The Ghost Of W.D.Gann: Another Crash Is Coming

Authored by Philip Soos & Lindsay David via RenegadeInc.com,

The original wizard of Wall Street, W.D Gann was a finance trader and wealthy speculator that spent decades investigating cyclical trends in equity market patterns and found that prices could be predicted long in advance. He successfully predicted the crashes in the 1929 and Dot-Com stock market bubbles.  And according to his analysis, the US stock market is due for another crash in 2020.

Every movement in the market is the result of a natural law and of a Cause which exists long before the Effect takes place and can be determined years in advance. The future is but a repetition of the past, as the Bible plainly states…

After suffering through the worst economic and financial crisis since the 1930s depression when the real estate and stock markets crashed in 2007, the United States’ bubble economy is back into full swing. Residential and commercial real estate prices are growing strongly, along with equities.

The US stock market, as defined by the S&P500 index, has boomed after collapsing to a trough in 2009. The market ‘recovered’ more quickly than anyone thought it would, and has continued surging from thereon in.

This has led to a lot of commentary and media coverage that the S&P500 is in the thrall of yet another bubble that will burst. Despite the many predictions of collapse, the bubble has powered on unhindered.

Like all asset bubbles, the primary cause is speculators taking on debt to bid up prices to ever-higher levels, generating a stream of greater fools willing to purchase at inflated valuations. In the case of equities, the type of debt used is margin debt.

The trends in the S&P500 index and margin debt are obvious. The name of the game is capital gains; income is increasingly sidelined as yields become compressed to record lows.

The annual change in margin debt (the first derivative) closely tracks that of the S&P500 index. In Australia, this was true of our largest equities bubble on record, which peaked in 2007 and then burst, declining by 55% from peak to trough.

Margin debt all too coincidently rose rapidly during the boom.

In the case of the S&P500 bubbles which peaked in 2000 and 2007, margin debt also peaked a few months beforehand in terms of absolute values, annual growth and acceleration (the second derivative).

It is therefore worth closely tracking the trends in margin debt to understand where equity prices are heading.

Another metric to watch out for is private non-financial business debt because the very low interest rates on business bank loans makes it easy for corporate executives to drive up stock prices by loading up on debt to engage in stock buybacks.

As prices are often linked to executive remuneration, they have every incentive to engage in this unproductive strategy.

The peaks in the annual change of non-financial business debt correspond with those of the equities market. It should be noted that non-financial business debt is also used to speculate on commercial land, which is why land prices cycle in tandem with debt.

The yield curve is one of the best leading indicators of recession and equity market downturns. The yield curve inverted a few months before both peaks in 2000 and 2007. Currently, the yield curve is 108 basis points above zero, and could take a while before it inverts.

While the metrics noted above can accurately indicate the peak of an equities bubbles several months in advance, they cannot tell us anything years ahead of time. For this, we must turn to the research of the original wizard of Wall Street, W.D. Gann. He was a finance trader who developed technical analysis tools and forecasting methods based on geometry, astronomy, astrology and ancient mathematics.

He was a successful and wealthy speculator, spending decades investigating patterns in equities markets. He concluded that equities exhibited a cyclical trend over decades and thus prices could be predicted long in advance.

In 1908, Gann constructed his financial timetable, which tabulated the booms and busts, peaks and troughs of the US equities market. Just like the Geoist land market cycle, there is a repeating 18-year average between every major cycle.

Gann managed to predict the crash of 1929 years in advance. He realised that the timetable would have to be recalibrated on the 25th December 1989.

The updated timetable is amazingly accurate from that date onward, predicting the Dot-Com bubble peak in 2000 and its collapse. The GFC peak was off by one year; 2007 instead of one year earlier in 2006. The trough was in 2009, followed by a minor panic in 2015, when the S&P500 dipped but has since boomed.

According to the timetable, 2020 will be the peak of the equities bubble, followed by a major crash similar to that of the Dot-Com bubble.

To the economists we’ve spoken to, the peak could range between 2019M09 to 2020M03. Given how large the S&P500 bubble has become, it is worth treading very carefully during this period for those exposed to US equities.

Gann is famous for saying: “Every movement in the market is the result of a natural law and of a Cause which exists long before the effect takes place and can be determined years in advance. The future is but a repetition of the past, as the Bible plainly states…”

Due to the ETF revolution, it is a straightforward matter to gain exposure to the S&P500, including leveraged and inverse instruments. It would be even better if the government would enact policies to prevent speculation and subsequent bubbles in the first place. This can be done by banning margin debt and other securities-based loans, and heavily taxing capital gains based on the length of time they were held for (the longer, the less tax).

While the equities market boom has added a great deal of wealth to the balance sheet of US households, it is merely the latest instance in a long line of asset bubbles. No doubt many speculators believe that ‘this time is different’ but the ghost of Gann would argue otherwise.

"The World Is Criminally Corrupt & Broken" - A Surprising Dinner Conversation With The Younger Generation

Authored by Mike Krieger via Liberty Blitzkrieg blog,

Dressed in red velvet, she trampled under her reckless feet the stray flowers fallen from other heads, and held out a salver to the two friends, with careless hands. The white arms stood out in bold relief against the velvet. Proud of her beauty; proud (who knows?) of her corruption, she stood like a queen of pleasure, like an incarnation of enjoyment; the enjoyment that comes of squandering the accumulations of three generations; that scoffs at its progenitors, and makes merry over a corpse; that will dissolve pearls and wreck thrones, turn old men into boys, and make young men prematurely old; enjoyment only possible to giants weary of their power, tormented by reflection, or for whom strife has become a plaything.

 

– Honore De Balzac, The Magic Skin

I don’t get out all that much these days, but last evening I had a really engaging and illuminating dinner conversation. In attendance was a 47-year old commercial real estate investor and fellow Boulder resident who I’ve become friends with, a 32-year old professional poker player looking to move here, and 28-year old tech startup founder. Although I hadn’t met the younger attendees before, it became immediately apparent that everyone in attendance was highly intelligent and very engaged with the world around them.

We discussed religion, philosophy, crypto assets, the importance of nature to humans, travel and more. That said, the reason I’m writing this post is due to some of the generational observations I came upon. It confirmed the overall thesis I discussed in detail within last month’s post, The Generational Wheels Are Turning.

Here are a couple of passages from that piece to refresh your memory:

The Baby Boomer generation, which has dominated so many aspects of our country for so many decades — including the overall narrative of everything — is finally heading off into the sunset.

 

It’s not so much that they’re physically expiring, but their influence is beginning to wane significantly. It’s not completely obvious just yet since our world continues to be defined by the institutions and ideals they championed, but in the hearts and minds of so many, particularly the younger generations, the world they left us is hopelessly corrupt, archaic and can’t be displaced quickly enough.

