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The Lull Before The Storm - It's Getting Narrow At The Top, Part 2
Submitted by David Stockman via Contra Corner blog,
The danger lurking in the risk asset markets was succinctly captured by Monday's overnight action in Asia. The latter proved once again that the casino gamblers are incapable of recognizing the on-rushing train of global recession because they have become addicted to “stimulus” as a way of life:
Shares in Hong Kong led a rally across most of Asia Tuesday, on expectations for more stimulus from Chinese authorities, specifically in the property sector…….The gains follow fresh readings on China’s economy, which showed further signs of slowdown in manufacturing data released Tuesday (which) remains plagued by overcapacity, falling prices and weak demand. The dimming view casts doubt that the world’s second-largest economy can achieve its target growth of around 7% for the year. The central bank has cut interest rates six times since last November.
More stimulus from China? Now that’s a true absurdity - not because the desperate suzerains of red capitalism in Beijing won’t try it, but because it can’t possibly enhance the earnings capacity of either Chinese companies or the international equities.
In fact, it is plain as day that China has reached “peak debt”. Additional borrowing there will not only prolong the Ponzi and thereby exacerbate the eventual crash, but won’t even do much in the short-run to brake the current downward economic spiral.
That’s because China is so saturated with debt that still lower interest rates or further reduction of bank reserve requirements would amount to pushing on an exceedingly limp credit string.
To wit, at the time of the 2008 crisis, China’s “official” GDP was about $5 trillion and its total public and private credit market debt was roughly $8 trillion. Since then, debt has soared to $30 trillion while GDP has purportedly doubled. But that’s only when you count the massive outlays for white elephants and malinvestments which get counted as fixed asset spending.
So at minimum, China has borrowed $4.50 for every new dollar of reported GDP, and far more than that when it comes to the production of sustainable wealth. Indeed, everything is so massively overbuilt in China——from unused airports to empty malls and luxury apartments to redundant coal mines, steel plants, cement kilns, auto plants, solar farms and much, much more—-that more borrowing and construction is not only absolutely pointless; it is positively destructive because it will result in an even more destructive adjustment cycle.
That is, it will only add to the immense already existing downward pressure on prices, rents and profits in China, thereby insuring that even more trillions of bad debts will eventually implode. And that, in turn, will prolong the CapEx depression, which is the inexorable flip-side of the credit driven investment spree that has so massively bloated and deformed China’s economy.
In short, the kind of dead cat bounces like those registered in the Asian bourses last night have virtually nothing to do with prospects that the unfolding global recession can be reversed by central banks or other state fiscal actions. These mini-rallies are entirely financial spasms triggered by the vestigial algorithms of robo-machines and chart-point chasing day traders.
But that is exactly why bubbles eventually splatter. When peak debt is reached, additional credit never leaves the financial system; it just finances the final blow-off phase of leveraged speculation in the secondary markets.
Indeed, what is happening now is that the herd of buy-the-dip speculators is being pushed into a narrower and narrower slice of the market. A few weeks ago we pointed this out with respect the quartet of FANG stocks:
In fact, there were some fireworks in last week’s gains, but if history is any guide they were exactly the kind of action that always precedes a thundering bust. To wit, the market has narrowed down to essentially four explosively rising stocks—–the FANG quartet of Facebook, Amazon, Netflix and Google—–which are sucking up all the oxygen left in the casino.
At the turn of the year, the FANG stocks had a combined market cap of $740 billion and combined 2014 earnings of $17.5 billion. So a valuation multiple of 42X might not seem outlandish for this team of race horses, but what has happened since then surely is.
At this week’s close, the FANG stocks were valued at just under $1.2 trillion, meaning they have gained $450 billion of market cap or 60% during the last 11 months——even as their combined earnings for the September LTM period were up by only 13%.
This means that the FANG stocks were driven to a 60X PE as the gamblers piled on the last trains out of the station.
Yet after 27 failed attempts to rally, including Tuesday’s low volume melt-up, the modest rebound of recent weeks is surely just another spasm of the dying bull.
That’s especially the case coming as it does on the heels of a flood of negative domestic economic news, the onset of the fifth recession in 7 years in Japan, more cratering of credit and industrial activity in China, another plunge lower in Brazil that Goldman has described as an outright depression, continued severe pressure on exchange rates and credit markets in the DM and the specter of a Thermidorian Reaction to the Paris terrorism events in Europe.
