Stockman: "Bitcoin Is The Poster-Boy For An Unhinged Financial System"

Authored by David Stockman via Contra Corner blog,

The lemmings are now in full stampede toward the cliffs. You can literally hear the cold waters churning, foaming and crashing on the boulders far below.

From bitcoin to Amazon, the financials, the Russell 2000 and most everything else in between, the casinos are digesting no information except the price action and are relentlessly rising on nothing more than pure momentum. The mania has gone full retard.

Certainly earnings have nothing to do with it. As of this morning, the Russell 2000, for instance, was trading at 112X reported LTM earnings.

Likewise, Q3 reporting is all over except for the shouting and reported LTM earnings for the S&P 500 came in $107 per share. That's of signal importance because fully 36 months ago, S&P earnings for the September 2014 LTM period posted at $106 per share.

That's right. Three years and $1 of gain. They talking heads blather about "strong earnings" only because they think we were born yesterday.

What happened in-between, of course, was the proverbial pig passing through the python.

First, the global oil, commodities and industrial deflation after July 2014 took earnings to a low of $86.44 per share in the March 2016 LTM period.

After that came the opposite---the massive 2016-2017 Xi Coronation Stimulus in China. The new Red Emperor and his minions pumped out an incredible $6 trillion wave of new credit, thereby artificially stimulating a global rebound and a profits recovery back to where it started three years ago.

The difference of course is that $106 of earnings back then were priced at an already heady (by historical standards) 18.6X, whereas $107 of earnings today are being priced at a truly lunatic 24.6X.

After all, nothing says earnings bust ahead better than an aging business cycle, a cooling Red Ponzi, an epochal shift toward central bank QT (quantitative tightening) and a massive Washington Fiscal Cliff. Yet every one of those headwinds are self-evident and have made their presence known with a loud clang in the last few days.

Self-evidently, we are now 36 months closer to the next recession in a business cycle which at 101 months is already approaching the 1990s record of 118 months and facing far greater headwinds. Foremost among these is the unprecedented but unavoidable turn of the central banks---after two decades of relentless expansion--- toward interest rate normalization, QT (quantitative tightening) and trillions of debt and other securities sales (demonetization or balance sheet shrinkage).

The new Janet Yellen in tie and trousers made that perfectly clear at yesterday's confirmation hearing:

Powell said he expected the balance sheet to shrink to about $2.5 trillion to $3 trillion over the next three to four years under a program set in motion by Yellen......On interest rates, Powell said: "I think the case for raising interest rates at our next meeting is coming together."

Actually, the promised balance sheet shrinkage process is going to rapidly escalate from $10 billion per month of Fed bond sales now, to $30 billion by spring and $50 billion by next October. That amounts to a $600 billion annual run rate; and when the ECB and other banks join the "normalization" party in 2019 and beyond total central bank bond sales will pierce through the $1 trillion per year level.

And that's a very big deal because the law of supply and demand has not yet been abolished, meaning prices and yields in the global bond market are heading for a big reset. For instance, if the UST 10-year benchmark note normalizes to a yield of 4.0%, its price will fall by more than 40% from current levels (2.35%).

Needless to say, the entire market for risk assets including equities, junk bonds, corporates and real estate is predicated upon current ultra low yields and historically unprecedented leverage. So smash the price of the benchmark bond by 40% and you have a cascading chain of downward valuation adjustments that will reach the tens of trillions.

But that's not all. The 19th Party Congress is over, but the Red Suzerains of Beijing wasted no time throttling down China's red hot credit bubble and hyperventilating housing market. The chart below is the smoking gun----and puts the lie to the foolish Wall Street meme of the moment that the world economy is in the midst of an outburst of "synchronized growth".

Actually, it's puffing on the exhaust fumes of a veritable housing hysteria during the run-up to China's 19th Party Congress, which saw home mortgage issuance soar by nearly 60% in 2016.

Now, however, Beijing's clampdown is giving Ross Perot's famous "sucking sound to the south" an altogether new definition. In the most recent period, year over year mortgage growth actually turned negative----meaning China's gigantic apartment construction and building materials complex will be cooling rapidly, too.

Needless to say, what happens in the Red Ponzi does not stay in the Red Ponzi. The modestly rebounding global figures for industrial production, trade and GDP reported recently were just feeding off the massive credit impulse evident in the red line below.

When S&P earnings were peaking back in September 2014, China's total credit growth from all sources---including its $15 trillion shadow banking system---had slowed to a 15% annual run rate, but then was gunned to upwards of 30% during the Coronation Boom from early 2016 onwards.