While at dinner last night, I tried to listen as closely as possible to how the younger guys saw the world and where it was headed.

I wouldn’t say their views of the future were wildly optimistic, but there wasn’t a sense of dread or pessimism either. There was a vibe of, yeah our generation was screwed, the government sucks and so do all these corrupt institutions, but we’re gonna get out there and do our best. I’ve noticed this worldview consistently over the years from people roughly tens years younger than me, i.e., the heart of millennial generation. Not only is my wife in that age group, but so are many of my close friends at this point, and this ethos has been pretty consistent from my experience.

They don’t trust government, corporations or anyone with power to do the right thing. This is why they didn’t enthusiastically buy the Hillary Clinton kool-aid, despite not liking Donald Trump either.

It seems being thrust into adulthood with terrible employment and wage prospects resulted in a very healthy dose of cynicism about how things work. There’s a very clear appreciation that the world as is functions today is criminally corrupt and broken.

When I go out and chat with people my age and older, I notice a completely different tone compared to when I engage with younger generations. One thing is crystal clear. Older friends of mine not only think the status quo will strike back against extremely disruptive forces like Bitcoin and crypto assets, they also think the status quo will win. They expect a return to the gold standard, or some IMF-globalist one world digital currency to provide a framework for the post-dollar reserve currency system. Generally speaking, the biggest difference between the two groups is that one expects the current power structure to cunningly survive this current period, while younger people think the world can, and will, be fundamentally changed for the better. You know which camp I’m in.

Generally speaking, older people tend to be strongly anchored to the world paradigm as it exists, while those who are younger are naturally more open to massive disruption and upheaval. I’d argue that the current younger generation is even more willing to flip the table over and build entirely new structures than most people realize. The popularity of crypto assets amongst this generation is just one manifestation of this desire. That’s not to say us optimists are naive and expect this to be a smooth transition without a fight, but it’s to say we believe paradigm level, positive change is not only possible, but likely. Which is precisely the attitude you must have if you want to win. If you go into a battle expecting to lose, the result is obvious.

Most interesting to me was how the youngest member at the table responded when the subject of gold came up. He said something like, “I get the investment thesis, I get the concept of it, but it’s just not something I’m interested in.” He went on to describe why.

He likened it to buying an asset, holding it tight, and then waiting for the world to burn around him to profit. This blew my mind because I’ve heard this exact same sentiment, virtually word for word, from other people his age previously. They get gold and they understand the investment thesis, but they simply aren’t interested in it for very specific and interesting reasons. Many older people think millennials are just acting stupid and naive with their interest in crypto assets. They think these kids don’t know anything about gold or monetary history, which is why they’re attracted to these new digital forms of value, but if you actually talk to them, you’ll see that’s not the case. I’ve had too many experiences like the one described above with intelligent and aware millennials to be increasingly confident of this conclusion.

It reminded me of what I wrote last month:

This is where many older people who understand how fraudulent and terminal the current system is seem to get sidetracked. To them, the next logical step as we enter a new financial system has to be to go through gold. Far more ridiculously, some people even push the spectacularly idiotic idea that an SDR will become the accepted global currency of the future. While I don’t profess to know exactly how things will play out, I try to keep an open mind as others arrogantly dismiss Bitcoin completely.

 

It’s no coincidence that many of those who are particularly condescending toward Bitcoin are from older generations. They’re doing what humans tend to do, which is take their own understanding of the world and life experiences and extrapolate them into the future. Someone who lived 30 years or more before the internet came to dominate everything will naturally possess a radically different perspective of the world and where it’s headed than someone who never knew life without it. This is precisely why a younger person will inherently understand the value and utility proposition of something like Bitcoin far more easily than someone much older.

The only person at the table who owned no crypto assets was the oldest one in attendance (although he’s totally supportive of the space). This pattern is repeated over and over again in my experience. When I go out with friends my age or older they’re almost never involved, but when I go out with younger generations they almost always are. Some people will write the whole thing off as a fad, but my observations point me in an entirely different direction. The evolution and success of Bitcoin and crypto assets is not just a function of revolutionary technology being introduced into the world. Its blistering adoption rate is a reflection of a global consciousness developing amongst younger generations. It’s reflection of a burning desire for a more dynamic, trustless and decentralized world, and it will be up to them to ensure that it happens.

None of us know exactly how the future will unfold, but I’m going to take my cues from younger generations. Their values and desires will be what shapes the world as older generations retire and die off. If you aren’t talking to them and studying the way they see things, you’re going to be completely blindsided by the next 10-20 years.

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Proposed Legislation: Fannie And Freddie Are Here To Stay - There Is No Alternative

Since the US government nationalized the two GSEs in 2008 in a $187 billion bailout of the mortgage giants, there have been consistent calls for them to be wound down and for the private sector to fill the void. As we discussed, this view is, or was, shared by new Fed Chairman, Jay Powell.

Mr. Powell has called on Congress to overhaul the housing finance system, saying he’d like to see the country’s two large mortgage-finance firms, Fannie Mae and Freddie Mac, move out from under government conservatorship. More private capital in those firms would reduce the risk of a taxpayer-funded bailout in the event of a downturn, he said in a speech in July.  Although the Fed isn’t responsible for housing finance, it supervises some of the country’s largest lenders who frequently sell their loan to the two agencies. “No single housing finance institution should be too big to fail,” he said.

In August this year, Fannie and Freddie’s regulator, the Federal Housing Finance Agency (FHFA), published the results of its latest annual stress tests on the two GSE’s. The FHFA outlined a “severely adverse” scenario in which US real GDP decline 6.5%, the unemployment rate rises to 10.0%, equity prices decline almost 50%, home prices decline 25% and commercial real estate prices by 35%. Under these conditions, it estimates Fannie and Freddie would need a bailout of up to $100 billion in the form of a draw on the Treasury (depending on how they treat assets to offset tax).

Mortgages guaranteed by Fannie and Freddie amount to about $4 trillion and account for about 40% of the total US market.

Note: 2017 data through June. Sources: Inside Mortgage Finance, Urban Institute

Sadly, after almost a decade of federal ownership, the hope that Fannie and Freddie could be wound down has evaporated. Senators on both sides of the political divide have concluded that they are too big and too risky to replace. Proposed legislation in 2018 will see them retained at the centre of the US mortgage industry, rather than replacing them as a previous senate proposal tried and failed four years ago. According to the Wall Street Journal.

Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down, people familiar with the matter said.

