Robert Gore's "Hard Core Doom Porn"

Authored by Robert Gore via Straight Line Logic blog,

It will be a crash like we’ve never seen before.

SLL has been accused of trafficking in “doom porn.” Guilty as charged. If you don’t like doom porn, don’t read this article, it’s hard core. If you prefer feel good and heartwarming, there are plenty of Wall Street research reports and mainstream media stories about the economy available. Enjoy!

In 1971, President Nixon closed the “gold window,” which allowed foreign governments to exchange their dollars for gold. This severed the last link between any government and central bank-created debt and the real economy. Debt could be conjured at whim, and governments and central banks have done so for the last 46 years.

Not surprisingly, credit creation without restraint has papered the globe with the greatest pile of debt mankind has ever amassed, measured in nominal terms or relative to the underlying economy. A measure of how extraordinary this situation is: most people regard it as normal, if they think of it all. Debt is a first mover, a financial constant. Any exigency small or large can be met from an unlimited credit pool that will always be with us. How to rebuild Houston, Florida, and Puerto Rico? No problem, borrow.

Although fiat credit creation by governments and central banks is unconnected to the real economy, its effects are not. Their debt becomes an asset within the financial system. Through fractional reserve banking, securitization, and derivatives it become the basis for a multiplication of the original debt. That multiplication is many times the multiplier (the reciprocal of the reserve requirement) taught in introductory macroeconomics classes whereby the debt is contained within the banking system.

Nominal global debt is reckoned at between $225 and $250 trillion, or about three times global GDP. Financial, debt-supported derivatives (financial instruments whose prices are derived from the prices of other financial instruments) are estimated at anywhere from $500 trillion to $1 quadrillion notational, or six to twelve times global GDP.

Overpriced houses did not cause the last financial crisis and almost bring down the world’s financial system, securitized packages of mortgages and their associated derivatives did. The Panglossian view of derivatives is that most of them can be netted out against offsetting derivatives, thus actual exposures are far less that notational amounts. The real world view is they can only be netted out as long as all counterparties remain solvent. As we learned in 2009, that is not always a correct assumption.

Globally, unfunded old age pension and medical liabilities, not counted as debt but still promises made that often have the force of law, sum to another $400 trillion. In the US, they are about $210 trillion, or about 11 times US GDP. Demographics amplify the liability: across the developed world, declining birth rates and extensions in life expectancies mean a shrinking pool of workers supports an expanding pool of beneficiaries. In the last month, SLL has posted four excellent articles by John Mauldin for those who want all the gruesome details. (Just enter John Mauldin in SLL’s search box and they’ll pop right up.)

This doom porn, the skeptics will say, is almost as old as Deep Throat (released in 1972). Markets crash from time to time, but they always bounce back. Central banks and governments come to the rescue with fiscal stimulus (increased government debt) and unlimited fiat debt.

Why should we worry now?

There are a number of reasons.

When the world was less indebted, a fiat currency unit’s worth of debt produced more than a fiat currency unit’s worth of expanded output of goods and services. Sometime within the last year or two, the marginal economic effectiveness of all that government and central bank debt reached zero, and is negative after debt service.

With the world saturated in debt, another fiat currency unit of debt produces no increase in output. Kick in the costs of servicing and repaying that debt, and increasing debt is actually retarding economic growth. It accounts for the long-term slowing growth trend, flat incomes, and “secular stagnation” that puzzle so many economists.

It also accounts for the lack of inflation that puzzles so many central bankers, at least in the price indexes they look at. They are looking at the wrong indexes. The relevant indices are stock, high-grade bond, real estate, and cryptocurrency prices, still at or close to record highs, and corporate and securitized-debt credit spreads to treasury benchmarks at record lows (indicating massive complacency about corporate credit risk). Here inflation—the speculative kind that blows bubbles—is alive and thriving.

With the Federal Reserve now taking steps to shrink its balance sheet and other central banks making noises about doing the same, global fiat debt creation may go into reverse for the first time in many years. Brandon Smith at Alt-Market.com argues that this is part of plan leading to a crash and global, centralized monetary control.

