Tag Archives: Market Crash

If the “Market” Never Goes Down, The System Is Doomed

Posted on by
1

By Charles Hugh Smith

Source: Of Two Minds

The reliance on “good news” narratives dooms our financial system and economy to a death spiral once reality breaks through the induced euphoria.

“Markets” that never go down aren’t markets, they’re signaling mechanisms of the Powers That Be. Markets are fundamentally clearing houses of information on price, demand, sentiment, expectations and so on–factual data on supply and demand, shipping costs, cost of credit, etc.–and reflections of trader and consumer emotions and psychology.

If markets are never allowed to go down, the information clearing house has been effectively shut down. Whatever information leaks out has been edited to fit the prevailing narrative, which in this moment is “central banks will never let markets go down ever again, so jump in and ride the guaranteed Bull to easy gains.”

The past 12 years offer ample evidence for this narrative: every dip draws a near-instantaneous monetary-policy response that reverse the dip and gooses markets higher.

That permanent monetary intervention distorts markets doesn’t matter to participants. Who cares if markets have become “markets,” simulacra of real markets that are now nothing but signaling mechanisms that all is well so buy, buy, buy? If gains are essentially guaranteed, who cares that markets are not longer information clearing houses?

Indeed. There’s no reason to care until the fatal spiral downward surprises us all. Here’s an analogy of what happens when real information gets edited to fit a convenient narrative.

Unfortunately, the patient has cancer which is starting to metastasize, i.e. spread to other organs in the body. But unbeknownst to the patient, this accurate information is considered “bad news,” so the test results and other information is carefully edited to show the cancer is actually shrinking–the exact opposite of what the actual facts reflect.

The patient is naturally delighted with this false data because it appears he’s on the mend and doesn’t need any surgery or other drastic treatments.

If participants don’t have information that reflects actual conditions, they cannot help but make disastrous decisions. Falsified or heavily edited information is misleading, and so all decisions made on the assumption this information is accurate will be fatally skewed.

Symptoms of the fatal spread of the disease are masked by stimulants that not only mask the spread but give the patient a sense of euphoric power and supreme confidence.

Imagine the patient’s terrible dismay when symptoms break through the euphoria and he learns his cancer is now terminal. Increasing the tragedy is his awareness that had the authorities in charge of his care given him the real-world data instead of the carefully edited “happy story” version, treatments could have been undertaken that might have extended his life. Now those options have been lost forever.

That’s the situation in our economy and financial system. The information cleared in markets has been suppressed, distorted and edited for 12 long years of permanent and ever-increasing monetary interventions, as the “doses” of intervention required to maintain the cocaine-like euphoria and supreme confidence in central bank manipulation of “markets” so they always signal the “good news” of guaranteed gains ratchets higher on every intrusion of reality.

The reliance on “good news” narratives dooms our financial system and economy to a death spiral once reality breaks through the induced euphoria. Our last chances to clear the financial cancers eating away at our economy are slipping away forever, masked by the “market’s” cocaine-like euphoria and supreme confidence in central-bank guaranteed gains.

If the stock market is never allowed to go down, this is the equivalent of telling the cancer-riddled patient that their cancer has disappeared, even as the disease is leading inexorably to the patient’s needless demise.

A Warning From the B.I.S.: the Calm Before the Storm?

Posted on by
Reply

banker-thief

By Mike Whitney

Source: CounterPunch

The Bank for International Settlements (BIS) is worried that recent ructions in the equities markets could be a sign that another financial crisis is brewing. In a sobering report titled “Uneasy calm gives way to turbulence”  the BIS states grimly: “We may not be seeing isolated bolts from the blue but the signs of a gathering storm that has been building for a long time.”

