This crash beneath the surface showed something had broken, that the magic had died, that hype and hoopla were suddenly unable to carry the day.
By Wolf Richter. This is the transcript of my podcast recorded last Sunday, THE WOLF STREET REPORT.
Stocks have been in a downward spiral for a while. The S&P 500 Index has dropped 23% from its high on January 3rd, the Nasdaq has dropped 33% from its high on November 22.
But here is the thing: many, and I mean a whole bunch of the biggest high-flyers peaked in February 2021, so about nine months before the Nasdaq peaked, and they have since then collapsed by 70%, 80%, and even over 90%. And it happened very fast, stock by stock. These stocks started getting totally crushed nine months before the Nasdaq headed south.
They include many big-name stocks that have crashed 70%, 80%, or 90% since February 2021.
What many of these companies have in common is that they’re losing lots of money, still, after many years in business. There are a handful in this group that are making money, but most are losing a running ton of money, and by now, many of them have started laying off staff.
Another thing they all had in common is that these stocks reached ridiculous peaks, mind-boggling peaks where any rational human would look at that and say, this crap is in a ridiculous bubble. They were hyped to the nth degree by Wall Street and everyone. And I’ve been calling them the hype-and-hoopla stocks.
On that long list of stocks that peaked in February 2021, and that since then have plunged 70%, 80% or even over 90% are Uber, Spotify, Snap, Pinterest, Zillow, Redfin, Opendoor, MicroStrategy, Twilio, AMC Theaters, Chewy, Virgin Galactic, educational platform Chegg, auto insurer Metromile.
Metromile had gone public via SPAC in February 2021, and that was the high, and it has imploded by 96% since then.
Zoom Video is in this group. It’s down 76% from its ridiculous peak in February 2021. But it’s one of the few companies on this list that made some money.
A bunch of EV makers that had just gone public via merger with a SPAC or via an IPO are on this list, including Lordstown, Workhorse, Faraday Future, and Lucid Motors. They got massacred since their high in February 2021.
Cathie Wood’s Ark Innovation ETF, which tracks a bunch of these hype-and-hoopla stocks, also peaked in February 2021, and has since then crashed 76%.
The Renaissance IPO ETF, which tracks stocks that had their IPOs over the past couple of years, also peaked in February 2021 and has since then crashed 63%.
The Cannabis ETF and the AdvisorShares Pure US Cannabis ETF, both peaked in February 2021 and have since crashed by 87% and by 79% respectively.
By March 3, 2021, 10 months before the S&P 500 Index peaked, this bloodletting beneath the surface that had kicked off in February 2021, was becoming so brutal and so obvious that it gave rise to my first article on this phenomenon. I titled it: “Was That the IPO Stocks Bubble that Just Popped?” I wrote at the time: “When there are suddenly second thoughts in this market powered by so much blind and crazy exuberance, the entire foundation begins to wobble.”
By April 20, 2021, when the EV startup stocks were blowing up, I wrote an article that I titled, “the EV SPAC Hype Boom is Imploding Spectacularly,” and that these stocks were “getting massacred on the edge of the stock market.”
By May 11, 2021, this was getting so obvious that I wrote an article, with the title, “The Most Hyped Corners of the Stock Market Come Unglued.”
And this occurred while all the major indices were still lumbering from new high to new high, driven by the biggest stocks, and while the Federal Reserve was still printing money hand over fist, and while inflation had started to surge.
But this crash under the surface was an indication that something had broken, that the magic had died, that hype and hoopla were suddenly unable to carry the day, that enough investors were bailing out and were dumping this stuff into the laps of the hype-and-hoopla dip buyers; many then got their faces ripped off. And it was a sign that the Big S was starting to hit the fan.
So what happened around February 2021 that caused investors to dump those stocks and abandon them?
Inflation was suddenly surging, while the Federal Reserve was still printing money hand-over-fist and was still repressing interest rates, and while the third round of stimulus checks were getting set up to be sent out in March. And all these inflation issues were vigorously brushed off by the Federal Reserve, by the media, by economists, and most vigorously by hype-and-hoopla Wall Street.
In February 2021, CPI inflation jumped by 0.44% from January. That’s an annual rate of 5.5%. And it came after some big increases in the prior months. In March 2021, CPI inflation spiked by 0.64% from February, which is an annual rate of close to 8%. These were suddenly huge month-to-month inflation numbers, and the Federal Reserve was brushing them off as transitory, essentially telling everyone that it was going to let inflation rip because it would go away on its own.
But even before these CPI numbers were released, consumer prices were rising in all kinds of things that had nothing to do with commodities, such as used cars, new cars, and rents, and other services. And everyone knew that once the stimulus money would reach consumers, they’d spend much of it, and would thereby push up prices further. And investors who chose to see it – investors who weren’t participating in the consensual hallucination – could see it.
