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Should You Use Leverage With Precious Metals And Mining Stocks?
While I will maintain, until proven wrong by the test of time, that Bitcoin and Cryptocurrencies are nothing more than a temporary fad, investing with a long term outlook (20-30 years) gives the investor the best probability of generating life-style changing wealth.
William Powers, of MiningStockEducation.com, invited onto his podcast to discuss using leverage in precious metals and mining stock investing. We discuss greed/fear, using margin with mining stocks, volatility, options, futures and the leveraged ETFs.
The problem for most investors, and the reason many have not made a lot of money – or might have lost money – in the precious metals sector is the inability to invest with a long term perspective. Since 2001, gold has outperformed every asset class. The mining stocks, in general as measured using the HUI index, have outperformed the Dow/Naz since 2001.
If your reason to be invested in a sector is still valid, there’s no reason to sell investments in that sector. Have the reasons for investing precious metals as a hedge against a collapsing U.S. economic and political system, and thereby a collapse in the U.S. dollar, changed? Have the problems taking the U.S. down been fixed? The answer is pretty obvious, which means you should be holding your precious metals investments, even if you bought them in early 2011. In fact, if you bought then, you should be buying more now. I know I have been adding to my holdings gradually since early 2016.
The next issue of the Mining Stock Journal will be published this Thursday. I’ll be reviewing a junior stock that has gone parabolic and a mid-cap producer that has been hammered hard but is poised to bounce back just as sharply. You can learn more about the MSJ here – new subscribers get all of the back-issues: Mining Stock Journal information.
America’s Supernova: The Final Stage Of Collapse
I started observing the slow-motion train-wreck in process in 2001 – a year removed from my perch as a junk bond trader on Wall Street and living several thousand miles away from NYC and DC in the Mile High City, where the view is a lot more clear than from either coast.
The United States has been in a state of collapse for several decades. To paraphrase Hemingway’s flippant description of the manner in which one goes bankrupt, it happens in two ways: slowly then all at once (“The Sun Also Rises”).
The economic decay was precipitated by the advent of the Federal Reserve; then reinforced by FDR’s executive order removing gold from the citizenry’s ownership, the acceptance of Bretton Woods, and the implementation of what is capriciously termed “Bretton Woods Two” – Nixon’s disconnection of the dollar from the gold standard. If you study the monetary and debt charts available on the St. Louis Fed’s website, you’ll see that post-1971 both the money supply and the amount of debt issued at all levels of the system (public, corporate, household) began gradually to go parabolic.
I would argue the political collapse kicked into high-gear during and after the Nixon administration, although I know many would argue that it began shortly after the Constitution was ratified in 1788. At the Constitutional Convention, someone asked Ben Franklin if we now had Republic or a Monarchy, to which Franklin famously replied, “a Republic, if you can keep it.”
Well, we’ve failed to keep the Republic. Now the political, economic and financial system is controlled by a consortium of big banks, big corporations, the Department of Defense and a handful of very wealthy individuals, all of which are ruthlessly greedy and misanthropic.
The current political and social melt-down is nothing more than a symptom of the underlying rot – rot that was seeded and propagated by the implementation of fiat currency and a fractional banking system. The erection of the Fed gave control of the country over to those with the authority to create paper money and issue debt.
And now the political and social clime of the country has gone from ridiculous to beyond absurd. James Kunstler wrote a must-read piece which captures the essence of the Dickensian societal caricature that has sprung to life before our very eyes (Total Eclipse):
What do you know, long about Wednesday, August 16, 2017, House Minority Leader Nancy Pelosi (D-Cal) discovered that the United States Capitol building was infested with statues of Confederate dignitaries. Thirty years walking those marbled halls and she just noticed? Her startled announcement perked up Senator Cory Booker (D- NJ) who has been navigating those same halls only a few years. He quickly introduced a bill to blackball the offending statues. And, of course, the congressional black caucus also enjoyed a mass epiphany on the bronze and stone delegation of white devils…
…Just as empires tend to build their most grandiose monuments prior to collapse, our tottering empire is concocting the most monumentally ludicrous delusions before it slides down the laundry chute of history. It’s as if the Marx Brothers colluded with Alfred Hitchcock to dream up a melodramatic climax to the American Century that would be the most ridiculous and embarrassing to our posterity.