The authors of the report are particularly concerned that the plunge in stock prices and the slowdown in global growth are taking place at the same time that investor confidence in central banks is waning. The Bank Of Japan’s announcement that it planned to introduce negative interest rates (aka–NIRP or negative interest rate policy) in late January illustrates this point. The BOJ hoped that by surprising the market, the policy would have greater impact on borrowing thus generating more growth. But, instead, the announcement set off a “second phase of turbulence” in stock and currency markets as nervous investors sold off risk assets and moved into safe haven bonds. The BOJ’s action was seen by many as act of desperation by a policymaker that is rapidly losing control of the system. According to the BIS:

“Underlying some of the turbulence of the past few months was a growing perception in financial markets that central banks might be running out of effective policy options.”

This is a recurrent theme in the BIS report, the notion that global CBs have already used their most powerful weapons and are currently trying to muddle-by with untested, experimental policies like negative rates that slash bank profitability while having little impact on lending.

While the BIS report provides a good rundown of recent events in the financial markets, it fails to blame central banks for any of the problems for which they alone are responsible. The sluggish performance of the global economy, the massive debt overhang, and the erratic behavior of the stock market are all directly attributable to the cheap money policies coordinated and implemented by central banks following the Great Recession in 2008.  It’s hard to believe that the BIS’s failure to insert this fact into its narrative was purely accidental.

But the real problem with the BIS report is not that it refuses to assign blame for the current condition of the markets and the economy,  but that it deliberately misleads its readers about the facts. While it’s true that China is facing slower growth, oil prices are plunging, emerging markets have been battered by capital flight, and yields on junk bonds are relentlessly rising, it’s also true that central bank policy is not primarily designed to address these problems, but to ensure the continued profitability of its main constituents,  the big banks and mega-corporations. Keep in mind, the global economy has been sputtering for the last 6 years, but the BIS has only expressed alarm just recently.  Why? What’s changed?

What’s changed is profits are down, and when profits are down,  Wall Street and its corporate allies lean on the central banks to work the levers to improve conditions. Here’s more on the so called “earnings recession” from an article in the Wall Street Journal titled “S&P 500 Earnings: Far Worse Than Advertised”:

“There’s a big difference between companies’ advertised performance in 2015 and how they actually did.

How big? ….S&P earnings per share fell by 12.7%, according to S&P Dow Jones Indices. That is the sharpest decline since the financial crisis year of 2008. Plus, the reported earnings were 25% lower than the pro forma figures—the widest difference since 2008 when companies took a record amount of charges.

The implication: Even after a brutal start to 2016, stocks may still be more expensive than they seem. Even worse, investors may be paying for earnings and growth that aren’t anywhere near what they think. The result could be that share prices have even further to fall before they entice true value investors.” ( “S&P 500 Earnings: Far Worse Than Advertised“, Wall Street Journal)

Profits are down and stocks are in trouble. Is it any wonder why the BIS is running around with its hair on fire?

Also, corporate earnings have dropped for two straight quarters which is a sign that the economy is headed for a slump. Take a look at this clip from CNBC:

“Recessions have followed consecutive quarters of earnings declines 81 percent of the time, according to an analysis from JPMorgan Chase strategists, who said they combed through 115 years of records for their findings.”(CNBC)

“81 percent” chance of a recession?

Yep.

This is what the BIS is worried about.  They could are less about China or the instability they’ve created with their zero rates and cheap money policies. Those things simply don’t factor into their decision-making. It’s all just fluff for the sheeple. Here’s more from Jim Quinn at Burning Platform:

“The increasing desperation of corporate CEOs is clear, as accounting gimmicks and attempts to manipulate earnings in 2015 has resulted in the 2nd largest discrepancy between reported results and GAAP results in history, only surpassed in 2008…..Based on fake reported earnings per share, the profits of the S&P 500 mega-corporations were essentially flat between 2014 and 2015…..earnings per share plunged by 12.7%, the largest decline since the memorable year of 2008….

