The Return To Normalcy - Even The Supply Of Greater Fools Is Limited

Tyler Durden's picture

Submitted by Joe Calhoun of Alhambra Investment Partners,

I think sometimes, with the stock market doing its best imitation of the Energizer bunny, we forget just how extraordinary are the times in which we live. We’ve been lulled to sleep by the relentless and mesmerizing march higher of stocks and all manner of risky assets. Maybe it’s just that having lived through two booms and busts already that people have come to believe that another boom in risky behavior is not just the new normal but the old one as well.  And having survived the last two busts, none the wiser apparently, everyone figures we’ll survive the next one too. Maybe. Or maybe people just don’t realize how truly weird things are right now.

I’m guilty of this type of thinking too but it seems like every week I get some kind of reminder that snaps me back to reality. Last week it was an article on MarketWatch about a convicted murderer passing out investment advice while serving a 54 years to life sentence. The article detailed some of his stock picks which included a healthy dose of social media stocks and other tidbits such as his affinity for penny stocks. When the stock market mania has reached all the way to San Quentin, one can’t help but think maybe things have gotten a bit frothy. Stocks are not, as I’ve said more than a few times recently, cheap by any measure but as the market has demonstrated repeatedly in this bull phase, that is no reason prices can’t continue to go higher. The supply of greater fools however is not unlimited and at some point reality and rationality will return, likely with a vengeance.

It isn’t just stock markets that are acting extraordinarily. If anything, debt investors have gone even more bonkers than stock buyers. Leveraged loans, junk bonds and the sovereign debt of governments just about everywhere are trading at prices that incorporate no margin of safety. Banks are lending to companies to buy back stock, an action that increases the risk to existing bondholders (a lot of the bank debt is secured) who seem oblivious to the leverage being taken on to keep the junior part of the capital structure happy. Private equity deals are being struck at unprecedented prices with bonds issued at unprecedented low yields. Merger Monday is back with companies announcing takeover deals struck over the weekend, trying to buy the growth they can’t generate on their own. Having wrung all the excess out of their own operations the only path left for higher earnings and bonuses is to combine with another company, eliminate the duplications and reduce taxes through international tax arbitrage. That is not good news no matter how much it excites existing shareholders and the talking heads of CNBC.

The extraordinary extends to the economy and economic policy as well. The Fed has kept interest rates at zero for 6 years now and their expectations setting forward guidance says 7 is in the bag. For all those who worried that the US might turn into Japan, well worry no more, that ship has sailed. Over a half decade of zero interest rates says we already have become Japan, with the same demographic, productivity and structural problems so well documented. High taxes, a shrinking workforce, offshored production, protection of large incumbent firms, political gridlock, a falling savings rate,  a growing xenophobia and an affinity for sushi all point to America as the economic kissing cousin of the land of the setting sun. Turns out the Vapors were not just one hit wonders but keen eyed economic forecasters as well.

The US economy isn’t acting normally, now in the 6th year of an anemic expansion the likes of which we haven’t seen since, well, never. The temptation is to compare this period with the Great Depression but even the recovery from the early part of that self inflicted economic wound was better in some respects. The unemployment rate has fallen but the path of improvement has been a road less traveled in economic history. No matter the reason, full time employment has become an unreachable dream for too many Americans. Multiple part time jobs and underemployment have made debt a way of life, starting with the ubiquitous student loan and throughout life as a way to achieve the perception, the illusion, of success, if not the real thing.

Companies aren’t investing for the future, preferring to spend on the present through stock buybacks and dividends that in many cases exceed their current cash flow, the difference being plugged with debt. Balance sheets are seen as sound by investors who see cash on the asset side of the ledger, forgetting apparently that there is a liability side as well. Where we have seen investment, the returns have left much to be desired. The capital sunk into extracting high cost oil and gas is staggering, approaching $1 trillion per year and $5.5 trillion globally since 2008. What we got for that staggering sum is not a single field that can produce profitably at less than $80/barrel and $4.5 per foot of gas. In some cases, the search for oil has gone to such extremes the breakeven prices are well over $100/barrel. You don’t have to be an Austrian to see that as malinvestment.