Bipartisan Senate legislation set to be introduced in early 2018 marks the clearest sign of this reversal and shows how the companies, entering their 10th year under federal control, have proven too risky to attempt replacing. The housing market has seen strong demand in recent years, driven in part by steady access for many Americans to 4% or lower 30-year fixed-rate mortgages, thanks in part to a government backstop of the companies. Advancing legislation to refashion the nation’s $10 trillion mortgage market is a heavy political lift and may yet sputter during the coming midterm-election year, as a prior Senate effort did four years ago. One big difference this time around: a more incremental approach largely reliant on the existing housing-finance framework.

The new plan, proposed by Senators. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) could be introduced as early as next month. Instead of a new mortgage-finance system, Fannie and Freddie will be retained under government control and permitted to issue mortgage securities guaranteed by the Treasury until private sector competitors emerge. The GSE’s investment portfolios, which have fallen to less than $250 billion each from over $900 billion each at their peak, could be liquidated under the Senate plan.

“We’re looking for a more simplified approach that protects the taxpayer, preserves the 30-year fixed mortgage and includes stronger access and affordability provisions,” Mr. Warner said in a statement Friday.

However, Bloomberg’s sources acknowledge that a private sector alternative to Fannie and Freddie will not only take years to emerge, but it’s not clear which companies will enter the market. Besides having the advantage of bi-partisanship, the proposals have the advantage that politicians who wish to reform mortgage finance are reaching retirement age as Bloomberg notes.

Another factor bolstering chances for a deal is the retirement of Washington officials interested in reducing government control of housing, including Mr. Corker. The Tennessee senator has been working with Mr. Warner and Senate Banking Committee Chairman Mike Crapo (R., Idaho) all year on the issue, according to people familiar with the deliberations, and Mr. Crapo has made the overhaul a top goal for his panel.

Even House Financial Services Committee Chairman Jeb Hensarling (R., Texas) signaled this month in a speech to Realtors that he would like to see a Fannie and Freddie deal in what is to be his final year in Congress. Mr. Hensarling said he is still committed to replacing the companies, but has backed off a position that any future setup provide no federal backstop.

Reforming mortgage finance has not been a focus for the Trump administration and nor has it endorsed any proposed legislation thus far. However, Treasury officials are reported to have been in close contact with the Senate officials as the plan has emerged. Furthermore, Treasury Secretary Steven Mnuchin, who also headed up Goldman’s mortgage securities department in the late 1990s, disagreed with calls for abolishing Fannie and Freddie last month.

“No, I wouldn’t,” he said in an interview at November’s Wall Street Journal CEO Council meeting. “We have got to make sure that the housing system is built to last.”

Bloomberg reports that supporters of Corker and Warner’s proposal see a “narrow window” in early 2018 when the legislation could be added on to another bill to reduce post-crisis regulations in the financial sector.

The question about what to do with Fannie and Freddie has now come full circle since the financial crisis. In its aftermath, the consensus view became so negative that even long-time supporters, like Democrat Barney Frank, capitulated, saying they should be abolished. In 2013, Obama called on Congress to wind them down and “end Fannie and Freddie as we know them”. However, the tide started to turn shortly after due to the lack of confidence in mortgage bonds that didn’t have a government guarantee. The latest Senate proposal is the first having bipartisan backing which keeps Fannie and Freddie instead of replacing them.

So, a bit like the “Too Big To Fail” banks, the encroachment of government into parts of the financial system which it should never have entered, makes winding back that intervention difficult, if not impossible. We could have seen it coming as Bloomberg laments.

Washington’s about-face will come as little surprise to market participants who for years predicted that efforts to replace Fannie and Freddie, which together back around half of all outstanding mortgages, would prove too difficult. But the shift on Capitol Hill nevertheless illustrates one way in which policy ideologues appear to have lost ground to market realities.

 

Regulating Cryptocurrencies... And Why It Matters

Authored by Charles Hugh Smith via OfTwoMinds blog,

Nations that attempt to limit cryptocurrencies" ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.

There"s a great deal of confusion right now about the regulation of cryptocurrencies such as bitcoin. Many observers seem to confuse "regulation" and "banning bitcoin," as if regulation amounts to outlawing bitcoin.

Further confusing things is the regulation of cryptocurrency exchanges, where cryptocurrencies are bought and sold.

In China, for example, cryptocurrencies are not outlawed, but exchanges were shut down until regulators could get a handle on how to deal with the potential for excesses such as fraud, misrepresentation, etc.

A Wild West free-for-all is conducive to scammers, and so some thoughtful regulation that protects users is to be welcomed.

Governments tax income and capital gains. This is how they fund their activities. Clearly, gains reaped from cryptocurrencies are no different from gains reaped from other speculations and investments, so they should be recorded and taxed in the same manner.

Some enthusiasts of cryptocurrencies seem to think that regulations requiring the reporting and taxation of gains made buying and selling cryptocurrencies is tantamount to destroying cryptocurrencies.

I think this view has it backwards: fully legalizing and regulating cryptocurrencies as financial instruments legitimizes them in a much wider circle of potential users, and common-sense regulations are to be encouraged and welcomed, not viewed as threats to cryptocurrencies.

I want to stress that beneath all the speculative frenzy we see in the cryptocurrencies, what will retain value and remain scarce and in demand is whatever solves problems.

Cryptocurrencies have the potential to solve two problems:

1. reducing the cost and friction of financial intermediaries.

2. holding value as the $250 trillion in phantom wealth created in the asset bubbles of the past 12 years vanishes.

These are real problems: financial intermediaries introduce a great amount of friction and cost globally, and even a modest reduction in cost and friction (time, effort, compliance, recording transactions, etc.) would add up very quickly.

The global value of real estate, stocks, bonds and debt-assets such as mortgages and auto loans is around $500 trillion. By my rough estimate, about half of this was created in the past 12 years as central banks inflated enormous bubbles.

A house that was worth $200,000 in 2005 is now worth $500,000, but it provides no additional value as shelter; it is the exact same house with the exact same utility value. So the additional $300,000 of current market value is entirely phantom wealth.

The same can be said of all the other assets whose value has skyrocketed: the underlying assets/collateral haven"t changed enough to justify the current valuations.

Once the bubbles in stocks, bonds, housing, commercial real estate and debt-assets start popping, the owners of all that phantom wealth will be desperate to sell what is dropping in value and convert that wealth into assets that are either holding their value or appreciating.

Virtually all of this newly created financial "wealth" is ephemeral. Bitcoin et al. are routinely criticized as being "worthless" due to their digital/ephemeral nature.

But critics rarely if ever examine the equally ephemeral nature of $250 trillion in financial "wealth."

