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Forget The Dips, Sell The Rips
Submitted by David Stockman via Contra Corner blog,
Now that was fast!
When I posted a piece a week ago noting that the S&P 500 had crossed the 2100 line from below for the 13th time this year, it signified that the market had been thrashing sideways since February 13th. Perhaps that was an omen, but technically speaking it was just further proof that the stock market is driven by Fed-following day traders and algos that reflexively buy the dips.
But on Thursday and Friday last week, the casino gamblers got a rude awakening. Not only did they lose their lunch in a violent plunge during the last half-hour of trading two days in a row, but they also gave back another seven months of gains, as well as the crucial chart points that have kept the robo-machines aggressively buying the dips for the past six years.
As shown below, the S&P 500 has now retreated to the level it first crossed nearly 14 months ago on July 1, 2014; and it has also sliced through both the 50-day and 200-day moving averages like a hot knife through butter.
Worse still, in Monday’s pre-market futures the SPX is down another 60 points. If that holds, the market will be down 10% from its May 21 peak and off nearly 8% from its 200-DMA. The latter is double the short-lived 4% swoon back on October 15.
That all adds up to some kind of carnage, but don’t think the dip buyers are all done. As Doug Short demonstrated in his weekend chart updates, last Friday’s plunge brought the SPX down from its May peak by exactly the 7.4% drop which occurred last October.
That sell-off, however, was instantly reversed when one of the Fed’s most consistently inconsistent empty suits, Governor James Bullard, averred that perhaps it was time to consider an extension of QE within days of its actual ending. Upon that signal, the machines raged violently, taking the index up to 2050 or nearly 7% during the next 30 trading days.
So expect some bullardization from the Eccles Building any day now—-perhaps when Ben Bernanke’s PhD advisor, and now Vice-Chairman of the Fed, Stanley Fischer, explains to a shell-shocked audience at Jackson Hole that we’re not there yet!
That’s right. This ridiculous academic pettifogger and cowardly monetary apparatchik will likely tell the oh so serious financial crème de crème gathered there that we are well short of the Fed’s magic 2% on the PCE deflator, and, therefore, the time may possibly not be quite ripe—not just yet—– for “lift-off”.
That notion is unspeakably duplicitous, destructive and self-serving. The Fed will likely defer the September rate increase not because there is too little inflation, but because it is scared silly about the kind of stock market hissy fit that is going on at this very moment. In truth, every bus driver and retired postman in America knows that main street has been “blessed” with a surfeit of inflation for as long as any ordinary citizen can remember.
Just in the 15 years of this century, the price level has risen by 39% or about 2% per year if you credit the BLS’ deliberately tranquilized CPI, and by 2.5% annually if you use an honest measure of cumulative housing and rent inflation.
That the measured inflation rate in the last few months is running below that well-established trend level due to the self-evident collapse of oil and other commodities is completely irrelevant. Zero interest rates can do exactly nothing about a ferocious global deflation that was actually caused by the massive malinvestment generated by years of zero interest rates and central bank financial repression.
So the Fed is keeping its foot planted squarely on the neck of savers and retirees for the contemptible purpose of keeping the Wall Street gamblers in free carry trade money, thereby hoping to trigger another stock market up-leg in its misbegotten campaign to generate economic growth by showering the 1% with fantastic “wealth effect” windfalls.
Yet notwithstanding its sheer humbuggery, any such Fed confected headline is likely to catalyze another face-ripping frenzy of dip buying, accompanied by a chorus of Wall Street pitchmen announcing that the market has bounced off “support”, and the bull is ready for another upward sprint.
Do not buy this dip, even the crater now forming. It does not represent “value”; it embodies a nasty trap owing to the unfolding collapse of the worldwide central bank driven financial bubble that has been expanding for more than two decades.
Too be sure, we have been at this juncture before——exactly seven times since the March 2009 bottom. At the time, one of Wall Street’s most astute and sober minded traders, Doug Kass, called 666 on the S&P 500 a “generational bottom”.