But now that Mr. Xi's very thoughts have been enshrined in the Communist Party constitution---check-by-jowl with the wisdom of the Great Helmsman, Mao Zedong----credit growth is plummeting. Even China's new Red Emperor recognizes that $40 trillion of debt on a purported $12 trillion economy (actually far lower when massive malinvestments are deleted from the reported GDP "flows") is a recipe for collapse.

Xi Jinping may well be delusional about the capacity of centralized bureaucrats--even ones with all the guns--- to tame and stabilize the greatest Ponzi-style digging, constructing, borrowing, spending and speculating scheme in recorded history. But his goal is a third term in 2022, and in the interim he means to mop down China's fevered borrowing and building spree with alacrity.

Accordingly, the global commodity and CapEx cycle will rapidly weaken as the red line in the chart heads toward the flat-line. The talking heads will not be gumming about synchronized global growth much longer.


But what they will be talking about soon is a US Fiscal Cliff like none before. It now seems that the desperate GOP politicians of Capitol Hill have come up with so many fiscal gimmicks that they may actually cobble together 51 votes in the Senate.

But the emerging Rube Goldberg Contraption, which sunsets all of the individual tax cuts after 2025, and then piles on top a "trigger tax", which most surely would turn the whole things into massive ($350 billion) tax increase after a 2024 "growth" test, is actually a giant debt trap.

In fact, between 2018 and 2024 the emerging Senate "compromise" would generate upwards of $1.4 trillion of new debt including interest on the added borrowing. That's because as we explained yesterday the Senate tax bill is front-loaded with the annual revenue loss peaking at $250 billion in 2020 and diminishing steadily thereafter to just $145 billion in 2025 and a slight surplus in 2027.

Consequently, the public debt builds up rapidly in the early years---long before any added growth could possibly move the needle. We will provide more detailed calculations on this crucial point tomorrow and completely debunk the "growth will pay for it" story.

But suffice it to say here that the massive front-loaded borrowing embedded in the Senate tax bill would come on top of the $6.1 trillion already built into the CBO baseline for the 2018-2024 period and another $1 trillion that will be needed for disaster relief and the Donald's massive defense build-up and dramatically heightened pace of global military operations.

In a word, we do not think you can finance $8.5 trillion of new Federal debt in an environment in which the Fed and its convoy of fellow traveling central banks are also selling bonds by the trillions. That is, without triggering a "crowding out" effect of the kind that has been in hibernation every since Greenspan's cranked up the Eccles Building printing presses after the 22% stock market plunge in October 1987.

The irony is that the GOP is setting up a fiscal cliff which will exceed $1 trillion per year of new borrowing as early as 2020 ($775 billion baseline plus $225 billion of revenue losses and added interest from the tax cut) based on the erroneous view that domestic economic growth is being stunted by high corporate taxes.

This chart below should put the lie to that confusion once and for all. Even as the effective corporate tax rate has been marching down hill for decades, the trend rate of economic growth has been steadily falling.

Notwithstanding today's GDP blip, real final sales have grown at just 1.2% per year over the last decade or by only one-third of the rate extant when the effective corporate tax rate was more than double the current 20% level.

Image result for images of effective us corporate tax rate

So today's lemming actually are marching toward a Fiscal Cliff---- oblivious to the true meaning of the Senate tax bill maneuvers. But by definition, at the blow-off peak of a great financial bubble markets are oblivious to everything except the price action.

In that context, Bitcoin is neither an outlier nor a one-off freak; it's a poster boy for an unhinged financial system where honest price discovery, two-way markets, fear of risk and financial discipline have been completely destroyed by the central banks.

Whatever its eventual merits as a private money and payment system away from the grasping hand of the Deep State, bitcoin (and the mushrooming slate of other cryptos) at the moment is in the throes of the kind of mania that reminds us of why runaway bubbles eventually generate their own demise.

Image result for bitcoin chart in last year

For want of doubt, Zero Hedge early today calculated out bitcoin's accelerating rate of rise.