Bitcoin in particular has two features which may be viewed as having value as all these coordinated bubbles pop:

1. The organization and distribution of bitcoin is mathematical. It is not something that can be changed at the whim of a handful of self-serving people in a room (i.e. central bankers).

2. It is limited in quantity.

Some critics claim this can be changed, but that"s not the way it works. A group of bitcoin miners can propose a new version of bitcoin that will issue a trillion coins, but if nobody supports their new version, it dies.

In other words, the marketplace of users decides what has value and what doesn"t.

Regulations that enable cryptocurrencies to solve the two problems listed above should be welcomed, as these problems are structural and impact everyone in some fashion.

Nations that attempt to limit cryptocurrencies" ability to solve these problems will find that protecting high costs and systemic friction will grind their economies into dust.

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I"m offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20). Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Blow.Off.Top.

Authored by Sven Henrich via NorthmanTrader.com,

No period is worse for bears than when it’s the best time to sell stocks. It’s the polar opposite of when conditions are worst for bulls, right when it’s the best time to buy as it was in January-March 2009. The exhaustion factor is enormous. It’s called capitulation as moves get stretched to the extreme even though the set-up is valid.

November’s close marked the 13th consecutive month straight up for global markets. Nothing but up with fewer and ever smaller dips in between. Deutsche Bank’s Reid illustrated the point: “We’ve never had such a run with data going back over 90yrs”. I’d say that qualifies as the worst of time for bears.

Yet we could be sitting on a generational opportunity to sell equities as it could be argued that conditions will never be better for bulls as the game of offering carrots of free money is coming to an end. Indeed it could be argued that the prospect of tax cuts is the final carrot the free money scheme has to offer. The carrot top. No more carrots.

Consider the central banking liquidity game has peaked and is dropping off:

The 2016/2017 period saw the largest amount of central bank intervention ever. Ever. Over 8 years after the financial crisis.

The slow reduction in central bank liquidity has been supplemented by record ETF inflows this year. Retail went long and continues to buy the most expensive market since 1900 according to Goldman:

Even now via @jennablan: “U.S.-based money market funds attract inflows of $33 bln in week ended nov 29, largest inflows for the year”.

And leverage has never been higher either. Via @Schuldensuehner: 

“Dow Jones Industrial closed >24k for the first time ever. Wall St record has occurred in tandem w/record margin debt. Margin debt now at $561bn, double amount of tech bubble of 2000, 47% > than in 2007”:

Retail is in and we see it in various data charts:

Via @BN:

The Rydex bull/bear allocation data shows the most bullish allocation into equities ever:

Don’t tell me it’s the most hated bull market ever. The data says otherwise.

Markets are in big time pig time mode. The prospect of imminent tax cuts keeps investor salivating and allocating cash into all time highs as markets drenched in 8 years of artificial liquidity find tax cuts to be the next carrot to push markets caps into the stratosphere:

A blow-off top perhaps setting us up us for something more sinister than a correction. What’s the biblical phrase? Forgive them for they do not know what they are doing?

Look, the tax narrative is that tax cuts will pay for themselves, that companies will hire more people as a result, and that middle class will benefit greatly from it, that GDP will swell to 4% and Trump claimed that these tax cuts will actually personally hurt himself financially. None of these things are true. Not a one. In fact everything is precisely the opposite. The math says so.

While extreme political tribalism encourages ideology over facts math is true whether you believe in it or not. And these tax cuts will add greatly to the deficits. I won’t belabor the point here as I’ve outlined my thoughts on the subject in detail in Tax Cut Scam.

An Opinion Piece From The Edge: Tax Cut Scam.
This tax cut proposal is a scam. Don"t fall for it.https://t.co/rkDg5UnIZ3 pic.twitter.com/L9lhIqd9sn

— Sven Henrich (@NorthmanTrader) November 9, 2017

The deficit will increase, many will see actual tax increases over time and/or lose benefits and the big tax cut benefits go precisely to people such as Trump and corporations already sitting on record cash positions. As far as GDP growth the FOMC doesn’t believe it either as incoming Fed Chair Powell affirmed a 2.5% GDP outlook for 2018 and many companies are on the record that they will use the extra cash for dividends and buybacks not hiring. This tax bill will exacerbate wealth inequality.

And hiring? Forget it. Structurally we’re looking at the great firing to come: 800 million people might be out of a job by 2030 because of automation

Precise numbers are to be taken with a grain of salt but it’s coming, whether you want to believe it or not.

And this perhaps is the biggest lie of the entire construct: That it’s done for the benefit of the middle class. It’s not. It’s done for wealthy donors who have threatened to cut off donations if they don’t see results. It’s big time pig time. Greed at its finest consequences be damned.

So the odds are the tax cut bill will end up passing in one form or another unless someone stands up and says they’re not voting for something that’s based on a lie.

Deficits will keep expanding before even a new recession hits. I’ve said for a long time that market levels and economic growth have been bought with debt and stimulus producing multiple expansion. See below multiple expansion in context of price and aggregate GAAP earnings:

We do not know what organic growth is without permanent intervention. That was true with the past administration and it is true with this one.

Except now we see increased in defense spending and a cutting of the revenue structure. This year’s deficit was already $666B and that’s without tax cuts. The deficit will be expanding to $900B by 2019 according to JPMorgan.

Even Janet Yellen felt compelled to comment on the debt:

“I would simply say that I am very worried about the sustainability of the U.S. debt trajectory,” Yellen said.

 

“It’s the type of thing that should keep people awake at night,” she added.”

Cute, especially coming from her who was a key contributor to the easy money train. The context is glaringly obvious:

Janet Yellen:
“It’s the type of thing that should keep people awake at night” pic.twitter.com/PsRUHVpbH5

— Sven Henrich (@NorthmanTrader) November 30, 2017

But Janet Yellen is not alone in suddenly getting concerned about the sustainability of debt expansion.

Dallas Fed president Kaplan came out this week and basically highlighted many of the concerns I’ve been talking about for a long time. A shockingly rare admission of the truth. Quite a statement:

“As a central banker, I want to be vigilant to imbalances and distortions that can build as a result of accommodative monetary policy. I have argued that monetary policy accommodation is not “free” —there are costs to accommodation in the form of distortions and imbalances in consumer decisions as well as in investing, hiring and other business decisions. More specifically, experience suggests that the greater the overshoot of full employment, the more difficult it is to unwind imbalances when growth ultimately slows—as it certainly must.

When excesses ultimately need to be unwound, this can result in a sudden downward shift in demand for investment and consumer-related durable goods. There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level.

It is of course possible that “this time will be different,” but as I assess the condition of the U.S. economy, I am carefully monitoring evidence that might suggest growing risks of real imbalances, which could threaten the sustainability of the current economic expansion. For example, the headline unemployment rate has fallen by 70 basis points over the past year, nearly matching the average rate of decline over the prior seven years of the expansion. If this rate of decline continues, this will further tighten labor market conditions and would likely add to excesses and imbalances accumulating in the economy.

