How To Survive Today"s Bubbly Market

Authored by James Rickards via Bonner & Partners,

To paraphrase one of the great gems of Wall Street wisdom, “Nothing infuriates a man more than the sight of other people making money.”

That’s a pretty good description of what happens during the late stage of a stock market bubble. The bubble participants are making money (at least on a mark-to-market basis) every day.

Meanwhile, the more patient, prudent investor is stuck on the sidelines – allocated to cash or low-risk investments while watching everyone else have fun. This is especially true today when the bubble is not confined to the stock market but includes exotic sideshows like cryptocurrencies and Chinese real estate.

It gets even worse when investors are taunted by headlines like the one in a recent article, “Investors Can Either Buy Bubbles or Be Left Far Behind.” The article is a case study in the “Bubblicious Portfolio.” Infuriating indeed. Actually, it should not be.

On a risk-adjusted basis, the prudent investor is not missing much.

When markets go up 10%, 20%, or more in short periods, market participants think of their gains as money in the bank. Yet, that’s not true unless you sell and cash out of the market. Few do this because they’re afraid to “miss out” on continued gains.

The problem comes when the bubble bursts and losses of 30%, 40%, or more pile up quickly. Investors tell themselves they’ll be smart enough to get out in time, but that’s not true, either.

Typically, investors don’t believe the tape. They “buy the dips,” (which keep dipping lower), then they refuse to sell until they “get back to even,” which can take ten years. These are predictable behaviors of real investors caught up in real bubbles.

It’s better just to diversify, build up a cash reserve, have some gold for catastrophe insurance, and then wait out the bubble crowd. When the crash comes, which it always does, you’ll be well positioned to shop for high-quality bargains amid the rubble. Then you’ll participate in the next long upswing without today’s risks of a sudden meltdown.

OK, so I just argued that the stock market (and other markets) are in bubbles. But where’s the actual proof of this?

Actually, it’s everywhere.

The Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio – a good indicator of how expensive stocks are – is at levels only seen at the 1929 crash that started the Great Depression and the 2000 dot-com bubble. Likewise, the market capitalization-to-GDP ratio is above the level of the 2008 panic and comparable to the 1929 crash.

The list goes on, including historically low volatility and unprecedented complacency on the part of investors.

For almost a year, one of the most profitable trading strategies has been to sell volatility. That’s about to change...

Since the election of Donald Trump, stocks have been a one-way bet. They almost always go up, and have hit record highs day after day. The strategy of selling volatility has been so profitable that promoters tout it to investors as a source of “steady, low-risk income.”

Nothing could be further from the truth.

Yes, sellers of volatility have made steady profits the past year. But the strategy is extremely risky and you could lose all of your profits in a single bad day.

Think of this strategy as betting your life savings on red at a roulette table. If the wheel comes up red, you double your money. But if you keep playing, eventually, the wheel will come up black and you’ll lose everything.

That’s what it’s like to sell volatility. It feels good for a while, but eventually, a black swan appears like the black number on the roulette wheel, and the sellers get wiped out. I focus on the shocks and unexpected events that others don’t see.

In short, we have been on a volatility holiday. Volatility is historically low and has remained so for an unusually long period of time. The sellers of volatility have been collecting “steady income,” yet this is really just a winning streak at the volatility casino.

I expect the wheel of fortune to turn and luck to run out for the sellers.

But it’s time to add another warning sign to the list. Certain high-yield (or “junk bond”) indices have fallen below their 200-day moving averages. This can be indicative of a stock market correction.

Junk bonds are riskier than equity. When they get in trouble, it’s a sign that the corporate issuers are having trouble meeting their obligations. That, in turn, is indicative of reduced revenues or profits, tight financial conditions, and lower earnings.

Panics in October 1987 and December 1994 were preceded by distress in bonds about six months earlier. While there is no deterministic relationship, bonds are a good leading indicator of stocks because they are higher in the capital table and feel distress sooner. The October 1987 one-day 22% decline in stocks and the December 1994 Tequila Crisis in Mexican debt were ugly for investors. The bond market gave a six-month early warning both times.

It may be doing so again.

But what the Fed? Is it setting markets up for a fall?

It’s true that the Fed has been raising interest rates since 2015 and had engaged in tapering for two years before that. Yet these actions hardly constitute tight money. The tightness or ease of monetary policy needs to be judged relative to financial and economic conditions.

You can have “easy money” at a 10% interest rate if inflation is running at 15% (something like the conditions of the late 1970s). In that world, the real interest rate is negative 5%, (10% – 15% = -5%).

In effect, the bank pays you to borrow. That’s easy money.

By most models, including the famous Taylor Rule, rates in the U.S. today should be about 2.5% instead of 1%. We have easy money today and have had it since 2006. This comes on top of the “too low for too long” policy of Alan Greenspan from 2002–2004, which led directly to the housing bubble and collapse in 2007.

The U.S. really has not had a hard money period since the mid-1990s. That’s true of most of the developed economies also.

What’s going to happen when central banks start to normalize interest rates and balance sheets and return to a true tight money policy in preparation for the next recession?

We’re about to find out.

Central banks all over the world including the Fed, ECB, and the People’s Bank of China are in the early stages of ending their decade-long (or longer) easy money policies. This tightening trend has little to do with inflation (there isn’t any) and more to do with deflating asset bubbles and getting ready for a new downturn.

But, in following this policy, central bankers may actually pop the bubbles and cause the downturn they are getting ready to cure. This is one more reason, in addition to those described above, why the stock market bubble is about to implode.

It’s important to realize that market crashes often happen not when everyone is worried about them, but when no one is worried about them.

Complacency and overconfidence are good leading indicators of an overvalued market set for a correction or worse.

If Bitcoin Is A Bubble...

Authored by Erik Norland via CMEGroup.com,

Our earlier articles on bitcoin discuss the crypto asset as a currency and a commodity. Both papers focused on the consequences of bitcoin’s defining feature: the asymptotic supply limit of 21 million coins. This gives it an unusual juxtaposition of demand uncertainty and supply certainty (as well as inelasticity). As a currency, it gives rise to a tension between its use as a store of value and as medium of exchange. Like commodities, it has a mining cost of production that both influences and is influenced by price. Finally, we explored bitcoin’s demand dynamics and the problems posed by rising transaction costs and their potential to trigger price crashes. This paper explores bitcoin as an equity, and more specifically as the first equity ever launched by a non-hierarchical “teal” organization, a self-driving entity with an independent force and purpose, its role in promoting blockchain and the potential consequences of bitcoin and blockchain for the economy.

While bitcoin is most commonly described as a currency, one can argue that it also has equity-like characteristics. These arguments can be both narrow and legal in nature as well as deeper and more philosophical. From a legal perspective, many governments are moving to regulate initial coin offerings (ICOs) of cryptocurrencies as they do initial public offerings (IPOs) of equity and other securities. Bitcoin’s ICO occurred in 2009 and at the time was largely overlooked by regulators. No longer. With over 1,000 additional cryptocurrencies being launched during the past two years, regulators worldwide are playing catch up, considering their response to this occurrence. 

On an economic and financial level, bitcoin also exhibits equity-like characteristics. The rewards that miners and those validating transactions on the bitcoin blockchain receive are analogous to stock grants made to employees by corporations. The stock of a company can be seen as an internal currency used to compensate and motivate employees, aligning their interests with those of the organization. To that end, the number of bitcoins in existence is comparable to the “float” of a corporation – the number of shares issued to the public. 