Needless to say, the sequence below is not the birthing throes of a new money being born; it's just another iteration of the same old lemmings stampeding toward the cliff:

  • $0000 - $1000: 1789 days
  • $1000- $2000: 1271 days
  • $2000- $3000: 23 days
  • $3000- $4000: 62 days
  • $4000- $5000: 61 days
  • $5000- $6000: 8 days
  • $6000- $7000: 13 days
  • $7000- $8000: 14 days
  • $8000- $9000: 9 days
  • $9000-$10000: 2 days
  • $10000-$11000: 1 day

Big dip overnight was bought and as US equity markets prepare to open, Bitcoin just topped $11,000...


rejected Gaius Frakkin'… Thu, 11/30/2017 - 16:20 Permalink

Maybe because they've been screwed more times than the younger monetary geniuses.I'm always impressed how boomers are mentioned in almost every thread regardless of the conversation. They're slowly dying out so your gonna have to find another group to lay the worlds problems on. Soon, even your generation will be ostracized for not doing the 'right thing',,, whatever the hell that is....

In reply to by Gaius Frakkin'…

dasein211 Pinto Currency Thu, 11/30/2017 - 15:31 Permalink

Why is he complaining? Trading is simple now. Gov’s will print whatever it takes to make the markets stable. Just buy whatever is trading based on that understanding that’s not controlled by governments. It’s bitcoin. He’s right that it’s nuts but fuck, how else is anyone going to make any money or protect themselves. They fuck the gold and silver markets all the time!! Buy whatever they can’t control! Simple!!!

In reply to by Pinto Currency

dasein211 Pinto Currency Thu, 11/30/2017 - 15:31 Permalink

Why is he complaining? Trading is simple now. Gov’s will print whatever it takes to make the markets stable. Just buy whatever is trading based on that understanding that’s not controlled by governments. It’s bitcoin. He’s right that it’s nuts but fuck, how else is anyone going to make any money or protect themselves. They fuck the gold and silver markets all the time!! Buy whatever they can’t control! Simple!!!

In reply to by Pinto Currency

inhibi dasein211 Thu, 11/30/2017 - 16:23 Permalink

Bitch please. The government can freeze your bank accounts (even overseas), take away your land, your visa, stocks, gold, etc. but not BTC?Im sure you will say that BTC is some free form of global currency - yeah, until you want to pay for something. Then all of a sudden, BTC is useless. Its a 100% financial investment formed on hype. Its akin to Uber or Snapchat. If youre an early investor, you make away like a bandit. If you jump on the bandwagon towards the end, your left penniless with your dick in your hand.China's Xi farts and BTC drops 15% in a day. Venezuela declares bankruptcy and BTC goes up 15% in a day. Some idiot posts an article online about BTC going to 1000000, and more people jump on the bandwagon to get pumped and dumped by the major players.Just look at the recent news on BTC:Katy Perry talking about BTC with Warren BuffetSome rap artist wants to create an ICODoes that not spell out a bubble to you?  

In reply to by dasein211

Archive_file Buckaroo Banzai Thu, 11/30/2017 - 15:28 Permalink

It’s true.

Bitcoin is a gigantic middle finger to the entire fake economy system. Bitcoin is transparent unlike the numerous middlemen involved in using a dollar.

Bitcoin is our salvation folks. It’s not 1950 anymore. India went digital, we’re next. However, when the balloon goes up and were told to go turn in our dollars for a government issued ATM card, bitcoin won’t give you pennies on your dollar.

In reply to by Buckaroo Banzai

JimT Archive_file Thu, 11/30/2017 - 15:50 Permalink
  • $0000 - $1000: 1789 days- infinite
  • $1000- $2000: 1271 days- 100%
  • $2000- $3000: 23 days- 50%
  • $3000- $4000: 62 days- 33.3%
  • $4000- $5000: 61 days- 25%
  • $5000- $6000: 8 days- 20%
  • $6000- $7000: 13 days--- you get the idea....
  • $7000- $8000: 14 days
  • $8000- $9000: 9 days
  • $9000-$10000: 2 days
  • $10000-$11000: 1 day


In reply to by Archive_file

Endgame Napoleon Archive_file Thu, 11/30/2017 - 16:53 Permalink

Its virtue—its diaphanous nature—might be its drawback as a currency, not just because of privacy issues, but because cryptocurrency might be less flexible than the Establishment system. It seems like the economies that stay solvent the longest are the ones that can change when needed. Theoretically, crytos are decentralized, and that word is supposed to unleash the ultimate economic flexibility. But like you say, governments will control Bitcoin when (if) it becomes an official currency. What will total transparency mean in a government-controlled currency? Best-case scenario: It could mean less chicanery by the political elites since the transactions are see-through. But you will never go broke underestimating the underhandedness of the political class. They would probably set up a transparent crypto for the serfs and another less transparent crypto for the lords. I still say cryptos are math-backed gold, an alternative store of value. Since people are scared the economy is going to crash, they are diversifying by putting some money in cryptos in case governments seize the gold in a crash.