I think this acceptance of the extraordinary as usual is just the normal human desire, after the shocks of the last 15 years – economic, social and geopolitical – for, as Warren Harding put it, a return to normalcy. We want to believe that the Fed’s policies will eventually work their magic and bring back the good old days. Recently, the metric upon which everyone has seized as evidence that normal is right around the corner is the renewed uptrend in borrowing, particularly via credit cards. The optimistic explanation is that it is confidence in their future that allows individuals to go out and spend money they don’t have to fulfill desires they didn’t know they had. There are alternate explanations of course – people borrow on credit cards because they don’t have the income to maintain their lifestyles –  but we latch onto the one that allows us to continue enjoying the mass delusion of debt fueled prosperity.

A return to normalcy would mean a rejection of the idea that debt is the sine qua non of economic growth. A return to normalcy would mean a recognition that the Fed’s monetary gnomes are the ones who got us in this mess and are therefore wholly unsuited in their role as the economy’s knight in shining armor. A return to normalcy would mean rewarding and recognizing savers as the unsung heroes of economic growth. A return to normalcy would mean a shared prosperity for all rather than just the privileged few with access to the Fed or the ear of their congressional representative.

Achieving the goals of the Fed’s extraordinary policies – full employment and low inflation – would require an extraordinary set of conditions to develop. The economy would have to achieve a rate of growth that has escaped it for years while the Fed would have to extricate itself from a policy regime they barely – and that is generous – understand. I see no reason other than wishful thinking to believe those conditions can be met.

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666's picture

From what I've seen, the supply of greater fools is indeed unlimited.

Dr. Richard Head's picture

49% of the American public are available bag holders, should they have any extra fiat laying around, if the NSA poll is to be believed.

TeamDepends's picture

Case in point:  Many democrats think that Elizabeth Warren is the answer.  This is, in no way, shape, or form an endorsement of the (R) party.

NOTaREALmerican's picture

There's only two choices:

Kick-ass daddy and smothering mommy.   Who else are "da people" supposed to support?

Lewshine's picture

ZH suggest the Fed needs more and more buyers (greater fools) to sell these nosebleed equity levels? Goes to show you how much ZH doesn't understand. The US equity market moves, for the last 5.5 years, have absoulltely nothing to do with; buyers, sellers or volume.

Market action is programmed a day in advance. Welcome to the Matrix you stupid fuckers!

Professorlocknload's picture

There's one born every minute.

Miffed Microbiologist's picture

I have been wondering where hospitals were going to come up with nonexistent cash and today I found out...the employees! An email I received today without the sarc tag.

" As HealthCare employees, we are united in our commitment to transform the health care experience for those we serve.
When considering making a gift to HealthCare, you may be recognized in one of the following giving societies:

Hour Club
• By donating the equivalent of one hour of your pay, per pay period, or a minimum of 26 hours of PTO per year or more, you will become an Hour Club member and receive special benefits and recognition.

Partners in Health

• Donors who contribute $1,000 or more per year (that's $38.46 per pay period) are recognized as Partners in Health, Our premier annual giving society.
With your tax-deductible donation,you are helping build facilities, fund innovative programs and provide technology that saves lives. And you can support the aspect of health care that touches you most deeply.
It’s easy to give. Choose the donation option that’s right for you.

• Automatic payroll deductions

• Annual cash gift"

So now part of my employment is to donate ( voluntarily so far) to my employer. My own little world of NIRP. Believe me, I know of many foolish people here that would do this.


WillyGroper's picture

I was going to ask until I read your last paragraph. 

JHC corporate used to try and strong arm me for two different scams. I even got a personal letter from a division manager trying to shame me into joining a legacy scam for an annual fee. This was in the 90's after I'd been downsized with major cut in pay & I promptly told him where he could stick it. 

Cattender's picture

We're Living in the Twilight Zone Bitches!!!!

Dr. Richard Head's picture

The stock buybacks remind me to the music industry where the label will buy 100,000 or so albums of their opwn recording artist to get it on the Billboard charts to create the social consensus that the band is something everyone is buying, which leads to other sales.  Interestingly enough, the cost for buying the albums is charged right back to the artist or band. 

On another note, I went to get my haircut yesterday and the barber (who has never been one to understand economics) told me that the stock market is hot and THEY are saying it will hit 20K soon.  Talk about frothy.

I am glad I left this game some six years ago, but can't help but to continue to watch the slow moving train wreck a comin'!

Quinvarius's picture

Those buybacks will all turn into secondary offerings at the lows.  They always do.

IANAE's picture

Just after the 1987 crash, a story circulated about a finance professor who had presciently advised his colleagues to exit the stock market.