When bitcoin forks into a new currency, such as bitcoin cash, the move is comparable to a corporate action such as a spin out.  In a spin out, a corporation can give each of its shareholders new shares in a division of the firm that is being released to the public as separate and independent entity. In September 1996, for example, shareholders of the communications giant AT&T found themselves owning two stocks: that of AT&T services business, and that of Lucent Technologies, a phone equipment maker, of which AT&T (wisely) divested itself. Likewise, when bitcoin most recently forked, the owner of each bitcoin received one bitcoin cash, a new and separate cryptocurrency. 

While bitcoin is not by any means a traditional corporate entity with earning statements and a board of directors, it could be seen as an equity in its own ecosystem whose value derives from the size and health of that community. What is clear is that if bitcoin is equity, it represents a radically different corporate form than has ever created before.

It appears to be one of the first examples of what sociologist and organizational development specialist Frederic Laloux describes as a “teal organization”: an organization with fluid hierarchy that is adaptive and rules-based where authority is decentralized and distributed among members. That such an organizational form would arise around a distributed ledger is perhaps not surprising but it does, nevertheless, represent a radical new experiment in human organization. In his book, Reinventing Organizations, Laloux describes five organizational types: red, amber, orange, green and teal (Figure 1).  Red organizations are primitive tribal groups led by a single person. Street gangs and the mafia are modern examples. By their nature they are unstable: when the leader dies or becomes impaired, there is a fight for control and the organization can disappear or split if a new leader does not emerge. See Francis Ford Coppola’s “The Godfather” series for details. 

Figure 1: Organizational Theorist Frederic Laloux’s Five Kinds of Human Organizations

Amber organizations, the world’s first and oldest bureaucratic form, represent a radical innovation: an immutable organizational command-and-control hierarchy that survives and outlasts any member.  Organized religion, government bureaucracies and militaries are examples of amber organizations.

Most corporations are either orange or green organizations. Compared to amber organizations, orange ones feature additional agility. While they maintain strict hierarchies, they form more ad hoc project groups, have greater differentiation in expertise, and change the size, scope and form of their hierarchies in conjunction with needs. They can also merge and split apart peaceably. Green organizations take this approach further, often decentralizing decision-making to frontline employees. They tend to be somewhat flatter and management is meant to enable the success of frontline employees in a partial reversal of (or at least a more two-way version of) the usual top-down reporting lines.

Until the creation of bitcoin, teal organizations were mostly theoretical, although Wikipedia could be considered an example. What Wikipedia and bitcoin have in common is that both are essentially non-hierarchical organizations in which users make voluntary contributions to the development of the entity.  For Wikipedia, this comes in the form of writing and editing articles on millions of subjects in dozens of languages in accordance with the rules of the organization.  For bitcoin, the voluntary contributions come in the form of mining bitcoin and validating transactions. What differentiates bitcoin from Wikipedia is that the latter is a not-for-profit organization that requires periodic, voluntary monetary contributions from supporters. Bitcoin, by contrast, rewards contributors economically in a manner somewhat analogous to orange or green corporations but with much stricter, and less political, rules for who gets paid what and why. Little wonder that bitcoin and its crypto peers are described as “the internet of money.”

Bitcoin’s limit on supply to 21 million coins is also open to a useful equity analogy. This limit on the number of coins is one of the reasons why we think that bitcoin is useless as a medium of exchange and is being treated, rightly or wrongly, as a highly volatile store of value, sort of like gold on steroids. Bitcoin could become a more useful medium of exchange if it increased the cap on the total number of coins. So, why doesn’t it? Corporations have the option of issuing more shares. For example, in the early days of the Great Recession, many banks issued more shares to recapitalize themselves. The problem with issuing more shares is that it dilutes the value of the existing equity holders and usually lowers the price of a stock. As such, aside from compensating themselves and some of the employees with share options and share grants, corporate managements avoid issuing more shares like the plague. And normally, equity holders want such share grants to be limited so as not to be excessively dilutive. 

We don’t know if the bitcoin user community will one day allow for the creation of more than 21 million bitcoins.  If they do, it would improve the value of bitcoin as a medium of exchange but it would likely come at the expense of bitcoin holders’ value. As such, we are not sure why existing bitcoin holders would agree to such a change. Nor is it clear why the miners and transaction validators would agree to such a change, which would likely lower their profit margins.

Bitcoin’s Equity Bubble and The Macroeconomy

As of this writing, bitcoin has a market cap of around $280 billion.  While that’s substantial, it’s relatively small compared to the biggest corporations, which are valued north of $500 billion each. It also pales in comparison to the $75-trillion global economy. If bitcoin’s price collapsed to zero tomorrow, economic impact would be negligible.  But what would happen if bitcoin rises another 1,000%, as it has thus far in 2017? If it achieves a $3 trillion market cap and then suffers a price collapse of, say, 80-90%, as it has twice thus far in its short history, what impact will it have on the economy then? Still probably fairly minimal. U.S. equities alone are valued at $25 trillion. If U.S. equities fall 10% and wipe out $3 trillion in value, that alone would not likely cause a recession.

Let’s pursue a truly extreme and hypothetical case to illustrate our point. What if the currency rises to $1,000,000 per bitcoin? It may sound farfetched but it wouldn’t be too surprising given what has already happened to bitcoin prices (Figure 2). That would give it a market cap of around $20 trillion, depending upon how many bitcoins exist by then. If it then collapsed, it could have a negative impact upon the finances of more recent buyers, many of whom might not be financially well off and many of whom would have purchased near the top. If one assumes a -5% wealth effect for drops in asset prices – a dubious but common assumption—then if bitcoin one day lost $20 trillion in market cap, it could shave $1 trillion of consumer spending globally. That would be enough to slow the global growth rate by over 1%.  Moreover, a crypto meltdown could also one day hit investment in computer hardware like during the collapse of technology stocks between 2000 and 2002 which led to a sharp decline in business investment and tripped the U.S. economy into a recession in 2001. A combined wealth and investment effect might drive the global economy into a recession and trigger a backlash against cryptocurrencies if they rally enough in the meantime to have such an impact. Obviously, this is an extreme hypothetical. For the moment, however, we’re not the point where this is a serious concern. And, as Aristotle once commented, ‘probable impossibilities are to be preferred to improbable possibilities.’

Figure 2: Proof That Anything is Possible.

Investors who are buying bitcoin are presumably hoping to find someone else to sell the currency to at a higher price. That said, there is more to bitcoin economically than just the theory of the greater fool. As more people bid up the price, the difficulty of solving bitcoin’s cryptographic algorithms increases. This in turn is driving up investment in more powerful and faster computing technology of both a traditional integrated circuit and non-traditional variety. Indeed, solving cryptographic problems may be one of the first tests facing quantum computers.

The problem is that investors in bitcoin and its peers are mainly out to make profits and not to finance or subsidize the development of distributed ledgers nor more powerful computers. As such, if the price of crypto assets collapsed, investors may be sorely disappointed just as many were when the first generation of internet stocks collapsed between 2000 and 2002, driving the Nasdaq 100 index down over 80%. 

One possible result of the current run up in cryptocurrencies and their possible collapse is that central banks may one day decide to issue their own distributed ledger currencies. Former Fed Chairman Alan Greenspan once compared making monetary policy to driving a car guided only by a cracked rearview mirror. Even now, important policy decisions must be based upon imperfectly estimated economic numbers that are weeks or months old by the time they become available. In 2017, economic policy making is still a vestige of the 20th century. 