Excesses can also manifest themselves in financial imbalances. While I would prefer to rely primarily on macroprudential policy tools to manage financial imbalances, I am nevertheless monitoring various measures of potential financial excess. I monitor these and other market measures because I am aware that, as excesses build, we are more vulnerable to reversals which have the potential to cause a rapid tightening in financial conditions, which in turn, can lead to a slowing in economic activity. Examples of potential excesses might include:

• The U.S. stock market capitalization now stands at approximately 135 percent of GDP, the highest since 1999/2000.[3]Correspondingly, commercial real estate cap rates and valuation measures of debt and other markets appear notably extended.


• Measures of stock market volatility are historically low.[4] We have now gone 12 months without a 3 percent correction in the U.S. market.[5] This is extraordinarily unusual.


• While household debt to GDP has improved over the past eight years, corporate debt is now at record highs.[6] I am not overly concerned about current levels of corporate debt because, importantly, financial sector leverage has declined substantially since the Great Recession. However, U.S. government debt now stands at approximately 75 percent of GDP,[7] and the present value of unfunded entitlements now stands at approximately $49 trillion.[8] In my view, the projected path of U.S. government debt to GDP is unlikely to be sustainable—and has been made to appear more manageable due to today’s historically low interest rates.


• Debt and equity securities trading volumes have markedly declined over the past several years. For example, NYSE equity trading volume on average for 2017 is down 51 percent from 2007 levels, while the NYSE market cap has increased 28 percent over the same time period.[9] I would also note that margin debt is now at record-high levels.[10] In the event of a sell-off, high levels of margin debt can encourage additional selling, which could, in turn, lead to a more rapid tightening of financial conditions. Sufficient market trading liquidity is key to managing the resulting increased volume. I am cognizant that lower trading volumes may be due, in part, to low levels of market volatility and may also be due to regulations such as the Volcker rule.”

So he’s watching markets closely and looking at some of the very same trends and factors we are.

In essence he is affirming one of the key cornerstones of the bear case: We are late in the cycle and low unemployment is not sustainable:

Again:  “There are surprisingly few historical examples of “soft landings” in cases where employment has risen above its maximum sustainable level”.

And neither is the debt build up and he knows it just like Yellen: “In my view, the projected path of U.S. government debt to GDP is unlikely to be sustainable —and has been made to appear more manageable due to today’s historically low interest rates”.

The chart above outlines the argument I’ve been making for a long time. This hyper bull market has not only been enabled by low rates but is the end product. Low rates enabled unprecedented debt expansion. And without low rates it can’t be sustained.

In this context then the concern is what happens if the 10 year were to rise above its 30 year trend line. Note the 2 most recent market tops came at a time when the 10 year was approaching its upper trend line. It is doing so again now.

And it’s doing it in context of a flattening yield curve:

The Fed is paying attention and it’s very concerned:

“Federal Reserve Bank of St. Louis President James Bullard on Friday warned that more rate increases by the central bank would raise the risk the U.S. economy could fall into recession.”

The key question: How sensitive is the entire construct to rising rates in context of record debt. The macro charts I keep tracking suggest stress building underneath.

And so the question then becomes not if it unwinds, but when and from where.

Morgan Stanley came out this week and raised its own concerns:

“An unprecedented central bank unwind… We think there is way too much complacency regarding what is a notable and growing shift in central bank policy globally. Remember, monetary policy has been massive in this cycle, and extremely supportive for credit markets. The Fed is now tightening in an untested way, through the balance sheet, while also pushing rates near restrictive territory. Markets expect a seamless unwind. We do not.

…with markets late cycle, and very dependent on ultra-easy liquidity… It is not a coincidence that fundamental problems are becoming more apparent in one sector after the next, as the Fed withdraws liquidity. In fact, we see late-cycle risks popping up all over the place, and as is often the case near a top, these risks are mistakenly (we think) being rationalized as purely ‘idiosyncratic’ problems. Defaults should remain low in 2018, but that is expected. Credit markets anticipate defaults one year ahead of time, and we think a cycle turn is closer than many believe.

…and valuations very rich: Spreads are near all-time tights, adjusting for the quality deterioration in the indices over time. Yes, the technicals have been strong, but that may change as the Fed’s balance sheet shrinks faster. We note, a recession is not necessary to see negative excess returns, especially in the second half of a cycle, and particularly late in a Fed tightening cycle. Credit markets have not experienced three straight years of positive excess returns in over 20 years.

More than anything else, we firmly believe that central banks have been THE driver of credit in this cycle, stimulating markets like never before. Now they are attempting to tighten in a completely untested way, and yet credit is pricing in a seamless unwind. At the least, we expect a bumpier 2018, with a tougher setup anyway we slice it. Growth will decelerate, while the Fed continues tightening into a low-inflation environment, driving a completely flat yield curve (per our rates forecasts). Additionally, the year is beginning with booming confidence, as hopes for tax cuts rise, thus the bar to positively surprise is high, while “Goldilocks” is firmly in the price across most risk assets.

We would not rule out the scenario in which financial conditions could tighten materially next year as the Fed withdraws stimulus in this unprecedented way, especially if growth expectations decline at the same time, pushing us from late cycle to end of cycle (though not our economists’ base case). And for those expecting the Fed to come to the rescue any time volatility picks up, remember that, with the balance sheet now effectively set on “auto-pilot,” reversing course, in our view, is a last resort.”

You may note how these comments compliment the concerns Kaplan is raising himself. All of this fits with the larger macro analysis I’ve been outlining all year.

There is a reason the Fed has been oh so careful in tinkering and hand wringing. There’s a reason the ECB and the BOJ keep printing. They all know the construct is fragile and they are all worried. They actually say so:

From the recent FOMC minutes: “They worried that a sharp reversal in asset prices could have damaging effects on the economy.”

That’s it. Asset prices are now so elevated that a correction is viewed as a clear and present danger to the global economy. It’s actually all quite simple and obvious. They’ve created a monster and are worried about pissing it off. So the entire construct is held up by low rates and there is a moment where the balance breaks. But we don’t know the when and the where although as my previous chart showed $SPX just hit its 1987 trend line this week which could make any further advances rather challenging or perhaps mark a key pivot.

Here’s the closer view:

Note this tag is coming in context of a $VIX that keeps pinging its upper trend line as it did again this week:

The monthly view via Mella:

These charts continue to signal that volatility will eventually break higher and perhaps violently so.