I would urge everyone to read the entire piece, which I’ve linked above. And now for America’s coup de grace, it has offered up “president Trump,” which by the way not any worse than the alternative would have been. Rather, it’s another symptom of the cancer beneath the skin.
Empires in collapse are at their most dangerous to the world when they are on the brink of imploding. I was discussing this with a good friend the other day who was still clinging to the brainwashing we received in middle school history classes that “America is different.” This just in: America is not different.
The Financial Times has written a disturbing – yet accurate – accounting of the current turmoil facing the White House and the world (America Is Now A Dangerous Nation):
The danger is that these multiple crises will merge, tempting an embattled president to try to exploit an international conflict to break out of his domestic difficulties…Mr Gorka’s flirtation with the idea that the threat of war could lead Americans to rally around the president should sound alarm bells for anyone with a sense of history…Leaders under severe domestic political pressure are also more likely to behave irrationally.
In commentary which reinforces my view presented above, the FT article closes with:
A final disturbing thought is that Mr Trump’s emergence increasingly looks like a symptom of a wider crisis in American society, that will not disappear, even when Mr Trump has vacated the Oval Office. Declining living standards for many ordinary Americans and the demographic shifts that threaten the majority status of white Americans helped to create the pool of angry voters that elected Mr Trump. Combine that social and economic backdrop with fears of international decline and a political culture that venerates guns and the military, and you have a formula for a country whose response to international crises may, increasingly, be to “lock and load”.
The current “everything bubble,” fueled by the creation of massive amounts of fiat money and debt issuance is America’s “supernova.” It’s the final explosion of fraudulent currency printing and credit creation. I sincerely hope that when the pieces hit the ground, there will be enough material with which the original Republic can somehow be reconstructed.
Shorting Stocks Will Outperform The Market
On December 1st, with a short-sell report I wrote on L Brands (LB) and published by Seeking Alpha (note: that was the last article I submitted to Seeking Alpha – you can now find my work on Simply Wall St.)that I used to launch the Short Seller’s Journal, I explained why L Brands was a great short idea at $96. Here was my rationale:
L Brands (NYSE:LB) is a specialty retailer that operates the Victoria Secret and Bath & Body Works chains. It also operates La Senza, a Canada-based intimate apparel retail concept, and Henri Bendel, a highend accessory products brand. The stock has run from under $7 in March 2009 to its current (November 27) price of $96.68. In that time period, it has outperformed the S&P 500 by over 350%. But, in the context of rapidly slowing revenue growth, declining operating margins, increasing financial leverage and a likely pullback in consumer spending, LB’s stock is extremely overvalued relative to its underlying fundamentals and relative to its peers. In my view, LB represents a compelling opportunity to short the highly overvalued stock of a company operating in a business sector facing significant economic headwinds.
Here’s how the LB short performed from 12/1/15 to present, after reporting an pre-arranged “beat” of Wall St’s earnings estimates (the big game that has developed over the years is for management to “wink wink” walk Wall Street’s robotic analysts’ quarterly estimates down to a level below the actual numbers the company plans to report) but was forced to warn about the rest of the year:
As you can see, shorting LB on December 1, 2015 has significantly outperformed the XRT retailer ETF. It has also outperformed going long the S&P 500 by a factor of nearly 400%. Nothwithstanding what to me was the onset of a consumer spending recession and an obviously overvalued stock market, LB at the time was overvalued relative to both the stock market and the retail stock sector:
The traits specific to LB, and that is based on information that is freely available to anyone who is motivated to do the research, included: a stock priced for perfection, aggressive debt issuance to finance huge share repurchases, heavy insider dumping of shares into the share repurchases and a stock valuation far in excess of industry peers.