Blockchain technology has the potential to one day allow policy makers to issue their own cryptocurrencies that will give them real time information on inflation, nominal and real GDP. It won’t allow them to peer through the front windshield into the future but at least they can look into the rearview mirror with much greater clarity and see out the side windows of the monetary policy vehicle. This could allow them to create the amount of money and credit necessary to keep the economy growing at a smooth pace more easily than they do today. Switching off of the gold standard vastly reduced economic volatility and improved per capita economic growth (Figures 3 and 4).  Moving to blockchain-enhanced fiat currencies could further reduce economic volatility and, ironically, enable further leveraging of the already highly indebted global economy as people find ways to use capital more efficiently. More broadly, crypto-inspired investments could bring about new technologies that we cannot yet imagine.

Whether bitcoin “equity” investors are rewarded for bringing about such “improvements” is another matter. A few investors in the early days of the internet during the 1990s came away enormously wealthy. Many others lost money. The current cryptocurrency boom could end in a similar fashion. 

If Bitcoin Is a Bubble

The truth is that most of the assets that trade on exchanges have been in ‘bubbles’ at one time or another for reasons that have nothing to do with the existence of futures contracts. ‘Bubbles’ by the way are only visible in rear-view mirrors.

Silver experienced a bubble in 1980 when the Hunt brothers cornered the physical spot market. The price soared from $4 per ounce to around $50 and then collapsed. The futures market performed just fine during this period and fulfilled its function of allowing silver users to hedge risk from the price volatility. 

The same can be said of subsequent bubbles, including those in the equity market in 1987 and the Nasdaq in 2000. As the housing bubble popped, beginning in 2007, the banking system suffered severe stress but futures markets functioned with neither interruptions nor bailouts. Daily margining helped to prevent the kinds of overleverage that plagued the banking sector.

Many commodity prices also experienced bubbles during the past decade and saw their prices collapse.  Crude oil fell from $147 per barrel in the summer of 2008 to as low as $36 per barrel by early 2009.  Natural gas prices dropped from $13 per MMBtu in 2007 to as low as $2 per MMBtu by early 2015 while exhibiting bitcoin-like volatility. Metals prices also collapsed between 2011 and 2016 after huge run-ups during the previous decade. In every case, futures markets functioned well.

Figure 3: GDP Growth Per Capita Improved Under the Fiat Currency Standard.

 

Figure 4: Economic Volatility Fell with Fiat Currencies.

 

Does Bitcoin Have Inherent Value?

There are those who argue that bitcoin has no inherent value and is merely a speculative vehicle. With respect to inherent value, we largely agree. Bitcoin has no inherent value. Neither do the U.S., Australian, Canadian or New Zealand dollars, the euro, the yen, the pound, the Swiss Franc or any other government-issued currency. Yet large user networks trade in these currencies in great quantity every day and agree that they do have value in the present moment. Moreover, futures contracts have existed on these fiat currencies for four decades. If fiat currencies have no inherent worth then neither do government bonds. Both are forms of debt whose value derives from taxing authorities and whose value can be eroded by inflation. 

Gold also has little inherent worth. It barely figures into industrial processes. Most gold is hidden away in vaults and that which is not is largely worn as jewelry – pretty but not economically functional, unless conspicuous consumption really does create value. A small amount of gold winds up in people’s teeth.  The fact that gold is prized is a function of both its scarcity and a large user network that accepts that it has value. Bitcoin is no different, only more recent. And, while it can’t be worn as bling-bling, it can be exchanged for hard currency, which is accepted in jewelry stores worldwide.

Only industrial metals, agricultural goods and energy products can be said to really have any inherent worth. Yet despite the critical importance of these goods, prices are not sky-high because supplies are, for the moment, abundant. 

Lots of Pots, Lots of Kettles

While there is much truth to saying that bitcoin has no inherent worth, there are lots of glass houses in this financial neighborhood, so one should be careful about throwing stones. Cryptocurrencies, including bitcoin, are unique. That said, one can understand them better by drawing analogies to a variety of more familiar asset classes, including fiat currencies, commodities and equities.  However unique, bitcoin carries characteristics of all of these assets to which we are more accustomed. 

Bottom line:

• In addition to currency and commodity-like characteristics, bitcoin also resembles equity.


• Bitcoin can create spin offs (hard forks).


• Bitcoin miners and transaction validators are compensated with bitcoin in a manner analogous to companies granting stock to employees.


• Like Wikipedia, cryptocurrencies represent non-hierarchical “teal” organizations in which people make voluntary contributions. 


• Bitcoin is a bit like an equity on an ecosystem that surrounds the crypto asset rather than a traditional hierarchical corporate entity.


• If there is indeed a crypto bubble, it may be financing and incentivizing the creation of a new generation of powerful computers which could have widespread and unpredictable future applications.


• Investors in cryptocurrencies may or may not benefit from popularizing the blockchain and distributed ledgers.


• At the moment, bitcoin is too small to pose any threat to the stability and continued growth of the global economy but this could change if the currency rises to a much higher value and then collapses. 

 

The Fed is Arranging Deck Chairs on the Titanic (the Iceberg Comes in 2018).

The Fed concludes its final FOMC meeting of the year today.

The entire financial world expects the Fed to raise rates a final time. This will mark the fifth rate hike since December 2015, and the fourth of the last 12 months.

Throughout this time period, the Fed has routinely stated that it is confused as to why inflation is “too low.”

Inflation is not too low. The method the Fed uses to measure inflation is intentionally incorrect. As a result, the official inflation numbers reflect whatever the Fed wants, as opposed to reality.

Alan Greenspan devised this entire gimmick back in the 1990s. At that point, the amount of debt in the US financial had already become a systemic issue.

So Greenspan opted to “paper over” this fact via inflation… hoping that by aggressively devaluing the US Dollar he could keep this game going.

The only problem as far as the Fed was concerned was that the inflation numbers would reveal the Fed’s strategy. So Greenspan started tinkering with how the Fed measured inflation, removing various components (food and energy) and tweaking things so the Fed would no longer measure the cost of maintaining the same quality of life.

Greenspan hoped understating inflation publicly he would give him the cover he needed to pursue an aggressive devaluation of the US Dollar. The flip side of this was that the Fed would begin intentionally creating asset bubbles by maintaining loose monetary policy ad infinitum.

The late ‘90s was the Tech Bubble.

When that burst in the mid-‘00s, the Fed created a bubble in housing.

When that burst in ’08 the Fed created a bubble in US sovereign bonds or Treasuries.

And because these bonds are the bedrock of the US financial system, the “risk-free rate” of return against which ALL risk assets are valued, when the Fed did this it created a bubble in EVERYTHING.

That bubble is now beginning to burst. And ironically it is inflation (which the Fed claims is too low) that will do it.

It will take time for this to unfold, but as I recently told clients, we"re currently in "late 2007" for the coming crisis.

The time to prepare for this is NOW before the carnage hits.

On that note, we are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

Finally, An Honest Inflation Index – Guess What It Shows

Posted with permission and written by John Rubino, Dollar Collapse 

 

 

Central bankers keep lamenting the fact that record low interest rates and record high currency creation haven’t generated enough inflation (because remember, for these guys inflation is a good thing rather than a dangerous disease).

 

To which the sound money community keeps responding, “You’re looking in the wrong place! Include the prices of stocks, bonds and real estate in your models and you’ll see that inflation is high and rising.”

 

Well it appears that someone at the Fed has finally decided to see what would happen if the CPI included those assets, and surprise! the result is inflation of 3%, or half again as high as the Fed’s target rate.

 

New York Fed Inflation Gauge is Bad News for Bulls

 

(Bloomberg) – More than 20 years ago, former Fed Chairman Alan Greenspan asked an important question “what prices are important for the conduct of monetary policy?” The query was directly related to asset prices and whether their stability was essential for economic stability and good performance. No one has ever offered a coherent answer even though the recessions of 2001 and 2008-2009 were primarily due to a sharp correction in asset prices.