His explanation to his colleagues ex post crasho - he had hopped into a cab (in midwest, not a money center location) and the cabby asked him what stock he should buy, his being a finance guy and all, leading him to conclude the market had too much irrational money in it and only bad things could happen.


insanelysane's picture

Doc, did you tell the barber to load up on tesla and apple?

slaughterer's picture

Problem with this article is that the "market" no longer needs "greater fools" to go up: all it needs is POMO liquidity, Z/NIRP forever, "Belgium", corporate stock buybacks, reverse repo facilities and jaw bones. 

sof_hannibal's picture

all in; what could possibly not go wrong?

syntaxterror's picture

Don't forget the hopium faggot's pen and phone.

Quinvarius's picture

The stock markets need twice as much money as they did at DOW 10k, not half as much.  They move on liquidity.  If the Fed is cutting back the free money, sure as shit, this non-recovery is going to get priced in.

pakled's picture

Perhaps is just a question of people's varying ability to perceive the truth of things....


"Some people can read War and Peace and come away thinking it's a simple adventure story. Others can read the ingredients on a chewing gum wrapper and unlock the secrets of the universe."

-Lex Luthor

fzrkid's picture

what to SHORT when the correction begins?!?!?!

buzzsaw99's picture

buy a taser, press it against your scrote, then pull the trigger. it will be less painful in the long run.

NOTaREALmerican's picture

If anybody has money left  to SHORT, it won't correct. 

Renewable Life's picture

Great question, and the answer is nothing, your still holding on to the delusional notion that stocks go up and down with some unconnectedness to the government??? That somehow, this time will be the same as last time and all these people will short and get mega rich, like the handful of over celebrated cats that shorted the "housing crisis"!!

But that won't happen this time, the government is 5-10x more powerful and tyrannical then it was in 2007-08, and they know damn well that "evil shorts and speculators" are the "problem" if the charade gets tested. They will simply freeze or "halt" the asset in question, for an unlimited period of time, freezing your capital with it, and when they do that to 20-30 of the big leveraged names, with massive short action, everyone will get the point in a hurry! There won't be shorting this time around, and there won't be market forces allowed to do shit, just the Government and the Fed, and if you want to play along, keep buying or we will just freeze this bitch for as long as it takes, days, months, it doesn't matter to them, they'll just pull out the old "national security" rhetoric play book and everyone will shut the fuck up and wait, and then play along again!

This is why, people who have "played" out all the options going forward, can come to NO other conclusion then, when it finally fails, it will to "complete collapse of society" type of shit, nothing less! They won't let there be anything else, because that would require pain of some kind for someone, and that is NOT allowed in the New America!

TabakLover's picture

For someone to buy.....another has to sell.   Freeze the whole thing?  Welcome to Panic City.

Renewable Life's picture


oh i dont dispute there IS going to be panic at some point, but i think your missing the bigger picture here, like millions of others who  have their money in banks and on wall street, the "capital controls" and "anti bank run" legistaltion has already been passed and is on the books!  You can panic all you want, but when they freeze assets and accounts and tell you to calm down, you can panic all you want, you just wont be doing it with YOUR (their money) in the bank and money market accounts!  

Argentina had accounts frozen for 5 years or longer in their last crash, Cyprus and Greece are STILL is under capital controls a year or more later, Venz. is never gonna get out from under gheir capital controls, Thailand, Egpyt, Iraq, Syria, Ukraine are currently under controls that have frozen their peoples assets in place!

Panic away America, you just wont be doing it with whatever money you think you have left, when it goes bad!


TabakLover's picture

Looks like a whole mess of them showed up at Noon today.

Yen Cross's picture

    I woke up early and flicked to CNBS for a quick look at the futures this morning. There were 2 assclowns talking about how the markets aren't overvalued and what an anomaly the -2.9% Q-1 GDP print was because earnings grew 9%.

   They were trying to make the argument that the numbers didn't jive and trying to disprove the GDP numbers when Joe Korntooth made a weak attempt to question their madness.

  To you two fucking retarded puppets, here's why you're full of shit and why the numbers don't jive.

 1) non-gaap reporting

 2) mergers & acquistions

 3) stock buybacks with cheap Fed. $

 4) one time writedowns

  So there you have it you(2) fucking retarded parasites! Don't give up your night jobs, sucking your banker pals cocks...

fonzannoon's picture

is there somewhere we can get a look at the murderer's portfolio? 

NoDebt's picture

I was thinking "he can't be any worse than Gartman."

I'll take street savvy over book-smart any day.  

And he obviously would have no problem "pulling the trigger" on a trade.