Now in context of $TNX and the $SPX I’ve created a ratio chart looking at the interplay between $SPX and $TNX:

Note that since the 2009 lows a trend line established itself and it was broken in 2016. Indeed in 2017 it rejected trying to recapture the trend line. Furthermore we can observe a potential right shoulder building. With a significant lower high. Why is that? Well because despite $SPX printing new highs $TNX is not printing new lows. So if $TNX breaks higher it will take massive higher market gains to avoid a break lower in the ratio. This pattern is massive and it would accelerate to the downside if markets broke lower with yields rising. In essence the scenario that Kaplan and Morgan Stanley expressed concerns about.

Bottomline: The macro analysis of the entire construct remains spot on. Central banks have created the TINA effect (there is no alternative) asset prices have become amplified via multiple expansion in lieu of any other investment alternatives and now with the prospect of tax cuts all sellers have disappeared. For now.

Markets have proven they can rally with the loosest financial conditions in this cycle along with continued M1 money supply expansion:

They have yet to prove they can do without.

But after tax cuts there are no more carrots to dangle in front of markets hence we’re finding ourselves in an environment of an imminent carrot top.

The watershed moment will come when people want to sell. How will markets handle a situation with sellers suddenly appearing? Nobody knows. But clearly the Fed is worried about it.

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Morgan Stanley Turns Apocalyptic On Credit: "A Cycle Turn Is Closer Than Many Believe"

While many have repeatedly warned over the past year that the record gains in credit are simply too good to stay - especially in Europe where yields and spreads have collapsed largely thanks to the ECB"s relentless purchases of corporate debt, with the central bank announcing on Monday it held a record €127.7bn in bonds under its CSPP program - few are as bearish on credit as Morgan Stanley, which today issued ots 2018 US Credit Outlook which is, in a word, "dire."

In the report titled "When the Levee Breaks" strategist Adam Richmond list the three biggest headwinds for credit as follows: "Fed policy should become a material headwind, markets seem very late cycle, and valuations look extremely rich" and details each below:

An unprecedented central bank unwind... We think there is way too much complacency regarding what is a notable and growing shift in central bank policy globally. Remember, monetary policy has been massive in this cycle, and extremely supportive for credit markets. The Fed is now tightening in an untested way, through the balance sheet, while also pushing rates near restrictive territory. Markets expect a seamless unwind. We do not.

 

...with markets late cycle, and very dependent on ultra-easy liquidity... It is not a coincidence that fundamental problems are becoming more apparent in one sector after the next, as the Fed withdraws liquidity. In fact, we see late-cycle risks popping up all over the place, and as is often the case near a top, these risks are mistakenly (we think) being rationalized as purely "idiosyncratic" problems. Defaults should remain low in 2018, but that is expected. Credit markets anticipate defaults one year ahead of time, and we think a cycle turn is closer than many believe.

 

...and valuations very rich: Spreads are near all-time tights, adjusting for the quality deterioration in the indices over time. Yes, the technicals have been strong, but that may change as the Fed"s balance sheet shrinks faster. We note, a recession is not necessary to see negative excess returns, especially in the second half of a cycle, and particularly late in a Fed tightening cycle. Credit markets have not experienced three straight years of positive excess returns in over 20 years.

Looking at the technicals, Morgan Stanley echoes what we said last month when he showed the collapse in spreads to 2007 levels, and warns that "credit spreads are very rich nearly any way we slice the data. Spreads adjusted for leverage are back to 2007 levels in high yield, and 1997 levels in IG."

Exhibit 20 shows our fair value model for IG, HY and loans. In short, we estimate that IG, HY and loan spreads are 41bp, 197bp, and 111bp rich to fair value, respectively, using long-term default, downgrade, and risk-premium assumptions. And as we show in Exhibit 21 below, if we adjust for the deterioration in quality of the IG index over time, we find spreads are only 9bp wide of the all-time tights.

One of the main reasons for Richmond"s bearishness, is the "complacency" about the Fed"s tightening, which of course is applicable to all asset classes. He explains:

More than anything else, we firmly believe that central banks have been THE driver of credit in this cycle, stimulating markets like never before. Now they are attempting to tighten in a completely untested way, and yet credit is pricing in a seamless unwind. At the least, we expect a bumpier 2018, with a tougher setup anyway we slice it. Growth will decelerate, while the Fed continues tightening into a low-inflation environment, driving a completely flat yield curve (per our rates forecasts). Additionally, the year is beginning with booming confidence, as hopes for tax cuts rise, thus the bar to positively surprise is high, while "Goldilocks" is firmly in the price across most risk assets.

 

We would not rule out the scenario in which financial conditions could tighten materially next year as the Fed withdraws stimulus in this unprecedented way, especially if growth expectations decline at the same time, pushing us from late cycle to end of cycle (though not our economists’ base case). And for those expecting the Fed to come to the rescue any time volatility picks up, remember that, with the balance sheet now effectively set on "auto-pilot," reversing course, in our view, is a last resort.

 

Taking a step back, per our forecasts, the Fed will hike 3 times in 2018. While gradual on the surface, this rate-hike cycle needs to be put in context. In other words, as we show in Exhibit 3 this time around, the Fed began hiking much later in an expansion, when GDP growth was weaker and corporate leverage higher vs. the start of past rate-hike cycles. In fact, given the drop in the neutral real Fed funds rate over time, monetary policy is already not that far from restrictive territory

 

 

As a result, we believe markets can withstand less tightening than a low absolute level of rates might suggest (exhibit 4). And remember, this is a unique rate-hike cycle. One, tightening began not when the Fed first hiked rates in December 2015, but when they began tapering in early 2014. In this regard, the Fed has arguably already tightened policy by a similar amount as in past cycles (Exhibit 5), a point when credit spreads tend to widen on average (Exhibit 6). Two, along the same lines, the Fed is continuing to tighten, not just by hiking rates, but also through reverse QE.

 

 

In fact, we believe investors are focused primarily on the "gradual" pace of rate hikes, treating the balance sheet as an afterthought. But the numbers are large. For example, the Fed will shrink its balance sheet by ~$400bn in 2018 alone. In our view, credit investors underestimated the tailwind from QE in this bull market. Similarly, they may now be underestimating the headwind from reverse QE. And while global central banks will still be adding liquidity next year, even they will be doing so at a slower pace, with the ECB cutting their purchases in half in 2018 and likely ending QE altogether around September of next year, while the BOJ hikes their long-term rate target in 3Q18.

 

 

We see "quantitative tightening" as a clear catalyst for weaker technicals – i.e., fixed income demand needs to rise to absorb the additional supply or prices have to adjust somewhere (supply/demand 101). Why not expect the opposite of what happened when the Fed was expanding its balance sheet in this cycle (one-way flows into US credit), as the Fed begins its unwind, at least at the margin?

