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The US Economy Is Failing – Paul Craig Roberts
IRD Note: Along with the housing market, the entire economy is beginning to collapse. 
Unless the Fed implements another round of trillions in money printing, the laws of economics will take control of the system. With the housing market, the point of inflection downward began to occur in late spring/early summer. I have detailed this assertion with copious amounts of data and ways to profit from this insight in recent Short Seller’s Journals. Despite the melt-up in homebuilder stocks, one of my ideas from last week was down 10% through Friday.
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The commentary below is by Paul Craig Roberts:
Do the Wall Street Journal’s editorial page editors read their own newspaper?
The front page headline story for the Labor Day weekend was “Low Wage Growth Challenges Fed.” Despite an alleged 4.4% unemployment rate, which is full employment, there is no real growth in wages. The front page story pointed out correctly that an economy alleged to be expanding at full employment, but absent any wage growth or inflation, is “a puzzle that complicates Federal Reserve policy decisions.”
On the editorial page itself, under “letters to the editor,” Professor Tony Lima of California State University points out what I have stressed for years: “The labor-force participation rate remains at historic lows. Much of the decrease is in the 18-34 age group, while participation rates have increased for those 55 and older.” Professor Lima points out that more evidence that the American worker is not in good shape comes from the rising number of Americans who can only find part-time work, which leaves them with truncated incomes and no fringe benefits, such as healh care.
Positioned right next to this factual letter is the lead editorial written by someone who read neither the front page story or the professor’s letter. The lead editorial declares: “The biggest labor story this Labor Day is the trouble that employers are having finding workers across the country.” The Journal’s editorial page editors believe the solution to the alleged labor shortage is Senator Ron Johnson’s (R.Wis.) bill to permit the states to give 500,000 work visas to foreigners.
In my day as a Wall Street Journal editor and columnist, questions would have been asked that would have nixed the editorial. For example, how is there a labor shortage when there is no upward pressure on wages? In tight labor markets wages are bid up as employers compete for workers. For example, how is the labor market tight when the labor force participation rate is at historical lows. When jobs are available, the participation rate rises as people enter the work force to take the jobs.
I have reported on a number of occasions that according to Federal Reserve studies, more Americans in the 24-34 age group live at home with parents than independently, and that it is those 55 and older who are taking the part time jobs. Why is this? The answer is that part time jobs do not pay enough to support an independent existence, and the Federal Reserve’s decade long zero interest rate policy forces retirees to enter the work force as their retirement savings produce no income. It is not only the manufacturing jobs of the middle class blue collar workers that have been given to foreigners in order to cut labor costs and thus maximize payouts to executives and shareholders, but also tradable professional skill jobs such as software engineering, design, accounting, and IT—jobs that Americans expected to get in order to pay off their student loans.
The Wall Street Journal editorial asserts that the young are not in the work force because they are on drugs, or on disability, or because of their poor education. However, all over the country there are college graduates with good educations who cannot find jobs because the jobs have been offshored. To worsen the crisis, a Republican Senator from Wisconsin wants to bring in more foreigners on work permits to drive US wages down lower so that no American can survive on the wage, and the Wall Street Journal editorial page editors endorse this travesty!
The foreigners on work visas are paid one-third less than the going US wage. They live together in groups in cramped quarters. They have no employee rights. They are exploited in order to raise executive bonuses and shareholder capital gains. I have exposed this scheme at length in my book, The Failure of Laissez Faire Capitalism (Clarity Press, 2013).
When Trump said he was going to bring the jobs home, he resonated, but, of course, he will not be permitted to bring them home, any more than he has been permitted to normalize relations with Russia.
In America Government is not in the hands of its people. Government is in the hands of a ruling oligarchy. Oligarchic rule prevails regardless of electoral outcomes. The American people are entering a world of slavery more severe than anything that previously existed. Without jobs, dependent on their masters for trickle-down benefits that are always subject to being cut, and without voice or representation, Americans, except for the One Percent, are becoming the most enslaved people in history.
Americans carry on by accumulating debt and becoming debt slaves. Many can only make the minimum payment on their credit card and thus accumulate debt. The Federal Reserve’s policy has exploded the prices of financial assets. The result is that the bulk of the population lacks discretionary income, and those with financial assets are wealthy until values adjust to reality.
As an economist I cannot identify in history any economy whose affairs have been so badly managed and prospects so severely damaged as the economy of the United States of America. In the short/intermediate run policies that damage the prospects for the American work force benefit what is called the One Percent as jobs offshoring reduces corporate costs and financialization transfers remaining discretionary income in interest and fees to the financial sector. But as consumer discretionary incomes disappear and debt burdens rise, aggregate demand falters, and there is nothing left to drive the economy.
What we are witnessing in the United States is the first country to reverse the development process and to go backward by giving up industry, manufacturing, and tradable professional skill jobs. The labor force is becoming Third World with lowly paid domestic service jobs taking the place of high-productivity, high-value added jobs.
The initial response was to put wives and mothers into the work force, but now even many two-earner families experience stagnant or falling material living standards. New university graduates are faced with substantial debts without jobs capable of producing sufficient income to pay off the debts.
Now the US is on a course of travelling backward at a faster rate. Robots are to take over more and more jobs, displacing more people. Robots don’t buy houses, furniture, appliances, cars, clothes, food, entertainment, medical services, etc. Unless Robots pay payroll taxes, the financing for Social Security and Medicare will collapse. And it goes on down from there. Consumer spending simply dries up, so who purcheses the goods and services supplied by robots?
To find such important considerations absent in public debate suggests that the United States will continue on the country’s de-industrialization, de-manufacturing trajectory.