Needless to say, that was a prescient call. Being long has never before in recorded history generated so much paper wealth so consistently and in such a relatively brief period of time. To wit, the Wilshire 5000 basket of US stocks alone gained more than $15 trillion of market cap during the last six years; and the total value of all corporate equity in the US economy, as tabulated by the Fed’s flow-of-funds report, soared by more than $20 trillion, thereby substantially outpacing the two earlier stock market bubbles.
Here’s the skunk in the woodpile, however. Those gigantic gains had virtually nothing to do with the long-term trends in the US economy, which have been punk, at best. Instead, the soaring stock averages and booming trading accounts since the March 2009 bottom were fueled by a monumental monetary reflation.
The Fed and other major central banks of the world essentially have sought to “delete” from the casino narrative any and all real world factors that brought the domestic and world economies to their knees in the fall of 2008. But what they have accomplished instead is a monumental falsification of prices in virtually every asset class that is traded or not traded. So doing, they have divorced the financial market from the real economy nearly everywhere on the planet.
That is the true meaning of the above chart. In fact, when total credit market debt outstanding is added to market equity the true extent of unsustainable financialization becomes readily apparent. Whereas finance outstanding amounted to $8 trillion and about 200% of GDP before 1980, it has subsequently just ripped away from its moorings in the real economy.
During the last 35 years the value of US finance grew by 13X to $93 trillion. At the end of 2014, it represented nearly 540% of GDP. But in the great scheme of history, there is no reason why the US national income should be capitalized at any higher multiple today than it was in 1980—–given the sharp deceleration of economic growth, the baby boom retirement bomb and the debt-saturation of the public and private sectors alike.
Even had total finance stabilized at the 240% of GDP level which was in place when Greenspan took the helm at the Fed, the blue line in the chart below would end at $43 trillion in 2014.
So call the difference $50 trillion of excess financialization. Call it an eventual financial implosion that will bury all the robo-machines and all the gamblers tempted to buy the dip for the eighth time running.
So what is different this time? The answer is that the post-2009 recovery was a false start. It represented a final and radical expansion of the growth and capital spending bubble that has been underway around the world since the early 1990s.
In effect, rather than allowing the earlier artificial booms driven by massive household credit expansion in the US and Europe to be liquidated, developed market central bankers drove interest rates to the zero bound in a foolish quest to jump-start consumption spending by debt-saturated households.
But this did not cause consumers to spend more in the US or Europe because the vast middle classes of these developed market economies were already at “peak debt”. Instead, it generated a madcap scramble for yield among money managers and an eventual capital outflow of $4-5 trillion into emerging market debt markets.
Taken together, the combination of unprecedented financial repression in developed market capital markets and the prodigious expansion of domestic business credit in China and the emerging market elicited a tidal wave of capital investment unlike the world has ever witnessed. According to the computations of Thompson Reuters Datastream for all publicly listed companies on a worldwide basis, global CapEx grew from about $500 billion per year in 1995 to $2.5 trillion annually at the peak in 2013.
That stupendous 5X gain is at the heart of the global malinvestment boom. It not only left the world drowning in excess oil, mining, ship-building, manufacturing, shipping, warehousing and distribution capacity, but also created a false chain of income multipliers. That’s because a capital spending boom of this magnitude—— fueled by cheap, falsely priced capital—–is initially accompanied by enormous windfall profits on existing capacity and booming production, wages, profits and vendor contracts among suppliers of new equipment, facilities and infrastructure.
Since 2013, however, the massive capital spending bubble driven by central bank policy has begun to roll-over—–even as the lagged effect of the project completion cycle has temporarily braked the fall. Accordingly, excess capacity continues to build, meaning that the cliff-diving phase of commodity and industrial prices and profit margins has just begun, and that worldwide capital spending will be plunging sharply southward for years to come.