Despite the inexorable grind higher in the Dow, SPX and Nasdaq indices, hundreds of stocks are either at 52-week lows are getting ready to embark on a “price-seeking” mission to find their 52-week lows. Just ask the Dick’s Sporting Goods (DKS) or Advance Autoparts (AAP) bulls. LB, DKS and AAP are examples of stocks will get cut in half at least two more times in the next 12-18 months.
The Short Seller Journal was launched with the goal to expose the truth about the stock market and the truth about the manipulated economic and earnings reports fabricated with the intent to support the most over-valued stock valuations in history and, more important, to use those truths to find short-sell ideas that will outperform long strategies. LB is an example of the types of ideas uncovered by the Short Seller’s Journal.
You can learn about this newsletter here: Short Seller’s Journal information. There’s very few, if any, newsletters that focus on shorting the market. The best time to invest in a market theme is when the rest of the market is doing the opposite. As a testament the quality of the Short Seller’s Journal, the subscriber turnover rate is remarkably low. There’s no minimum required subscription period and subscribers receive a 50% discount to the Mining Stock Journal.
The Government’s Retail Sales Report Borders On Fraud
As a quick aside, I got an email today from a colleague, a self-admitted “very small fish,” who told me he was now getting cold calls from Goldman Sachs brokers offering “very interesting structured products.” I told him the last time I heard stories like that was in the spring of 2008. One of my best friends was getting ready to jump ship from Lehman before it collapsed – he was in the private wealth management group. He told me he heard stories about Merrill Lynch high net worth brokers selling high yielding structured products to clients. He said they were slicing up the structured garbage that Merrill was stuck with – mortgage crap – that institutions and hedge funds wouldn’t take and packaging them into smaller parcels to dump into high net worth accounts. Something to think about there…
As conditions worsen in the real world economy and political system, the propaganda fabricated in an attempt to cover up the truth becomes more absurd. Today’s retail sales report, prepared and released by the Census Bureau which in and of itself makes the numbers extraordinarily unreliable, showed a .6% gain in retail sales in July from June. As I’ll show below, not including the affects of inflation, in all likelihood retail sales declined in July.
The biggest component of the reported gain was auto sales, for which the Census Bureau attributed a 1.1% gain over June. While this correlates with the SAAR number reported at the beginning of the month, the number does not come close to matching the actual industry-reported sales, which showed a 7% decline for the month of July. Note: the SAAR calculation is fictional – it implies that auto sales, which are declining every month, will continue at the same rate as the rate measured in July. Per the stark contrast between the Census Bureau number and the industry-reported number, the number reported by the Government is nothing short of fictional.
The automobile sales component represents 20% of the total retail sales report on a revenue basis. If we give the Government the benefit of doubt and hold the dollar value of auto sales constant from June to July (remember, the industry is telling us sales declined sharply) and recalculated the retail sales report, we get a 0.03% gain in retail sales.
Another huge issue is the number recorded for building material and sales. In the “not seasonally adjusted” column, the report shows a huge decline from June to July (a $1.3 billion drop from June to July. But through the magic of seasonal adjustments , the unadjusted number is transformed in a $337 million decline. Given the declining trend in housing starts and existing home sales, it would make sense that building and supply stores sold less in July vs. June. But the Government does not want us to see it that way.
Yet another interesting number is in the restaurant sales category, which the Census Bureau tells us increased .3% in July from June. Restaurant sales are also one of the largest components of retail sales, representing 12.1% of what was reported. This number was diametrically opposed to the Black Box Intelligence private sector report for monthly restaurant sales, which showed a 2.8% drop in restaurant sales in July (a 4.7% drop in traffic). The Census Bureau survey for total retail sales is based on 4,700 questionnaires mailed to retail businesses. The Black Box restaurant survey is based on data compiled monthly from 41,000 restaurants. We don’t know how many restaurants are surveyed and actually respond to the Government surveys.