With approximately $270 billion of “one time” add-backs to income used to deceive the public, the true valuation of the median S&P 500 stock is now the highest in history – higher than 1929, 2000, and 2007. Wall Street’s latest con game, with the active participation of corporate CEO co-conspirators, is a last ditch effort to fend off the inevitable stock market crash….All economic indicators are flashing red for recession. Stocks are poised for a 40% decline faster than you can say Wall Street criminal banks.” (“The Great Corporate Earnings Fraud“, Burning Platform)

Get it? When the profitability of the world’s biggest corporations are at stake, the central banks will move heaven and earth to lend a hand. This was the basic subtext of the discussions at the recent G-20 summit in Shanghai, China. The finance ministers and central bankers wracked their brains for two days to see if they could settle on new strategies for boosting earnings. In fact, the austerity-minded IMF even called on the G-20 to support a coordinated plan for fiscal stimulus to  boost activity and decrease the risks to the equities markets. Unfortunately, finance ministers balked because fiscal stimulus puts upward pressure on wages and shifts more wealth to working stiffs. That’s why the idea was shelved, because the oligarchs can’t stand the idea that workers are getting a leg-up. What they want is a workforce that scrapes by on minimum wage and lives in constant fear of losing their job.  The class war continues to be a top priority among the nations voracious CEOs and corporate bigwigs.

The “failed” G-20 summit was clearly a turning point for the markets. Now that the central banks are out of ammo, the only hope to keep stock prices artificially high rested on Keynesian fiscal stimulus injected directly into the real economy. That hope was extinguished at the meetings. The prospect that equities can continue to climb higher in the face of shrinking profits, tighter credit, slower growth and bigger corporate debtloads is unrealistic to say the least. Just check out this excerpt from a recent article at Bloomberg:

“Companies still have a little time before they must pay down the bulk of $9.5 trillion of debt maturing in the next five years….But it’s not getting any easier for these corporations to borrow, at least not in the U.S. In fact, many of these obligations are becoming harder and more expensive to repay at a time when companies face a historic pile of bonds and loans coming due.

It’s not terribly surprising that companies have a bigger debt load to pay down. They borrowed trillions of dollars on the heels of unprecedented stimulus efforts started by the Federal Reserve at the end of 2008 during the worst financial crisis since the Depression. They kept piling on the leverage as central banks around the world doubled down on low-rate policies and kept purchasing assets to encourage investors to buy riskier securities….”(“Scaling the $9.5 trillion debt wall, Bloomberg)

DB-US-Corp-leverage-close-to-peak

What the author is saying is that central bank policy seduced corporations into borrowing tons of money that they frittered-away on stock buybacks and dividends, neither of which create the revenue streams necessary to repay their debts. So rather than build their companies for the future, (Business investment is at record lows) corporations have been behaving the same way the Wall Street banks acted before the Crash of ’08. They’ve been borrowing trillions from Mom and Pop investors via the bond market, goosing their share prices through stock buybacks, increasing executive compensation, and dumping the money in offshore accounts. Now the bill is coming due, and they don’t have the money to repay the debt or the earnings-potential to avoid default. Something’s gotta give.

unnamed

Corporate red ink is one of many reasons why the BIS thinks “We may not be seeing isolated bolts from the blue but the signs of a gathering storm that has been building for a long time.” Like the gigantic asset-price bubble in stocks, it’s a sign that the economy and the markets are headed for a long and painful period of adjustment.

 

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

 

Wall Street Panic

Posted on by
1

panicked trader

By Mike Whitney

Source: Counterpunch

“Not only is the equity market at the second most overvalued point in U.S. history, it is also more leveraged against probable long-term corporate cash flows than at any previous point in history.”

— John P. Hussman, Ph.D. “Debt-Financed Buybacks Have Quietly Placed Investors On Margin“, Hussman Funds

“This year feels like the last days of Pompeii: everyone is wondering when the volcano will erupt.”

