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Stockman: "The Bottom's Not In", Why This Market Is Dumber Than A Mule
Submitted by David Stockman via Contra Corner blog,
They were trying to put in a bottom - again! The sell-off earlier this week amounted to the sixth sizeable “dip” since November 20 - so the market’s ingrained reflex was back at work all afternoon, trying to scoop up the “bargains”.
But the roundtrip to the flat-line shown below is not a classic “wall of worry” and its not a “bottom” that’s being put in. This market is dumber than a mule, and the nation’s central bank and its counterparts around the world have made it so.
The plain truth is that six years of torrential money printing and worldwide ZIRP have not happened with impunity. On the one hand, massive, sustained and universal financial repression caused an artificial growth and investment boom in much of the world, especially China and the EM, which has now run out of steam and is visibly and rapidly cooling.
There is probably no better proxy for the global investment boom than the spot price of iron ore because it captures China’s massive infrastructure construction spree and the waves of mining, shipbuilding, steel-making and construction materials spending that it set off all over the world. But this huge tidal wave has now crested, leaving behind the worst of both worlds——cooling demand and still expanding supply.
For the first time since around 1980, China’s steel consumption is projected to fall in 2015——with demand slumping from 830 million tons last year toward 800 million tons, and that is just the beginning as China’s credit-fueled construction frenzy finally comes to a halt. In fact, during the boom that took iron ore prices from a historic level of around $20-30 per ton to a peak of nearly $200 in 2011, China’s iron and steel capacity grew like topsy. Production capacity expanded from about 200 million tons at the turn of the century to upwards of 1.1 billion tons at present.
Yet this year’s decline of demand to around 800 million tons does not begin to reflect the coming adjustment. That’s because there is still a residual component of one-time demand in that number that is in no way sustainable. Even if the pace is slackening, the Chinese are still building high-rise apartments which will remain empty and airports, roads, rails and bridges that are hideously redundant. Eventually that will end because even the red capitalist rulers in Beijing are terrified of China’s towering mountain of debt——$28 trillion and still rising by hundreds of billions every month.
Yet underneath this one-time explosion of demand for steel, aluminum, copper, concrete and the rest of the materials slate is something called sell-through demand. The latter reflects the sustainable level of demand for replacement of long-lived assets like bridges and shorter-term durables like cars and appliances. In the case of steel, that sustainable “sell through” demand level could be as low as 500-600 million tons or hardly half of China’s steel production capacity.
The emerging global deflation has already brought the spot price of iron ore under $60 per ton—-or back to where the latest credit-fueled boom cycle commenced in March 2009. The consequences of that are visible, among many other places, in Australia’s burgeoning depression and the slide of Brazil into its worst two-year economic slump since 1930-1931.
Yet there is still a long way to go because of the investment cycle time lag: New capacity to mine, transport and deliver water-borne iron ore is still surging because it was ordered years ago when the global boom appeared to be endless. So not only will iron ore prices continue to erode at the commodity level; their plunge is also a proxy for a similar excess downstream capacity to make steel and the coming flood of surplus or “dumped” supplies on the global market.
Today Bloomberg had an excellent update on the imports flooding into the US owing to the strong dollar and China’s rapidly weakening internal demand. From a level of less than 50 million tons annually two years go, the run-rate of China’s fire-sale steel exports is already above 100 million tons and heading much higher. As shown in the graph below, this has already caused the domestic steel industry utilization rate to plunge, eliciting a rising tide of lay-offs, plant closures and steel company profit warnings.
And then the rolling adjustment will move downstream from steel to the fabrication and manufacturing industries. In short, there is an unprecedented global industrial deflation brewing that is the downside of the central bank driven boom. That is, we are now plunging into the crack-up phase of the great central bank monetary deformation. Indeed, the idea that the US is immune to this and that it has somehow decoupled from the global economy is downright farcical.
Perhaps that’s why yesterday’s extremely downbeat industrial order report came as such a shock to the talking heads. Self-evidently, they have been drinking the Fed’s Cool-Aid or they would have noticed long ago that we are not in any “recovery” worthy of the name. How could it be when real industrial orders are still 10% below their average pre-crisis level?
Real Durable Goods Orders Ex Aircraft and Defense – Click to enlarge
Needless to say, there is plenty more evidence where that came from. In fact, the Atlanta Fed’s so-called “nowcast” of GDP is essentially a running tabulation of the “in-coming” data that eventually flows into the GDP report. With yesterday’s latest iteration of data, the outlook for Q1 is now down to 0.2%.
And this is why there is a big financial storm coming. The Fed and other central banks are now out of dry powder and credibility. The only thing happening at this point is a currency race to the bottom. They have no capacity whatsoever to arrest the epochal deflation that is gathering force all around the planet.