He may or may not be on to something, however, valuation extremes and sentiment indicators point to the same conclusion concerning a crash. SLL maintains financial markets are exercises in crowd psychology, impervious to government and central bank efforts to control them, designed to separate the maximum number of speculators from a maximum amount of their money.

Robert Prechter, of Elliott Wave International, has written the chapter and the verse on markets and psychology. (SLL reviewed his groundbreaking tome, The Socionomic Theory of Finance.) Consider the following from Elliot Wave International’s October “Financial Forecast.”

Every month another sentiment indicator seems to pop to a frothy new extreme. Last month it was the percentage of cash that members of the American Association of Individual Investors harbored in their investment portfolios. At 14.5%, it was the smallest allocation to this safe alternative since January 2000, the same month that the Dow Industrials began a 38% decline that lasted through October 2002. Last month, we also showed a new bullish extreme for the five-day average of Market Vane’s Bullish Consensus survey of advisors. On September 15, the average pushed to 71%, a new ten-year extreme.

 

...

 

The most recent Commitment of Traders Report shows that Large Speculators in futures on the CBOE Volatility Index (VIX) have amassed a record net- short position of 172,395 contracts.

 

...

 

This record bet on subdued volatility sets the stage perfectly for the period of “high volatility” that EWFF called for in August.

 

...Large Speculators in the E-mini DJIA futures have pushed their net-long position to 95,976 contracts, more than four times the number of contracts they held in January 2008, shortly after the Dow started its largest percentage decline since 1929. So, investors are betting to a record degree that the stock market will continue to rise and volatility will continue to remain subdued. Paradoxically, these measures indicate that exact opposite.

 

...Various media accounts confirm that a rare complacency now dominates the stock market.

One doesn’t have to buy in to socionomics to realize that virtually everyone is now on the same side of the boat, a condition generally followed by the boat capsizing. Using conventional valuation measures, the only time stocks have been more highly valued is just before the tech wreck in 2000.

If one does buy into socionomics, the last few upward squiggles in the stock market will put the finishing touches on intermediate, primary, cycle, supercycle, and grand supercycle Elliot Waves dating back to 2016, 2009, 1974, 1932, and the 1780s, respectively. In other words, this is going to be a crash for the ages.

Given the unprecedented level of global debt, that appears to be the most likely scenario. Every financial asset in the world is either a debt claim or an even less secure equity claim—a claim on what’s left after debt is paid. Much of the world’s real, tangible assets are mortgaged.

When the debt bubble implodes, a global margin call will prompt forced selling, driving down all asset prices precipitously. Most of what is currently regarded as wealth will vanish. Opening up the world’s fiat debt spigots full force won’t stop this one. The notions that governments and central banks have speculators’ backs, that problems caused by excessive debt can be solved with more debt, will be revealed as monumental follies. And markets will not come back, at least in our lifetimes.

Long-time readers will point out that SLL has been issuing warnings for years. Again, guilty as charged. However, we’ll join Mr. Prechter and company in their prediction that US equity markets top out before the end of this year. (They called last year’s top in the government bond market, adding to an impressive list of correct calls.) If we’re wrong, it won’t be the first or last time. If we’re right, given the magnitude of what’s coming, being a few years early won’t matter at all.

Our concluding clichés: fear is stronger than greed and markets go down much quicker than they go up.

Comments

Rapunzal Fidel Sarcastro Thu, 10/12/2017 - 22:27 Permalink

The crash is already here, but it's still invisible for the majority.
1. Every government statistic that exists is a lie or badly manipulated.
See the CPI, unemployment and many more
2. The banks are all bankrupt, changes in accounting and FED liquidity keeps up the corpses.
3. The money creation, electronically, was so enormous, that if the banks were to release this money, it would collapse the dollar instantly. So as of today all our savings, pensions, 401K, SS etc. are already worthless, only to wait for banks to pull the plug.

In reply to by Fidel Sarcastro

Yen Cross Thu, 10/12/2017 - 22:22 Permalink

  I'd prefer Tylers', facts.  The bond curve inverting, and macro financials- overlayed on ES earnings estimates work fantastically for me.