A new underlying inflation gauge, or UIG, created by the staff of the New York Fed may finally provide the answer. Its broad-based measure of inflation includes consumer and producer prices, commodity prices and real and financial asset prices. The New York Fed staff concluded that the new inflation gauge detects cyclical turning points in underlying inflation and has a better track record than the consumer price series.

The latest reading shows inflation of almost 3 percent for the past 12 months, compared with 1.8 percent for the consumer price index and 1.8 percent for core consumer prices, which exclude food and energy. Since the broad-based UIG is advancing 100 basis points above CPI, it indicates that asset prices are large, persistent and reflect too easy monetary policy.

The UIG carries three important messages to policy makers: the obsessive fears of economy-wide inflation being too low is misguided; monetary stimulus in recent years was not needed; and, the path to normalizing official rates is too slow and the intended level is too low.

Harvard University professor Martin Feldstein stated in a recent Wall Street Journal commentary that “The combination of overpriced real estate and equities has left financial sector fragile and has put the entire economy at risk.” If policy makers do not heed his advice odds of another boom and bust asset cycle will be high — and this time they will not have the defense mechanisms they had after the equity and housing bubbles burst.

To summarize, a true measure of inflation – one that is highly correlated with the business cycle – is not only above the Fed’s target but accelerating.

 

Note on the above chart that both times this happened in the past a recession and bear market followed shortly.

 

The really frustrating part of this story is that had central banks viewed stocks, bonds and real estate as part of the “cost of living” all along, the past three decades’ booms and busts might have been avoided because monetary policy would have tightened several years earlier, moderating each cycle’s volatility.

 

But it’s too late to moderate anything this time around. Asset prices have been allowed to soar to levels that put huge air pockets under them in the next downturn. Here’s a chart that illustrates both the repeating nature of today’s bubble and its immensity.

 

 

In other words, it is different this time — it’s much worse.

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

 

 

Finally, An Honest Inflation Index – Guess What It Shows

Posted with permission and written by John Rubino, Dollar Collapse 

 

 

 

Check out these other articles by our contributors:

 

Jason Liosatos via Rory Hall - Dr. Paul Craig Roberts – Why is England, Germany and France Ruled by Washington? 

Craig Hemke - Another Tradable Low Coming

Jeff Thomas - Tilt! Game Over

Watch Live: Senate Banking Committee "Grills" Trump"s Fed Chair Nominee Jerome Powell

Update (11:45 am ET): As Powell"s testimony draws to a close, analysts at Stone & McCarthy noted that - as expected - the future Fed chair"s comments were "generally dovish".

The hearing was largely free of surprises. As it neared its close, Powell offered his thoughts about the blockchain and digital currencies (one day they could impact the Fed"s policies, but right now they"re too small to matter), and the mysterious roots of low inflation (the Fed is still struggling to determine if it"s due to transitory factors, or some kind of fundamental shift.

Here"s Stone & McCarthy:

• In his confirmation hearing before the Senate Banking Committee, Powell fielded questions mainly on the topics of raising interest rates, shrinking the balance sheet, and his views on "tailoring" regulation.


• Powell maintained the view that it is appropriate to gradually increase short-term rates against a backdrop of healthy, consistent growth with a strong labor market. He did not address inflation issues.


• He said GDP growth should be about 2.5% in 2017, and looking forward to "something pretty close to that" next year.


• Powell declined to specifically say if he would vote for another rate hike at the December 12-13 FOMC meeting. He did say "conditions are supportive" for another rate hike and "the case for raising rates at the next meeting is coming together".


• He anticipated that balance sheet normalization will proceed "passively and gradually", and that in "about 3 or 4 years" that the balance sheet will decline to a "new normal" of about $2.5 trillion-$2.9 trillion. He said no one can be certain about the exact size at the end. He also said the Fed wants the balance sheet to be composed mainly of Treasurys.


• "I do" oppose auditing of monetary policy decisions. He reiterated that an independent central bank helps ensure better outcomes for the economy. He said there has been "nothing" in his conversation with the Administration to give him any concern about political interference.


• He declined to answer questions regarding the tax reform bill, he said broadly "the debt needs to be on a sustainable path", but "not our role" to comment on fiscal policy.


• He supported "tailoring" of regulation and supervision to put the "most intense and stringent" regulation on the largest institutions and scaling down for smaller banks. "We are taking a fresh look at this now." He said he and Vice Chair for Supervision Quarles are in agreement on most points.


• There are currently three vacancies on the Board for the terms ending January 31, 2020; January 31, 2022; and January 31, 2030. There will be a fourth when Yellen retires from the Board for her term as Governor that ends January 31, 2024. By law, one of these seats will go to a community banker.


• The office of the Vice Chair of the Federal Reserve is currently vacant. The White House has not named a candidate as yet. The position of Vice Chair for Supervision was filled by Randal Quarles as of October 15.

* * *

Update (11:00 am ET): So far, Powell’s testimony before the Senate Banking committee has been a snooze-fest. However, Powell offered what many view as a telling clue about how his approach to banking regulations might differ from his predecessor’s.

In response to a question by Republican Sen. John Kennedy of Louisiana, Powell said that he doesn’t believe there are any more “too big to fail” banks in the US.

The question came after Kennedy admonished Powell to fight harder for community banks, after accusing him of trying to "regulate them half to death.”

In previous remarks, Fed Chairwoman Janet Yellen said her assessment of the country’s financial institutions, and the industry as a whole, is that the US has “a safer” banking system now than it did leading up to the crisis. Because of that, she said the Fed planned to eliminate certain burdens on smaller regional banks.

Powell’s remark suggests he might be open to loosening the burdens on larger banks as well.

Here’s more from WSJ:

Sen. John Kennedy (R., La.) put Mr. Powell in an awkward position with a question about whether big U.S. banks are still “too big to fail.”

 

The only way to know the answer for sure is for one of those banks to actually fail, without a taxpayer bailout. That hasn"t happened since the last bailouts in 2008.

 

Mr. Powell first gave the stock answer for regulatory officials: “We’ve made a great deal of progress on that,” he said, citing regulations adopted after the financial crisis. Pressed further, Mr. Powell did something regulators rarely do:

 

He answered the question directly.

 

“I would say no,” he said.

Powell also revealed his expectations for GDP growth, saying he expects 2.5% growth this year, and around that level next year thanks to accomodative financial conditions and a strong stock maret. He added that the case for a December rate hike is "coming together," though he declined to give a "specific answer" about whether the bank would hike.

"We need to go ahead and have the meeting to listen to each other."

* * *

Just two weeks after President Donald Trump announced that Fed Governor Jerome “Jay” Powell would be his pick to succeed Janet Yellen as chairman of the Federal Reserve, he is appearing today before the Senate Banking committee in a confirmation hearing that’s viewed as a virtual certainty.

The hearing begins at 10 am ET. Watch it live below:

However, while Powell’s chances of approval are high – given that he’s been twice confirmed as a Fed governor - Business Insider’s Pedro Da Costa points out that Powell – a former private equity executive - has commented fairly sparsely on monetary policy and regulatory matters despite serving as a Fed governor since 2012, so there are lots of unanswered questions about his views. As Reuters points out, Powell - once one of the FOMC"s more hawkish members, has recently moderated his position to more closely resemble Yellen"s dovish approach.