— Senior banker commenting to the Financial Times

Last Friday’s stock market bloodbath was the worst one-day crash since 2008. The Dow Jones dropped 531 points, while the S&P 500 fell 64, and the tech-heavy Nasdaq slid 171. The Dow lost more than 1,000 points on the week dipping back into the red for the year. At the same time, commodities continued to get hammered with oil prices briefly dropping below the critical $40 per barrel mark. More tellingly, the market’s so called “fear gauge” (VIX) skyrocketed to a 2015 high indicating more volatility to come.  The VIX has remained at unusually low levels for a number of years as investors have grown more complacent figuring the Fed will intervene whenever stocks fall too far. But last week’s massacre cast doubts on  the Central Bank’s intentions. Will the Fed ride to the rescue again or not? To the vast majority of institutional investors, who now base their buying decisions on Fed policy rather than market fundamentals, that is the crucial question.

Ostensibly, last week’s selloff  was triggered by China’s unexpected decision to devalue its currency, the juan.   The announcement confirmed that the world’s second biggest economy is rapidly cooling off increasing the likelihood of a global slowdown. Over the last decade, China has accounted  “for a third of the expansion in the global economy,… almost double the contribution of the US and more than triple the impacts of Europe and Japan.” Fears of a slowdown were greatly intensified on Friday when a survey showed that manufacturing in China shrank at the fastest pace since the recession in 2009. That’s all it took to put the global markets into a nosedive. According to the World Socialist Web Site:

“The deceleration of growth in China, reflected in figures on production, exports and imports, business investment and producer prices, is fueling a near-collapse in so-called “emerging market” economies that depend on the Chinese market for exports of raw materials. The past week saw a further plunge in stock prices and currency rates in Russia, Turkey, Brazil, South Africa and other countries. These economies are being hit by a massive outflow of capital, placing in doubt their ability to meet debt obligations.”

(“Panic sell-off on world financial markets”, World Socialist Web Site)

While a correction was not entirely unexpected following a 6-year long bull market, the sudden drop in equities does have analysts rethinking the effectiveness of the Fed’s monetary policies which have had little impact on personal consumption, retail spending, wages, productivity, household income, or economic growth all of which remain weaker than they have been following any recession in the post war era.  For all intents and purposes, the plan to inflate asset prices by dropping rates to zero and injecting trillions in liquidity into the financial system has been an abject failure.   GDP continues to hover at an abysmal 1.5% while  signs of a strong, self sustaining recovery are nowhere to be seen. At the same time, government and corporate debt continue to balloon at a near-record pace draining capital  away from productive investments that could lay the groundwork for higher employment and stronger growth.

What’s so odd about last week’s market action is that the bad news on China put shares into a tailspin instead of sending them into the stratosphere which has been the pattern for the last four years. In fact, the reason volatility has stayed so low and investors have grown so complacent is because every announcement of bad economic data has been followed by cheery promises from the Fed to keep the easy-money sluicegates open until the storm passes.  That hasn’t been the case this time, in fact, Fed chair Janet Yellen hasn’t even scrapped the idea of jacking up rates some time in September which is almost unthinkable given last week’s market ructions.

Why? What’s changed?   Surely, Yellen isn’t going to sit back and let six years of stock market gains be wiped out in a few sessions, is she?  Or is there something we’re missing here that is beyond the Fed’s powers to change? Is that it?

My own feeling is that China is not the real issue. Yes, it is the catalyst for the selloff, but the real problem is in the credit markets where the spreads on high yield bonds continue to widen relative to US Treasuries.

What does that mean?

It means the price of capital is going up, and when the price of capital goes up, it costs more for businesses to borrow. And when it costs more for businesses to borrow, they reduce their borrowing, which decreases the demand for credit. And when the demand for credit decreases in a credit-based system, then there’s a corresponding slowdown in business investment which impacts stock prices and growth. And that is particularly significant now, since the bulk of corporate investment is being diverted into stock buybacks. Check out this excerpt from a post at Wall Street on Parade:

“According to data from Bloomberg, corporations have issued a stunning $9.3 trillion in bonds since the beginning of 2009. The major beneficiary of this debt binge has been the stock market rather than investment in modernizing the plant, equipment or new hires to make the company more competitive for the future. Bond proceeds frequently ended up buying back shares or boosting dividends, thus elevating the stock market on the back of heavier debt levels on corporate balance sheets.