Peak Housing Bubble: 2008 Deja Vu All Over Again
Existing Home Sales were released Wednesday and the NAR’s seasonally adjusted annualized rate metric was down 1.7% from July. July was down 1.3% from June. The NAR’s SAAR metric is at its lowest rate since last August. Naturally the hurricane that hit Houston is being attributed as the primary culprit for the lower sales rate. Interestingly, the “not seasonally adjusted” monthly number for the South region was higher in August than in July. Moreover, I’m sure the NAR’s statistical “wizards” were told to “adjust” for Houston. So I’m not buying the excuse.
As for the NAR’s inventory narrative, that’s a bunch of horse hooey. Recall the chart I’ve posted a couple times in previous issues which shows that sales volume is inversely correlated with inventory – this is 17 years of data:
In other words, sales volume increases as inventory declines and sales volume declines as inventory rises. This is intuitive as prospective buyers will get desperate and rush to secure a purchase when inventory is low. Conversely,when a prospective buyer sees inventory climbing, the tendency will be to wait to see if prices come down.
It’s disingenuous for the NAR to claim that low inventory is affecting sales. Based on its own calculus, there’s 4.2 months of supply right now. This is up from 3.8 months in January. In fact, from December through March, months supply was said to have been well under 4 months. And yet, the monthly SAAR sales for each month December through March averaged 4.5% above the level just reported for August. In other words, the excuse put forth by the NAR’s chief “economist” is undermined by the NAR’s own numbers. However, given that the inventory expressed as “months supply” has been rising since April, it should be no surprise that sales are declining. This is exactly what would have been predicted by the 17 years of data in the sales vs inventory chart above.
The other statistic that undermines the “low inventory is affecting sales” propaganda is housing starts. Housing starts peaked in November 2016 and have been in a downtrend since then. Robert Toll (Toll Brothers – TOL) stated directly in his earnings commentary a couple weeks ago that “supply is not a problem.” Furthermore, DR Horton – the largest homebuilder in the country) is carrying about the same amount of inventory now as was carrying at the end of 2007 – around $8.5 billion. The average home price is about the same then as now, which means it is carrying about the same number of homes in inventory. It’s unit sales run-rate was slightly higher in 2007. Starting in 2008, DHI began writing down its inventory in multi-billion dollar chunks. Sorry Larry (NAR chief “economist” aka “salesman”), there are plenty of newly built homes available for purchase.
The Fannie and Freddie 3% down payment, reduced mortgage insurance fee program that has been in effect since January 2015 has “sucked” in most of the first-time buyers who can qualify for a mortgage under those sub-prime quality terms. If the housing market cheerleaders stated that “there is a shortage of homes for which subprime buyers can qualify to buy,” that’s an entirely different argument.
Housing price affordability has hit an all-time low. Again, this is because of the rampant home price inflation generated by the Fed’s monetary policy and the Government’s mortgage programs. The Government up to this point has done everything except subsidize down payments in order to give subprime quality borrowers the ability to take down a mortgage for which they can make (barely) the monthly mortgage payment. At this stage, anyone with a sub-620 FICO score who is unable to make a 3% down payment and who does not generate enough income to qualify under the 50% DTI parameter should not buy a home. They will default anyway and the taxpayer will be on the hook. As it is now, the Government’s de facto sub-prime mortgage programs are going to end badly.
Speaking of the 50% DTI, that is one of the qualification parameters “loosened” up by Fannie Mae. A 50% DTI means pre-tax income as a percentage of monthly debt payments. Someone with a 50% DTI is thereby using close to 70% or more of their after-tax cash flow to service debt. This is really not much different from the economics of the “exotic” mortgages underwritten in the last housing bubble. As the economy worsens, there will be sudden wave of first-time buyer Fannie Mae and Freddie Mac mortgage defaults. I would bet that day of reckoning is not too far off in the future.
The Fed has fueled the greatest housing price inflation in history. In may cities, housing prices have gone parabolic. But to make matters worse, this is not being fueled by demand which exceeds supply.
After all, we know that homebuilders have been cutting back on new home starts for several months now. Price inflation is the predominant characteristic of this housing bubble. The price rise since 2012 has been a function of the Fed’s enormous monetary stimulus and not supply/demand-driven transactions.
The effect of the Fed’s money printing and the Government’s mortgage guarantee programs has been to fill the “void” left by the demise of the private-issuer subprime mortgages in the mid-2000’s housing bubble. The FHA has been underwriting 3.5% down payment mortgages since 2008. In 2008, the FHA’s share of the mortgage market was 2%. Today it’s about 20%. Fannie Mae and Freddie Mac allow 3% down payment mortgages for people with credit scores as low as 620. 620 is considered sub-prime. On a case-by-case basis, they’ll approve mortgage applications with sub-620 credit scores. Oh, and about that 3% down payment. The Government will allow “sweat” equity as part of the down payment from “moderate to low income” borrowers. Moreover, the cash portion of the down payment can come from gifts, grants or “community seconds.” A “community second” is a subordinated (second-lien) mortgage that is issued to the buyer to use as a source of cash for the down payment.
Again, I want to emphasize this point because it’s a fact that you’ll never hear discussed by the mainstream media: The Government mortgage programs resemble and have replaced the reckless “exotic” mortgage programs of the mid-2000’s housing bubble.
To compound the problem, most big cities are being hit with an avalanche of new apartment buildings. In Denver, the newer “seasoned” buildings are loading up front-end incentives to compete for tenants. There’s another tidal wave of new inventory that will hit the market over the next six months. This scene is being replayed in all of the traditional bubble cities. As supply drives down the cost of rent, the millennials who can barely qualify for a mortgage that sucks up more than 50% of their pre-tax income will revert back to renting . This will in turn drive down the price of homes.