Also, Powell"s record isn"t without blemish: In the past, however, Powell has been more cautious about the risks posed by such an expansive approach. In his first months at the Fed, Powell was among those who pressured then chair Ben Bernanke for more clarity on when the central bank would start scaling back its bond buying. When Bernanke made those plans public it triggered a “taper tantrum” spike in market interest rates in the summer of 2013, forcing Bernanke, Powell and others to do damage control.

This could precipitate a lively Q&A session as senators try to get to the heart of exactly what they can expect from the reticent central banker.

According to media reports and analysts’ assessments, Trump’s logic in choosing Powell (over both Kevin Warsh, John Taylor and Powell’s current boss, Janet Yellen) is that, being a lifelong Republican, Powell has a slightly more permissive stance on regulation than Yellen. However, he also shares Yellen’s dovish tendencies, and it’s widely believed that interest rates and the Fed’s balance-sheet unwind will proceed cautiously under his leadership.

During the hearing, da Costa posits that Powell faces two principal tasks: Flesh out his views on monetary policy, regulation and how they differ from those of his predecessor.

Here are a couple hypothetical questions that, if da Costa were a senator, he would ask:

1. Do you intend to continue raising interest rates in December and next year despite below-target inflation, and what factors are you considering in making that decision?

Part of Powell’s early mission on this front will be establishing himself as a leader and developing his own way of communicating on major policy issues, many of which he has touched upon only sparsely as a Fed governor.

 

Powell should be pressed on his lack of economics training - he’s the first Fed chair in decades to lack a doctorate in the field - and how he will use his staff and the expertise of his colleagues to help guide decision making.

 

Powell is expected to maintain the more committee-centered approach that began under Ben Bernanke, who wanted to move away from Alan Greenspan’s cult of personality, and continued under Yellen.

 

The Fed has raised interest rates four times since December 2015, to the current 1% to 1.25% range. The central bank has also started to gradually shrink a $4.5 trillion balance sheet that expanded sharply in response to the Great Recession of 2007-2009.

2. What is your view of the post-crisis financial rules and how willing would you be to roll them back, in particular capital requirements for big banks and consumer protections now under challenge?
 

Many investors and public advocates worry that weaker rules could lead banks to again take wild risks and put consumers and workers at undue risk. Powell, a former Carlyle Group executive, has plenty of financial market experience, but some might worry he is ideologically too close to the sector to supervise it closely.

 

Both Yellen and the recently-retired vice chair, Stanley Fischer, have spoken in unusually blunt terms about the dangers of rolling back financial rules.  

 

Powell has been friendly to the idea of letting financial institutions roam more freely, albeit within limits, according to The New York Times. Indeed, Powell"s industry-friendly stance probably didn"t hurt his chances of landing the job.

 

A political squabble that started last week over the leadership of the Consumer Financial Protection Bureau is just a small taste of all the political blowback that is likely to ensue from Republican efforts to undo post-crisis financial regulations. These include much higher capital requirements for the largest Wall Street institutions, because these are the ones that brought the financial system to the brink of failure in 2008.

 

Another big regulatory issue facing the Fed is how to regulate so-called “shadow banks,” which range from hedge funds to private equity to the money market industry — essentially firms without a banking charter that perform banking-like functions.

 

Before the financial crisis, investment banks were part of the shadow banking world, and the lack of regulatory scrutiny on their activities was a major culprit of the crisis.

 

Given the massive and lingering costs of that debacle in the form of lost jobs, wealth and productivity, Americans should hope Powell places the burden of proof on the need for any rule rollbacks on the industry, and even then, assesses their assertions with a giant grain of salt.

In his prepared remarks – released last night - Powell said he expected the central bank to continue raising its benchmark interest rate and trimming its balance sheet under his leadership, but had some pointed comments over deregulation, economic stability, and the plunge protection team...

Chairman Crapo, Ranking Member Brown, and other members of the Committee, thank you for expeditiously scheduling this hearing and providing me the opportunity to appear before you today. I would also like to express my gratitude to President Trump for the confidence he has shown by nominating me to serve as Chairman of the Board of Governors of the Federal Reserve System. The Federal Reserve has had a productive relationship with this Committee over the years, and, if you and your colleagues see fit to confirm me, I look forward to working closely with you in the years ahead.

 

Before I continue, I would like to introduce my wife, Elissa, who is sitting behind me. I would not be here today without her unstinting love, support, and wise counsel.

 

As you know, I have served as a member of the Board of Governors and the Federal Open Market Committee (FOMC) for more than five years, contributing in a variety of capacities, including most recently as chairman of the Board"s Committee on Supervision and Regulation. My views on a wide range of monetary policy and regulatory issues are on the public record in speeches and testimonies during my service at the Fed. The Congress established the Federal Reserve more than a century ago to provide a safer and more flexible monetary and financial system. And, almost exactly 40 years ago, it assigned us monetary policy goals: maximum employment, meaning people who want to work either have a job or are likely to find one fairly quickly; and price stability, meaning inflation is low and stable enough that it need not figure into households" and businesses" economic decisions.

 

I have had the great privilege of serving under Chairman Bernanke and Chair Yellen, and, like them, I will do everything in my power to achieve those goals while preserving the Federal Reserve"s independent and nonpartisan status that is so vital to their pursuit. In our democracy, transparency and accountability must accompany that independence. We are transparent and accountable in many ways. Among them, we affirm our numerical inflation objective annually and publish our economic and interest rate projections quarterly. And, since 2011, the Chairman has conducted regular news conferences to explain the FOMC"s thinking. Additionally, we are accountable to the people"s representatives through twice-a-year reports, testimony, oversight, and audited financial statements. I am strongly committed to that framework of transparency and accountability and to continuing to look for ways to enhance it. In our federated system, members of the Washington-based Board of Governors participate in FOMC deliberations with the presidents of the 12 regional Federal Reserve Banks, which are deeply rooted in their local communities. I am a strong supporter of this institutional structure, which helps ensure a diversity of perspectives on monetary policy and helps sustain the public"s support for the Federal Reserve as an institution.

 

If confirmed, I would strive, along with my colleagues, to support the economy"s continued progress toward full recovery. Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target. We expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink. However, while we endeavor to make the path of policy as predictable as possible, the future cannot be known with certainty.

 

So we must retain the flexibility to adjust our policies in response to economic developments. Above all, even as we draw on the lessons of the past, we must be prepared to respond decisively and with appropriate force to new and unexpected threats to our nation"s financial stability and economic prosperity--the original motivation for the Federal Reserve"s founding.

 

As a regulator and supervisor of banking institutions, in collaboration with other federal and state agencies, we must help ensure that our financial system remains both stable and efficient. Our financial system is without doubt far stronger and more resilient than it was a decade ago. Our banks have much higher levels of capital and liquid assets, are more aware of the risks they run, and are better able to manage those risks. Even as we have worked to implement improvements, we also have sought to tailor regulation and supervision to the size and risk profile of banks, particularly community institutions. We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms - strong levels of capital and liquidity, stress testing, and resolution planning - so that banks can provide the credit to families and businesses necessary to sustain a prosperous economy. In doing so, we must be clear and transparent about the principles that are driving our decisions and about the expectations we have for the institutions we regulate.

 

To conclude, inside the Federal Reserve, we understand that our decisions in all these areas matter for American families and communities. I am committed to making decisions objectively and based on the best available evidence. In doing so, I would be guided solely by our mandate from the Congress and the long-run interests of the American public.

 

Thank you. I would be happy to respond to your questions.

The hearing is expected to last until noon ET.
 

The Mother Of All Irrational Exuberance

Authored by David Stockman via Contra Corner blog,

You could almost understand the irrational exuberance of 1999-2000. That"s because everything was seemingly coming up roses, meaning that cap rates arguably had rational room to rise.

