Monday, December 25, 2017

As Good As It Gets?

Authored by Sven Henrich via NorthmanTrader.com,


So they got their tax cut done. In the middle of the night again no less, despite the vast majority of the American people not wanting it. The reason may simply be that the American public is not believing the false narratives that are being sold to them. And who can blame them? It starts at the top after all. When Donald Trump claims the tax plan would personally hurt him everyone knows that’s simply not true. And still his agents insists on defending the lie by lying some more.


So I had to ask, does truth still matter:



The answer may not reveal itself for months to come.


US cooperations will see benefits to GAAP earnings and they will increase dividends and buybacks. All true. But they will not hire more or pay more. We already know this:




And since none of these things have to do with organic business growth corporations will eventually face a situation where in the following years an unfavorable comparison will emerge as the artificial earnings benefits are priced in and then earnings growth will look to drag in comparison as the organic growth won’t make up for the artificial delta. Ironically then pressure for efficiency improvements will arise and companies will rightsize in the name of efficiency gains to make up the difference, i.e. layoffs. So ironically corporate tax cuts in the long term will do the opposite of what they were advertised to do. One can virtually see it coming. But hey. Party away.


Fact is the tax cuts will not pay for themselves and deficits will be gigantic and the US treasury is already set to sell $1.3 trillion in debt next year alone.


My general premise is that deficits will further explode once the economy slows as the tax base will have shrunk. Paul Ryan is already on the record wanting to cut social security and medicare benefits. And the AARP knows who will get hurt:



Short term gain, long term pain, but the architects of this construct will be long gone enjoying their gains.


It’s been said that bull markets end on good news and in this regard this may be as good as it gets.


2017 will go down in history as a year where markets got everything beyond their wildest imagination:


The most liquidity injections by central banks ever. (Over $2 trillion). The loosest financial conditions in cycle history:



A Fed that promised a reduction in its balance sheet but actually only delivered noise:



In addition markets got to enjoy solid earnings growth coming from weakness in the years before. Never mind that most of the price expansion was multiple expansion related:



Other factors favoring asset prices: Negative interest rates across the globe continued to force money into high risk assets (“pushing people“). Central banks such as the SNB kept buying billions of dollars of US stocks. Record inflows of passive ETF inflows chasing returns they can’t find elsewhere. The elimination of organic sellers as part of a normally functioning market place. Buybacks, while not at a record pace, still continuing with billions upon billions of dollars allocated to reduce the float of shares. None of it related to organic growth.


And hence the disconnect of asset valuations from the underlying economy is now larger than during previous market peaks:



My summation here: Things will never be better for bulls. The supply demand equation will never be tilted so uniformly in one direction as they are now.


The combined effect of what I summarized above has produced massive multiple expansion and the end of any corrective activity in markets accompanied by record volatility compression:



The elimination of any price discovery. And what this chart above shows in the macro we see in the daily price action every day: Gaps, ramps & camps with virtually no price discovery in between:



Every day:



This is hubris. It’s not rooted in an economic growth base to back up the valuation growth presumed going forward. And the technical dislocation is not sustainable and I maintain all these gaps will fill into 2018.


Has it gone farther than we expected? Sure. Once you remove sellers from a market who knows where it ends up.


After all we find ourselves in an environment where companies can reach $10 billion market caps in the blink of an eye based on absolutely nothing.


The very definition of a mania.


So when I asked the other day whether we are sitting on a generational opportunity to sell equities I meant this not as a facetious question. Now granted I can’t say whether we top here, today or next year.


After all we now have a president literally promising higher stock prices on twitter:



Stock prices are now a matter of national security. The Fed views a sudden decline in asset prices as a threat to the economy and the president sees stock market levels, the poster child of widening wealth inequality in the population, as a benchmark of his presidency:



What hasn’t been priced in: Less looser financial conditions, less central bank liquidity, no more tax cut carrot. But perhaps more importantly? How sensitive will the consumer be to higher rates? I asked this question in Riddle me this.


Fact is consumers keep piling into debt while rates are rising:




And with rising rates come higher interest payments:



I trust you see the math problem there. Indeed the majority of Americans may find that the tax cut crumbs coming their way may go toward servicing their debt:



Perhaps that’s ok if unemployment stays low forever:



The unemployment chart however suggests that this is as good as it gets.









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