Flippers who are leveraging up to pay top-dollar will get stuck with their attempted housing “day-trade.” Studies have shown that it was flippers who were unable to unload their homes who triggered the 2008 collapse, as they “jingle-mailed” the keys back to the greedy bankers who funded the “margin debt” for their failed trade.
It may not look exactly the same as late 2007 right now. But there’s no question that it will be deja vu all over again by this time next year…
The above commentary and analysis is directly from last week’s Short Seller’s Journal. In the latest issue I presented three ways to take advantage of the coming collapse in the housing and mortgage market, one of which is already down 10%. If you would like to find out more about this service, please click here: Short Seller’s Journal subscription info.
I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K, and in the U.S. – James
Peak Housing Bubble: The Big Short Is Back
Wash, rinse, repeat. The American public never gets tired of the destructive abuse it suffers from Wall St. The deep sub-prime mortgage market is roaring back and, with it, the nuclear bomb-laden derivatives that triggered round one of The Big Short de facto financial system collapse:
It’s an astonishing comeback for the roughly $70 billion market for synthetic CDOs, which rose to infamy during the crisis and then faded into obscurity after nearly destroying the financial system. But perhaps the most surprising twist is Citigroup itself. Less than a decade ago, the bank was forced into a taxpayer bailout after suffering huge losses on similar types of securities tied to mortgages.
Citigroup is leading the charge this time around, instead of Bear Stearns and Lehman: Citi Revives The Trade That Blew Up The System In 2008. Oh, and do not be mistaken, the financial “safeguards” legislated by Congress and widely heralded by Obama and Elizabeth Warren are completely useless.
The commentary below is a guest post from a reader and Short Seller’s Journal subscriber who is a 25-year subprime lending professional. Below, he shares his wisdom of experience in explaining why the latest deep subprime mortgage products hitting the market is the definitive “bell” that rings when a market bubble is about to pop.
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Before the Lehman crash I was part of the brokering and banking system that built billion dollar pools of commercial cow manure loans we farmed out to Lehman Bros. JPM, CIT, Zion’s Bank, Bank of the West and others did the same.
Lehman was the poster child. They stretched the envelope of mortgage insanity. Their failure was the instant death knell of that terrible scam. Every originator of these pools and brokering conduits failed. Some disappeared in 24 hours. But like the undead, these NINJA warriors are back from the grave just in time to profit from the biggest housing bubble in human history.
While “The Big Short” bubble/bust wiped out the industry, the overseers walked away collectively with billions and no one went to jail other than a few scape-goated underlings. But like the survivors of a 7 year mortgage apocalypse cycle of feast or famine, those who made it are back are more corrupt than ever.
No one learns from these mistakes. Bankers and brokers are like “Chucky” in the “Child’s Play” horror movies. It wasn’t more than a few days after Lehman imploded that the entire fraudulent subprime commercial and residential loan edifice came down. The commercial bank loan system shut down for nearly a year. Banks failed by the hundreds. Thousands more were propped up with TARP and HARP.
What got me going is that the latest product being pimped by Citadel Capital reminds me of a classic bucket shop operation with all the worst elements of gangster loan sharks, knee breakers and “vig” of 5% a week. Perhaps one of the most insidious aspects of the subprime business being originated by Citadel is the manner in which they get around the legislation implemented under Obama via Dodd-Frank that was supposed to protect the public from predatory lending and Wall Street fraud. Citadel specifically has a lending program that is called “Outside Dodd Frank.”
Citadel really caught my eye. There’s a wealth of information on Citadel Servicing Corporation, some from their web page and some from the ‘net itself. While the mainstream media heralds the merits of the Dodd Frank legislation, there are large loopholes in the mortgage broker/banker regulations that circumvent the alleged “safeguards.”
This mortgage origination program, which is disguised as a “business loan program” was sent to me by Citadel Capital, a relatively new and rapidly growing residential and commercial lender. Citadel Capital is part of the Citadel LLC hedge fund empire.
As a commercial loan broker for the last 25 years, I can tell by the rates being charged for these loans that the “professionals” at Citadel hold their nose while they package the junk paper and send them as “mortgage pools” to Wall Street. The Citadel junk is much like the old sub prime NINJA crap that filled portfolios from coast to coast.
Citadel doesn’t want these loans to ripen and turn sour, defaulting while they still sit on Citadel’s balance sheet waiting to be shipped to Wall Street’s financial sausage factory. It’s likely they sit on Citadel’s shelf for no more than a month or so and, like smuggled heroin, peddled to the next middle man in the chain for cutting, diluting and selling to the end user.
Most companies like Citadel borrow on wholesale lines capital provided by yield-starved pension funds. These funds are on the hook for as long as it takes Citadel to churn them like rancid butter, as they aggregate a loan pool big enough to interest Wall Street into securitizing the pooled loans into the infamous CDO’s (collateralized debt obligations). These are the financial nuclear weapons that blew up Wall Street in 2008.
The big fish,TBTF banks bailed out by Obama and Bernanke, take the loan pools and repackage them into risk-return-tiered mortgage-backed trusts. They then piece out the tranches to their clients – yield-starved institutional investors and greedy high net worth sitting ducks. Some of the tranches of these financial sausages are given ratings from Moody’s and S&P which are significantly higher than they merit in return for a small part of the “vig” involved. You are naive if you thought the post-2008 financial “reform” eliminated this important step in the entire process.