I better stop now, this is becoming too much fun.

slaughterer's picture

Yeah, I bet that murderer really has a good portfolio: can we get to see it?

lasvegaspersona's picture

I don't see the world as 'lulled'. I see a world of traders and investors and savers all collectively says''''WTF...this is not anything we have ever seen before."

Granted most people don't pay attention to the markets very closely, more watch sports and Breaking Bad by far. Of those who do pay attention I see a collective amazement at the unprecidented actions of the Fed. The fact that it actively performs in the derivative market (Ok the Fed / ESF) has rates at zero, has done Operation Twist, has (or at least some CBs have) outright purchased equities, has caused gold to remain low in price and has purchased huge amounts of debt to save the system...all these efforts have not gone unnoticed.

I think most of us (if we are honest) will admit that we know things are far from normal and collectively we wait for something very unusual and very bad to happen.

slaughterer's picture

I do not think that anything bad is going to happen very soon other than Yellen getting diarhea from bad sushi.

Cthonic's picture

Wait a minute, Bernanke said we wouldn't run out of fools in his lifetime.  Wait a minute, how much longer is he supposed to live?  Isn't it like twenty years?

Or maybe Ben's not actuarially inclined...

Keltner Channel Surf's picture

Fed's resisting normalcy.

Instead of the "Taylor Rule", they're employing the "Taylor Swift Rule”:  bond yields and stock returns are “never ever ever getting back together.”

zerocash's picture

Or the Taylor Dayne Rule:

Tell it to my heart
Tell me I'm the only one
Is this really a market or just a game?

JR's picture

A return to normalcy would mean rewarding and recognizing savers as the unsung heroes...

And wouldn't normalcy include a level playing field for the use of capital unlike the current 1% rate (and even 0%) that the big banks and corporations are allowed on use of free, non-deposit, unearned, synthetic Fed money?  And now, after 100 years of complete dependence on the commercial Big Banks, our present civilization is bordering on total collapse, worldwide.

A great summary, Mr. Calhoun, of the condition of our country and the cost of our slavery.

The insanity doesn’t just continue, it intensifies.”

In his article, “Global Economy Is Deteriorating Fast,” Raul_I_Meijer concludes:

“And indeed, ‘There is something strange about fighting debt by incentivizing more debt.’ In fact, not so much strange as it is stupid, blind, or criminal.

“It would be good if we all realize one thing: there is no economic growth; the only thing that grows is the debt (aka credit). If time is money, then we are borrowing money to borrow time. But time is not money: it doesn’t grow, you can’t get more of it, and when you waste it, you can’t get more of it; once spent, it’s gone.

“In other words, we can’t really borrow time, that’s as much of a delusion – intentional or not – as debt being able to cure or economic ills today. And because we continue to borrow more, and then even more, anyway, our economies must necessarily deteriorate as fast as we borrow. Just not at the same rate for everyone: corporations can borrow at 1%, but you can’t.

“So if present policies serve one purpose after all, it’s to increase inequality. Still, when it comes to inequality, you ain’t seen nothing yet; just wait and see what happens when interest rates start to rise and all the debt must be serviced. The too big to fail banks won’t be called upon to do that, it would make them fail; instead, you and yours will have the honor.”

sof_hannibal's picture

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. . . . corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”

—U.S. President Abraham Lincoln, Nov. 21, 1864
insanelysane's picture

Lincoln was the guy that destroyed the republic by destroying states rights.  Stars can only be added to the flag and never subtracted.  Although Lincoln prevented recession by having a war fought by Americans against Americans in America.  All of the war funding and the reconstruction money stayed home.  Great for GDP!

Anonymole's picture

The question on my mind is what will be the source of the next collapse? 

The last two boom and bust cycles have been analyzed to death and the understanding behind their evolution is seemingly, now, well known. So I would gather every economist or wanna-conomist is acutely aware of what might trigger the next great failure; and is doggedly on the look out. Any sign, whatsoever, that something is amiss will be flagged and bombarded with media attention.

• Auto loan debt? Naw. 

• Real estate again? Doubtful.

• Energy squeeze? Unlikely.

• War? Maybe.

So what will cause the next financial/economic collapse? What's going to bitch slap the poor and middle class *again* and leave the rich with even more power and wealth? What?



Re-read the article above and ask yourself if this article sufficiently warns the reader that the whole system of economics in the world has gone

completely mad. And then ask yourself how much longer it will be before the whole economic system crashes yet again? IMHO we are talking about a crash that must be just days away and not even months anymore. I suspect that the markets will blow up very shortly.