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“It’s Worse Than Bad” – We’re On The Cusp Of Global Economic Depression
Since 1971, when the world officially abandoned the gold standard, economic growth has been stimulated through vigorous applications of aggressive Central Banking monetary policies: the imposition of artificially low nominal interest and boundlessly unrestrained credit issuance. Eventually the global economic system becomes immune to the stimulative effects of low interest rates and the financial system reaches a point at which it can no longer absorb additional debt issuance.
The de facto financial collapse, nee Great Financial Crisis, in 2008 was the manifestation of these destructive financial policies. Central Banks globally shifted gears into outright money printing in order to defer the inevitable. This served the purpose of keeping the big banks from collapsing and created a temporary mirage of “real” economic growth. The money printing also enabled a post-2008 reinflation of the credit markets well beyond the proportions of the bubble that popped in 2008.
What’s been billed as “economic growth” by a highly propagandistic media since 2008 is nothing more than debt-fueled inflation in the form of “nominal” economic growth. In truth, the U.S. has been in a state of economic contraction since 2007 if a true inflation rate were used in the GDP deflator. What’s been billed as “recovering housing and auto markets” is in reality nothing more than an abundance of cheap debt that has been made available to millions of borrowers who can ill afford to service that debt over an extended period of time. This fact is already being confirmed by sky-rocketing auto loan delinquencies.
Amusingly, a reader sent me an email accusing me being wrongly a bear on housing for quite some time. The truth of the matter is that I have wrongly underestimated the extent to which the Fed and the U.S. Government would intervene to reinflate the housing bubble. The value of housing is the most disconnected from the underlying “organic” market fundamentals than at any time in history. Furthermore the Fed/Government market intervention has succeeded in putting a significant number of people and small investors into homes that soon will be unaffordable for them support.
My short call in Beazer has returned close to 60% in the last 17 months. My short call in KBH is nicely green. I shorted TOL over two years ago and that short is up over 10%. All three are remarkable feats given the amount of Fed/Govt intervention in both the housing market and the stock market.
Market intervention masquerades as a “bull” market until it the costume falls off. We are very close to this point of “undressing” and the consequences of the extreme moral hazard generated from seven years of monetary lasciviousness will make the 2008 housing collapse look like a polite tea party.
Steve “Wake Up With Steve” Curtis on KLZ-560 radio in Denver hosted me on his show recently. We discussed topics ranging from the collapsing global economy, the fraudulent stock market and China’s aggressive gold accumulation policy. You can listen to discussion here: Wake Up! With Steve Curtis.
The latest issue of the Short Seller’s Journal is out. It features the high-flying stock of company that extremely overvalued and is riddled with misleading, if not fraudulent, accounting (even worse than AMZN). This stock looks ready to drop about $100. It also discusses the next move in oil and a bank stock that is highly leveraged to the energy market and which looks ready to shed $10-20 points quickly once oil starts heading lower. You can subscribe by clicking HERE.
The System Will Implode When Central Bank Intervention Fails
The economic reports released this morning added to the near-continuous flow of information reflecting a U.S. economy that is likely contracting, for the most part. Perhaps the only “fundamental” variable not contracting is the hot air coming from the Fed.
In today’s release of its “services” PMI, Markit explains: “The US economy is going through its worst growth spell for three and a half years…and the worst may be to come as the greatest concern is the near-stalling of new business growth.”
The core durable goods new orders index released today dropped for the 13th month in a row – Zerohedge points out that it is the longest “non-recessionary” stretch of consecutive monthly drops in 70 years.
In fact, a good argument can be made that if a bona fide rate of inflation was applied to the Government’s GDP calculations, the U.S. economy has not produced real, inflation-adjusted economic growth since 2006. Review the work of John Williams’ Shadowstats.com for evidence of this fact.
The Swiss National Bank admitted that it has spent $470 billion on currency manipulation since 2010. Given the Fed’s refusal to disclose any information about its currency swap programs – including denying all FOIA requests on this matter – there can be no doubt that the Fed has been actively funding the SNB’s endeavors. The same goes for the SNB’s huge U.S. stock portfolio, which includes insanely overvalued gems like AAPL and AMZN.