But eventually the mania lost all touch with reality; it succumbed to an upwelling of madness that at length made even Alan Greenspan look like a complete fool, as we document below.

So doing, the great tech bubble and crash of 2000 marked a crucial turning point in modern financial history: It reflected the fact that the normal mechanisms of honest price discovery in the stock market had been disabled by heavy-handed central bankers and that the natural balancing and disciplining mechanisms of two-way markets had been destroyed.

Accordingly, the stock market had become a ward of the central bank and a casino-like gambling house, which could no longer self-correct. Now it would relentlessly rise on pure speculative momentum---- until it reached an asymptotic top, and would then collapse in a fiery crash on its own weight.

That"s what subsequently happened in April 2000 when the hottest precincts of the stock market---the NASDAQ 100 stocks----began a perilous 80% dive; and it"s also what happened in the broader markets-----including the S&P 500---in 2008-2009, when a thundering 60% plunge unfolded in a hardly a year"s time.

So with the market raging in self-fueling momentum at the 2600 mark on the S&P 500, we reflect back to the great dotcom crash for vivid reminders of what happens next. That earlier meltdown is especially pertinent because in many ways today"s stock market mania is far less justified than the one back then.

Moreover, the dotcom version was also the first great central bank fueled bubble of modern times---a creature that market participants understandably did not fully grasp. Yet to its everlasting blame, the Fed"s subsequent experiments in reflationary bailouts of the casino gamblers has only caused Wall Street"s muscle memory to atrophy further.

Indeed, after 30 years of Greenspan-style Bubble Finance and two devastating crashes, Wall Street is even more credulous today than it was on the eve of the tech crash. Back then, in fact, there was a considerable phalanx of Wall Street old-timers who warned about the dotcom insanity. Now almost no one sees this one coming.

 

Indeed, today"s nutty forecast by Goldman Sachs that the S&P 500 will hit 3,100 by the end of 2020 makes Greenspan"s earlier bubble blindness look clairvoyant by comparison.

In hindsight, Alan Greenspan did see it coming early on--- when he broached the "irrational exuberance" topic in passing during a speech in December 1996. Unfortunately, he has mostly been dinged for being allegedly way too early in making the call.

In fact, we don"t think he was making much of a call at all---he"s was just musing out loud with no intention of reining-in the then rampaging bull. What he actually did was to conduct several gumming fests at subsequent Fed meetings and then diffidently raised interest rates a single time by a pinprick 25 basis point in April 1997.

After that the Maestro (so-called) apparently forgot all about "irrational exuberance" even as that very thing soon began infecting the entire warp and woof of the financial system.

In fact, Greenspan"s fatuous amnesia became so pronounced that by the very eve of the dotcom crash in April 2000, he proved himself blind as a bat when it comes to central bank created bubbles.

Said the Maestro to a Senate committee on April 8 when asked whether an interest rate increase might prick the stock market bubble:

That presupposes I know there is a bubble....I don"t think we can know there is a bubble until after the fact. To assume we know it currently presupposes we have the capacity to forecast an imminent decline in (stock) prices".

At least he got the latter part right. After the NASDAQ had risen from 835 in December 1996 to 4585 on March 28, 2000---or to an out-of-this-world 5.5X gain in 40 months----Greenspan wasn"t even sure he was seeing a bubble!

Accordingly, he apparently didn"t have that capacity to predict an imminent decline---although the 51% crash to 2250 by the end of the year would seem to have been exactly that.

Indeed, after unloading the above tommyrot at the tippy-top of the NASDAQ-100 bubble, Greenspan proved himself a clueless, pitiable fool when this giant bubble deflated by 81% over the next two years.

In fact, the index ended up in September 2002 almost exactly where it had been when Greenspan spoke the words "irrational exuberance" and then moved along with the Fed"s printing press at full speed---claiming there was nothing to see.

Still, back then you could almost have made a (lame) excuse for the Fed chairman"s bubble blindness. The Maestro was operating in the early days of monetary central planning and wealth effects management, and its potent capacity to unleash rampant speculation in the financial system was not yet fully understood----even if the underlying monetary theory defied all the canons of sound finance.

Moreover, in addition to rampant bubbles in the financial market, the Fed"s money pumping during the 1990s did also seem to be producing some seemingly robust real world effects on main street and in the booming new tech part of the economy.

And, in turn, these positive macroeconomic developments were unfolding in a global political/strategic environment that had suddenly become more benign that at any time since June 1914.

Indeed, the outside world fairly buzzed with positive developments. These included the fact that the internet/tech revolution still exuded adolescent vigor, the government"s fiscal accounts were nearing balance for the first time in two decades, the vast market of China was convincingly rising from its Maoist slumber and the Committee To Save the World (Greenspan, Summers and Rubin) had just rescued Wall Street with alacrity from the Long-Term Capital Management (LTCM) meltdown.

Likewise, Europe was launching the single currency and expanding the single market. In place of the Soviet Union, which had disappeared from the pages of history in 1991, Russia, its breakaway republics and the former Warsaw Pact (captive) nations were all bursting out of their statist chains and experimenting with home grown capitalism and reaching out to the west via rising trade and capital flows.

In the US, the combination of the end of the cold war and the internet revolution contributed a doubly whammy to growth and prosperity. When defense spending fell from 7% of GDP on the eve of the Soviet collapse to under 4% by the year 2000, substantial domestic resources were released for private investment and a resulting substantial productivity uplift.

In fact, real private nonresidential investment grew at 7.3% per year from the 1990 pre-recession peak through 2000. That was more than double the still respectable 3.4% rate recorded between 1967 and 1990; and causes the anemic 1.4% real growth of fixed investment between the pre-crisis peak (2007) and 2016 to pale into insignificance.

Notwithstanding all of these positives, however, the great bull stock market of the late 1990s ended-up getting way ahead of itself. That was especially the case during the next 18 months after the Fed"s heavy-handed and somewhat panicked bailout of LTCM in September 1998 had confirmed to the newly energized casino gamblers that the Greenspan Put was most definitely operative.

In the Great Deformation we tracked 12 of the highest-flying big cap stocks ("Delirious Dozen") during the period between Greenspan"s December 1996 speech and the April 2000 dotcom bust. During this 40-month period, the combined market cap of these 12 leading momo stocks---including Microsoft, Cisco, Dell, Intel, Juniper Networks, Lucent, AIG, GE  and four others---soared from $600 billion to $3.8 trillion.

That eruption did indeed give the notion of trees which grow to the sky an altogether new definition. To wit, the total market cap of the Delirious Dozen grew by 75% per annum for nearly 4 years running; and the future outlook was claimed to be even more fantastic.

For instance, as of mid-2000 Intel was valued at $500 billion and traded at 53X its $9.4 billion of LTM earnings. Yet it was argued that this nosebleed multiple was more than warranted because the company had grown its net income from $1 billion to $9.4 billion during the previous decade, and that there was nothing but blue sky ahead.

Here"s the thing, however. Intel was and is a great company that, in fact, has never stopped growing.

But during the 17 years since mid-2000, its net income growth rate has sharply slowed to just 1.79% per annum; and its $12.7 billion of LTM net income for September 2017 is valued at only 15.7X or $210 billion.

In short, at the peak of the tech bubble Intel"s market cap had vastly outrun its long run-earnings capacity. Even today it has only earned back 40% of its bubble peak valuation.

Likewise, Cisco was valued at $500 billion in July 200 and sported a 185X PE multiple on its $2.7 billion of LTM net income. And it, too, has continued to grow, posting LTM net income of $9.7 billion for September 2017.