Bete Noire Thu, 10/12/2017 - 22:29 Permalink

So who goes in the crapper first, us (U.S) or Europe?if it's Europe first isn't that money going to come here? And what will that do to the averages? Being doomish ( I am) has cost me LOTS.

EndOfDayExit Thu, 10/12/2017 - 22:37 Permalink

Here CBs have everyone by the balls. CBs can set whatever price they want for the markets. Very few (if any) people are in the know about the particular political / economic developments CBs are most concerned about and which could force CBs hand.... All it takes for CBs to prevent the markets from falling is to keep selling volatility futures in unlimited amounts. Then the other market participants will take care of the equity prices via arbitrage. The same is likely being done to gold - as long as very few people want to buy physical and instead are buying futures, CBs can keep selling them those futures without limit and without moving the price of gold higher at all.

gramps Thu, 10/12/2017 - 22:37 Permalink

The good thing about being a doomer is you're always right eventually. I do believe that this next one is going to be massive and transformative. When the dollar dies is when the big push for world government begins and the UN is shooting for 2030.

samsara Thu, 10/12/2017 - 22:38 Permalink

Fucking about time, some Doom Porn I can sink my teeth in. Not like all the other 'Feel Good' shit ZH has been flooded with recently...

/sarc

Erwin643 Thu, 10/12/2017 - 22:53 Permalink

This is the same kind of doomer porn that's been keeping people from making money in the markets all these years. Market participation isn't even what it was around 2000. Talk about creating wealth inequality!! It's articles like these that are doing it!!Oh yeah, Brandon Smith, of course. Yeah he's a real authority on central banks and monetary policy  - he's just a Survivalist who lives out in the woods in Montana (No offense, Brandon).

Lost in translation Thu, 10/12/2017 - 23:47 Permalink

Too much doom porn has led to narcolepsy, and I'm unable to remain conscious any longer.

Would somebody please wake me up when the bankers begin landing on the pavement outside 432 Park Avenue?

Irvingm Thu, 10/12/2017 - 23:56 Permalink

We are all doomed according to Zero Hedge.  Oh wait. They have been saying that for 8 year. Many traders have gone belly up. Only analysts left who can predict markets is Shepwave.

Beaker99 Fri, 10/13/2017 - 00:08 Permalink

Anyone can pick it's going to end badly. It' all about the timing though. Next week, next year?? Until you have some intelligent insight into exactly when this all falls apart, it's basically useless information.

fattail Fri, 10/13/2017 - 07:29 Permalink

The CB ability to keep this economy afloat with cheap money and asset purchases is impressive and has been more effective than I expected.  But that doesn't change the math, it just makes it worse.  The cracks are showing though.  State and local governements are becoming more incapable of balancing their budget and meeting their pension promises.  There are starting to be runs on the pensions.  Illinois and Conneticutt and probably a few other states are going to eat it in the next down cycle as tax revenues dry up.  If trump eliminates the state and local tax deduction that will drive the migration even more.  5vs30's are back on their lows.  China's entire "growth" has all been from a huge credit bubble which has grown something like 14X since 2000.  The communist party meeting is in november so everything should be all good til after that.   The dollar will have to be printed in massive quantities, but it won't matter initially as technologies ability to produce things at lower prices along with the influx of AI and ML to reduce costs and the wages of the few needed unskilled and lowskilled workers, will hide the depreciating value of the currency for awhile.  

gilhgvc Fri, 10/13/2017 - 11:18 Permalink

SLL has been accused of trafficking in “doom porn.” Guilty as charged. If you don’t like doom porn, don’t read this article, it’s hard core. If you prefer feel good and heartwarming, there are plenty of Wall Street research reports and mainstream media stories about the economy available. Enjoy!................ that was aimed at you boys.....lmao

Leftsmasher Sat, 10/14/2017 - 14:15 Permalink

The power or one negative person to suck positive ones into their rip current outweighs x10 the power of one positive to pull up the DCMF (dark cloud mother effer)
Stockman lives on it $$$.