Now, with commodity prices resuming their plunge and currency wars spreading, concerns of financial contagion are back in the markets and spreads on corporate bonds versus safer, more liquid instruments like U.S. Treasury notes, are widening in a fashion similar to the warning signs heading into the 2008 crash. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam.” (“Keep Your Eye on Junk Bonds: They’re Starting to Behave Like ‘08 “, Wall Street on Parade)

As you can see, the nation’s corporations don’t borrow at zero rates from the Fed. They borrow at market rates in the bond market, and those rates are gradually inching up. And while that hasn’t slowed the stock buyback craze so far,  the clock is quickly running out. We are fast approaching the point where debt servicing, shrinking revenues, too much leverage, and higher rates will no longer make stock repurchases a sensible option, at which point stocks are going to fall off a cliff. Here’s more from Andrew Ross Sorkin at the New York Times:

“Since 2004, companies have spent nearly $7 trillion purchasing their own stock — often at inflated prices, according to data from Mustafa Erdem Sakinc of the Academic-Industry Research Network. That amounts to about 54 percent of all profits from Standard & Poor’s 500-stock index companies between 2003 and 2012, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell.”

You can see the game that’s being played here. Mom and Pop investors are getting fleeced again. They’ve been lending trillions of dollars to corporate CEOs (via bond purchases) who’ve taken the money, split it up among themselves and their wealthy shareholder buddies, (through buybacks and dividends neither of which add a thing to a company’s productive capacity) and made out like bandits.  This, in essence, is how stock buybacks work. Ordinary working people stick their life savings into bonds (because they were told “Stocks are risky, but bonds are safe”.) that offer a slightly better return than ultra-safe, low-yield government debt (US Treasuries) and, in doing so, provide lavish rewards for scheming executives who use it to shower themselves and their cutthroat shareholders with windfall profits that will never be repaid. When analysts talk about “liquidity issues” in the bond market, what they really mean is that they’ve already divvied up the money between themselves and you’ll be lucky if you ever see a dime of it back. Sound familiar?

Of course, it does. The same thing happened before the Crash of ’08. Now we are reaching the end of the credit cycle which could produce the same result. According to one analyst:

“There’s been worrying deterioration in the overall global demand picture with the continuation of EM (Emerging Markets) FX (Currency Markets) onslaught, deterioration in credit metrics with rising leverage in the US as well as outflows in credit funds in conjunction with significant widening in credit spreads…..The goldilocks period of “low rates volatility-stable carry trade environment of the last couple of years is likely coming to an end.”

(“Credit: Magical Thinking“, Macronomics)

In other words, the good times are behind us while hard times are just ahead. And while the end of the credit cycle doesn’t always signal a stock market crash, the massive buildup of leverage in unproductive financial assets like buybacks suggest that equities are in line for a serious whooping. Here’s more from Bloomberg:

“Credit traders have an uncanny knack for sounding alarm bells well before stocks realize there’s a problem. This time may be no different. Investors yanked $1.1 billion from U.S. investment-grade bond funds last week, the biggest withdrawal since 2013, according to data compiled by Wells Fargo & Co…..

“Credit is the warning signal that everyone’s been looking for,” said Jim Bianco, founder of Bianco Research LLC in Chicago. “That is something that’s been a very good leading indicator for the past 15 years.”

Bond buyers are less interested in piling into notes that yield a historically low 3.4 percent at a time when companies are increasingly using the proceeds for acquisitions, share buybacks and dividend payments. Also, the Federal Reserve is moving to raise interest rates for the first time since 2006, possibly as soon as next month, ending an era of unprecedented easy-money policies that have suppressed borrowing costs….

“Unlike the credit market, the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis,” the analysts wrote…..

So if you’re very excited about buying stocks right now, just beware of the credit traders out there who are sending some pretty big warning signs.”  (“U.S. Credit Traders Send Warning Signal to Rest of World Markets”, Bloomberg)

It’s worth noting that the above article was written on August 14, a week before the stock market blew up. But credit was “flashing red” long before stock traders ever took notice.

