by
James Quinn
The stock market has reached new all-time highs this week, just two
weeks after plunging over the BREXIT result. The bulls are exuberant as
they dance on the graves of short-sellers and the purveyors of doom.
This is surely proof all is well in the country and the complaints of
the lowly peasants are just background noise. Record highs for the stock
market must mean the economy is strong, consumers are confident, and
the future is bright.
All the troubles documented by myself and all the other so called
“doomers” must have dissipated under the avalanche of central banker
liquidity. Printing fiat and layering more unpayable debt on top of old
unpayable debt really was the solution to all our problems. I’m so
relieved. I think I’ll put my life savings into Amazon and Twitter stock
now that the all clear signal has been given.
Technical analysts are giving
the buy signal now that we’ve broken out of a 19 month consolidation
period. Since the entire stock market is driven by HFT supercomputers
and Ivy League MBA geniuses who all use the same algorithm in their
proprietary trading software, the lemming like behavior will likely lead
to even higher prices. Lance Roberts, someone whose opinion I respect,
reluctantly agrees we could see a market melt up:
“Wave 5, “market melt-ups” are the last bastion of hope for the
“always bullish.” Unlike, the previous advances that were backed by
improving earnings and economic growth, the final wave is pure emotion
and speculation based on “hopes” of a quick fundamental recovery to
justify market overvaluations. Such environments have always had rather
disastrous endings and this time, will likely be no different.”
As Benjamin Graham, a wise man who would be scorned and ridiculed by
today’s Ivy League educated Wall Street HFT scum, sagely noted many
decades ago:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Short-term traders can make immediate profits using momentum
techniques, following the herd, and picking up pennies in front of a
steamroller. Remember your brother-in-law who was getting rich day
trading stocks in 1999? Remember your cousin who was getting rich
flipping houses in 2005? Remember The Big Short, where the Too Big To
Trust Wall Street banks were getting rich creating fraudulent mortgage
derivatives and selling them to suckers? There are always profits to be
made for awhile. Then the bottom drops out, because fundamentals, cash
flow, valuations, and reality matter in the long run.
Lance Roberts points out some inconvenient facts, and I’ll point out a few more.
“It is worth reminding you, that while the markets are moving
higher and pushing new highs currently, it is doing so against a
backdrop of weak fundamentals, high valuations, and deteriorating
earnings.”
History might not repeat itself, but it certainly rhymes. Late in
2007, as the housing collapse was well under way, the stock market hit
all-time highs of 1,575 in October. The bulls were exuberant, even as
the greatest housing crash in history was evident to everyone except
Bernanke and Paulson. Corporate earnings were falling. Valuations were
at levels only seen in 1929 and 2000. The so called “doomers” like
Hussman, Shiller and Schiff were warning of an impending crash. Very few
heeded their warning. In retrospect, the economy was already in
recession by December 2007 despite economic reports saying otherwise.
GDP and other falsified economic indicators were revised negative years
after initially being reported as positive. Familiar?
The stock market dropped 20% from the October high by March of 2008,
as Bear Stearns collapsed and struck fear into the hearts of the Wall
Street sociopaths. But the Fed and their Wall Street puppeteers needed
to keep the game going a little longer so they could short their own
fraudulent derivative creations and screw over their clients once more.
JP Morgan, which was just as insolvent as Bear Stearns, bought them and
restored confidence in the ponzi scheme. The market proceeded to soar by
12% over the next two months. All was well!!! Until the bottom fell out
in September. By March 2009, the market had fallen 58% from its October
2007 high.
The market topped out in May of 2015 at 2,126. Since then, corporate
profits have been in freefall, consumer spending has been in the
toilet, GDP has been barely positive, and virtually every economic
indicator has been falling. Valuations are now higher than at the 1929,
2000, and 2007 peaks. The median existing home price of $239,700 is 55%
higher than the median price in 2012. At the peak of the housing bubble
in 2005/2006 the median price to median wage ratio reached 9.5. In 2012
it had fallen to a reasonable level of 5.6. It currently stands at a
bubble like level of 8.3.
The market meandered about for the next seven months going nowhere.
It then suddenly dropped in January and February, falling 13% from its
May 2015 high. This was unacceptable to central bankers around the globe
who believe stock market gains are the only factor reflecting the
health of our economic system. Maybe it’s because they are only beholden
to bankers, oligarchs, corporate chieftains, corrupt politicians, and
unaccountable bureaucrats. Central bankers from around the world have
come to the rescue by buying stocks and providing unlimited liquidity to
banks and corporations so they can buyback their own stocks. The
result, is new record highs.