And that means, in turn, that the chain of income multipliers which has inflated profits, wages and bonuses all over the world in the capital goods industries will now violently reverse direction. That not only means that the Chinese and Korean shipyards will soon be bankrupt and that Australia and Brazil are heading for depression, but also that the upstream waves will make a mockery of the US “de-coupling” myth peddled by Wall Street. CAT is as good a short as is China and the European luxury brands which have thrived on Beijing’s Red Ponzi.
So now comes the era of gluts, shrinking profits and a drastic deflation of the giant financial bubble that the world’s central banks have so foolishly generated. And this time they will be powerless to stop the carnage.
Yet the beleaguered central bankers will launch desperate verbal and market manipulation ploys to brake the current sell-off and thereby preserve the bloodied remnants of their handiwork. When in response the gamblers make their eighth run at buying a dip that is now rapidly turning into a crater, it will be an excellent time to sell anything in the casino that isn’t nailed down.
It is well and truly possible that 2130 on the S&P 500 will prove to be the opposite of Doug Kass’ epigrammatic pronouncement. That is, a generational high. Every time the market attempts to climb back into the 2050-2130 zone, it will likely be meet with another shoe falling in the global economy.
Moreover, in the context of the great global deflation and capital goods depression now unfolding, negative economic news will now be seen for what it is—–a confirmation that the great 20-year central bank driven bubble is over, and that inflated incomes and profits will be coming back to earth.
Still, the generation of traders and robo-machines that have so stupendously harvested from the dips after Kass’ generational bottom will by no means be reconciled to the end of the game. They will be eager buyers of calls near the generational top.
Take their premiums whenever the old tops are near. The opportunities are plentiful, starting with Janet Yellen’s favorite short, the NASDAQ Biotech Index:
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< Only thing that got ripped were some muppet asses.
< Que up Kermit the Frog
This show of force today is ALL ABOUT preserving the rate increase in September...they have no other choice
RIPS YOU SAY?
Its real after/about 9/11....this is just a test.
RIPS
It's all about preserving the banks.
http://www.federalreserve.gov/monetarypolicy/policy-normalization-qa.htm#1
Let's say rates got back to %5(stop laughing). $2.5 Trillion(excess reserves) at 5%(I.nterest O.n E.xcess R.eserves)=$125 Billion per year counteferfeit that would go directly to the banksters bottom line to counteract their failing loans.
The Dow is down 10% since May. How is this a Bull Market?
Bull(shit)
Silly. If there are enough headlines with the words "Bull Market", the algos can't help themselves and keep pumping. its been on auto pilot for some time. Like that ill fated german airliner.
If a Social Media campaign started to alter the algos via an Internet search for 'Markets Crashing' on Google, we could change what the algos are reading. Such a campaign would have to have thousands of contributors that wanted to end the FED by this participation. Moreover, given that the establishment is censoring negative headlines so the algos, and masses, don't read them, it would seem prudent to counter their manipulation.
In this day and age, its the instant gratification that matters. I think this day is going to be spun as a "sooper positive sign" to the masses even if it ends down. The whole "market 'letting of some steam' " bullshit play.
IBB is getting a bad case of IBS
Its a trap!
I just saw a commercial where one of the Najarian brothers was selling shamwows! Flipped channels, and there was that other Najarian bastard floating around in a boat somebody shot a cannonball through! Unbemotherfuckinleevable!
Both those mouthbreeders eyes are so close together, they share the same pair of glasses...good thing they were borned nipplenosed, wouldnt work otherwise...
jp the ripper
https://www.youtube.com/watch?v=NMur55NDPvE
Fuck David Stockmen! Anybody remember "trickle down", "star wars", and the "peace dividend". Fucking psychopath.
You' do know that Stockman wasn't on board with Regonomics right? No, maybe you should read before you comment.
I don't have to "read" it, I watched him selling it first hand, so fuck off.