The money involved is enormous. The wholesalers – entities like banks and investment funds who provide “warehouse” lines of credit used to fund the loans – get a 3-4% spread as their fee on funds loaned. When funded, these loans are priced to give the aggregator such as Citadel premiums of 5-9% or more, depending on the various ingredients stirred in to “juice” the yield. These premiums are apportioned to the various parties involved in funding the mortgages and bringing borrowers to the table. The mortgage brokers offer up their clients like lambs to the slaughter, concerned with one thing, collecting the points paid by the borrower plus handsome rebates from Citadel where allowed by state or federal statute.
There’s even bigger “vig” for bringing the borrowers to the party. Citadel brokers and outside mortgage brokers can make up to 8-9% on the amount borrowed depending on both the risk-profile of the borrower and the willingness of the borrower to accept various “bells and whistles” which ultimately increase the cost of the loan. But these hidden fees are not paid up-front by the borrower. Instead, they’re built into the high rate charged to the borrower. The Citadel “group” gets paid when the loan is part of a pool that is marked up in value and sold to Wall Street as material for its financial sausage.
Speaking of those “bells and whistles,” which substantially increase the cost of the mortgage to the borrower, and having seen how these loans were crafted in the past, I know that any one of these “innocuous” terms written into the fine print can increase the cost to the borrower by 1 percent or more. To make matters worse, these are the terms that make it nearly impossible for the borrower to make payments for more than a short period of time.
The borrowers stagger into loan offices like Dead Men Zombies with 500 FICOs and nary a pulse. Many are remnants of the last sub prime crash, walking wounded waiting to be fleeced again. They provide some bank statements, often photo-shopped by the borrower or the broker. They offer up hand-me-down, shop worn camp fire stories of woe that get better with each telling. The greed-driven broker feigns a look of sorrow and understanding. If I’ve heard 1 story I’ve heard 100.
Even if they’ve defaulted on the last 3 loans, filed Chapter 11 or 22 and stiffed every creditor in town, somehow they’ll convince the underwriter they’ve had their St Francis of Assisi debt moment and will never be late again. Listen up. There’s a reason they have a 500 FICO. They’re deadbeats with a real estate deal to lend on. They’ll willingly agree to the high-priced terms in order to get back in the game of buying and flipping.
The end investor buys this tranche and yet still might carve it up like a hog, selling some slices here and there; repriced and re-rated by the rating agencies to cover the stink. They might keep the best parts for themselves while dumping the low cuts and offal to a new tier of overseas zombie, yield-starved investors.
The science behind these mortgage conveyor belts was perfected 35 years ago. The bankers pulling the levers will never be prosecuted; just fines; pittance by the DOJ. The brokers will never look back. They’re unlikely to be prosecuted except for the rare ones; those who get caught because they stayed in the game too long or didn’t cover their tracks.
IRD’s note: Citadel is not the only purveyor of these financial time-bombs. There’s several “bucket shop” deep sub-prime mortgage generators springing to life across the country. As an example, there’s a company called SCL Mortgage (“SCL” stands for “Special Circumstances Lending”) based out of Castle Rock, Colorado. Castle Rock is a “poster child” city for the previous and current housing bubble. The Company was founded and is led by a one of the deep subprime “NINJA warriors” of the previous “Big Short” era, as are several of his employees.
Can The Fed “Normalize” Without Collapsing The System?
The official lies about the economy keep mounting. The Dallas Fed reports that its regional economic activity metric surged in early September, despite the complete shut-down of Houston for a few days during the “measurement” period. The “general activity” index spiked up to a 7-month high. Clearly the quality of this report is suspect, to say the least.
Contrary to this report, the Chicago Fed’s National Activity Index plunged to -0.31. It was the weakest reading since last August and a huge plunged from the July reading of 0.03. The Street was expecting 0.11. Because of the nature of this index (85 sub-components measured at the national level) it takes a lot to “move the needle” for this metric. A negative point-three-one reading implies that the national economy broadly contracted during August.
Clearly the Dallas Fed propaganda was intended to reinforce the Fed’s empty threat to raise interest rates and “normalize” its balance sheet . Silver Doctors invited me onto their Friday weekly market podcast to discuss the latest propaganda that spewed forth from the Fed’s FOMC meeting earlier in the week, the western Central Banks’ losing battle to push the price of gold lower and the continuing deterioration in the U.S. political and economic system:
The precious metals is in the early stages of another bull market run, like the one that occurred from 2001-2011. This one is being driven by the China-led movement to remove the dollar as the world’s reserve currency and replace with a currency that will incorporate incorporating gold back into the monetary system. The Mining Stock Journal is a bi-weekly newsletter that will help you get invested ahead of the next huge capital flow into the precious metals sector. To find more, click here: Mining Stock Journal
“Best 20 quid a month I’ve ever spent.” – subscriber from the UK
“Never Let A Good Crisis Go To Waste” – And Short AMZN
The “crisis” quote above originated with Winston Churchill. Several U.S. politicians have referenced it since then (most recently Rahm Emanuel when he was Obama’s Chief of Staff). I’m sure the Wall Street snake-oil salesmen and economic propagandists are more than happy to attribute the deteriorating economic numbers to the hurricanes that hit Houston and southwestern Florida.
Retail sales for August were released a week ago Friday and showed a 0.2% decline from July. This is even worse than that headline number implies because July’s nonsensical 0.6% increase was revised lower by 50% to 0.3% (and it’s still an over-estimate).