So here’s the buy the dip history during which the central banks destroyed price discovery, short sellers and economic sanity itself. They rendered the markets as dumb as a mule, capable of nothing more than reflexively buying the dips.
It will take awhile, but eventually the robo-traders will desist, the day-traders will be broke and the fast money will get short—–once it becomes clear that “escape velocity” was a myth, the global recession has arrived and the central banks are firing blanks.
Then the bottom will be in, albeit a long way down from here.
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That is a slap in the face to all Mules.
I'll take iron ore for $200 Alex
Mules are "dumb as a mule" because they can't speak, not because they are stupid. It's a sad misuse of a saying, due to common usage shifting. Our species broadly misunderestimates other species, anyway.
"Stubborn as a mule" stands unchanged, though.
Yep,
Is a mule really dumb because it doesn't want to haul your shit?
Amen. Mules are stubborn, not stupid. In fact they will work to death. Bankers and markets on the other hand serve no worldly purpose. Only one thing describes them - a virus. They replicate and destroy their host before moving to another. Every species on earth has a purpose, except for the bankers...
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Nothing to see here...move along....
ok man, I read you (not buying nor selling though - I let my, not declared, AI do that for me:-)
For the first time since around 1980, China’s steel consumption is projected to fall in 2015——with demand slumping from 830 million tons last year toward 800 million tons, and that is just the beginning as China’s credit-fueled construction frenzy finally comes to a halt. In fact, during the boom that took iron ore prices from a historic level of around $20-30 per ton to a peak of nearly $200 in 2011, China’s iron and steel capacity grew like topsy. Production capacity expanded from about 200 million tons at the turn of the century to upwards of 1.1 billion tons at present.
Yet this year’s decline of demand to around 800 million tons does not begin to reflect the coming adjustment. That’s because there is still a residual component of one-time demand in that number that is in no way sustainable. Even if the pace is slackening, the Chinese are still building high-rise apartments which will remain empty and airports, roads, rails and bridges that are hideously redundant.
its tough to say we are experiencing a "risidual component" of the chinese boom. if they have been producing ghost towns for the last 5 years- with no checks and balances, whats to stop them from continuing to do so?
Debt. Same thing that always stops these massive mal-investment schemes.
If you build something that serves no productive purpose, what's the payback on your investment? Nothing. And the debt just piles up.
re: whats to stop them from continuing to do so?
Capital is scarce. Malinvest too much of it, and you eventually run into the problem that some of your projects simply cannot be finished because you have run out of real resources.
What's with all these peopleless cities in China?
I wonder who's comng to dinner.
50 different shades of Grey's?
Janet better fire up the printers. I smell a Wall St tantrum brewing.
If EU collapses first then fresh investments will be coming in from there.
It is just a question of how fast, how wide, and how deep the Reset, and when.
Best to wait in cash before getting short (again).
These charts in the article definitely show the massively degraded economic foundation.
European bad banks, or Greece, or Ukraine may be the Black Swan trigger.
Interesting times.
I'm beginning to think the Grexit is telegraphed well enough that it won't be the trigger. It'll be a head fake. The trigger will be the realization that there's a series of Eurosocialist dominos right behind Greece. Once the "who's next" chatter starts the markets will get a bad case of "THE FEAR!"
I'm so glad I've stopped listening to investment advice from ZH and these so called experts. I would have missed out on one of the best bull runs ever. The age old addage is "Don't fight the Fed." Meaning, when they act, you better piggy back because they will move the market and you will be swimming upstream.
.
"Eventually that will end because even the red capitalist rulers in Beijing are terrified of China’s towering mountain of debt——$28 trillion and still rising by hundreds of billions every month".
Bubbles bubbles everywhere and just more printing to protect the illusion of growth.
Hard to argue his points, but wonder if day-only traders will concur: the past 7+ wks have been the worst for intraday index trading in nearly 4 years, w/ volume shockingly low, allowing for bizarre spikes and retracements. Some will claim this evidences a multi-year top, with holders not inclined to buy or sell. But that's not what I'm seeing -- it appears TRADING has stopped. In the past, flat days were the result of 2-3 major moves in opposing directions, now it seems we get early, big sudden spikes or pukes, then 5 hours of low-volume, hamfisted scavenger buying, 401k funds and corp buybacks. It's entirely plausible without the current buyback quiet period and impending tax filings, Wednesday's action, the first solid trend day in months, would have been unthinkable. Still, that was ONE day, followed by two largely horizontal flea market 'bargain' shopping. Puzzling ...
You are observant - of course, if you are day trading, you can't help but notice that there are days (ot at least extended periods) that just can't be traded right now. I am avoiding losses, but usual gains aren't there either. Even HFT's seem to be quieter.
You did a good job summarizing the trading patterns. I have day-traded for the last 15 years and this is a persisting, difficult, and frustrating period. You have to watch the market minute-by-minute just to catch the occasional tradable move, then maybe hours of nothing.