We are witnessing the western Central Banks’ last gasp at preventing total systemic collapse. The Fed et al were able to defer this event in 2008 with many trillions of direct money printing – deceptively marketed as “Quantitative Easing” – and many more trillions of direct Government income and spending subsidization. After all, a Government willing to underwrite and guarantee 3% down payment, subprime credit mortgages is creating nothing more than a form of “helicopter money” dressed in drag.
A reader who is a self-professed real estate expert took issue with my blog post the other day in which I stated that the housing market is tipping over now. He said: “Until proven otherwise, the U.S. housing market is still alive and well right now – and Denver is still doing very well too!”
Quite an assertion given that his opinion is based almost solely on the corrupted data produced by the National Association of Realtors (I refer you to one of several blog posts in the past in which I demonstrate in detail why the NAR data is highly flawed, if not intentionally fraudulent to some degree). To which I responded:
We’ll have to agree to disagree. Despite the propaganda, prices have been falling in Denver since last summer. Inventory is going through the roof. The “bubble” neighborhoods everywhere in metro-Denver are starting to look like they did in 2008, littered with for sale and for rent signs. I’m not sure where your “Denver” data is coming from but I conduct actual “boots on the ground” due diligence. I am getting emails from readers in Florida, DC/Virginia, NY and other regions describing the same thing I’m seeing in Denver.
The NAR data is highly manipulated. Yr over yr SAAR is useless as is the NAR data collection methodology. The “seasonal adjustment” regression program is the same program the Government uses in its data manipulation scheme.
At the lower end of the spectrum, we are seeing the last fumes of a regenerated subprime mortgage bubble sponsored by FNM/FRE/FHA/VHA/USDA. Yes, the USDA, which sponsors 0% down pmt mortgages in “rural” areas where “rural” turns out be the outermost suburban band of most MSA’s. Were you even aware of that? There’s also been a “last gasp” surge in investor/flipper volume. They will be stuck holding the bag on homes they can’t sell or rent, just like in 2008.
My point in all of this is that the only “trick” left in the Fed’s bag right now is direct intervention in the stock market. It’s a last gasp effort in an attempt to generate a “confidence” and “wealth effect” dynamic. Hey, if the stock market isn’t going down things can’t be that bad, right?
The problem is that, for the most part, the world can no longer absorb any more credit expansion. We’re seeing this in the U.S. with the rapidly rising delinquency rates for auto and student loans, soon to be followed by another round of mortgage delinquency/defaults.
The Fed knows this and that’s why it continues to defer raising rates despite the constant barrage of threats to do just that at “the next meeting.” Even the boy who cried “wolf” is blushing on behalf of the Fed. I believe that the Fed’s inability to inflict a meaningful price take-down of gold and silver – especially silver – may be an indication that the Fed’s manipulative powers are beginning to atrophy.
It’s likely that this latest bear market bounce in stocks – the one for which Jim Cramer has ceremoniously proclaimed “a new bull market” – is going to start tipping over. It won’t happen all at once but it will likely lead to yet another “waterfall” drop in the S&P 500. Incredibly, the last two times around witnessed an incredible amount of screaming from the “peanut gallery” for the Fed to do something in response to just a 10-15% drop in stocks. Bear markets typically don’t end until stocks have dropped 60-90%.
At some point the Fed will be completely helpless to prevent the market from going lower. That’s the point at which the system will collapse. In my upcoming issue of the Short Seller’s Journal, I outline why I believe both oil and stocks are getting ready to head down the roller coaster tracks once again. I have an idea that will capitalize on another move lower in oil plus accelerating defaults in the energy sector. Subscribers also received an update email last night that presented a stock that I think is getting ready to experience an “elevator shaft” drop. This company’s accounting is more misleading than Amazon’s, if that’s possible.
The Fed has been working overtime to hold up a stock market that is the most overvalued in U.S. history based on using traditional GAAP earnings. My Short Seller’s Journal will help you find stocks that will ultimately fall at least twice as much as the overall market, either because of misleading accounting that gets exposed or rapidly deteriorating fundamentals, or both. (click below to subscribe)
Housing Sales Start To Tank As Suprime Auto Loan Delinquencies Soar
Note: For the record, I am expecting the possibility that the new homes sales report for February released today will show an unexpected spike up. For the past several months, there’s been what I believe to be a pre-meditated pattern in which the existing home sales data series and the new home data series move in the opposite direction. Let’s see if the trend continues.