Before you attribute the drop in August retail sales to Hurricane Harvey, consider two things: 1) Wall St was looking for a 0.1% increase and that consensus estimate would have taken into account any affects on sales in the Houston area in late August; 2) Building materials and supplies should have increased from July as Houston and Florida residents purchased supplies to reinforce residences and businesses. As it turns out, building supplies and material sales declined from July to August, at least according to the Census Bureau’s assessment. Furthermore, online spending dropped 1.1%. Finally, the number vs. July was boosted by gasoline sales, which were said to have risen 2.5%. But this is a nominal number (not adjusted by inflation) and higher gasoline prices, i.e. inflation, caused by Harvey are the reason gasoline sales were 2.5% higher in August than July.
Too be sure, the retail sales overall were slightly affected by Harvey. But the back-to-school spending is said to have been unusually weak this year and AMZN’s Prime Day no doubt pulled some August online sales into July. However, back-to-school spending reflects the deteriorating financial condition of the middle class. I have no doubts in making the assertion that the factors listed in the previous paragraph which would have boosted sales in August because of Harvey offset significantly any drop in retail sales in the Houston area during the hurricane.
Note – John Williams published his analysis of retail sales and it agrees with my analysis above (Shadowstats.com): Net of Hurricane Harvey Effects – Headline Economic Numbers Still Were Miserable, Suggestive of Recession – Hurricane Impact on August Activity: Mixed, Probably Net-Neutral for Retail Sales – August Real [inflation-adjusted] Retail Sales Declined by 0.61% (-0.61%) in the Month, Plunged by 1.24% (-1.24%).
The Fed Continues To Target Stock Prices. The Dow and the SPX continue to hit new all-time highs every week. At this point there’s no explanation for this other than the fact that, according to the latest Fed data, the Fed’s balance sheet increased by $18 billion two weeks ago. This means that the Fed pushed $18 billion into the banking system, which translates into up $180 billion in total leverage (the reserve ratio on high-powered bank reserves is 10:1).
The good news – for Short Seller’s Journal subscribers – is that, despite this overt market intervention, a large portion of the stocks in the SPX are trading below their 200 dma:
The chart above shows the percentage of stocks in the SPX trading above their 200 dma. In March nearly 80% of the stocks were above the 200 dma. By late August the number was down to 54%. Currently 60% are trading above the 200 dma, which means 40% are trading below.
It’s uglier for the entire stock market, as only 43.5% of the stocks in the NYSE are trading above their 200 dma, which means that 56.5% are trading below the 200 dma. This explains why neither the Nasdaq nor the Russell 2000 were able to close at new all-time highs.
Without the Fed’s direct support of the stock market, there’s no question in my mind that the stock market would be crashing. Perhaps more frightening is the increasing amount of debt being added throughout the U.S. financial system. The debt ceiling limit was suspended until December. The amount of Treasury debt outstanding jumped over $300 billion to over $20 trillion the day the ceiling was suspended. John Maynard Keynes’ macro economic model was one in which Governments could stimulate economic growth through debt-financed deficit spending. But once the economy was in growth mode, the Government was supposed to operate at a surplus and pay down the debt. Never did Keynes state that it was acceptable to incur deficit spending and debt to infinity, which is the current course of the U.S. Government.
Trump has suggested removing the debt ceiling. I’m certain it was “trial balloon” to see how vocal the opposition to this idea would be. The Democratic leaders love the idea. I have not heard much resistance from the Republicans. My bet is that by this time next year, or maybe even by the end of the year, there will not be a debt-ceiling on the amount of money the Government can borrow. In truth, this is no different than giving the Government an unlimited printing press.
Corporate high yield debt issuance has exploded globally, as you can see from the chart to the right, which shows the amount of junk bond debt issuance annually on a trailin
g twelve month basis. Globally the amount outstanding has increased by more than 400%. Close to 60% of this issuance has occurred in the U.S. In conjunction with this, U.S. corporate debt hits an all-time high every month. Most of this debt is being used either to re-purchase stock or over-pay for acquisitions (see the AMZN/Whole Foods deal).
Currently the amount of debt issued to complete acquisitions as a ratio of Debt/EBITDA is at an all-time high, with 80% of all deals incurring a Debt/EBITDA of 5x or higher. The last time this ratio hit an all-time high was, you guess it, in 2007. As an example, let’s look at AMZN’s acquistion of Whole Foods. AMZN issued $16 billion of debt in conjunction with its acquisition of Whole Foods. No one discussed this, but the Debt/EBITDA used in the transaction was 13x. Whole Foods operating income plunged 25% in the first 9 months of 2017 vs the first nine months of 2016.
A 13x multiple outright for a retail food business with rapidly declining operating income is an absurd multiple. That the market let AMZN issue debt in an amount of 13x Whole Food’s EBITDA is outright insane. What happened to all that “free cash flow” that Amazon supposedly generates? According to Bezos, it was $9.6 billion on a trailing twelve month basis at the end of Q2. If so, why did AMZN need to issue $17 billion in debt? We know that the truth (see previous analysis on AMZN) is that AMZN does not, in fact, generate free cash flow but burns cash on a quarterly basis. Currently AMZN is busy slashing prices at Whole Foods, which will drive WF’s operating margin from 4.5% toward zero. This is the same model that is used in AMZN’s e-commerce business, which incurred an operating loss in Q2.
In my view, AMZN continues to be one of the best short ideas on the board – the graph below is as of last Friday (Sept 15th) when AMZN closed at $986, Short Seller Journal subscribers were given some put option ideas as alternatives to shorting AMZN outright (click to enlarge):
The chart above is a 1-yr daily. Technical analysis adherents would see the head and shoulders formation I’ve highlighted in AMZN’s chart. This is potentially quite bearish. Despite the Dow and SPX hitting a series of all-time highs this month, AMZN has not come within 5% of its all-time high on July 26th ($1052 close). It traded up to $1083 intra-day the next day before closing below the previous day’s close and then dropped its Q2 earnings bombshell when the market closed. Based on its $986 close this past Friday, it’s 9% below its July 27th intra-day high-tick. Some might say that’s “halfway to bear market territory.”
