It’s Not Just China You Should Be Worried About.
By Bill Bonner, Chairman, Bonner & Partners:
Chinese stocks fell hard yesterday. The Shanghai Composite plunged more than 6% – the biggest fall in three weeks. Our research team in Beijing is downcast.
“Nobody here wants to hear about stocks,” they tell us.
And the junkiest – and riskiest – part of the U.S. bond market has taken a dive too. Here’s that chart of the big U.S. junk bond ETF that Chris highlighted in yesterday’s Market Insight. It has completely rolled over this year…
Meanwhile, U.S. corporate earnings have plateaued. And according to Deutsche Bank’s David Bianco, earnings are actually falling when you exclude companies’ slick accounting adjustments to “smooth” their numbers.
The only thing left propping up Wall Street stocks, as we explained yesterday, is insider trading.
Recent sales figures from America’s retailers show how deep the rot has become. Sales have been rising at an alarmingly slow rate – just 0.5% since 2007.
Between 2000 and 2007, they went up four times as fast. In the 1990s recovery, they went up six times as fast.
Especially rotten are sales at America’s four largest mall retailers – Macy’s, Kohl’s, Sears, and JCPenney. Together, their sales are falling at a 10% rate per year… or four times faster than the fall in department store sales generally.
What is interesting about these four companies is that they have been among the most aggressive of the stock market manipulators. Between 2005 and 2014, they earned a combined total of $13 billion. But their top execs spent $34 billion deceiving investors about the true value of their firms, by way of share buybacks, pocketing billions for themselves in the process. (More on how this works below…)
If you’re counting on the markets to reveal the right price for a stock, you may have a long wait. To paraphrase Lord Keynes, the cronies can falsify the data longer than you can remain solvent.
A Rigged Market
The Fed rigs the bond market. The cronies rig the stock market. Here is how it works…
The C-suite cronies buy shares of their own companies in the open market and then cancel them. This increases the earnings per share of the remaining shares, pushing up their value. In turn, this makes the cronies’ stock options more valuable… triggering big bonus payouts.
Bearish money manager John Hussman at Hussman Funds elaborates:
The cronies wouldn’t be able to rig stock prices to the same extent without the feds’ ultra-low interest rates. Putting the price of money below what 19th-century Swedish economist Knut Wicksell called the “natural rate” – the rate of return on capital – turns every number in capitalism into a lie.
Look what has happened to retail space…
Do you remember 1990? There was no shortage of places to spend money. But in retail – as in dot-coms, houses, mortgage-backed derivatives, oil, and commodities – cheap financing makes overdoing it irresistible. Retail space has doubled since 1990, even though household income fell. We now have about the same household buying power as the Germans… and four times as much retail space per person. What are they going to do with all that space?
Mall vacancies were running at about 5.5% a year in 2007. Now, they’re running at more than 9% a year. Why?
U.S. households are still wary of taking on debt. According to figures from Bloomberg, the level of overall household debt remains 6.5% below its peak of $12.7 trillion reached in the third quarter of 2008.
That leaves corporate America and Washington to keep the credit bubble inflated. Only government and corporations are willing to keep pouring good money after bad, in other words. Small wonder. It’s not their money!
Yes, dear reader, consumers have pulled back. The median household income has fallen, in inflation-adjusted terms, since the 2008 financial crisis. Without wage rises, households can’t increase spending – except by going further into debt. And they saw what happened to them the last time they did that.
So, that leaves the feds… and the corporate sector.
A gridlocked Washington doesn’t seem to be taking its responsibility very seriously. Deficits have gone down to just 2% of GDP. That’s equal only to about one-fifth of the 2009 fiscal stimulus package.
As for monetary stimulus, it’s gone way down, too. After expanding its balance sheet by about $4 trillion, the Fed’s QE is on hold. Of course, a fair amount of liquidity leaks in from Japan, Europe, and China… but not enough to keep this credit bubble fully inflated.