The existing home sales data series has become as erratic and unpredictable as the Census Bureau’s new home sales report. One can only wonder about the reliability of the National Association of Realtors reporting methodology when its Chief “Economist” repetitively states month after month that “job growth continues to hum along at a robust pace.” Any economist who uses the Census Bureau’s monthly employment report as their evidence that the U.S. economy is producing meaningful, income-producing jobs is either just another propaganda mouthpiece or is of questionable intelligence. Either way a statement like that is highly unprofessional.
You must be wondering why I’m connecting home sales to the recent data which shows that subprime auto loan delinquency rates are soaring (here and here). Let me explain.
All cash sales of existing homes in February were reported to be 25% of all sales in February, down from 26% in January. This means that 75% of existing home sales (93% of new home sales) are dependent on mortgage financing. The FHA has been underwriting 3.5% down payment mortgages since 2008. 3.5% down payment mortgages are nothing more than sub-prime mortgages “dressed in drag.” The FHA’s share of the mortgage market soared from about 2% at the beginning of the 2008 to around 20% currently (plus or minus a percent or two). Fannie Mae and Freddie Mac have been issuing 5% down mortgages for quite some time and lowered the down payment to 3% in early 2015.
If you require a 5% or less down payment to buy a home, you are a subprime credit risk, I don’t care what your FICO score it.
First time buyers represent about 30% of all existing home sales. A good bet is that the first time buyer segment almost exclusively uses the lowest down payment possible to buy a home. RealtyTrac issued a report in June 2015 which showed that low down payment purchases hit a 2-year high in Q1 2015 and accounted for 83% of all FHA purchase mortgages. Understandably RealtyTrac has not updated this report. My bet would be that somewhere between 30-50% of all purchase mortgages were of the low down payment variety, or clearly de facto subprime quality.
The Wall Street Journal published an article last year which discussed the rising trend in low to no down payment mortgages: Down Payments Get Smaller.
This is where soaring subprime auto loan delinquencies come into play. To the extent that a potential home buyer is behind on his auto loan, it will impede his ability to take out a mortgage of any down payment variety. In fact, I believe that the U.S. financial system has hit the wall in terms of the amount of debt that can be “absorbed” by potential borrowers. Auto loans and student loans outstanding hit new record highs daily, with both well over a combined $2 trillion outstanding. In my opinion, this is why existing home sales dropped 7.1% from January, more than double the 3.1% decline forecast by Wall Street.
The National Association of Realtor’s Chief Clown attributes the big drop in home sales in February to “affordability.” But this is statement seeded either in ignorance or fraud. Forget the Case-Shiller housing price comic book. Nearly every major MSA has now entered into the continuous “new price” vortex. This has been going on Denver since last June. I’m getting reports from readers all over the country describing the same dynamic in their markets. This problem is especially acute the high end. Besides, every mortgage sales portal in existence markets a calculator that take your monthly income and calculates how much house you can “afford.” Price has nothing to do with ability to get approved for a mortgage.
Speaking of “affordability,” the cost of financing home dropped to 3.66% in February, it’s lowest rate since April 2015. In other words, the cost of buying a home actually became more affordable in February.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion” – Ludwig Von Mises. The Fed and the Government prevented the collapse of the system that was set in motion by the housing/mortgage market in 2008. As Von Mises stated, “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion , or later as a final and total collapse of the currency system involved.”
I believe that it is quite likely that the Fed’s ability to push further credit expansion has reached, or is close to, its limits. The soaring delinquency rates of auto loans and a housing market which is likely beginning to tip over now reflect this reality.
I was early in 2004 when I predicted a collapse in the housing market. I underestimated Greenspan and Bernanke’s ability to expand mortgage credit. I was once again early in predicting the demise of the current housing bubble. Again, I underestimated the Fed’s ability and the Government’s willingness to stuff the average American up to his/her eyeballs in debt. Regardless of flaws in predictive abilities with regard to timing, my overall analysis materialized in 2008 and it’s a good bet that it’s coming to fruition once again – only this time it is likely that the Fed will be helpless in preventing the inevitable.