AMZN lost $31 last week despite the SPX hitting a record high on Wednesday. This negative divergence is bearish. In addition, Walmart has taken off the gloves and is directly attacking AMZN’s e-commerce business model. WMT offers 2-day free shipping on millions of items without the requirement of spending money upfront to join a “membership.” WMT is also running television ads during prime time which attack some of AMZN’s marketing gimmicks.
Some other bearish technical indicators, a highlighted above: 1) Since the end of July, the volume on down days in the stock price has been higher than the the volume on up days; 2) The RSI has been declining gradually since early April; 3) the MACD (bottom panel) has been declining steadily since early June. All three of these indicators reflect large institutional and/or hedge funds selling their positions.
The stock is sitting precariously on its 50 dma (yellow line above). I would not be surprised to see it test its 200 dma, currently $904, before it reports Q3 earnings. If you want to speculate on this possibility, the October 6th weekly $920 – $930 puts, depending on how much premium you want to pay, might be a good bet. You might also want to out another week to the October 20th series. One caveat is that AMZN will no doubt manipulate its numbers using merger and acquisition accounting gimmicks, which give the acquiring a window in which to egregiously manipulate GAAP numbers. I don’t know if the market will “see” through this or not. But based on the performance of the stock since AMZN dropped its Q2 earnings bombshell, I’d say the stock on “on a short leash.”
The above commentary and analysis is directly from last week’s Short Seller’s Journal. If you would like to find out more about this service, please click here: Short Seller’s Journal subscription info.
Will The Fed Really “Normalize” Its Balance Sheet?
To begin with, how exactly does one define “normalize” in reference to the Fed’s balance sheet? The Fed predictably held off raising rates again today. However, it said that beginning in October it would no longer re-invest proceeds from its Treasury and mortgage holdings and let the balance sheet “run off.”
Here’s the problem with letting the Treasuries and mortgage just mature: Treasuries never really “mature.” Rather, the maturities are “rolled forward” by refinancing the outstanding Treasuries due to mature. The Government also issues even more Treasurys to fund its reckless spending habits. Unless the Fed “reverse repos” the Treasurys right before they are refinanced by the Government, the money printed by the Fed to buy the Treasurys will remain in the banking system. I’m surprised no one has mentioned this minor little detail.
The Fed has also kicked the can down the road on hiking interest rates in conjunction with shoving their phony 1.5% inflation number up our collective ass. The Fed Funds rate has been below 1% since October 2008, or nine years. Quarter point interest rate hikes aren’t really hikes. we’re at 1% from zero in just under two years. That’s not “hiking” rates. Until they start doing the reverse-repos in $50-$100 billion chunks at least monthly, all this talk about “normalization” is nothing but the babble of children in the sandbox. I think the talk/threat of it is being used to slow down the decline in the dollar.
To justify its monetary policy, Yellen stated today that she’s, “very pleased in progress made in the labor market.” Again, how does one define progress? Here’s one graphic which shows that the labor market has been and continues to be a complete abortion:
The labor force participation rate (left y-axis) has been plunging since 2000. It’s currently below 63%. This means that over 37% of the working age population in the United States is not considered part of the labor force. That’s close to 100 million people between the ages of 15 and 64 who, for whatever reason, are not looking for a job or actively employed. A record number of those employed are working more than one part-time job in order to put food on table and a roof over the heads of their household. Good job Janet! Bravo!.
The blue line in the graph above shows the amount of dollars spent by the Government on welfare. Note the upward point acceleration in the rate of welfare spending correlates with the same point in time at which the labor force participation rate began to plunge. Again, nice work Janet!
The labor force participation rate is much closer to the true rate of unemployment in the United States. John Williams of Shadowstats.com has calculated the rate of unemployment using the methodology used by the Government a couple of decades ago and has shown that a “truer” rate of unemployment is closer to 23%.
The true level of unemployment is definitively the reason why the rate of welfare spending increased in correlation with the decline in those considered to be part of the labor force. It could also be shown using the Fed’s data that another portion of the plunging labor force participation rate is attributable to the acceleration in student loans outstanding. I would argue that part of the splurge in student loan funding, initiated by Obama, was used to keep potential job-seekers being forced by economic necessity from seeking jobs and therefore could be removed from the labor force definition, which in turn lowers the unemployment rate.
As I write this, Yellen is asserting that “U.S. economic performance has been good.
” I’d like to get my hands on some of the opioids she must be abusing. Real retail sales have been dropping precipitously (the third largest retail store bankruptcy in history was filed yesterday), household debt is at an an all-time high, Government debt hits an all-time high every minute of the day and interest rates are at 5,000 year lows (sourced from King World News)
Note to Janet: near-zero cost of money is not in any way an attribute of an economy that is “doing well.” In fact, record levels of systemic debt and rising corporate and household bankruptcies are the symptoms of failed Central Bank economic and monetary policies. This is further reinforced by the record level of income disparity between the 1% highest income earners and the rest of the U.S. labor force.
The entire U.S. economic and financial system is collapsing. If the Fed truly follows through on its threat to “normalize” its balance sheet and raise rates, the U.S. will likely collapse sometime in the next couple of years. On other hand, up to this point since Bernanke’s famous “taper” speech in May 2013, most of the Fed’s statements with regard to hiking rates (hiking them for real) and reducing its balance sheet has been nothing but hot air. And in fact, unless the Fed reverse repos its balance sheet back to the banks, it’s assertion of “balance sheet normalization” is nothing more than another in long series of lies.