Here’s the Census Bureau’s dirty little secret (click to enlarge):
The sections highlighted in yellow are marked with an asterisk. In the footnotes to the report, the Census Bureau discloses that the asterisk means that, “advance estimates are not available for this kind of business” (Retail Sales report). In other words, a significant percentage of the Government’s retail sales report is based on guesstimates. Lick your index finger and stick it up in the political breeze to see which way you need to make the numbers lean.
I calculated the total amount of sales for which the Census Bureaus claims is not based on guesstimates. 45.3% of the report is a swing and a miss. Not coincidentally, the areas of its report that conflict directly with actual industry-provided numbers and area guestimate categories happen to be auto sales, building materials and restaurant sales. Get the picture?
Just like every other major monthly economic report – employment, GDP, inflation – the retail sales report is little more than a fraudulent propaganda tool used to distort reality for the dual purpose of supporting the political and monetary system – both of which are collapsing – and attempting to convince the public that the economy is in good shape.
Household Debt At Record Level – Bigger Than China’s GDP
The economy continues to grow weaker despite all of the Fed, Wall St. and media propaganda to the contrary. The economy is growing weaker due to the deteriorating financial condition of the consumer, which is by far the biggest driver of GDP in the United States. The only way the policy-makers can avoid a systemic collapse is “helicopter” money printing, in which printed cash or digital currency credits is, in some manner, distributed to the populace.
The Fed reported that non-revolving consumer debt (not including mortgage debt) hit $2.6 trillion at the end of the first quarter. Student loans outstanding hit a record of $1.44 trillion. Recall that at least 40% of this debt is in some form of delinquency, default or “approved” non-pay status. Auto loans hit a record $1.2 trillion. Of this, at the very least 30% is subprime. A meaningful portion of the auto debt is of such poor credit quality when it’s issued that it is not even rated. Individuals rarely check their credit scores and have no idea what could be harming it. Not many know how to remove derogatory items from a credit report and leave their credit report for the banks and lenders to see. Credit card debt is now over $1 trillion dollars and at a record level. The average outstanding balance per capita is $9600 per card for those who don’t pay in full at the end of the month. Just counting the households with credit card debt balances, the average balance per household is $16,000. The average household auto loan balance for all households with a car loan is over $29,000. All of these loans and debts seriously affect credit ratings and then individuals wonder why they can’t get certain credit cards or mortgages, or even the best interest rates.
The data shows a consumer that is buried in debt and will likely begin to default at an accelerating rate this year. Consumers are now turning to payday loans to help them make ends meet, only adding to their crippling debt. Some are seeking the services of National Payday Relief to consolidate their loans and make manageable payments, helping them regain control of their finances. Of course, there are other methods that some of the American population are turning to. One of these methods is selling any valuable items you might have, but no longer need, to a pawn shop, similar to Monte De Piedad for example. This can free up some space in your home, whilst also providing you with some quick money to help you pay off any debts you might have. However, consumers need to be proactive when trying to resolve their debt otherwise it will damage the whole economy as well as themselves. In fact, I’d call these statistics an impending economic and financial disaster. Credit card companies are already warning about credit charge-offs. Synchrony (which issues credit cards for Amazon and Walmart) reported that its credit card charge-offs would rise at least 5% in 2017. Capital One (Question: “What’s in your wallet?” – Answer: “Not money”) reported that credit card charge-offs soared 28% year over year for Q1. Synchrony, Capital One and Discover combined increased their Q1 provision for bad loans by 36% over last year’s provisions taken.