Stranger Than Fiction: The System Is On Full Retard
I said half-facetiously in early 2004 that if a small nuke detonated in Times Square that the Dow would probably shoot up 200 points. Today I reiterate that assertion with full sincerity. All of the markets, but especially the stock market, are now openly manipulated. The Fed and the Treasury never bother even to tacitly deny it.
Yesterday in our conversation with Paul Craig Roberts, Dr. Roberts rhetorically asked, “why does the Fed operate a massive and highly sophisticated trading desk in New York?” I add to that question, rhetorically of course, why does the U.S. Treasury’s Working Group On Financial Markets office in the same building as the NY Fed in NYC?
The Fed officials are back at it threatening us with interest rate hikes in April once again after weeks of bluffing before blinking at the March FOMC meeting. If these guys can’t raise rates just one quarter of one percent – if for no other reason than to avoid looking like village idiots – then the true condition of the underlying economic system must be far worse than any of us can imagine.
This rate-hike “meme” dove-tails well with Chicago Fed National Activity report released last week showing a sharp contraction in economic activity, as its index fell from +.41 to -.29 in February. It takes a lot to move the needled on that index, which means economic activity contracted precipitously during February. This was reinforced by the big plunge in existing home sales during February per the NAR yesterday.
Lewis Carroll’s imagination could not make this stuff up.
By now everyone is well aware of the fact that the S&P 500 has retraced nearly the exact path that it took after the 11.2% plunge in August (click image to enlarge):
Here’s a few interesting statistics: Through yesterday, there have been 26 trading days and only six have been down days; during the September rally there were a total of 26 trading days before the market rolled over and only eight of them were red; from the Feb 11 bottom through today (Mar 22), the SPX has rallied 12.3%; from the bottom on Aug 25 to the top on Nov 4, the SPX rallied 17.3%; as you can see from the two bottom panels in the graph, the RSI and MACD momentum indicators are as “overbought” now as they were at the top of the last plunge/spike-up rally; in both cases, the SPX has rallied back above its 200 dma (red line).
Currently the stock market is more dislocated from the underlying fundamentals of the U.S. financial, economic and political system than at any time the history of the country. While it seems that current push higher in the stock market is climbing the euphemistic “wall of worry,” at this point the current rally is less powerful than the previous move off of the September 2015 lows.
I was chatting with a prominent cycle theory analyst, Longwave Group’s Ian Gordon, who successfully forecasted the 2008 market crash in 2007. He thinks the Fed will be unable to contain the next stock market sell-off the way it was able to in September. He thinks this current move has, as most, another three months. I told him I thought the market would tip over sooner than that…
In the meantime, one has to wonder if both Fed officials – Dennis Lockhart and John Williams – have somehow been wandering around Alice’s Wonderland with their heads firmly inserted where the sun never shines.
SoT – Paul Craig Roberts Part 1: The Establishment Can’t Control Trump Or Sanders
The public has learned that the political Establishment represents the 1% and they have no chance with any Establishment candidate, either Republicans or Democrats…They’re supporting them less for their stance on issues and more on the fact that maybe there’s a chance that they [Trump/Sanders] would do something for the 99%. – Dr. Paul Craig Roberts, Shadow of Truth
Aside from the fact that Hillary Clinton is allowed to run for President rather than spend all of her time defending herself from criminal charges for treasonous political crimes, the most horrifying aspect of the 2016 Presidential Campaign is watching the Republican Establishment contemptuously disregard democracy and spend millions in an attempt to defeat Trump, is the people’s choice to be the Republican Presidential candidate.
I don’t think the Establishment will allow Trump or Sanders if they can prevent it to win the Presidential election. We already have prominent Republicans stating that if Trump wins the nomination they’ll vote for Hillary. – Paul Craig Roberts, Shadow of Truth
The wealthiest businessmen and corporations who fund politicians in order to control the political process are lining up like pigs at the trough to throw as much money as is needed to try and derail Trump’s candidacy. The same is true with Hillary Clinton, as her biggest donors are George Soros and the big Wall Street Banks.