Why Is The BIS Flooding The System With Gold?
A consultant to GATA (Gold Anti-Trust Action Committee) brought to our attention the fact that gold swaps at the BIS have soared from zero in March 2016 to almost 500 tonnes by August 2017 (GATA – BIS Gold Swaps). The outstanding balance is now higher than it was in 2011, leading up to the violent systematically manipulated take-down of the gold price starting in September 2011 (silver was attacked starting in April 2011).
The report stimulated my curiosity because most bloggers reference the BIS or articles about the BIS gold market activity without actually perusing through BIS financial statements and the accompanying footnotes. Gold swaps work similarly to Fed repo transactions. When banks need cash liquidity, the Fed extends short term loans to the banks and receives Treasuries as collateral. QE can be seen as a multi-trillion dollar Permanent Repo operation that involved outright money printing.
Similarly, if the bullion banks (HSBC, JP Morgan, Citigroup, Barclays, etc) need access to a supply of gold, the BIS will “swap” gold for cash. This would involve BIS or BIS Central Bank member gold which is loaned out to the banks and the banks deposit cash as collateral to against the gold “loan.” This operation is benignly called a “gold swap.” The purpose would be to alleviate a short term scarcity of gold in London and put gold into the hands of the bullion banks that can be delivered into the eastern hemisphere countries who are importing large quantities of gold (gold swaps outstanding are referenced beginning in 2010).
I wanted dig into the BIS financials and add some evidence from the GATA consultant’s assertions because, since 2009, there has been a curious inverse correlation between the amount of outstanding gold swaps held by the BIS and the price of gold (as the amount of swaps increase, the price of gold declines). You’ll note that in the 2009 BIS Annual Report, there is no reference to gold swaps so we must assume the amount outstanding was zero. By 2011 the amount was 409 tonnes.
The gold swaps enable the BIS to “release” physical gold into the banking system which can then be used to help the Central Banks manipulate the price of gold lower. This explains the jump in BIS gold swaps between March 2016 and March 2017 and the drop in the price of gold from August 2016 until early July 2017. It also explains the rise in the price of gold between July and September this year, which correlates with a decline in the outstanding gold swaps between April and July . Finally, the hit on gold that began earlier this month coincides with a sudden jump in BIS gold swaps in the month of August. (Note: there would be a short time-lag between the gold swap operation and the amount of time it takes to “mobilize” the physical gold)
The graphic below shows the increase in gold swaps from March 2016 to March 2017:
As you can see, the total amount of the gold loans outstanding increased by 14.1 billion SDRs (note: the BIS expresses its financials in SDRs). The accompanying note explains that most of this gold loan is comprised of an increase in the BIS’ gold swap contracts outstanding.
I find it interesting that the reports of gold backwardation in London (see James Turk’s interviews on King World News) and the backwardation I have observed between the current-month (delivery month) Comex gold contract and the London gold fixings over the past several months correlates well with the sudden jump in gold swap activity at the BIS.
Backwardation in any commodity market indicates that the demand for delivery of the underlying commodity is greater than the near-term supply of that commodity. It’s hard to ignore that the backwardation observed on the LBMA and with Comex gold delivery-month contracts has been accompanied by soaring gold demand from India, as reported by the Economic Times of India (article link): Gold Imports Jump Three-Fold in April-August.
Furthermore, it appears as if the BIS gold swap activity continued to increase between March 2017 and August 2017, as the BIS’s August Account Statement shows another 2.2 billion SDR increase in amount of outstanding gold loans (a BIS monthly account statement only reports the balance sheet with no accompanying disclosure). These loans primarily are swaps, per the disclosure in the 2017 Annual Report.
However, this jump in gold swaps between March and August is somewhat misleading. The outstanding amount of loans declined from 27.2 billion SDRs at the end of March to 24.6 billion SDRs at the end of July. The price of gold rose over 11% between July and early September. By the end of August, the BIS balance sheet shows 29.3 billion SDRs. A jump of 4.7 billion SDRs worth of gold swaps.
It was around April that the World Gold Council began to forecast that India’s gold importation would drop to 95 tonnes per quarter starting in Q2. As it turns out, India imported 248 tonnes of gold in Q2 2017. This number does not include smuggled gold. Please note the curious correlation between the jump in BIS gold swap activity at the end of the summer and the unexpected surge in Indian gold imports.
In my view, there is a direct correlation between this sudden leap in the amount of gold swaps conducted by the BIS between July and August and the price attack on gold that began two weeks ago. The gold swaps provide bullion bar “liquidity” to the bullion banks who can use them to deliver into the rising demand for deliveries from India, China, Turkey, et al. This in turn relieves the strength and size of “bid” on the LBMA for physical gold which in turn makes it easier for the same bullion banks to attack the price of gold on the Comex using paper gold. This explains the current manipulated take-down in the price of gold despite the rising seasonal demand from India and China.
Anti-Gold Puppet Now Hints Gold Will Soar
Several representatives of the elitists have been warning about a major global financial crisis. Recently the former Head of the Monetary and Economics Department at the Bank of International Settlements, the Central Bank of Central Banks, warned that there are “more dangers now than in 2007.”
Goldman Sachs commodities analyst, Jeff Currie, who is infamous for incorrectly predicting gold would drop to $800 about three years ago, recently advised anyone listening to own physical gold: “don’t buy futures or ETFs…buy the real thing. . .the lesson learned was that if gold liquidity dries up along with the broader market, so does your hedge, unless it’s physical gold in a vault, the true hedge of last resort.”