Indeed as the old Wall Street adage holds, market tops are a process, not an event. Another peak under the hood of the S&P 500 index, in fact, reveals exactly that.
It turns out that the Tremendous Ten mega-stocks listed in the chart below currently have a combined market cap of $3.76 trillion. That’s up by the considerable sum of $440 billion or 14% since the start of 2015.
But what is not up is the net income of the group as a whole. It weighed in at $158 billion for the 12 months ending in September, and that’s down by 17% from the $190 billion of net income the Tremendous Ten posted for the LTM in December 2014..

But the point is, speculators are hiding in a diminishing number of these seemingly safe havens without regard to short-run earnings performance. At this point, for example, Exxon’s market cap is only down by $50 billion or 13% from year-end 2014 levels, meaning that it is still trading at 18X earnings that are heading much lower for much longer.
Likewise, the market cap of Microsoft (MSFT) has actually risen by $50 billion or 13% to $435 billion. With the global economy heading into a CapEx depression it seems a little more than late in the hour for MSFT to be sporting a 35X trailing PE ratio.
More importantly, the other 490 S&P stocks as a group have been sinking for the better part of a year. Their combined market cap was $15.1 trillion at the end of last year, but has since slide to only $14.6 trillion.
And well it should have. The balance of the S&P 500 still trades at 23X earnings, not withstanding an 11% drop in reported net income since the peak in Q3 2014.
All of this is to say that the third stock market collapse of this century is near at hand. The global economy is in the midst of an unprecedented commodity deflation and CapEx depression - the payback for 20 years of lunatic monetary stimulus and credit expansion.
Yet the central banks are powerless to stop the payback. When the Fed announces a rate increase after 84 months of dithering next week in the face of GDP growth that has already decelerated to barely 1% this quarter the jig will be up.
Monumental money printing has failed. Soon there will be no place to hide - not even in the Tremendous Ten.
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Be a dip....and buy the dip.
Good luck....we're all counting on you.
https://www.youtube.com/watch?v=aB2yqeD0Nus
I'm sure that is how the Fed has propped up the market for the past year...just buy 10 stocks and have it lift the market. What a crock.
What is Fang, Maxwell Smart's dog, having anything to do with the stock market? And why is Stockman using the FANG acronym, created by CNBC blowhard Jim Cramer?
This 1967 true story is of an experience by a young 12 year old lad in Kingston, Ontario, Canada. It is about the vivid memory of a privately rebuilt P-51 from WWII and its famous owner/pilot.
In the morning sun, I could not believe my eyes. There, in our little airport, sat a majestic P-51. They said it had flown in during the night from some U.S. Airport, on its way to an air show. The pilot had been tired, so he just happened to choose Kingston for his stop over. It was to take to the air very soon. I marveled at the size
of the plane, dwarfing the Pipers and Canucks tied down by her. It was much larger than in the movies. She glistened in the sun like a bulwark of security from days gone by.
The pilot arrived by cab, paid the driver, and then stepped into the pilot's lounge. He was an older man; his wavy hair was gray and tossed. It looked like it might have been combed, say, around the turn of the century. His flight jacket was checked, creased and worn - it smelled old and genuine. Old Glory was prominently sewn to its shoulders. He projected a quiet air of proficiency and pride devoid of arrogance. He filed a quick flight plan to Montreal ("Expo-67 Air Show") then walked across the tarmac.
After taking several minutes to perform his walk-around check, the tall, lanky man returned to the flight lounge to ask if anyone would be available to stand by with fire extinguishers while he "flashed the old bird up, just to be safe." Though only 12 at the time I was allowed to stand by with an extinguisher after brief instruction on its use -- "If you see a fire, point, then pull this lever!", he said. (I later became a firefighter, but that's another story.) The air around the exhaust manifolds shimmered like a mirror from fuel fumes as the huge prop started to rotate. One manifold, then another, and yet another barked -- I stepped back with the others. In moments the Packard -built Merlin engine came to life with a thunderous roar. Blue flames knifed from her manifolds with an arrogant snarl. I looked at the others' faces; there was no concern. I lowered the bell of my extinguisher. One of the guys signaled to walk back to the lounge. We did.