But that’s beside the point. Whether the troubles started with China or the credit markets, probably doesn’t matter. What matters is that the system about to be put-to-the-test once again because the appropriate safeguards haven’t been put in place, because bubbles are unwinding, and because the policymakers who were supposed to monitor and regulate the system decided that they were more interested in shifting  wealth to their voracious colleagues on Wall Street than building a strong foundation for a healthy economy. That’s why a simple correction could turn into something much worse.

NOTE: As of posting time, Sunday night, the Nikkei Index is down 710, Shanghai down 296, HSI down 1,031. US equity futures are all deep in the red

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

It’s the Law

Posted on by
Reply

privacyNOT

Interesting commentary by James E. Miller, editor-in-chief of the Ludwig von Mises Institute of Canada. It connects recent current events in a logical narrative and offers a plausable explanation for the apparant wind-down of the war on (some) drugs.

excerpt:

With today’s nation-state, the monopoly on law enforcement has eroded the traditional notion of justice. Certainly various levels of government still prosecute those who commit malum in se wrongs. But the granting of sole discretion over societal function to the state has brought about a litany of prohibitions on otherwise harmless actions. The most widespread and destructive example of this gross perversion of law has been the American drug war. In major metropolitan areas, large numbers of users of substances designated harmful to public tranquility are fined, detained, and imprisoned. The very act of ingesting mentally-altering narcotics constitutes no harm absent the self-imposed kind. The outlawing of drug use superimposes control of the individual, and makes him beholden to the political class. As Will Grigg posits, the malum prohibitum on narcotics is a subset of human slavery as the premise denies complete self-ownership.

In an act of supposed moral revelation, U.S. Attorney General Eric Holder recently announced the federal government would begin relaxing indictments of low-level, nonviolent possessors of drugs. In a speech before the sleazebag of litigating opportunists known as the American Bar Association, the nation’s top mob enforcer declared “too many Americans go to too many prisons for far too long and for no good law enforcement reason.” The mandatory minimum sentencing laws passed by Congress will simply go ignored.

The gullible reader might assume the odious basis for the war on drugs may finally be visible to the heavily armed buffoons who raid private homes and the sloth-resembling chief law enforcer, but that would be a naive supposition. The wind down has little to do with morality and everything to do with cost. Imprisoning thousands of junkies takes a great deal of resources. With a corpulent debt financing military adventurism and welfare pocket-padding, Holder and the rest of the federal government racket are feeling the squeeze.

The very same penalty relaxation occurred at the height of the Great Depression. While Franklin Roosevelt busied himself with turning American business into a quasi-fascist state, he was intelligent enough to recognize the civil demolition wrought by alcohol prohibition. As the black market for booze paved the way for organized crime during the roaring 1920s, the stock market crash left state and local governments hamstrung by a lack of tax revenue. If action was not taken, thousands of wealth-sucking bureaucrats would be thrown to the streets. So the Democratic Party endorsed making America wet again, while nominating the craze-minded Roosevelt in 1932. After the Twenty-first Amendment to the Constitution was ratified, excise taxes were levied on wine and spirits. As economists Mark Thornton and Chetley Weise document, the resulting tax receipts staved off what would have been shriveling bankruptcy.

Rarely does the state cede authority when it comes to corralling the citizenry. The only barrier that stands between government domineering is always the cost of its behemoth, sluggish operation. The relaxation of penalties for drug ingestion is demonstrative of this rule. At the same time, it is a mockery of the concept of reasoned law. If using narcotics were truly an affront to the natural order, there would be no leniency. The immoral act would be opposed root and branch, similar to rape or murder. Current legal prohibitions on various forms of opiates are not grounded in justice but are merely a form of societal control. In the classic bootleggers and baptists sense, these restrictions enrich those who profit from sale, distribution, and incarceration while satisfying the warped psyche of taskmaster puritans.
To read the complete essay, visit the Ludwig von Mises link or the repost at Zerohedge.com.