Occasional set-ups are still seen before what are expected to be major announcements.
Thanks for the incisive reply. The one persistent worry as this unusual period persists: did many of the medium sized firms whose trading produced familiar setups stop trading, or worse, go out of business, in response to world central banks' impact on markets. Given the huge daily income they collectively raked in, the only logical reason they'd stay out is if the risk wasn't worth the available pennies, then low volume begets lower volume, and the whole mess spirals, everyone waiting for everyone else to come back in.
To be even more specific: seems that, starting in Feb, algos using the Daily chart, assumed to be the largest firms, are producing fairly common candle shapes and end points, but the intraday path toward that end is completely randomized and largely spiked in the first and last 1/2 hour, as if the medium term algos, those giving us bounces on the hourly and 15-min charts, have been turned off, or sumo-wrestled to the ground. Hard to tell if this is a technical strategy, or a function of certain players dropping out of the game, volume would suggest the latter.
First David, mules are not dumb. In fact, after having worked with them for years as a kid growing up, pretty intelligent, but obstinate would be my take.
Second, you were a fucking sellout and now simply trying to sell books trying to repaint history of your involvent that started this mess 30 years ago. I'm still waiting on my "Peace Divident" - fucking prick.
Fuck off!
Aside from your anger, there is validity to your timeline as it was indeed during the early 1980's that the U.S. 'decoupled' from sanity and went on a fiscal spending binge that to this day, has not abated and also included the meteoric rise in personal credit, debt, the decline of personal savings habits and the advent of 'financialization'. And that doesn't even take into account the ~Real~ genesis of the problem, which took place 10 years prior to that, in August of 1971.
Here and Now
http://www.showrealhist.com/recDJIAtoRD.html
http://patrick.net/misc/Ask+journalism+how+much+it+got+for+its+soul.++%2...
I, for one, can attest that your average mule is nowhere near "stupid." Stubborn maybe, but not stupid.
It's hard to argue with Stockman's analysis. But fundamentals are for long-haul investing, the advisability of which (for equities) can be summed up in a word: Don't. But when it comes to trading, technicals have to be factored into the immediate picture.
On the ES we're at a decision point. Are we going to break the neckline of the double top and continue selling off? Or are we going to bounce off it and form a double bottom, and act like we're making for new highs? In light of which conundrum, today, we're dithering.
IMHCO the likelihood is the second option, just for the fact that markets never go straight down. One of the features of a bear trend, as a matter of fact, is rip-your-face-off rallies.
Careful, bears...
How the hell did we get here? I have been through a few recessions ( I am 50 ) but right away I knew this one was not right. I sold up my home and bought a new home that is eco friendly, so I dont need to warm my house during the winter ( No mortgage). I have no debt and have stocked up food in my garage.
Ayn Rand wrote, without property rights, no other rights are possible.
America is a very sad case, what the forefathers delivered was nearly maricle in the context of human history. Like a wealthy family trying to pass their inheritance to a spoiled child it will be squanded, because they dont understand the virtues and values that created that wealth and made America a great nation.
Outside Independence Hall when
the Constitutional Convention of 1787 ended,
Mrs. Powel of Philadelphia asked Benjamin Franklin,
"Well, Doctor, what have we got, a republic or a monarchy?"
With no hesitation whatsoever, Franklin responded,
"A republic, if you can keep it."
America is losing it and will require another revoltion, thank the forefathers that American citizens can own firearms when your governmet goes crazy. There is nothing protecting us here in the UK except maybe the Magna Carta.
Word.
How many people are shot by cops in the UK? Do cops in the UK pull you over for no reason and just take your money? If owning firearms is such a great deterrent against crazy government, why is all that happening in the USA?
BTW, I will take your Magna Carta remark as sarcasm.
Iron is dumb but mules ain't.
Oh, Dave..
Is that like Liberace crying all the way to the bank?
Not only is the market the only game in town, it's like an elevator that can only go up.
The next bottom will be simultaneous with the 'boys' covering the shorts they put on at 18,200.
This is not THe Bottom? Really?
Holey fuck, I guess the bottom is not in... What about the top? Is the top in Dave?
Are the "Curbs In"? Please give us a damn "curbs in" day already, just for morale.
'The consequences of that are visible, among many other places, in Australia’s burgeoning depression.'
Stop talking like that you make us nervous in the Lucky country
David is correct but it will take years to unwind. The fed will panic after the market declines 2%, more QE on the horizon, liquidty trap realization, gold should catch a serious bid only that market is rigged also... this is going to end very badly.
Don't count Tweets as durable good orders?
David
I wish you would explain in a future article why further QE won't work any more and how will the dollar be devalued by the eventual genuine money exporters. Or will it be rejected as payment for trade.
I understand your arguments for collapsing demand but I still don't see how QE cannot still prop up the dead Fiat horse as it's been doing.