In reply to by Archive_file

Billy the Poet Archive_file Thu, 11/30/2017 - 17:34 Permalink

Bitcoin is transparent unlike the numerous middlemen involved in using a dollar. Bitcoin is our salvation folks. It’s not 1950 anymore. India went digital, we’re next. However, when the balloon goes up and were told to go turn in our dollars for a government issued ATM card, bitcoin won’t give you pennies on your dollar. So you're looking forward to the day when the government forces everyone to use a currency which can be tracked through every transaction and you're trying to pass that off as a feature called "transparency" rather than as a bug called tyranny?

In reply to by Archive_file

crazybob369 Buckaroo Banzai Thu, 11/30/2017 - 16:16 Permalink

I disagree Buck. Bitcoin (and Cryptos) are very much a symptom. I guarantee you, that Bitcoin would not have taken off like it has, if currencies were still linked to gold (or some other asset). What you are seeing in Bitcoin (and the markets in general) is inflation manifesting itself through other channels. And by inflation I mean;  people’s lack of confidence in their currency. It also reflects a generational bias. Older people would gravitate toward PM’s in these times, younger people are more comfortable with tech and therefore tend to gravitate to things like Bitcoin. I also don’t believe that the “disease” can be cured with Bitcoin (or others), because TPTB will kill it, long before it can kill their system.

In reply to by Buckaroo Banzai

bwh1214 crazybob369 Thu, 11/30/2017 - 16:27 Permalink

Rising PM's in 09, 10 and 11 are also a symptom.  Much of that crowd have shifted to Crypto.  If that trend of attempting to protect yourself with crypto doesn't change it's going ot the moon, cause people are going to need protection.  I keep my PM's incase of crypto failure, but own crypto in case trends continue.  The PM community should understand they have a natural hedge agains crypto failure thus should invest more, not less than the average investor.  Sour grapes for BTC stealing silvers thunder is a powerful thing though.

In reply to by crazybob369

inhibi bwh1214 Thu, 11/30/2017 - 17:14 Permalink

Its all a system formed from decades of low interest rates and QE being pumped by govs to banks around the world.1% of the world is dicking around in a fabricated world of finance with free/unearned money, and people try to rationalize. What I find hilarious, though, is that BTC somehow became a symbol of a revolution when it's almost solely made up of extremely wealthy entities that could give less than a fuck about the rest and are using gov fiat to fund their BTC investments. 

In reply to by bwh1214

HRClinton John Law Lives Thu, 11/30/2017 - 17:16 Permalink

Hard to say what the price curve looks like in the short term. But in the longer term, other factors determine it's price dynamics.    PM + CC*  = Currency of the PARALLEL  ECONOMY    * Crypto Currency Peeps, keep building the Parallel Economy. De-Dollarize.Watch those fiat casino coins fleeing into various CCs. Peeps are going Financial Galt. 

In reply to by John Law Lives

Endgame Napoleon CJgipper Thu, 11/30/2017 - 15:51 Permalink

Cryptocurrencies are an alternative savings option, a way for people around the world to salvage some money in case of an overall financial collapse, orchestrated by the reckless economic practices of dictators or globalist-neoliberal Uniparties in more [and less] democratic nations.

That is why the Bitcoin icon is gold[ish] to conjur up the concept of gold as a store of value and a [safer] harbor, although the physical Bitcoins are actually copper.

Then they get some of the trendy, futuristic and rebel markets, including people who just like the idea of [less corrupt] programmers in control of banking, as opposed to keeping the Establishment and its bought-and-paid-for politicians in control of every morsel of your money.

I do not understand why people equate cryptos with fiat, because with the banking of paper money, there is a dual function. Bank deposits do not just fuel lending; banks serve the practical function of helping depositors keep track of their daily spending. Maybe, Bitcoin plus Paypal could replace that utilitarian function.

Actually, some are gold and gold-plated, even 24-karat gold.…

In reply to by CJgipper

HRClinton CJgipper Thu, 11/30/2017 - 17:47 Permalink

Are you another shill for TPTB, or are you too dumb to recognize FLIGHT OF CAPITAL (FoC)?FoC can not be explained by Asset Bubble Theory. But most here are too dumb or psychologically stuck on Casino models, to recognize polar shifts in Monetary Systems.Go have another 'hit', another 'bong' of Casino Bennies, if it helps keep your world in balance.When it's all over, you can claim you "I saw it coming all along (even though I lacked the brains and balls to catch the early waves, and am as dumb, poor and gutless as ever)". LMAO.

In reply to by CJgipper