Assessing rate risk, MS says that while the Fed may in fact be successful at threading the needle, an outcome that is likely already priced into markets. However, the bank warns that "at the least we can be certain that as the balance sheet shrinks more rapidly, so will the "liquidity buffer" in markets, which should magnify any negative catalyst that pops up along the way."

Another major risk factor for Morgan Stanley is that the US economy is now very late in the cycle, to wit:

Markets are very late cycle, in our view, and if anything these risks have risen compared to this time last year. That we are in a late-cycle environment is a consensus view, but "late cycle" can mean different things to different people. To be more specific, we think there is a good chance that markets peak for the cycle in 1H18 and price in rising defaults in a bigger way throughout the year. But even if our timing continues to be too early, remember, late-cycle environments are often not great for credit returns regardless, with equities often outperforming. (Note, as we discuss further below, we believe the very late-cycle signal where credit/equities diverge is already happening, focusing on CCC-rated HY credit.) A recession is not necessary for credit spreads to widen late in a cycle. In fact, credit markets have not had three straight years of positive excess returns since 1996.

Here Richmond takes offense with the argument that weak growth for much of this cycle has prevented "excesses" from building, and hence an already long cycle can last even longer. As he says "we disagree and see excesses all over the place, driven in part by years of ultra-low rates." He notes the following specific details:

• Credit markets have grown by 116% in this cycle, and leverage is at unprecedented levels for a non-recessionary environment.


• Low quality BBB issuance was 44% of total IG supply in 2017, a record as far back as we have data, and B rated or below loan issuance is now two thirds of total loan supply.


• LBOs levered over 6x are now a higher percentage of new LBO loans than in 2007. Covenant quality is considerably weaker than pre-crisis, while the debt cushion beneath the average loan is much lower.


• Investors have reached for yield in fixed income in this cycle in a massive way. Foreign flows have flooded into the asset class, arguably treating US credit as a rates product, while liquidity needs have risen, with mutual fund/ETF ownership of credit now over 19% vs. 11% pre-crisis.


• Excesses are apparent even outside of corporate credit, with underwriting quality deteriorating in auto lending in this cycle, while non-mortgage consumer debt is at a high, and CRE prices are ~25% above prior-cycle peaks.


• Stock-buyback activity has been substantial in this cycle, credit valuations have rarely been richer, and consumer confidence has not been this high since 2000.

Summarizing, and "cutting through the details" Morgan Stanley says that it has high conviction in the following two points:

1. Excesses have to be out there, given what central banks have done in this cycle – i.e., rates near or below zero for nearly a decade and round after round of QE globally, and


2. the excesses are always difficult to spot as markets are rising, and then become obvious after the turn (how did I miss that?). We think this time is no different. To be clear, excesses are not everywhere. For example, credit quality did not deteriorate in places like housing and US financials in this cycle. However, this simply tells us that the problems of the last cycle will not be the same as the problems of the next.

As a result, 2018 is when the critical mass of excesses finally spills over, or, to reuse the title, "the levee finally breaks":

While the excesses may be out there, that has arguably been the case for a while. The difference, we think, is that more cracks are now forming under the surface, which in our view, means a turn is closer than the consensus believes. For example, outside of corporate credit, we have seen signs of weakness and tighter credit conditions in places like commercial real estate. Consumer delinquencies are rising across products (i.e., autos, credit cards, and student loans). And in corporate credit, one sector after the next is exhibiting "idiosyncratic" problems (e.g., Retail, Telecom, and Healthcare to name a few). All of this is consistent with a late-cycle environment where the yield curve is flattening, correlations in markets are dropping, the economy is at (or arguably through) full employment, the Fed is well advanced in its tightening cycle (we think), and equity multiples are expanding.

To Richmond, these dynamics are "late-cycle 101. Problems pop up early on in the areas that experienced the most severe deterioration in fundamentals in the bull market. Investors initially treat those issues as "idiosyncratic." The problems then spread when credit conditions tighten more broadly. And along these lines, we think it is not a coincidence that weaker-quality high yield credits are underperforming, as the Fed is hiking faster and quantitative tightening is now being set in motion."

If that wasn"t enough, Morgan Stanley highlights two further risks: one having to do with the incremental impact of tax cuts, should they pass...

And as a side note, tax cuts would not extend the cycle in our view – they risk doing the opposite. Very simply, credit markets will benefit from anything that keeps the cycle going – modest growth and a patient Fed. Tax cuts that come when the unemployment rate is 4.1%, which drives an overheating labor market, forcing a more aggressive Fed, if anything could cut off the cycle sooner.

... and the inevitable rise in default intensity:

We think there is a high likelihood that defaults will start rising again late next year and into 2019. Without going into the details here, in our view, CCC HY bonds are already "sniffing out" these budding default risks with their recent weakness. This should continue as tighter central bank policy exposes the fundamental challenges in the asset class (the problems are easier to hide when markets are flooded with liquidity). And the fundamental issues are broad-based. Not only is leverage high across sectors, but we also estimate that almost 30% of the HY market is either in secular decline or has clear operational challenges (Exhibit 16), with declining revenue growth over the past five years. Thinking about it more quantitatively, as we show in the default section below, based on the lag between when the cycle indicators we track have turned historically and when defaults have subsequently spiked, as well as the status of those metrics today, 2019 could be a year of materially higher defaults.

Wrapping up the above, Morgan Stanley"s conclusion is the following:

Adding everything up, we see three key challenges in 2018: 1) Credit markets have been hugely reliant on central banks in this cycle, and now the Fed is withdrawing liquidity in an unprecedented way. We think markets are underestimating the risks of a mistake. 2) This liquidity withdrawal is happening while late-cycle risks (we think) are popping up all over the place. 3) Investors are buying credit at valuations that almost guarantee poor long-term returns, with the assumption that they will be able to time when to get out before the turn.

... or stated even simpler, "get out now."

David Stockman Derides The Delirious Dozen Of 2017

Authored by David Stockman via Contra Corner blog,

We have previously noted the massive market cap inflation and then stupendous collapse of the Delirious Dozen of 2000.

The latter included Microsoft, Cisco, Dell, Intel, GE, Yahoo, AIG and Juniper Networks - plus four others which didn"t survive (Lucent, WorldCom, Global Crossing and Nortel).

Together they represented a classic blow-off top in the context of a central bank corrupted stock market. When the bubble neared its asymptote in early 2000, the $3.8 trillion of market cap represented by these 12 names was capturing most of the oxygen left in the casino. That is, the buying frenzy had narrowed to a smaller and smaller group of momo names.