Several minutes later we could hear the pilot doing his pre-flight run-up. He'd taxied to the end of runway 19, out of sight. All went quiet for several seconds. We ran to the second story deck to see if we could catch a glimpse of the P-51 as she started down the runway. We could not. There we stood, eyes fixed to a spot half way down 19. Then a roar ripped across the field, much louder than before. Like a furious hell spawn set loose -- something mighty this way was coming. "Listen to that thing!" said the controller.
In seconds the Mustang burst into our line of sight. It's tail was already off the runway and it was moving faster than anything I'd ever seen by that point on 19. Two-thirds the way down 19 the Mustang was airborne with her gear going up. The prop tips were supersonic. We clasped our ears as the Mustang climbed hellishly fast into the circuit to be eaten up by the dog-day haze. We stood for a few moments, in stunned silence, trying to digest what we'd just seen.
The radio controller rushed by me to the radio. "Kingston tower calling Mustang?" He looked back to us as he waited for an acknowledgment. The radio crackled, "Go ahead, Kingston." "Roger, Mustang. Kingston tower would like to advise the circuit is clear for a low level pass." I stood in shock because the controller had just, more or less, asked the pilot to return for an impromptu air show! The controller looked at us. "Well, What?" He asked. "I can't let that guy go without asking. I couldn't forgive myself!"
The radio crackled once again, "Kingston, do I have permission for a low level pass, east to west, across the field?" "Roger, Mustang, the circuit is clear for an east to west pass." "Roger, Kingston, I'm coming out of 3,000 feet, stand by." We rushed back onto the second-story deck, eyes fixed toward the eastern haze. The sound was subtle at first, a high-pitched whine, a muffled screech, a distant scream. Moments later the P-51 burst through the haze. Her airframe straining against positive G's and gravity. Her wing tips spilling contrails of condensed air, prop-tips again supersonic. The burnished bird blasted across the eastern margin of the field shredding and tearing the air. At about 500 mph and 150 yards from where we stood she passed with the old American pilot saluting. Imagine. A salute! I felt like laughing; I felt like crying; she glistened; she screamed; the building shook; my heart pounded. Then the old pilot pulled her up and rolled, and rolled, and rolled out of sight into the broken clouds and indelible into my memory.
I've never wanted to be an American more than on that day! It was a time when many nations in the world looked to America as their big brother. A steady and even-handed beacon of security who navigated difficult political water with grace and style; not unlike the old American pilot who'd just flown into my memory. He was proud, not arrogant, humble, not a braggart, old and honest, projecting an aura of America at its best.
That America will return one day! I know it will! Until that time, I'll just send off this story. Call it a loving reciprocal salute to a Country, and especially to that old American pilot: the late-JIMMY STEWART (1908-1997), Actor, real WWII Hero (Commander of a US Army Air Force Bomber Wing stationed in England), and a USAF Reserves Brigadier General, who wove a wonderfully fantastic memory for a young Canadian boy that's lasted a lifetime.
For the past year???? The past 8 years I think.
"they have become addicted to “stimulus” as a way of life"
Give us more Methadone now whhhhaaaaaaa!
Should have kicked the big habit long ago. 8 years of increasing debt and leverage will kill the junkie this time.
Jenga!
Indeed.
time to get yourself right with God, folks
https://www.youtube.com/watch?v=AfnvFnzs91s
How appropriate..."Obviously a MAJOR MALFUNCTION"
I think they can play this another year or so, although if you live and habitate on US main street (or any other 'mainstreet'), you will see the effects start to excellerate in 2016 in terms of unemployment, wage deflation, commercial vacancy, falling industrial output, increased social unrest, etc.
So, it's a big game of financial chicken at this point. How close do you want to 'play' it before the inevitable collapse. And yes, the central banks cannot prevent a total collapse. At best, they can play for time, and at this point, if they play very well, we may go through 2016 without the wheels falling off!
Man, it's going to be big! BTW, if you are a millenial, don't worry about your 'career.' You are going to experience the ultimate career change here soon, especially if you are a white collar type. Will not be much need for analytics and spreadsheets once the shit goes down. Oh, I work for an analytics company, so I know my job will be irrelevant within 5 years.
Agreed on the 2016 analysis. As far as the market, it can stay irregular longer than we can stay solvent. The market right now is in some sort of fibrillation, meaning it's quivering waiting its final beat....the question of course, is when.
The Odumbo schedule today...
TODAYTHE SCHEDULE
In the morning, the President and the Vice President will receive the Presidential Daily Briefing in the Oval Office. This meeting is closed press.