It has the feel of JP Morgan “rescuing” Bear Stearns and saving the
world in early 2008. Smoke, mirrors, negative interest rates, debt
creation, money printing and the artificial elevation of stock
valuations by central bankers and their politician co-conspirators is
not creating wealth. It is creating epic bubbles in stock markets, bond
markets, home real estate markets, commercial real estate markets, and
automobile markets. John Hussman chimes in with a reality based
assessment of their reckless actions:
“Instead, central bankers seem to view elevated security
valuations as “wealth.” The longer this fallacy persists, the worse the
subsequent fallout will be. I have little doubt that future generations
will look at the reckless arrogance of today’s central bankers no
differently than we view speculators in the South Sea Bubble and the
Dutch Tulip-mania. Unfortunately, there is no mechanism by which
historically-informed pleas of “no, stop, don’t!” will penetrate their
dogmatic conceit. Nor can we change the psychology of investors.”
Today is just a continuation of the bubble blowing policies of the
Fed and their central banker cohorts at the ECB and BOJ. These policies
are deranged, illogical, and always result in the destruction of real
wealth. Promoting financial engineering, while destroying the incentive
to save and invest in the real economy has gutted true investment in our
country. This is why good paying jobs have disappeared and we are left
with the gutted remains of decades of financialization and
globalization. As Hussman points out, our real economy has died a long
slow death, drowning in debt.
“One of the hallmarks of the bubble period since the late-1990’s
is that the growth rate of real U.S. gross domestic investment has
slowed to less than one-quarter of the rate it enjoyed in the preceding
half-century. Yet because central banks have stomped on the accelerator
at every turn, the quantity of outstanding debt has never been higher,
and the combined value of corporate equities and debt (“enterprise
value”) is now at the highest multiple of corporate gross value-added
since the 2000 bubble extreme.”
Artificially boosting stock prices through convoluted liquidity
schemes, devious machinations, backroom central banker deals, sending
Bernanke to Japan, and helicopter money dropped on Wall Street only, has
just exacerbated the wealth inequality permeating the world. The anger
over this blatant pillaging by the .1% who rule the world is reflected
in the chaos across Europe and the brewing civil war here in the U.S.
As Hussman notes, no wealth is being created because no productive
investments are being made. Mega-corporations buying back hundreds of
billions of their own stock to enrich their executives is not a
productive wealth creating venture. We are in the midst of a sickening
crisis created by appalling incentives, driven by sociopathic corporate
and political leadership captured by their greedy desire for power
wealth and control. The sickness is pervasive and terminal.
“In a healthy economy, savings are channeled to productive
investment, and the new securities that are issued in the process are
evidence of that transfer. In an unhealthy economy, and particularly one
with very large wealth disparities, a large volume of securities may be
created, but they are often simply a way of supporting debt-financed
consumption. As a result, no productive investment occurs, and no
national “wealth” is created. All that occurs is a wealth transfer from
savers to dis-savers. Over the past 16 years, U.S. real gross domestic
investment has crawled at a growth rate of just 1.0% annually, compared
with a growth rate of 4.6% annually over the preceding half-century.
There’s your trouble.”
A chart that caught my eye this week, along with dozens of other data
points from the real world, reveals the phoniness of the stock market
rally and the underlying weakness of this tottering edifice of debt. We
are supposedly in the seventh year of an economic recovery. Corporate
profits have been at record highs. Interest rates are at record low
levels.
The Fed and the FASB have colluded to allow banks and commercial real
estate companies to fake their financial statements and pretend their
assets are worth more than they are and to pretend rental income from
non-existent tenants in their malls and office buildings can cover their
debt payments. And somehow delinquencies and charge-offs are soaring by
levels seen during the height of the 2008/2009 financial crisis. It
seems all those vacant mall storefronts and all those FOR LEASE signs in
front of every other commercial building across America are finally
coming home to roost.
This faux economic recovery has been driven by debt, with much of it
subprime. The shale oil scam was built on high yield debt and false
promises. The Wall Street banks reported fake profits for years by
relieving their loan loss reserves created in 2009. Now the table has
turned.
The three largest banks in the US—Bank of America, JPMorgan Chase,
and Wells Fargo—disclosed that the number of delinquent corporate loans
increased by 67% in Q1.
- JPMorgan’s delinquent corporate loans increased by 50% to $2.21 billion
- Bank of America’s delinquent loans increased 32% to $1.6 billion
- Wells Fargo’s delinquent loans increased by 64%, to $3.97 billion
The banking industry added $1.43 billion to the total money it has
set aside to cover bad loans in Q4 2015, according to the FDIC. Making
bad loans to deadbeats can make profits look spectacular in the
short-term, but interest and principal can’t be paid with a cool
business plan and a narrative. Cash flow is a necessary ingredient to
servicing debt in the real world. The fun has just begun. Fitch Ratings
just reported that the default rates for junk bonds rose to 3.9% this
month, up from 2.1% in April 2015.