Yet today"s earnings are accorded only a 19X multiple after 17 years of 2.4% per annum growth; Cisco"s current $181 billion market cap, in fact, sits at just 36% of its bubble peak.

Even the mighty Mr. Softie has experienced pretty much the same fate. Back in mid-2000, it posted $8.3 billion of LTM net income and was valued at $600 billion or 72X. Today its net income has tripled to $23.1 billion, but its PE multiple has receded to just 29X.

Stated differently, Microsoft"s net income has grown at 6.1% per annum since the company vastly outran it true value back in early 2000. Accordingly, its market cap gained just 0.4% per annum during the last 17 years. That is, it has taken one of the greatest tech companies of all time upwards of two decades to earn back its peak dotcom era bubble valuation.

And when it comes to the industrial and financial conglomerate empire that Jack (Welch) built, the story is even more dramatic. GE"s mid-2000 market cap of $500 billion stands at just $155 billion today; and its PE multiple of 60X has shrunk to just 22X.

In short, that was irrational exuberance back then, and it did not take long for the vast quantities of bottled air in the market cap of the Delirious Dozen to come rushing out. By the bottom in September 2002, four of these companies had vanished into bankruptcy and the market cap of the survivors had imploded to just $1.1 trillion.

That"s a fact and you can look it up in the papers. In less than 30 months, $2.7 trillion of market cap had literally ionized.  And these were the leading companies of the era.

None of them, it might be noted, were valued at 280X shrinking net income, as is Amazon today; or at infinite PE multiples like much of the biotech sector and momo hobby horses like Tesla.

More importantly, the promising macro-economic situation at the turn of the century has given way to a world precariously balanced on $225 trillion of debt and the tottering $40 trillion Red Ponzi of China.

Likewise, the benign geo-strategic environment of that era has long since disappeared into the madness of RussiaGate, endless wars in the middle east and Africa and the incendiary confrontation between the Fat Boy and the Donald on the Korean peninsula.

Finally, after 30 years of rampant monetary expansion the central banks of the world have been forced to reverse direction and begin to normalize interest rates and balance sheets.

And that now incepting and unprecedented experiment in massive demonetization of public debts is coming at a time when----after 8 years of business cycle expansion---the US, Japan and most of Europe are running monumental "full-employment" budget deficits.

Even then, these reckless fiscal policies are happening in the teeth of a demographically driven tsunami of pension, medical and welfare spending.

For the period just ended, the S&P 500 companies earned $107 per share on an LTM basis---or just 2% more than the $105 per share posted back in September 2014; and also only modestly more than the $85 per share recorded way back at the June 2007 pre-crisis peak.

Stated differently, on a trend basis S&P 500 companies have grown their earnings at 2.33% per annum over the last decade. How that merits a 24.3X PE multiple on today"s 2600 index price is hard to fathom---let alone Goldman"s 3100 target for 2020.

Indeed, just to retain today"s absurd PE multiple would require $130 per share of GAAP earnings by 2020 at the Goldman target price.

That"s right. By the end of 2020 we would be implicitly in the longest business expansion in recorded history at 140 months (compared to 118 months in the 1990s),

Furthermore, the term structure of interest rates will be 200-300 basis points higher according to the Fed"s current policies, while the US treasury will be running $1 trillion plus annual deficits and experiencing recurring debt ceiling and financial crises.

Even then you would need 7% annual earnings growth to hold onto today"s 24.2X PE multiple at the Goldman S&P 500 target.

As we said, relative to today"s casino madness and the Goldman fairy tale hockey stick, Alan Greenspan circa April 2000 looks like a model of sobriety by comparison.

So if that was Irrational Exuberance back in April 2000, what we have now is surely the mother thereof.

David Stockman Exposes "The Illusion Of Growth"

Authored by David Stockman via The Daily Reckoning,

The Wall Street Journal published a superb example of hopium recently in a sunny-side-up story entitled “U. S. Manufacturing Rides Rising Tide, Buoyed by Global Growth, Optimism.”

Indeed, this lazy cheerleading excuse for journalism captured the sum and substance of why the punters keep buying the dips despite troubles gathering all around.

That is, as the tax bill falters, the crusade to remove the Donald from office gathers strength, the Fed moves into balance sheet normalization and instability breaks out all over the world from the Persian Gulf to the Korean peninsula.

You would think the title says it all, but the WSJ was not nearly done. It cited a 156,000 pick-up in manufacturing employment since last November, rising energy and commodity prices as evidence of a booming global economy and double digit growth in business investment earlier this year, among other things.

American manufacturing has picked up pace over the last 12 months thanks to steady global economic growth, a rise in energy and other commodity prices, and increased business confidence.

 

Although progress isn’t being felt by all industries, makers of items ranging from bulldozers to semiconductors to food products are on the upswing as various measures of spending, sentiment and employment have climbed, while stock markets have hit record highs.

Yet every one of the trends cited in the WSJ article are less than a year-old. They coincide with the Great Coronation Boom in the Red Ponzi ( the run-up to Xi Jinping’s ascension to total power at the 19th Party Congress); represent only a minor up-tick from the 2014-2015 global deflation; and in the context of the current feeble recovery from the 2008 crisis represent nothing at all to write home about.

Indeed, I am confident that as the Red Ponzi goes into a stabilization and credit containment mode, as is already evident from the October economic data (fudged as it is), that the slight lift to global activity engendered by the latest China credit impulse will quickly fade. And with it the entire trading meme reflected in that WSJ puff piece.

But short of that yet to unfold but predictable global mini-cycle, the actual data on U.S. manufacturing output trends through September reveal nothing to smile about.

In fact, overall U.S. manufacturing production is still down 4.3% from its pre-crisis high back in December 2007, and was no higher last month than it was three years ago in November 2014.

Of course, global commodity prices did perk up during the last 18 months. Not only did they rebound off the bottom in normal cyclical fashion, but the hands of China’s central bank were more than a little evident.

When they unleashed the latest credit tsunami in early 2016, the hordes of Chinese speculators dutifully bought up all the iron ore, copper, steel, diesel fuel etc that was to be had and which could be readily financed in cash and futures markets alike.

Presently, they will be selling, too, as the post-coronation signals coming out of Beijing become unmistakably clear.

Nor is the above even the half of it. If you look at output of U.S. consumer goods, which is much less attached to the global commodity/industrial cycle, the rising tide of manufacturing output is nowhere to be seen.

In fact, consumer goods production has flat-lined for the last two years, and is still below where it was at the pre-crisis peak.

The same is true of manufacturing employment. There is no “rising tide.” Thus, between October 2007 and the April 2010 bottom, the U.S. lost 2.3 million manufacturing jobs — representing a loss of 76,000 high paying jobs per month.

By contrast, during the three years since October 2014, the U.S. has recovered about one-tenth of that loss — with manufacturing jobs expanding at a rate of  just 6,000 per month. That is to say, the WSJ was essentially trumpeting statistical noise.

We are now 120 months from the pre-crisis peak in November 2007. Yet the compound annual growth rate of manufacturing is just 0.08%. Which is to say, nothing.

By contrast, every prior peak-to-peak recovery pales that tiny beep of white noise into insignificance. Thus, between July 1981 and the July 1990 peaks, industrial production expanded at 2.18% a year during the so-called Reagan boom.

Likewise, during the Greenspan tech boom of the 1990s, the compound annual growth rate (CAGR) for industrial production was 4.02%. Even during the highly artificial and unsustainable Greenspan housing boom between December 2000 and November 2007, the index rose at a rate of 1.31% per year.

So Thursday’s industrial production number for October actually signaled that the U.S. industrial economy remains dead in the water. It is floundering in a manner that is off the historical charts — and not in a good way.

