who are still highly irritated by this. But I would be more shocked if Yellen and Company didn’t intervene in the stock market on a daily basis.
Even worse is the intervention in the Treasury market. Interest rates are on virtual “lock-down.” In fact, I would argue that, on a de facto basis, the Treasury market for all intents and purposes has been “shut down.” The Fed has become the largest holder by far and, via its network of Wall Street primary dealers and the Bank of Japan, has ensured that a meaningful supply from sellers will never hit the market. To refresh everyone’s memory, recall that the Bank of Japan is buying JGBs from Japan pension funds using printed yen and replacing them with U.S. Treasuries. Indirectly Japan has become the Fed’s warehouse for loose Treasuries – “loose” as in Treasuries being unloaded by Russia and China.
Do not mistake the money that has been “created” by the insane rise of a stock market that has been pushed to its highest valuation level in history. This is not “wealth” – it’s shifting the deck chairs around on the Titanic. The revenues of the S&P 500 companies have been declining for several quarters in a row now. If we were to use the accounting standards that were enforced in 2000 – instead of the highly misleading accounting rules in place now – the p/e ratio, forward p/e ratio and the dubious “Shiller p/e ratio” would show their highest levels ever.
Perhaps the biggest issue I’m grappling with now is what will happen when the Fed loses control? Rather than watch helplessly as the stock market collapse, I am beginning to wonder if they’ll just shut the markets down…