In the afternoon, the President will have lunch with the Vice President in the Private Dining Room. This lunch is closed press.
All times ET
11:45 AM
The President and the Vice President receive the Presidential Daily Briefing
Oval OfficeClosed Press
12:30 PM
The President and the Vice President meet for lunch
Private Dining RoomClosed Press
Add events to your calendarIn-Town Pool Call Time: 9:30 AM
Wires: AP, Reuters, Bloomberg
Wire Photos: AP, Reuters, AFP
TV Corr & Crew: CBS
Print: Talking Points Memo
Radio: SRN Subscribe to: the full
Yes. And of course we on ZH have known and been talking about this very end game for years now -- to no avail. TPTB will do what they do and bring it all down in the end.
David luv your work but some things. PLEASE EVERYONE STOP CALLING IT STIMULUS !! already. Its not!! Its the exact opposite in reality . B"old Wall Street adage holds," really? It still hasnt sunk in that does not apply? That free markets were shut down years ago? What planet have you been on since 9am 10/2/15 ?? Market collapse at hand ? Come on. How many years have we been hearing this? You should know if the last 4 months of the last 2 years the fed runs a hedge fund. When "they" decide the market is to collapse it will be such that. But NOTHING resembling fundamentals or even close to it will do so. It would awaken the sheep and its not time yet
Words are NOT for communication, they are to sell things.
Stimulus is a word to sell the notion that theft and graft are a net positive for our economy and therefore should be accepted.
Obviously the answer is to short them all.....its worked so well so far...
Stockman is correct that there is no safe place to hide your wealth. Any thing that would appear to be safety will be captured by government, as that is who is really driving this crap show. Gold will be taxed and property will be taxed and as we see in Greece, EVERY FUCKING THING WE POSSESS WILL BE TAXED.
we are captured and the only escape is minimalism, own nothing and live on nothing....or just die.
Or how bout lock and load and say hey hey ho ho government has got to go?
Goldman and JPM know which stocks (indexes) the Federal Reserve is buying.
Better believe they have billions front-trading William Dudley and his cohorts.
JPM and Goldman are also doing the buying for the Fed as well as it's member banks.
When the Russian jets were shot down and the market went up that was a huge signal it's the Fed along with the government's PPT.
Only a US currency crisis can free these markets. When no other country wants the US dollar and everyone is dumping it then the Fed loses control.
Only a tragic loss of life and military might from a lost war will upset this pattern. There will never be enough morally-compassed, fiscally-conservative, constitutionally-libertarian voters to end this process through an election.
Except.....there is a 9trill$ short on the USD and that will have to be covered, which means in simple terms: INCREASED dollar demand.
This is not rocket science. And is not Stockman maintaining that the Fed will hike at the next FOMC meeting?
Long cash; short EMs.
The US financial markets are buoyed by the US Federal Reserve and by the US debt. Whatever it takes, the government will do in order to keep the financial markets from collapsing. This will continue indefinitely.
So, BTFD has been and will continue to be the shrewdest investment strategy. And for the quick, trading options will make some extra money along the way.
In China, shorts are arrested. In America, we just bankrupt them.
I like permanent high plateau better. Nirvana.
Friend finder result for you: https://www.newyorkfed.org/research/economists/potter/index.html
interesting factoid ....the average life span for an S&P 500 company has shrunk from 60 years to 18 years
https://hbr.org/2014/04/the-art-of-corporate-endurance
Does this mean my puts/shorts will start to work?
It's the eye of the tiger, and it will eat you whole...get prepared now, while you still can.
amazing how facefuck cracks the top 10 - number one gossip and photo sharing website
Shee kina sitn wita ly dou fang
Let it ang wit a itin imin babee
Ide oln lee pak da thangs yoodo
Letit ang ifen eeton wacha ron wichoo
I wouldn't touch her with a ten foot pole.
[/zz top, el loco]
This may be useful for the folks of ZH
http://www.dummies.com/how-to/content/islamic-finance-for-dummies-cheat-...
The Fed could undertake QE4 and buy $5t to $10t in 50 yr muni bonds at 0% to NIRP that finance strategic infrastructure (roads, bridges,dams,transmission, renewables, R&D and education...).
This has the potential to be productive investment, will crowd in private investment, create millions of jobs and have have broad based benefits.
Regardless the Fed or Gov't is not out of bullets unless the elite want to choke the economy and the populace.