But stocks keep marching higher.

In short, financial information has been totally corrupted by the distortions of monetary central planning. Accordingly, when the third and greatest financial bubble of the 21st century collapses — and it is coming soon — it will also arrive as a great surprise.

As I keep insisting, monetary central planning systematically falsifies asset prices and corrupts the flow of financial information.

That’s why bubbles seemingly inflate endlessly and massively, and also why financial crashes and economic corrections appear to come out of the blue without warning.

Back in the winter of 1999-2000, for example, we were allegedly in the midst of a “new age economy.” The revolution in technology then underway, it was claimed, meant all historic valuation benchmarks — like P/E multiples, cash flow and book values — were irrelevant to stock prices.

Likewise, in the fall of 2007 there was nary a cloud in the economic skies. That’s because the Great Moderation led by the geniuses at the Fed had purportedly engendered a “goldilocks” economy destined to expand indefinitely.

Within months of the dotcom epiphanies, however, the highflying NASDAQ 100 crashed — eventually hitting bottom 83% below its new age heights. And 15 months after the S&P 500 reached its goldilocks peak of 1570 in October 2007 it staggered around in smoldering ruins at 670 — down 57% from its housing bubble high.

Today, the so-called stock market now consists entirely of what amounts to day traders and HST (high speed trading) machines. There is no “price discovery” in the classic sense of divining the true economic and political fundamentals. The casino has become entirely a ward of the central banks.

Needless to say, we are again on the precipice of a crash and correction that no one sees coming, but this one has an added twist.

Namely, three strikes and you are out!

What I mean, of course, is that the Fed and other central banks are out of dry powder. They are now stranded near the zero bound with bloated balance sheets that have actually reached hideous girth relative to current GDP and all historical experience — meaning they will have almost no capacity to reflate the next busted bubble, as they quickly did in 2001 and 2009.

Do yourself a favor and get out of the casino now.

Bubble Dynamics and Market Crashes

Authored by James Rickards via The Daily Reckoning,

To paraphrase one of the great gems of Wall Street wisdom, “Nothing infuriates a man more than the sight of other people making money.”

That’s a pretty good description of what happens during the late stage of a stock market bubble.

The bubble participants are making money (at least on a mark-to-market basis) every day.

Meanwhile, the more patient, prudent investor is stuck on the sidelines - allocated to cash or low-risk investments while watching everyone else have fun. This is especially true today when the bubble is not confined to the stock market but includes exotic sideshows like crypto-currencies and Chinese real estate.

It gets even worse when investors are taunted by headlines like the one in a recent article, “Investors Can Either Buy Bubbles or Be Left Far Behind.” The article is a case study in the “Bubblicious Portfolio.” Infuriating indeed. Actually it should not be.

On a risk-adjusted basis, the prudent investor is not missing much.

When markets go up 10%, 20% or more in short periods, market participants think of their gains as money in the bank. Yet, that’s not true unless you sell and cash out of the market. Few do this because they’re afraid to “miss out” on continued gains.

The problem comes when the bubble bursts and losses of 30%, 40% or more pile up quickly. Investors tell themselves they’ll be smart enough to get out in time, but that’s not true either.

Typically investors don’t believe the tape. They “buy the dips,” (which keep dipping lower), then they refuse to sell until they “get back to even,” which can take ten years. These are predictable behaviors of real investors caught up in real bubbles.

It’s better just to diversity, build up a cash reserve, have some gold for catastrophe insurance, and then wait out the bubble crowd. When the crash comes, which it always does, you’ll be well positioned to shop for high-quality bargains amid the rubble. Then you’ll participate in the next long upswing without today’s risks of a sudden meltdown.

OK, so I just argued that the stock market (and other markets) are in bubbles. But where’s the actual proof for this?

Actually, it’s everywhere.

The Shiller CAPE ratio (a good indicator of how expensive stocks are)  is at levels only seen at the 1929 crash that started the Great Depression, and the 2000 dot.com bubble. Likewise, the market capitalization-to-GDP ratio is above the level of the 2008 panic and comparable to the 1929 crash.

The list goes on, including historically low volatility and unprecedented complacency on the part of investors.

For almost a year, one of the most profitable trading strategies has been to sell volatility. That’s about to change…

Since the election of Donald Trump stocks have been a one-way bet. They almost always go up, and have hit record highs day after day. The strategy of selling volatility has been so profitable that promoters tout it to investors as a source of “steady, low-risk income.”

Nothing could be further from the truth.

Yes, sellers of volatility have made steady profits the past year. But the strategy is extremely risky and you could lose all of your profits in a single bad day.

Think of this strategy as betting your life’s savings on red at a roulette table. If the wheel comes up red, you double your money. But if you keep playing eventually the wheel will come up black and you’ll lose everything.

That’s what it’s like to sell volatility. It feels good for a while, but eventually a black swan appears like the black number on the roulette wheel, and the sellers get wiped out. I focus on the shocks and unexpected events that others don’t see.

In short, we have been on a volatility holiday. Volatility is historically low and has remained so for an unusually long period of time. The sellers of volatility have been collecting “steady income,” yet this is really just a winning streak at the volatility casino.

I expect the wheel of fortune to turn and for luck to run out for the sellers.

But it’s time to add another warning sign to the list. Certain high-yield (or “junk bond”) indices have fallen below their 200-day moving average. This can be indicative of a stock market correction.

Junk bonds are riskier than equity. When they get in trouble, it’s a sign that the corporate issuers are having trouble meeting their obligations. That in turn is indicative of reduced revenues or profits, tight financial conditions, and lower earnings.

Panics in October 1987 and December 1994 were preceded by distress in bonds about six months earlier. While there is no deterministic relationship, bonds are a good leading indicator of stocks because they are higher in the capital table and feel distress sooner.  The October 1987 one-day 22% decline in stocks, and the December 1994 Tequila Crisis in Mexican debt were ugly for investors. The bond market gave a six-month early warning both times.

It may be doing so again.

But what the Fed? Is it setting markets up for a fall?

It’s true that the Fed has been raising interest rates since 2015, and had engaged in tapering for two years before that. Yet, these actions hardly constitute tight money. The tightness or ease of monetary policy needs to be judged relative to financial and economic conditions.

You can have “easy money” at a 10% interest rate if inflation is running at 15% (something like the conditions of the late 1970s). In that world, the real interest rate is negative 5.0%, (10% – 15% = -5%).

In effect, the bank pays you to borrow. That’s easy money.

By most models including the famous Taylor Rule, rates in the U.S. today should be about 2.5% instead of 1.0%. We have easy money today and have had since 2006. This comes on top of the “too low, for too long” policy of Alan Greenspan from 2002-04, which led directly to the housing bubble and collapse in 2007.

The U.S. really has not had a hard money period since the mid-1990s. That’s true of most of the developed economies also.

What’s going to happen when central banks start to normalize interest rates and balance sheets and return to a true tight money policy in preparation for the next recession?

We’re about to find out.

Central banks all over the world including the Fed, ECB, and the People’s Bank of China are in the early stages of ending their decade-long (or longer) easy money policies. This tightening trend has little to do with inflation (there isn’t any) and more to do with deflating asset bubbles and getting ready for a new downturn.

But, in following this policy, central bankers may actually pop the bubbles and cause the downturn they are getting ready to cure. This is one more reason, in addition to those described above, why the stock market bubble is about to implode.

It’s important to realize that market crashes often happen not when everyone is worried about them, but when no one is worried about them.

Complacency and overconfidence are good leading indicators of an overvalued market set for a correction or worse.