That leaves Wall Street running out of time… and money. Risky corporate bond yields are rising. And stocks are beginning to roll over. The cronies are taking advantage of the summer lull to rig the markets… but it might be the last time for this go-round. By Bill Bonner, Chairman, Bonner & Partners
The start of a tsunami. US “Manufacturing Renaissance” takes another hit, in a peculiar manner. Read… LEAKED: GM Sees Overcapacity Fiasco in China, Hopes Americans Will Buy Lots of Chinese-Made Buicks
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There will be a panic as soon as the PM’s and traders get back from the Cape and begin to realize that the Fed has lost control of the situation.
The Fed is desperately trying to broadcast that there is NO PLAN and NO CONSENSUS on how to unwind the balance sheet. Our academic friends at the Fed executed a strategy involving the purchase of trillions of dollars in securities without any plan on how to unwind these positions. They state explicitly that they are only now beginning to look into the “market effects” of an unwind. Steve Liesman, does that make sense to you, bro?
While I initially believed the Fed could manage a slow bleed, I’m now beginning to see the huge panic potential once market participants begin to understand that the Fed rendered itself impotent. There are no policy tools left to prop up bond markets! This excerpt from the Fed statement (re balance sheet unwind) says it all:
“Most participants thought that it might be best
either to wind down reinvestments or to manage them
in a manner that would smooth the decline in the
balance sheet in a predictable way. However, some
participants supported ceasing reinvestments all at once
at the appropriate time. . . . No
decisions regarding the Committee’s strategy for ceasing
or phasing out reinvestments were made at this meeting. Participants requested additional analysis from the staff related to alternative approaches to halting or phasing out reinvestments, including consideration of the possible market effects, and agreed that it would be helpful to continue to discuss these issues at upcoming meetings.”
While I am no advocate of the Fed at all, they do have the option of freezing any future purchases and holding their assets to maturity – and not replacing them with new purchases. This will slowly unwind their balance sheet, although it might take years to unwind their trillions in purchases.
How much they lose (can they gain on this crap?) depends on how much they jack rates between now and then.
Personally, I think they are idiots and will hold rates at zero until the world divides by zero, but that isn’t the point at issue.
Of course the fed can unwind in the way you describe — and they should start that process immediately! But my point is that they are telling us in plain English that they have no idea how to deal with trillions of dollars of securities, and are only now researching market impact under different scenarios.
Based on my read of the minutes, these guys are scared and doing a lot of CYA to deflect blame when things go bad. One example of this is the statement from one of the Fed members that QE has not accomplished anything.
The larger issue is that the Fed now has no accommodative tools left.
On the can being kicked down the road is a picture on the label of a can being kicked down the road, with a picture of a can being kicked down the road on the label of the can in the label of the can now being kicked…it’s like one of those infinite regression mirrors: an optical illusion. None of it is real, and when the muppets come out of the ether, reality bites. Hard.
The Fed is basically trying to hold a pep rally on the deck of the Titanic.
However much they try to put a positive spin on things, it doesn’t change the fact that the boat is sinking.
Get ready for GFC Part Deux. A lot of loans were made assuming endlessly rising asset prices. When the collateral drops in value, Kaboom!
July CPI growth was 0.1% annualized and unemployment has been 5.3% for two months. Isn’t that the Fed’s “dual mandate? We have stable prices and normal levels of unemployment.
How come everything still sucks?
The unemployment number is a relic from the 80s. You have to look an labor participation rate. Unemployment hasn’t gone down much, and most new jobs created where in the oil sector, retail and hospitality.
Look at oil prices now and retail and hospitality are non union jobs easy come easy go.
Yes Larry, I understand that. I was trying to point out the irony. Stable prices and low unemployment are supposed to be good things yet our situation, as far as I’m concerned, is hard to distinguish from a recession that really never ended except in statistical terms.
Regarding unemployment the BS runs deeper than the participation rate. The employer survey counts each job reported as a person employed even though it might be one person with two part time jobs being counted twice. In the household survey if someone holds two or more part time jobs that total high enough hours, it’s counted as a fully employed person. Someone working 3 part time jobs might count as 3 employed in one survey and one full timer in another.