 

That severe concentration pattern was starkly evident during the 40 months between Greenspan"s December 1996 "irrational exuberance" speech and April 2000 (when he told the Senate no bubble was detectable). In that interval, the group"s combined market cap soared from $600 billion to $3.8 trillion.

That represented, in turn, a virtually impossible 75% per annum growth rate for what were already mega-cap stocks. As it happened, in fact, $2.7 trillion or 71% of the group"s bubble peak market cap vanished during the next two years.

What we didn"t mention yesterday, however, is that this bubble top intumescence never really came back. In fact, the market cap of the eight surviving companies---all of which have continued to grow----today stands at just $1.3 trillion or 34% of the 17-years ago peak.

Needless to say, that"s because the market no longer affords the Delirious Dozen of 2000 valuation multiples that are even remotely in the same bubblicious zip code.

Thus, the eight survivors posted combined net income of $52.3 billion during the LTM period ending in September 2017. On the far side of the 1999-2000 tech bubble, therefore, current earnings turn out to be worth 25X---not the 75X recorded back then.

We revisit the rise and fall of these turn of the century high flyers because we believe the same process of market narrowing into a diminishing number of momo names is exactly what is happening again as we reach the asymptote of this latest and greatest central bank fueled bubble.

 

In fact, we have identified a new roster for the Delirious Dozen of 2017 - and have tracked their course over the last 40 months. During that interval, of course, Janet Yellen did not even bother to muse in public about "irrational exuberance" like Greenspan did.

That"s undoubtedly because Fed orthodoxy now holds there just plain aren"t any bubbles---apart from isolated segments like commercial real estate. To the contrary, the 12 geniuses on the FOMC have purportedly vanquished the business cycle entirely, thereby insuring an economic nirvana of perpetual full employment, world without end.

We think otherwise. Accordingly, our new Delirious Dozen consists of the FAANGs (Facebook, Apple, Amazon, Netflix and Google) plus seven additonal high flyers (Tesla, NVIDIA, Salesforce, Alibaba, UnitedHealth, Home Depot and Broadcom).

Not surprisingly, their combined market cap has soared from $1.7 trillion to $4.0 trillion during the last 40 months in a pattern which is highly reminiscent of the last go round. And for our money, that $2.3 trillion gain represents the same kind of bottled air.

Thus, Amazon is now valued at $550 billion and thereby trades at 293X its $1.9 billion of LTM net income. But all of that net income is attributable to its rent-a-cloud service (AWS) which is arguably worth $100 billion on a standalone basis.

That is to say, the great Bezos E-commerce juggernaut is implicitly valued at $450 billion, yet has not generated a dime of profit from the scorched earth its has left behind in retail land. That"s what we call bottled air.

Likewise, Broadcom trades at 246X net income and Netflix is valued at 194X. These companies may well be the equal of Cisco and Intel as innovators and value generators with a long life of growth ahead.

But both are challenged by ferocious competitors, and have no more chance of sustaining their current absurd valuation multiples than did Cisco (200X then, 19X now) or Intel (60X then, 16X now).

Next consider Salesforce (CRM), which is currently valued at $77 billion, and Tesla, which sports a market cap of $54 billion. Yet both had large net losses during the latest 12 months. In fact, during the last five years, CRM has posted cumulative net losses of $650 million and Tesla has lost $3.3 billion.

Even if these two do manage to avoid the fate of Nortel and Global Crossing, the red ink stained charts below suggests that earning into their combined market cap of $131 billion will take more than a few miracles.

Even Alibaba at 55X, NVIDIA at 50X, and Goggle and Facebook each at 35X are essentially defying math and the business cycle.

The latter two companies, in fact, may be the greatest thing since sliced bread, but they are also virtually 100% dependent upon advertising revenue. During the last recession, global ad spending plunged by nearly 9%, as shown below, and by more than 14% in the US alone.

Moreover, the digital capture of market share---of which is 85% is attributable to FB and GOOG----has nearly run its course. Accordingly, no company in a cyclical 3-4% growth industry can sustain a 35X PE multiple for any appreciable period of time.

Much the same can be said for Home Depot (HD), which is currently flying high, but is not capable of permanently sustaining a 25X PE multiple. In fact, its recent results have been flattered owing to the capture of significant market share from the collapse of Sears and due to elevated sales from a standard home improvement spending cycle that is now reaching its peak. Additionally, it has not yet been attacked head-on by Amazon (but that"s surely coming).

But like much else at the current bubble top in the casino, Home Depot"s elevated short-run gains have been confused for permanent growth capacity. However, the verdict on that is crystal clear: During the 11 years since the 2006 housing peak, HD"s net income has grown from $6.1 billion to just $8.6 billion in the October 2017 LTM period.

That computes to a 3.2% per annum growth rate, and Home Depot"s best years are surely behind it. After all, the tsunami of baby boom retires are emptying their nests, not renovating them.

At the same time, America"s soon to be shrinking work force will face ever higher taxes to pay for the upkeep of the former, thereby sharply constraining the discretionary income of the overwhelming share of working households. Man caves and granite kitchen counter-tops are not likely to survive the generational squeeze looming ahead.

Accordingly, we believe that HD"s days as a 25X PE stock are numbered.

In short, among the Delirious Dozen for 2017, only Apple has a reasonable multiple at 19X. But then again, Apple has been cycling along the flat line for more than three years at its towering sales level of $230 billion and $50 billion of net income.

Yet even today"s casino recognizes that given Apple"s monumental size, it is virtually impossible to move the growth needle; and that even one delayed or botched product cycle could cause its $50 billion of net income to take a not inconsiderable plunge.

In short, aside from the unique case of Apple, the Delirious Dozen of 2017 are set-up for a repeat of the massive 2000-2002 deflation of bottled air. That is, in June 2014 the group (ex-Apple) had a market cap of $1.1 trillion, representing 34X its combined net income of $32 billion.

During the 40 months since then, the group"s market cap has nearly tripled to $3.2 trillion, while its net income has climbed to $65 billion. Consequently, the group"s PE multiple has now soared to 49X or to nearly the nosebleed level that pertained among the previous group of high flyers back in April 2000.

Needless to say, the business cycle has not been abolished and this expansion is now 101 months old. In fact, the chart below suggests it may be reaching its "sell-by" date.

But here"s the thing. The bottled air resident among the Delirious Dozen of 2017 is where all the top of the bubble mania has again gotten concentrated.

So when the Black Swan, Orange Swan or Red Swan, as the case may be, finally arrives and they begin to sell AMZN, FB, TSLA or CRM----look out below.

That"s where Wall Street"s next central bank fueled bloodbath is hiding in plain sight.