If your going to cite history, you might want to read it first, starting with why Stockman quit the Reagan administration........
TBTF
it's all worthless now.
have you noticed that all the government software projects are out of control.
MAD; careful what you wish for.
The talking heads on CNBS are screaming stay away from energy and buy NFLX. What's that tell you?
Hey when a stock goes up 25% in an hour who is going to argue with that kind of buy recommendation?
Sure if I put in a buy order at 9:30 for $88 it never would have been filled.
Just floating down the Shit river and approaching Flaming Turd Falls with nothing in our way, so BTFD one and all......
Here is your shitshow for today:
AAPL
From $92 to $108 - Up 15%
NFLX
From $88 to $108 - Up 20%
TSLA
$202 to $231 - up 13%
AMZN
$453 to $489 - up 8%
CMG
$685 to $720 - up 5% with a hilarious flash crass during the rip
What is Amazing is that each stock seemed to be bought up by the sam edollar amount. Like somebody just put out bids for $20 higher than the opening price on every stock.
I gotto give it to gambit in the other thread, saying how regardless of the shitshow that we must endure, ZH is the last bastion for sanity where you can get a good laugh. I fully agree! :-)
In all honesty, I'm right in the middle of changing careers to a new job. I have interviews lined up for the next week and just couldn't believe my fucking luck that all this started to come unglued now.
I for one am cheering the PPT today...keep it going for another couple years assholes.
Guy who downvoted me:
Good for you asshole, I'm sure you've got your stacks of gold, bullets, and food after having worked a successful career.
Some of us are barely scraping by here on less than $25k though not from lack of trying.
Given the massacre overseas, I believe today's US market actions make perfect sense! The break out crash, followed by a steady recovery as the people behind the curtain begin the offensive to restart the rise of equity share values. Who are they? Well, the suspects are well known, just google PPT and Fed Market Supports.
Whatever happens, I believe this morning was critical for US support of global markets. The PPT and it's allies in the underworld of elite banking and finance, and government, saved what should have been bloody Monday. If a real price discovery mechanism has been in place, the original collapse would have hit -2,000 by 10:00AM. Instead, it clawed back market value with a surge of power. Anyone out there think this surge was stock holders seeing buying opportunites? Was the rebound really the investors seeing a chance to buy the dip?
It is possible that this was legitimate market action with the fall being unwarrented. I give that a 5% chance. That Government ordered a recovery in stocks before it fell further, and used all it's tools to do it, I say is 95%. The USA had a World to Save this morning, and it looks more and more like they saved it for one more day!
These "market" moves of late seem like Kabuki theater. TPTB needed a firebreak of sorts to stave off further contagion.
By running the stops of the weak hands they simultaneously: 1) reallocate the sellers' resources; 2) give credence to forestalling
a Sept. rate hike (which I think may still come--pump-head fake--- take it to the hole/ got your shit punk);
3) provide a scenario for a miraculous stick save to desensitize muppets to volatility, setting them up for the real pain once they come off the sidelines.
4) provide a catharsis for pent up anxiety. The Uber-Algo is at some point going for a major shearing, and possibly a mutton entree.
5) eviscerate the cheeky short sellers.
BUT-- I could be completely wrong (I often am), and we could see a major shitshow starting at 3:30. I popping corn just in case.
Me too! The Powers That Be engineered a roaring comeback! BUT, will some seek profits at the close. If I was IN, I would!
I dunno Dave, my long-utility portfolio is doing pretty good - those dividends keep on rolling in. Was long GAS going into today, that worked out pretty well. I'm thinking there will be more appetite for "safe" yields and more appetite for acquisitions of companies that actually produce positive earnings (not the bull shit MTM type). Added a bit more GAS as the buyout is at $65/share but the market still under $62. I don't think SO backs out of the deal, and can't see why it won't get regulatory approvals. If any ZH readers think I'm missing something, I'm open to counter views.