The monthly consumer credit report last week showed a $12.4 billion increase over May. A $16 billion increase was expected by Wall St. Keep in mind that every month of credit expansion is another new all-time high in consumer debt. Credit card debt outstanding increased by $4.1 billion, which is troubling for two reasons. First, it’s likely that financial firms are lending to less than qualified borrowers, as evidenced by the rising credit card delinquency and charge-off rates. Second, given the declining household real disposable income and savings rate, it’s likely that households are using credit card debt to pay for non-discretionary expenses. The smaller than expected increase in credit is being attributed primarily to slower growth in auto loans.
Speaking of the auto industry, Bloomberg reported last week that auto dealers, in a desperate bid to increase sales and reduce inventory, cut prices on new cars and trucks in July by the most since March 2009. It also reported that used car prices dropped 4.1%. This graph from Meridian Macro Research captures the rapid deterioration auto sales (click to enlarge):
The chart shows rate of change in motor vehicle freight carload volume on a year over year basis vs. per capita auto sales. As you can see, the last time these two metrics were showing negative growth (a decline) and heading lower was 2008. The entire “boom” in auto sales since the “cash for clunkers” program, which ran from July 2009 to November 2009, has been artificially created by a massive expansion in Government-enabled credit and Fed money printing. The impending crash in the auto industry is unavoidable unless the Government resorts to outright “helicopter” money printing (i.e. giving cash directly to households rather than to the banks).
One of the best barometers of consumer financial health is restaurant sales, which are entirely dependent on the relative level of household disposable income that can be allocated to non-discretionary expenditures. Black Box Intelligence’s monthly restaurant industry snapshot, released Thursday, showed another monthly decline in restaurant sales and traffic – this one steeper than the past couple of months. I believe this is the 17th successive monthly year-over-year decline. Comp sales (year over year for July) were down 2.8% and comp traffic dropped 4.7%. The latter is more significant, as it better represents actual sales volume because dollar sales are boosted by price inflation. In contrast to these Real World numbers, the BLS reported in its employment report for July that the restaurant industry created 57,000 new jobs. This is not just flagrant misrepresentation of reality for propaganda purposes, it’s outright fraud.
In terms of specifics with the July restaurant numbers, sales declined in 183 of the 195 markets covered by the Black Box Intelligence survey. The worst region was the midwest, where sales declined 3.6% and traffic dropped 5.2%. The best region was California, with sales down 0.7% (price inflation) and traffic down 3.6%. Not surprisingly, the fine dining category outperformed the other industry segments, as it reflects the growing disparity in income and wealth between the upper 1% and the rest. The quick service segment turned in the worst performance.
The above analysis was excerpted from the Short Seller’s Journal, which is dedicated to digging truth out from the Government, Fed and financial media propaganda. Contrary to the message conveyed by the stock market’s inexorable climb higher, the average U.S. household, along with the Government at all levels (Federal to local municipal), is on the ropes financially and economically. The Short Seller’s Journal exposes this reality. Hundreds of stocks are plumbing 52-week and all-time lows. The Short Seller’s Journal helps you find these stocks before they plunge and take advantage of the most overvalued and most inefficiently-priced stock market in history. You can find out more here: Short Seller’s Journal information.
Is The Fed On The Verge Of Losing Control?
After hitting an all-time low of 8.84 three weeks ago, the VIX more than doubled at one point this past week, closing up 55% for the week. The attributed cause, those far from the primary reason, was the childish verbal skirmish between North Korea and Trump. The cat-fight bordered on the traditional playground, “my dad is stronger than your dad” duel.
From the U.S. propagandists’ perspective the show itself was a great device to deflect the public’s attention from the collapsing U.S. financial and political system, the process of which will get a boost from the upcoming political war over the Treasury debt ceiling (remember that?).
Silver Doctor’s invited me to join Eric Dubin and Elijah Johnson to discuss last week’s action in the stock and precious metals markets and why the stock market may be on the verge of a historic sell-off.