Paul Craig Roberts gained experience and insight on this subject as a member to the Reagan Administration. The Republican Establishment didn’t like Reagan because he was an outsider.
If Trump gets the nomination, the Republican Establishment is more threatened by him than they are by Hillary winning the election because an outsider disrupts their loss of control. – Paul Craig Roberts, Shadow of Truth.
The Shadow of Truth hosted Dr. Paul Craig Roberts for a discussion about the election, the rise of Putin and Russia’s military withdrawal from Syria and the economy/precious metals. Part One below starts off with Dr. Roberts’ assessment of the effort being made by the Establishment of both Parties to deny Trump and Sanders a chance to be their party’s Presidential candidate:
They don’t like Trump because says he’ll work things out with Putin…Trump also says we’ve got to reinvestigate 9/11 – well this drives the neocons wild. You have to ask yourself, if the 9/11 story was true, why would the neocons care if it was reinvestigated? But they are so opposed to it that there has to be something wrong with the story. – Dr. Paul Craig Roberts
A Reader Responds To Paul Craig Roberts
I love PCR’s well informed analysis of the situation. He clarified things for me when I read his book, How America Was Lost. The 9/11 commission report was delayed for a year, and then those on the commission felt they were lied to and not given all the information they requested.
I believe the neocons are afraid of Trump. That is a good enough reason for me to give him my vote. We should have another investigation of 9/11. Since President Obama has not answered the call, then it needs to be Trump.
The PNAC document provides all the evidence we need to demand an investigation. It is a blue print for the interventionist Middle East policy we have had since 9/11.https://en.wikipedia.org/wiki/Project_for_the_New_American_Century
Only Trump and Sanders are outside of the neocon’s grip.
Gold, Silver And Mining Stocks: The Bull Market Has Resumed
Perhaps the most intriguing aspect of the latest move up in the price of gold is that it has occurred with India’s imports shut down since March 1. Gold imports had fallen off during February as the industry was anticipating that the Government would cut the 10% import duty on refined gold bars. Instead, the Government announced an excises duty on non-silver jewelry. The jewelers industry went on strike, which effectively shut down the gold market in India since March 1.
This past weekend the finance minister of India assured the jewelers that the Government would not harass the jewelry industry for collection of the tax. As a result, the jewelers ended the strike. The jewelry industry contributes close to 4% of India’s GDP.
The end of the strike also means that the India’s gold imports will resume and will likely include a big “snap-back” spike in demand, which should be a catalyst to more than offset the current intervention attempts by the Fed and the western bullion banks.
The mining stocks are up 78% since January 19, when the HUI index briefly traded below 100. This may seem like an unsustainable move. However, in 2008 the HUI doubled between late October and December 31, on its way from 150 to 636 by mid-September 2011.
Jason Burak of Wall Street for Mainstreet hosted me to discuss the deterioration of the U.S. and global economy and the financial markets. We discuss why the junior mining stocks currently represent an opportunity to make lifestyle-changing money by investing in them now:
If you are looking for good mining stock ideas, try out my new Mining Stock Journal. It’s a bi-monthly newsletter which will provides exclusive market commentary and analysis plus in-depth 
research on a junior mining stock idea. The current issue presents a Canadian gold exploration junior that is largely undiscovered yet has a “de-risked,” advanced-stage gold mine development. This stock has huge upside potential. You subscribe from this link – MINING STOCK JOURNAL – or by clicking on the image to the right.
The idea presented in the first issue is an emerging larger-cap gold/silver producer that is up nearly 20% since March 4.
The Veneer Of Justice In The Kingdom Of Crime
The only aspect of the 2008 de facto financial system collapse that was more stunning than the fact that NONE of the big banks were prosecuted for crimes that were obvious to a 2nd grader was that fact that the Taxpayers were squeezed for close to a $1 trillion dollars to enable the big banks to continue on their unimpeded crime spree.
My good friend and colleague, John Titus, has produced a documentary which details the methodical manner in which Wall Street – and specifically Goldman Sachs – has completely annexed the Department of Justice.