The “tremendous” auto recovery which drove sales (I use the term
loosely since 31% of sales are actually leases and the rest are financed
over an average of 67 months) from 10 million in 2010 to 18 million in
2015 has been completely driven by easy money provided to Wall Street.
It’s amazing how many vehicles you can sell by doling out $350 billion
in 0% loans and allowing “buyers” to finance 100% of the purchase.
When they started to run out of legitimate suckers who liked being
perpetual debt slaves, they used the tried and true method that worked
so well with housing in the mid-2000s – loaning money to losers who
weren’t capable of repaying them. This Wall Street mindset is driven by
the free money provided them by the Fed. You borrow from the Fed at 0%,
lend it to deadbeats at 12% for 72 months so they can “buy” that $40,000
Cadillac Escalade and boost the economy. Over 20% of all auto loans are
now being made to subprime (aka deadbeat) borrowers. Now the shit is
hitting the fan belt.
Serious Delinquency Rates for Auto Loans by Term
|
Risk Tier |
| Loan Term |
Subprime |
Prime |
Super prime |
| 49-60 months |
22.4% |
3.4% |
0.4% |
| 61-72 months |
22.8% |
5.0% |
0.9% |
| 73-84 months |
30.7% |
7.1% |
1.8% |
Financing 100% of overpriced automobiles, extending terms, pretending
you will get repaid, and recording it as a sale is the corporate/banker
method of creating wealth. Auto loan terms between 73 and 84 months
more than doubled between 2010 and 2015. One quarter of all loans
originated in Q3 2015 were between 73 and 84 month terms, compared to
just 10% in Q3 2010. The average new-car loan rose to $29,551 during the
fourth quarter of 2015, up more than 4% over the past year, according
to Experian, one of the three major credit-reporting agencies.
The chickens are coming home to roost for subprime auto lenders and
investors, with Fitch Ratings warning delinquencies in subprime car
loans had reached a high not seen since October 1996. The number of
borrowers who were more than 60 days late on their car bills in February
rose 11.6% from the same period a year ago, bringing the delinquency
rate to a total 5.16%. Subprime lending always ends in tears. Wall
Street is probably betting against these packages of subprime slime
while simultaneously selling them to their muppet clients. History
rhymes.
These subprime auto loans look positively AAA compared to the
hundreds of billions in subprime student loans distributed like candy by
Obama and his government minions to artificially lower the unemployment
rate and again boost the economy. Student loan delinquencies are
already skyrocketing before the $400 billion doled out in the last four
years has come due. The official delinquency rate reported by the
government of 11% is another falsehood. The delinquency rate is really
17% when loans in deferment and forbearance — for which payments are
postponed due to any reason — are included. The taxpayer will eventually
foot the bill for at least $400 billion in losses.
![Student Loan Delinquencies are Sky High [Chart]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_tqIpjEVkgsaZWBQ6ViEBFVt2PLYzowTMfVg1pVYaMi79BRR_gDgJjXAJ0gLhfxo5o9-vKGyTyR1Kd9wZVuwMVLxUVXfJiFwJYtbyDrX5uoUTYS1yYubDZY4w87l1BDwGmagGOI3KFlZhQNOIhP_f-3GAcJu9ei-S87uyMP_eRURcWZYMD_NKLOBpg-nTWpJ2bi=s0-d)
We’ve been borrowing from the future for the last 16 years because
real economic growth was killed by Greenspan, Bernanke, Yellen and the
rest of the Fed yahoos. The stock market has returned 60% since the 2007
peak, three times the growth in corporate profits and GDP. The all-time
highs in the stock market have been driven by the $3.4 trillion
increase in the Fed’s balance sheet, hundreds of billions in stock
buybacks, PE expansion, and ZIRP. The valuation of the median stock is
now the highest in history.
For all I know the stock market could continue to rip higher. Madness
knows no bounds. The general public is not involved in this madness.
They were wiped out twice in the space of eight years. Wall Street and
their media mouthpieces have been unable to lure the average Joe back
into the casino because the average Joe has been impoverished by Fed
policies designed to benefit the .1%. The Wall Street lemming herd has
gone mad, but I’m not sure they will recover their senses before they
burn the entire demented financial system to the ground. But enjoy the
all-time highs while they last.
“Men, it has been well said, think in herds; it will be seen that
they go mad in herds, while they only recover their senses slowly, one
by one.” ? Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds
