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Market Top's In? Why Buy-The-Dippers Can't Get It Up
Submitted by David Stockman via Contra Corner blog,
I am sure some chart reader can explain the S&P 500’s laborious struggle since September 2——the day it crossed the 2000 barrier—-as a classic “wall of worry”. But that event occurred nearly seven months ago and the market has dipped 15 times since then and has actually plunged six times (by more than 3%). And all it had to show for its exertions going into today’s opening was a 50 point or 2.5% gain. In this bull market, that’s a rounding error.
So we have arrived at a precarious place. After the Fed has spent six-years inflating a new and even more stupendous financial bubble—-the third this century—-the market top is in. And after five-and-one-half years of so-called recovery from the recession’s end in June 2009, the bottom is now falling out of the economy—-both abroad and here, too.
In that context, a new form of danger arises. The Keynesian pettifoggers at the Fed have painted themselves into an epochal corner. After 78 months of ZIRP they have no idea about how and why they got here; and now, mired deep in the lunacy of free money, they are clueless about where they are going next.
But here’s the thing. During its long descent into ZIRP, consensus at the Fed came from the Easy Button. Once they got to the zero bound in December 2008, it was always possible to find one more reason for delaying the day of interest rate normalization and to persuade any reluctant members of the FOMC that the economy had not quite emerged from its slump, even if “escape velocity” into full employment was just around the corner.
But now they have been banging the Easy Button continuously since the first discount rate cut in August 2007. Folks, that was 91 months ago! That duration of madcap monetary expansion is nearly double the length of the average business cycle recovery since WWII and its 4-5X longer than most previous periods of continuous easing.
Even Greenspan’s peddle-to-the-metal rate cutting spree after the dotcom bust lasted for only 54 months. That included 30 months of outright rate reductions between December 2000 and June 2003 (from 6% to 1%); and another 2 years of “hang time” at 1% before the first rate increases in June 2005.
Needless to say, an heart-stopping episode called the GFC (great financial crisis) proves how well that one worked out. Likewise, at no time during the NADAQ boom of the 1990s did continuous periods of hitting the Easy Button last more than 24 months or result in a money market rate below 3%. That one didn’t work out so well, either.
That’s why the corner in which the Fed has now implanted itself is so dangerous. The Eccles Building has been so petrified of a Wall Street hissy fit that it has cowered its way right into the worst central bank error in recorded history: Namely, it is finally attempting to wean Wall Street from its addiction to free gambling money just in time for the tepid post-crisis business cycle recovery to exhaust itself.
So it will be “tightening”—-even if via only a few 25 basis point pinpricks from zero—at a time when the US economy is visibly rolling over. And that means that the Fed consensus around the Easy Button will now shatter. The casino’s management will soon be having real food fights in public. The Easy Button Fed will become the new Cacophonous Chorus.
So believe this. The headline reading algos will go full-tilt spastic.The buy-the-dippers will be looking for their heads in a bloody basket. The Fed is about to become your fiend, not your friend.
The US economy is faltering. Today’s three-peat of monthly industrial production declines was just one more piece of evidence on top of soaring business inventories, faltering retail sales, sub-prime saturated auto sales, plummeting activity and jobs in the shale states where all the job growth since June 2009 has actually occurred and the limpid state of wage growth and consumer finances generally.
Just consider February’s index number for manufacturing production. At 101.3 not only is it rolling over from last November’s cyclical high, but its also now below the October 2007 pre-crisis peak. Yes, manufacturing output in physical terms has not gained one inch of ground since the eve of the GFC. The ridiculous narrative of the Keynesian priesthood and the bubblevision talking heads simply assumes that you were born yesterday—–and that the monthly climb from the deep hole occasioned by the Fed housing bubble and bust represents progress.
No it doesn’t. What is cyclical in the current US economy is not the massive component of GDP called health care output—-that’s essentially a fiscal and tax-driven variable. Nor is it the $1.3 trillion housing services component of GDP because that’s imputed anyway. The government statistical mills just make it up and smooth it out.
No, what’s really cyclical and quasi-honestly measured, and what is necessary for economic growth even in our wait staff and Twitter driven economy, is manufacturing output. But the 7-year path back to square one depicted below never happened before; is not the slightest measure of “recovery” in the historical cyclical sense; and it had nothing to do with the Fed’s 75 months of ZIRP.
The 20% plunge of manufacturing production after the pre-crisis peak occurred due to drastic inventory liquidation during the GFC. And the rebound since then reflects merely the regenerative capacity of capitalism and the C-suite once again over-doing the inventory build-up in response to the Fed’s stock market bubble and their own soaring stock options.
This is nothing like a real cyclical recovery. During the post-dotcom recovery—-artificially goosed buy the subprime housing bubble as it was—-manufacturing output grew by 10% during the seven years after the 2000 peak. And during the long boom of the 1990s,manufcaturing output soared by 53%, even as much of the industrial economy was falling victim to the “China price” and being off-shored. So flat-lining this time around is flat-out not a “recovery” in any meaningful sense of the word.
Yet with production now rolling over, it is not surprising that the ratio of business inventories to sales is soaring. Indeed, last weeks’ report on January business sales is striking. The latter includes everything——manufacturing, wholesale and retail. The total sales number for January was $1.306 trillion and it was down measurably from the $1.340 trillion average for Q4 and even more from the mid-2014 peak. At the same time, inventories have continued to grow—–actually boosting reported GDP in 2014. In fact, on a year-over-year basis, business inventories were up by $57 billion compared to an actual $4 billion Y/Y decline in sales.
US Total Business Sales Chart
So the arithmetic of the matter is pretty straight forward. At 1.47X sales, the total I/S (inventory/sales) ratio for US business is now at its highest level since October 2008. As I argued last week, the C-suite is again over-doing its build up of stocks of goods and labor, just as it did during the Greenspan/Bernanke bubble which proceeded the GFC. The US economy has now became victim to the Great Immoderation because the Fed’s massive inflation of the financial markets inevitably gives rise to excessive bullishness among stock-option obsessed corporate executives.
US Total Business Inventory/Sales Ratio Chart
Owing to the central banks regime of false pricing in the financial markets, the C-suite gets drunk on the Cool-Aid and fails to see the storms brewing in the real economy or to take defensive action if they do. Just look at the executives at US Steel, for example. As the Wall Street Journal story this morning made clear, there is a massive headwind blowing in the steel industry owing to the deflationary bust now underway in global materials and industrial markets.
In this case—-and steel is only one typical example—- the relentless financial repression campaigns of the world’s central banks since the turn of the century has lead to a massive build-up of excess mining, manufacturing, transportation and distribution capacity. Moreover, since this “malinvestment” was driven by an unprecedented credit bubble that took the world’s outstanding credit market debt from $80 trillion to north of $200 trillion——hugely indebted companies in China and throughout the EM have no choice but to produce for cash flow, despite exploding P&L losses.
Stated differently, the world’s industrial economy has become unhinged by the money printing central banks. First it vastly over-invested; now it will chronically over-produce. Thus, China’s steel exports are now running at a 110 million ton annual rate compared to just 50 million in 2013. What’s worse, China has in excess of 1.1 billion tons of capacity and after nearly tripling production to satisfy its construction binge, its current 750 million tons of domestic demand has nowhere to go except down.
In short, there will be a flood of “dumping” like never before—–and not only in steel, but also in almost all the major raw materials categories and most especially petroleum where US production continues to rise not withstanding a breath-taking collapse of the domestic rig count from 1609 last October to well less than 900 last week..
Needless to say, this global deflationary tide will kill profits, growth and jobs as it unfolds. And as I discussed further on Bloomberg this AM, there is not a chance the US economy has decoupled from the rest of the world. The great credit-driven boom was universal and fueled by out of control central banks.
Click here for clip (Bloomberg embed code is useless)
Now comes the bust phase, and these same money printing central bankers have no clue what to do about it.Stayed tuned to America’s monetary Delphic oracle latter this week. Like Pythia of ancient Greece, she will utter gibberish—–which the high priests of Keynesianism will interpret as enigmatic reassurance.
Don’t believe them. The monetary politburo and all its oracles are lost. Soon even the robo-traders will understand that baleful reality.
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Well, that's a fine mess you've gotten us into this time, Krugman.
Perhaps we coiuld hold a bake sale...
Or at least sell TP and condoms to Venezuela.
Margins Dudes... and Dudettes.
Don't forget the Tampons for the Real Women
Michael Jorden says Barry sucks at golf.
Why not? He sucks everything else. How say you knucks?
Is the first gopher a hack golfer?
Whether the market top is in is up to the fed.
http://debtcrash.report/entry/history-and-introduction
Calling the market top has been like forecasting the return of Jesus. Everyone claims to know, yet I suspect no one will know the hour of the bear markets triumphant return.
The bell rang March 2 - that WAS the top.
For a different point of view on stock markets:
Even in a country that is so screwed up that MainStreet Jose can not find a bar of soap to take a shower or a roll of toilet paper to wipe his ass, where inflation is out of control, where protest are becoming a daily event, where finger prints are required to shop at the grocery store, this is what trading in the stock market looks like
http://www.bloomberg.com/quote/IBVC:IND/chart
Just look at the 3 yr performance. I am not saying that the US Stocks will follow the same path but instead suggesting that US Stock Market carnage is no sure thing.
PS: MainStreet Jose, without soap or toilet paper probably has little use for soon to be rationed condoms.
I didn't see any mention of the Baltic dry index, that's probably the biggest indicator of them all
apple fell off the s and p tree. good for apple, bad for s and p
media is doing fine work making people think all is stable. geopolitical theater will cause it to fall so that will get the blame, and all will be "shareing" the pain so just eat your loses. Well, I am fully our of all investments, house included. THe algos are just untested.
On YouTube his swing is pathetic ... and I personally know of absolutely no one who enjoys playing a 6+ hour round. That's not normal.
Mooch outlawed them. FLD "First Lady Dicktat"
Psst, Hey buddy....
I got the good stuff.
Pre-Hostess collapse Twinkies, with REAL TRANS-FAT, from 2005.
$10/box.
Must be time to break some more windows.
I do think the mess will get even bigger, new ATH should be expected...
http://tripstrading.com/2015/03/17/sp500-next-move-a-wave-3-v-iii-up/
I'm not saying Stockman is wrong, but I've been reading this shit for 5 years (the bottom falling out). The bottom sure as fuck fell out of my shorts back when I traded on this stuff. It will happen when it happens.
Now comes the bust phase, and these same money printing central bankers have no clue what to do about it.
No 'clue'? Sure they have a clue - start buying more shit with QE'd money.
They might as well buy it all since they have unlimited funds. Never let a crisis go to waste - consolidate real wealth at the top and handout promises (of debt no less).
Since the economy is doing so well on the road to recovery with green shoots popping up every where, It's Pat Yellen taking marching orders from JPM and GS, will raise rates. The Euro and commodities will tank and the banks will go on a buying spree with the currency that was GIVEN to them 6 yrs ago. After the banks have had they their fill, QE will resume. Laggard will be off the hook coz she already said not to raise and It's Pat Yellen will refer to govt supplied data as the culprit once a full senate circus has been convened and produced no evidence or results. Thus the criminals will get away with more. Just wondering when people are going to get enough of the s**t and do something about it. Oh 4got EBT
I hear you, but Draghi's last boondoggle is failing. Banks won't sell him the bonds. Japan has no numbers worth reading, but everyone seems to be reaching some limits.
Wouldn't it be nice?
Maybe if we think, and wish, and hope, and pray, it might come true.
I've tried clicking the heels of my Ruby Slippers.
Ya think maybe if I shaved my dog?
Its real this time LTER. The well connected, and well informed have already got out
of the US 'market'.You would be wise to follow suit.
You can take that to the bank.
Or as was said to me at new year."Anyone staying in the stockmarket is a schmuck".
Hows your BTD going this year ?
I'm out, except for my PMs.
Ditto.
I've been out, except for my 401-k. I have to quit my job to get the money under the rules now.
I think this will be the last of the rinse and repeat the fleecing cycles. QE4 will save the day but it will be so gargantuan that they'll not hit a top but blow the hell out of it, never to be seen again. First deflation, then real grandma-can't-ignore-it-this-time inflation that causes upheaval on the social rather than financial side.
Man, that scenario sounds more like a nuclear weapon going off, with the money expanding in a fiery mushroom cloud at an insane velocity and it's flattening everything in its path that's standing!
Gold will be the last man left standing when the dust settles over this contrived CB open market operations supported fraud.
We are now entirely dependent on covert Central Bank open market operations to keep this boat floating.
In the meantime, gold is on sale courtesy of the CB gold price suppression desk.
That is only because you cannot destroy gold, even with nukes.
Long-dated, out-of-the-money puts and gold...!! Sit back and wait....
This is all true, but well worn in these parts. Stockman is right about the .25%.
That's a nothing burger. Jerk it up to 5% Old Yeller, and SEE WUT HAPPENS;)
Why not channel her inner Volker and go 1981 on interest rates, as in 19.10%.
It won't happen but I wish it would.
DavidC
Is better not to. Is better to follow through with this charade and let it collapse under its own weight so that future generations (a couple anyway) will have piles of skulls to remind them of how not to run a country.
"The Keynesian pettifoggers at the Fed have painted themselves into an epochal corner."
I don't really see it that way, at least not yet. The market will drop and they will go back to buying treasuries and MBSs and will send rates negative if they feel like it. Thinking that they are painted into a corner just shows that you're unimaginative or are hanging onto the idea that the fed gives a fuck about its balance sheet or "credibility".
How does that affect overstocking and no consumer demand exactly ?
Might be OK for banks shares but shit all else.
"Why cant get it up?".... That's what she said.
This is nothing like a real cyclical recovery.
I've exposed my naivete before, but even several years ago it was clear to anyone paying attention that the recovery wasn't.
So we go from "great recession" to not a real recovery to another recession (if we're lucky). 50 years from now with the benefit of hindsight and analysis do you suppose they're still going to attempt to support the great propagandaing and record ZIRP? Are they going to do something even more insane to try to reinflate this bubble (NIRP, bail-ins, public works jobs for votes schemes)?
I don't know if they will be able to pull it off, but they will try to reflate. I think there's a good chance that they'll fail. And I'm not so sure that there will be a United States in 50 years. Between the financial rape and the idiotic war mongering with a nuclear state, the future of this country is not looking so bright.
get it up, pull it off, reflate...suddenly I'm feeling, um, it's been a while...kinda perky!
The FED juiced the markets so Wall Street would have 7 more years to bleed assets out of the middle class.
Who did QE benefit? Why, the Kleptoligarchy of course! The banks/insurers/corporations, the Military Industrial Complex (M.I.C.), and the revolving door mandarins in .gov and their lobbyist leeches.
Who is it bleeding out? Us "folks" that have to go to work everyday and pay our debts!
All by design, all by design.
Das kapital for real evil geniuses and useful idiots alike. Word is, the capitalists have run out of rope to sell.
BTFDers are in Europe right now. yes yes, you may still be in the US market, but you are not a "market-mover" are you?
All part of the great rotation - the seasonal migration patterns of great herds.
This is all about the collapse of the oil market...ignore everything else including the endless stream of balderdash from the likes of David Stockman et al.
The ENTIRE "global growth meme" is based ENTIRELY on not only on the price of oil (more than a dollar a barrel) but also its direction (always higher.)
This cannot possibly be true under any form of reasoning...especially the current one that has simply hundreds of trillions of dollar denominated debt floating around with no buyer at any price.
The actual manifestation of this impossibility is the difference in price between Brent (sour) crude and WTI (sweet) crude. The former is worthless but "costs" an incredible 25% more in dollar terms right now.
That says to me the pricing mechanism has been broken and the commodity itself is well nigh worth absolutely zero.
You might ask the question "what would I pay for something that is absolutely worthless" and indeed you'd be surprised by the answer.
Two words "working prototype." Everything else...is vaporware.
Don't get me wrong the refined product from oil is very valuable...but simply put there is too much of it and you can't "run your debt" on it.
Economies must be made..indeed are being made here. "In the name of God we are in the service of Mammon" does not a war effort make.
And indeed...as this war expands and goes nuclear "constant vigilance" (especially with one's Capital) is the word.
We are well past the point of no return here.
The Fed in my view is being forced to normalize...and therefore in fact will. I don't really see the big deal since they are in effect performing a Treasury function (blow the bubble to pay for the war) and not a Fed function (dual mandate) anymore anyways.
Citigroup looks good.
A few other things I guess.
Bubbles don't pay taxes though...let alone create incomes or provide a tax base.
That was after all why the Fed was created...to prevent exactly what he have going on here for thirty plus years now...namely the "boom/bust cycle."
Sorry to "burst the bubble" of course...but what we have here is absolutely NOT postwar USA.
One trillion for a "fighter plane" that won't fly? (Or get of the couch even.) No problem.
What happened to his Putin's bodyguard? Was it an accident?
I fear that even 25 basis points is too fast, unless you limit it to one a year, it will visibly impact equity yields and thus prices and thus cause fear and loathing. If the increase is kept below the rate of real growth, it can be hidden. The economy will look flat in spite of real growth - but that's what it takes to escape from this prison. Now, if real growth were larger, the rate increases could be faster. But I doubt *real* growth, above the population growth, is even one percent. Anyone disagree? Likely it's negative.
Also, I don't see Stockman addressing a very crucial point. The Fed has at least two tricks, one is rates but the other is printing. They can offset a rise in rates more or less with more printing. Right? Well then you heard it here first.
I asked.a.man at work with a 401k in mutual funds to limit his risk and get out of 20%/of the stock funds. He said he is in it for the long haul. Do I cry or laugh
That calls for a chuckle. The time for people to grow up mentally has passed when it comes to our societies dysfunction. If he is willing to trust the same system then so be it.
"Climbing the wall of worry !" .... "I've never seen so many, do so little, for so few !" Monedas
"Our Socialist government is self-righteously, although discreetly, punishing speculators, hoarders and day traders .... and is rewarding those who put their faith in the State !" Monedas
"There is a constant, deafening wail of Prognosticating Posters Predicting the top .... I tend to agree with their analysis .... that alone is sufficient to convince me .... we're going higher !" Monedas
The central banks are overdoing it in higher education too. Zirp loans to go to school resulting in excess capacity and then a race to the bottom in search of cash flow. Classic sophomore year mistakes.
We are closer to the bottom than the top.
No one in finance knows what they are doing.
Investment bankers thought they were Masters of the Universe and they could mange risk by spreading it through the system with derivatives.
In 2008 - we discovered they were delusional psychopaths.
The FED seems to exist in the same delusional psychopathic state as all bankers.
Psychopaths never take responsibility for anything and so can never learn from their mistakes.