Titus applies his acute legal mind and painstakingly meticulous research to lay out the case for a legal system that has become hopelessly and irreparably corrupted by Wall Street and the scarcely-publicized DC law firm DC law firm, Covington & Burling.
As you watch this brilliant documentary, see if you think Covington & Burling reminds you of the law firm in the Grisham novel, “The Firm,” and Goldman Sachs reminds you of the Chicago mobster clan depicted in the story.
The underlying theme in this documentary is the manner in which big money has assumed complete control of the United States political and justice system, as our Government progresses further down the road to oligarchic, totalitarian system – Rule by Money has replaced Rule of Law.
Valeant (VRX): “Hope” Is Not A Valid Investment Strategy.
A reader asked my opinion on the latest commentaries posted on Seeking Alpha about VRX. Generally they had a bullish slant, permeated with gratuitous rationalization seeded in blind hope. “Hope” is not a valid investment strategy. VRX is down another 8% today, which says a lot given that its probably the only stock in the Russell 2000 index that is red today.
One “analyst” explained away the reasons why VRX would not default on its debt. But I laid this out pretty clearly yesterday. Yes the banks will keep VRX alive. The banks are keeping EVERYTHING alive because they have $2.3 trillion in excess reserves that enable them to plug the cash flow deficits currently occurring from delinquent and defaulted assets.
VRX will not default because the banks will grant as much leeway to VRX as is needed to keep the corpse alive. At this point in time, VRX’s assets likely are worth enough to cover the bank debt obligations. Just like a vampire would want to keep a body warm and the pulse ticking while sucking out the blood, the banks will hold up VRX in order to get as much money out as possible.
Of course, the longer this drags out, the uglier it will become for all economically interested parties. Because there’s accounting and disclosure fraud involved, we can expect the class-action shareholder lawsuits to pile up once the lawyers get a whiff of the blood being sucked out by the banks.
But keeping VRX alive for creditor purposes won’t help the stock. At this stage in the game, VRX stock will descend – sometimes quickly, sometimes slowly – below $10. In other words, VRX’s stock has entered the Irreversible Debt Spiral.
In fact, VRX has already dropped another $1 while I have been writing this commentary. Money managers who like to keep their job are unloading this stock as if they were bailing water from the Titanic. 25 million shares have traded already vs the 90-day average daily volume of 13 milllion. ANY money manager who holds on to this stock is in serious breach of its fiduciary duty.
Valeant (VRX) Is Now Selling “Furniture” To Keep The Lights On
Valeant stock is down another 10% today. I’m wondering if some of the Wall Street Journal writers are reading this blog because the WSJ published an article late yesterday in which it reported that VRX could be forced to write-down its goodwill. I published an article two days ago in which I analyzed why VRX’s goodwill “asset” was likely fraudulent.
VRX said it won’t meet the March 15th deadline to file its delayed 10-K. It has until March 30th to file, otherwise it has 30 days before the bank creditors can declare an event of default and demand repayment of the debt. Because VRX’s tangible assets are worth less than the amount of debt outstanding, the most likely scenario is that the banks will grant covenant relief. At that point, VRX will attempt to sell assets in order to help pay down debt.
An analyst quoted in yesterday’s NY Times agrees with my assessment: “I’m not sure that the businesses are worth the debt. The value of the assets depended in part on Valeant’s ability to take price increases and get insurers to pay for these overpriced drugs. The assumptions they made when they acquired these businesses no longer apply.”
VRX is entering the “IDS” stage of business failure – the “Irreversible Debt Spiral.” Reportedly VRX has signed confidentiality agreements with potential buyers of some of VRX’s businesses, some of which VRX overpayed to buy in the past few years (Bausch & Lomb, Obagi and Solta). At this point VRX’s stock should begin another leg down, below $10.
VRX’s survival as a going concern will depend on two factors: 1) the degree to which creditors are willing to restructure VRX’s debt obligations and 2) the amount of capital to pay down debt that VRX can raise through asset sales. The latter variable is now more challenging because potential buyers know VRX is desperate.
Regardless of the VRX’s future as a going concern, VRX stock is headed lower. Any professional money manager who continues to hold this stock on behalf of investors is, at this point, in serious breach of its fiduciary duty.