The Mining Stock Journal and the Short Seller’s Journal are designed to offer a low-cost, high-quality stock and financial markets research tool help you take advantage of the historically undervalued precious metals sector and greatest asset bubble in history. Click on either image below to find out what each has to offer:
Dave, just a moment for some feed back. I just placed an order for 1oz gold eagles thx to my profits off your Tesla and BBBY short-sell ideas, thx as always. – subscriber feedback
SNAP Stock Just SNAPPED: Down 29% From Its March IPO
SNAP just reported earnings and plunged after hours after missing everything. It burned through $288 million in cash. The more it spends, the more it loses. An operational Ponzi scheme of sorts.
The SNAP IPO was led by Morgan Stanley, Goldman Sachs, JP Morgan, Deutsche Bank, Barclays, Credit Suisse and Allen & Company. All the usual criminal cartel banks aside from Allen & Company. Allen & Company is a financial “advisor” – i.e. sleazy stock broker – driven firm based in Florida. I don’t know how Allen & Co. was put on as an underwriting manager other than it’s likely that one of SNAP’s co-founders is buddies with one of the owners at Allen & Co.
Speaking of SNAP’s two co-founders, each sold $272 million worth of stock into the IPO. It would be impossible to know if they sold knowing that anyone who bought the IPO, or has bought share since the IPO, is going to end up holding an empty bag. But I provided an in-depth analysis of SNAP to subscribers of the Short Seller’s Journal in which I concluded that SNAP would eventually go below $2.
I have to believe that the Einsteins at Morgan Stanley, Goldman et al had to know this. That being the case, I don’t know how the public issuance of SNAP shares is not fraud. The venture capital and private equity funds who invested in the early rounds were given an out by the public – a public that was lied to about SNAP’s future prospects.
As I finish this, SNAP is now below $12/share ($11.85). It’s still a great short here. If I have time to pour through the numbers, I’ll be updating the subscribers of the Short Seller’s Journal and lay out a course of action to short the stock from here. You can learn more about this newsletter here: Short Seller’s Journal information. There’s no minimum subscription period and subscribers get a 50% discount on the Mining Stock Journal.
The Bitcoin Bubble: Hidden Risks And The NSA
“These digital currencies might make fiat currencies look good. That’s how bad they are.” – Peter Schiff
Until proven otherwise, Bitcoin, and all cryptocurrencies for that matter, are faith-based “currencies,” just like the U.S. dollar or any other fiat currency. Instead of “full faith and 
credit of the U.S. Government,” cryptocurrencies require full faith in blockchain technology. The Daily Coin posted an interview with Ken Schortgen of The Daily Economist in its revealed that: “The NSA developed blockchain technology and released the information in a white paper that has been uncovered by Ken Schortgen, Jr., The Daily Economist – LINK.” The white paper can found here: How To Make A Mint: The Crytotography Of Anonymous Electronic Cash – NSA, Cryptology Division, June 18, 1996.
Built to be skeptics, we have been wondering why Governments and Central Banks tolerate Bitcoin and all of the other cryptos if indeed the cryptos are the digital equivalent of the gold standard. Cryptocurrency has a reputation for being risky and unstable which is why investors interested in crypto often end up using Kraken or Binance and other platforms so they know their money is being invested in a reliable place. On top of this, there are apps available that can be set up to automatically sell their cryptocurrency if the price drops to a certain price. Even though several applications have been built and reviewed (like this News Spy Erfahrungen und Test, for example) to try and minimize the risk of investing in Bitcoin, it still could be dangerous if the economy relies too heavily on this new digital currency.
Bitcoin has soared in popularity in recent years, and in countries like Canada for example, there are even laws in place to ensure that Bitcoin transactions are taxed appropriately. You can find out more about taxing Bitcoin in Canada using this helpful guide from taxpage.com. As it turns out, the NSA de facto has the ability to hack crypto blockchains. We are certain the NSA is not the only entity globally with that ability.