Jeffrey Christian has spent most of his career operating as a shill for the western Central Banks and bullion banks who lead the effort to manipulate gold using fraudulent paper gold derivatives. He scoffs at the idea that gold is manipulated. It was curious, then, when he was interviewed by Kitco and was recommending that investors should hold at least 20% of their assets in gold. He also forecast a $1700 price target.
SGT Report invited me to discuss the significance Christian’s comments, which of course included a denial of gold manipulation:
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The Bitcoin And Cryptocurrency Bubble
I actively traded the internet stocks during the late stages of the internet/tech stock bubble in 1999 – from the short side. I will admit that I did take a few long-side day trade rides on a few internet stocks. I remember one Chinese internet stock that I bought in the morning at $10 after its IPO free’d up to trade and sold it about 2 hours later at $45. To this day I have no idea what the company’s concept was all about – I think it was one of those incubators. I doubt that company was in existence after 2001. As such, the crypto-currency craze reminds me of the internet stock bubble.
The cryptos certainly are a heated debate. The popularity of bitcoin is crazy, and people seem to be engrossed in news regarding the cryptocurrency. Crypto enthusiasts can check out btcnn for all the top cryptocurrency news stories if they want to stay informed about all the latest bitcoin news. The volume from the Bitcoin defenders is deafening, the degree to which I’ve only seen near the peak of bubbles. I had a subscriber cancel his Mining Stock Journal subcription after sending me an email explaining that he canceled because he was pissed off that I was not a Bitcoin proponent. He accused me of discouraging people from buying Bitcoins. His loss, he’s missed on out some high rate of return trade ideas in a short period of time like Banro and Tahoe Resources. I’m not trying to discourage anyone from buying anything. I’m simply laying out the “caveat emptor” case. Of course, there are a lot of tools out there for those of you who are interested involved with cryptocurrency trading, for example, there are platforms like this DEX crypto trading platform and if it is your thing you could check it out if you want to.
Having said that, there’s truth to the proposition that the inability to short Bitcoin contributes to its soaring valuation. I’d like to have an opportunity to see what would happen to the value of gold if the ability to short gold via the paper gold mechanism was removed from the equation.
Is it “Bitcoin” or “Bitcon?” The cost to produce, or “mine,” a Bitcoin does not imbue it with inherent value, as some have argued. It cost money to produce Pet Rocks in the 1970’s and they took off like a Roman Candle in popularity purchase price. Now if you own a Pet Rock, it’s nearly worthless. It costs money to produce and defend dollars. We know the dollar is headed for the dust-bin of history.
I’m not saying you can’t make money on cryptos. A lot of people made a small fortune on internet company stocks in 1999. But I’d bet that 98% of the internet stocks IPO’d during the tech bubble no longer exist. Currently cryptos are fueled by the “greater fool” model of making money. Most buyers of the cryptos are buying them on the assumption they’ll be able to sell them at a later time to another buyer at a higher price. You need to know your stuff, checking out various trading platforms, Crypto Signals and research into the currency before making an investment.
Cryptos are de facto fiat currencies. Perhaps there’s a limit to the supply of each one individually. But that proposition has not been vetted by the test of time. I do not believe that anything in cyberspace is 100% immune from hacking. Just because there have not been reports of the Bitcoin block-chain being hacked yet does not mean it can’t be hacked. It’s also possible that, for now, any breach has been covered up. Again, the test of time will resolve that. However, as we’ve seen already, the quantity of cryptocurrencies can multiply quickly in a short period of time. Thus, in that regard cryptos are no different than any fiat currency.
Finally, all it takes is the flip of a switch and your Bitcoin is unusable. But all these flaws are, for now, covered up by the euphoria of the mania. This is no different from every flawed “investment” mania in history. The current wave of crypto buyers are buying them with the hope of selling them at higher price later. “Hope” is not a valid investment strategy. “Hope” is the heart-beat of a speculative market bubble.
Perhaps one of the most definitive signals that the top in Bitcoin is imminent is this snapshot taken by the publisher of the Shenandoah blog at johngaltfla.com:
This picture was snapped in Florida. The sign says “got bitcoin? Passive income and no recruiting. Earn up to 1% on your money Monday – Friday.”
I recall reading about the process by which Bitcoins are “mined.” Anyone can get started by signing up at somewhere like swyftx trading, but it involves an upfront investment plus the ongoing expense of the considerable amount of energy used to power the computer system required to engage in the mining process.
Let me guess, the creators of Bitcoin will be happy to assist you with buying the equipment and software necessary to get started? How is this any different from a high-tech-equivalent of a multi-level marketing scheme? As johngaltfla asserts: “When someone implies that it is ‘easy money’ it isn’t, it is a bubble.”
I’m not here to criticize anyone attempting to profit from trading Bitcoin. I am suggesting that it is not a good idea to get married to the trade. I regret not loading up on Bitcoins in 2012.
Without a doubt I believe there is legitimacy to the cryptocurrency concept. However, I can envision a Central Banking-led attempt to implement the crptocurrency model as means of centralizing the process of removing cash currency from the system. But that also means the eventuality that Governments collude to remove competing cryptos from the internet. This is just surmisal on my part. Again, the test of time will determine the ultimate fate of cryptos.
Speaking of time-tested money, it’s worth noting that China is going to roll out a gold-backed yuan oil futures contract – not a cryptocurrency-backed yuan contract. Perhaps one of the major Central Banks will eventually roll out a gold-backed cryptocurrency. That’s where I believe this could be headed.
“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.