The majority of good blue collar jobs created have been in oil, and the surge in oil was created in part by artificially low interest rates and in part by high prices. The combination made fracking economically viable. Now, not so much.
It is worse.
Most of the economic development over the past 30+ years was fueled by debt. Hell, the depression folks are starting to feel started over 15 years ago with the tech bubble crash in 99/00. And things are going to get very, very ugly going forward.
How government counts things they don’t want to be accountable for is akin to allowing your children to revise the system by which you measure how much veggies they at at the dinner table. The sods will plow through the carrots and peas, but the clever ones will count single peas as whole carrots and boast about their veggie consumption … on the way to desert.
It isn’t good for them, but good luck trying to convince them of that.
The unemployment rate is a complete fraud! The real unemployment rate is the % of people who should be working and want jobs but don’t have them. Before 1994 it was calculated honestly and included the long term unemployed. Clinton changed it in 1994 to make his numbers look better for political reason. It only included those who had been unemployed for 6 months. Under Obama, it is basically 1 month. The result is a 5 point something unemployment rate that Obama can point to as a great economic success story. under the 6 month rule, the unemployment rate would double to more than 10%. Under the old honest system, it would more than double again to 23%. This is the real unemployment rate and is comparable to what we had in the Great Depression.
The Junk ETF is down 6% from its HIGHS and is has “completely rolled over”???
We’re in a hall of mirrors…with the lights off. How can anyone tell what anything is “worth”?
When all this fake capital evaporates, when cheap credit dries up, when collateral gets repriced and when zombie entities go incontrovertibly & un-hideably bankrupt, 6% losses will likely be a daily occurrence.
2010 i thought there might be an unwinding…those were the innocent days. of all the derivative market exposure, i never imagined this: http://www.bis.org/statistics/dt1920a.pdf
Interest Rate Contracts 12/2014 Notional 505,454 Trillion
“Barriers to accumulation are perpetually dissolving and re-forming around the issue of so-called natural scarcities and on occasion, as Marx might put it, these barriers can be transformed into absolute contradictions and crises.”
David Harvey, The Enigma of Capital and the Crises of Capitalism
unwinding…there may not even be a start over.
but we won’t all be cannon fodder…right?
Note what a disaster the lack of inflation and incipient deflation is for the FED. If only it could have got to 2.5 or 3 % it could inflate its way out of the balance sheet trillions.
If deflation happens its debt grows.
You guys are scaring me now. I am afraid of the unwind, but I am more afraid of the not unwind. Not a business type, so I find many of the comments here to be educational. Can one of you answer a, perhaps naive, question. That being: If we all agree to a global mass delusion, can’t the game run on much longer? OK, two questions: If every metric and every market function, possibly including gravity, is being manipulated, faked or ignored, how does the party stop?
Hmmmmm….. Think about it, even if everybody on board the Titanic had totally denied the situation, how would the party have come to an end?
Reminds of an old joke: A Liberal, a Conservative, and a Radical are on the deck of the Titanic observing the oncoming iceberg. The Liberal says, maybe we should form a committee to discuss the situation. The Conservative says, hell, no! we’ve done just fine up to now. The ?Radical says, we have to change course NOW!!
As far as current conditions are concerned, call me a Radical.
This is all really pretty straight forward to understand. Back in 2008 American ‘consumers’ hit the financial wall at just under the speed of sound and their viscera are still splattered all over the surrounding landscape. There has BEEN no “recovery” in any meaningful sense at this level of the economy. As Wolf points out. It’s only the feds ‘free money for billionaires’ policy that has kept a lid on things but that is rapidly losing any remaining shreds of legitimacy.
inflation is fostered by fiat in the things the like food, housing, health insurance, etc. This inflation destroys what discretionary spending is left. The ponzi cannot continue if the public spending goes into hiberation.
They ran out of money last Fall when QE stopped. They coasted for a year bouncing around a 10 to 15 percent range like a dog chasing his tail. Now the IV drip has run dry and they will be asking for another. Interest rate increase, my A$$.