Furthermore, the cryptocurrencies are absorbing a lot of fiat currency that likely would otherwise be flowing into gold and silver. It reminds us of GLD and SLV, both of which have absorbed billions of institutional cash into two “black hole” vaults that have yet to withstand a bona fide independent audit. A more solid, reliable and definitely more straight forward digital asset and investment would be looking into parking domains, it’s far away from cryptocurrency but may as well be considering it’s an investment in digital material, if you’re not sure what domain parking is, look here at what is a parked domain for more information.
In this episode of we bravely shred the Bitcoin and cryptocurrency mystique, which are more emblematic of the global asset bubble than a suitable substitute for gold and silver’s monetary function:
Why Is The Dow Outperforming The SPX And Naz?
“The combination of central banker-applied brute force (buying everything in sight) and deitylike central banker pronouncements has dampened market volatility and frisky free-lancing, but at the same time it has encouraged risk taking (in market positioning, not it business formation). We have thought, and still think, that confidence in central banks and policymakers has been unjustified and thus could erode or collapse at any time. Since the major financial institutions which comprise the financial system are still way overleveraged and opaque (in fact with record amounts of debt and derivatives at present), such a break in confidence could happen abruptly and without warning.” – from Paul Singer’s Q2 investor letter (note: Paul Singer is the founder of Elliot Management, one of the most successful hedge fund management firms since its inception in 1977).
Singer is considered one of the most shrewd and accomplished investors in the modern era. The quote above embodies two of the concepts I’ve been discussing for quite some time in the weekly Short Seller’s Journals: Central Bank intervention will ultimately fail in spectacular fashion; the Too Big To Fail Banks (TBTFs) currently have more leverage and OTC derivatives – the latter well hidden off-balance-sheet – than just before the 2008 financial crisis/de facto collapse.
Singer has been quite vocal recently about the inevitability of an eventual market/systemic collapse. It’s not a question of “if,” but of “when.” I read an analysis last week from Graham Summers of Phoenix Capital in which he suggests that the Fed would lose control of the VIX – lose control of its ability to keep the VIX suppressed – and a large spike up in the VIX would trigger an avalanche of selling from the $10’s of billions in Risk Parity Funds. These funds buy stocks when the VIX falls and unload stocks when it rises – all based on algorithms which are automatically executed by “black box” computerized trading systems.
I have to believe that the Fed (not the FOMC figure-heads but the Phd “rocket scientist” personnel who work behind the scenes at the Fed) is well aware of this possibility and has
taken the necessary steps to ensure the readiness of a “safety net” that will buffer the selling deluge that would accompany an uncontrollable spike in the VIX.
Upon further reflection, I believe that the eventual “black swan” event will be an unanticipated derivatives explosion that occurs from an out-of-control OTC derivatives position buried deep off-balance-sheet on one of the TBTFs. This is what occurred in 2008. The Lehman bankruptcy/liquidation triggered a massive counter-party failure by AIG on OTC derivatives underwritten by Goldman Sachs. This was the event that prompted then-Treasury Secretary and ex-Goldman CEO, Henry Paulson, to scramble furiously to arrange a Fed/taxpayer bailout of AIG and Goldman. The bailout was extended to dozens of banks, domestic and foreign. But the Goldman/AIG implosion was the nexus.
Circling back to the relevancy of Paul Singer’s quote, the degree of risk embedded in TBTF bank OTC off-balance-sheet derivatives can not be properly assessed because, not only did changes to accounting regulations enable banks to hide derivatives more easily and thereby lie to the institutional investor universe, but bank officials (including CEO’s) lie about their risk exposure to the Fed and to Government regulators. Some bank CEO’s do not even know the full extent of risk hidden on their bank’s balance sheet. Jamie Dimon admitted this when the JP Morgan London derivatives “whale” catastrophe occurred (2012). Having been on a risky bond trading desk in the 1990’s, I can attest first-hand that trading desks have the ability to hide risky or bad positions from a bank’s upper management. We did this every year before our books were marked to market and squared for bonus pool assessment by the risk control and accounting people.
At this point, I thus think that stock market crash event-trigger will be the detonation of a derivatives bomb (Warren Buffet’s weapon of mass financial destruction). Likely a credit, interest rate or currency based derivatives position and related counter-party default. The Fed will not see it coming because it was covered up and never disclosed to the Fed. Is this the flight-to-quality that marks the beginning of the end for the stock market
run?
The Fed heads dating back to at least Alan Greenspan always remark that it’s impossible to know whether or not an asset bubble is occurring until after it pops. Yellen went as far as to suggest there would not be another financial market crisis in our lifetime. These assertions are so absurd that I don’t think a response is necessary. But I ran some varying duration index comparisons and discovered this (click to enlarge):
You can see that the SPX, Dow and Naz were tightly correlated in mid-July. This correlation extends further back in time. You see that the Dow began outperform the SPX/Naz starting Tuesday, July 25th, after AMZN reported an unexpectedly huge earnings miss (the plunge in the green line), the SPX and Naz entered a downtrend while the Dow continued higher.
Back in the day when investors were more likely to on focus fundamentals rather than stockprice momentum, a chart like the one above would elicit references to Dow theory, which asserts that the final stage of an out-of-control bull market culminates with a “flight-to-quality” from risky stocks into the lowest risk market sectors. Traditionally the Dow is considered less risky than the universe of stocks that comprise the SPX and Naz.
The idea behind this theory is that, as big investors sense that smaller-cap, higher-beta stocks have reached a point of overvaluation and high risk, these investors move money from the overvalued stocks into the Dow stocks, which are traditionally considered more stable and more liquid. Investors ride the Dow until the entire market rolls over. Some articles appeared last week which made note of the deterioration in technical indicators. For instance, one analyst noted that the recent string of Nasdaq new highs occurred with “negative breadth” to a degree that ha not been seen since 1999-2000. Negative breadth is when an index has more stocks declining than advancing. It’s a negative divergence that often signals that large investors are moving more cash out of the stocks than is flowing into stocks.
No one knows for sure which of the many hidden “financial bombs” will explode unexpectedly and cause a market melt-down. But like all Ponzi schemes throughout history, the U.S. Ponzi scheme will implode under a massive weight of hubris, extreme greed and widespread ignorance disguised as complacency.
The above commentary is from the latest Short Seller’s Journal. Despite the inexorable climb to new records in the Dow, SPX and Naz, dozens of stocks are falling from the sky like pheasants in hunting season. The Short Seller’s Journal can help you make money from the short side. You can learn more here: LINK
More B.S. From The BLS Leads To A Blatant Attack On Gold & Silver
With the release of the latest BLSBS at 8:30am EST, the market interventionists were set up for a spectacular effort today. The S&P was first out of the gate, to the upside of course, and the precious metals were slammed. Ironically, the impulse triggered by the headline jobs report should have effected the stock market and the precious metals similarly.
How are 100’s of thousands of working age people leaving the labor force yet, somehow, the BLS can report hundreds of thousands of new jobs that were filled? Well, there is the “Birth/Death Model”. The Birth/Death Model, much like the Federal Reserve Note, is just made up out of thin air. A number is determined by the Bureau of Labor Statistics and then entered into the BLS report. It has nothing to do with reality. But someone forgot to tell the BLS that construction spending in June was down nearly 10% year over year from last June because the BLS reports that new construction businesses added 11,000 new jobs to the economy – an economic and statistical extreme improbability.
If there were any markets that actually moved in accordance with fundamentals, natural price discovery or anything associated with reality the S&P and Dow Jones would be moving to the downside as well. Why? Because as Dave explains in the latest Shadow of Truth, if the [equities] markets were sensing the Fed was going to raise interest rates, and if the employment report were based in reality the Fed would be forced to raise interest rates, this would be negative for those indices. But, alas, everything is rigged, so it doesn’t matter. The “market saved us again…”