Enough investors saw it coming: Sooner rather than later, inflation would get so bad that the Federal Reserve would be forced to crack down, and would be forced to raise rates by a lot, and end quantitative easing, and start quantitative tightening, and everyone knew what that meant: Stocks would spiral down because this entire stock market bubble was a result of money printing and interest rate repression, and to some extent, all that stimulus cash that the government handed out to companies, consumers, and municipal governments. Without all this, stocks would be toast.
Everyone who decided to think about it, knew that stocks would spiral down once the Fed reversed course and started raising rates and unload its assets, and that in fact, markets would spiral down well before the Fed would actually act, because the Fed signals this stuff well in advance, and markets react to those signals. And that’s exactly what happened.
And if you wanted to get out of these hype-and-hoopla stocks, the time was at the ridiculous valuations in February 2021, and not after they’d already started crashing. He who gets out first, gets out best.
At the same time, some big voices out there kept hyping this crap, and kept yelling that “cash was trash,” and that people had to buy stocks to deal with inflation, and they tried to motivate dip buyers, while perhaps the same folks started unloading that hype-and-hoopla crap into the eager hands of the dip buyers, who then got crushed over and over again.
In the spring of 2021, something else was starting to happen: Money market funds that focused on investing in short-term Treasury securities were swelling up with cash. That was a sign that some investors with deep pockets were looking for safety.
These Treasury money market funds have to buy short-term Treasury securities to invest the incoming cash. And the demand for short-term Treasury securities was so huge that the short-term yields were essentially 0% and were threatening to drop into the negative, and briefly did drop into the negative.
But money market funds are fragile, structurally, and if the yield drops below 0%, the fund might, as it’s called, “break the buck,” meaning the value of a share that is pegged at $1 might drop below $1, which could then trigger a run on the fund, where everyone would be trying to yank their money out, which could then cause the fund to collapse and wreak all sorts of havoc across the financial markets.
So by April, these money market funds started to get a helping hand from the Fed, where they lent their cash to the Fed in overnight transactions that matured the next day, at 0% interest, and in exchange, these money market funds took the Fed’s Treasury securities as collateral. The Fed calls these transactions overnight reverse repos, or overnight RRPs. These RRPs are essentially an overnight loan by the counterparties to the Fed.
By early June, the Fed had taken in over half a trillion dollars in RRPs, meaning the Fed had drained over half a trillion dollars in cash from the financial system. These RRPs are the opposite of QE.
QE adds liquidity to the system; RRPs drain liquidity from the system. And the Fed was draining liquidity via RRPs faster than it was adding liquidity via QE.
In mid-June, 2021, the Fed gave some indications that it was taking notice. It said at its meeting, that it had had “discussions about tapering QE, which at the time was still going on full-blast, and it pulled rate hikes closer, and among other things, it raised the interest rate it was paying on RRPs to an annual rate of 0.05%.
That was still near 0%, but it unleashed a flood of cash heading the Fed’s way. And two weeks later, by the end of June, the Fed had $1 trillion in RRPs. In other words, by then it had drained $1 trillion in cash from the financial system.
And the RRP balance kept rising. By the end of December 2021, the Fed had drained $1.9 trillion from the financial system.
This was investor cash that was looking for safety, $1.9 trillion in cash at the end of 2021 that the Fed had absorbed from money market funds. This was like a voluntary form of QT, where the Fed makes this available, and investors jump on it because they’re scared, and the effect is quantitative tightening, and by that time, the beginning of January 2022, stocks began plunging across the board.
As of Friday, the Fed had drained over $2.2 trillion in cash from the system via these RRPs.
What these RRPs show is that, starting in early 2021, enough investors were no longer willing to take risks on hype-and-hoopla stocks. Some had ridden them up, and now it was time to dump them, and then they put some of their cash into Treasury money market funds, even while new investors bought those stocks from them with new cash, including from the stimulus programs, and increasingly from stock-market leverage which began spiking out the wazoo in early 2021, as we can see from the spiking margin debt at the time.
And enough other investors refused to buy these stocks and instead put their cash into Treasury money market funds to ride this out.
These investors knew that inflation, which was beginning to surge in early 2021, would get big and would eventually be met by a response from the Fed that would topple the ridiculously inflated stocks off their sky-high perch one by one, and they knew that they couldn’t wait until the Fed actually acted because it telegraphs its moves well in advance, and markets react to those messages, and by that time it would have been too late to unload the hype-and-hoopla stuff.
And that’s how February 2021 was the beneath-the-surface beginning of what would turn into this brutal bear market.
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When a company needs VC investment to keep the lights on and pay the custodians, that’s probably not a good business model.
Some of the tech companies I’ve followed are on series E and F funding. I didn’t even know there was such a thing! And more and more are becoming ‘portfolio companies’.
This current recession will be a real shakedown for many of these on-the-edge ‘almost’ companies.
I’m guessing that a lot or even most of the “tech” companies you were following aren’t tech at all.
The “tech” label is another marketing gimmick to inflate prices. Right before the pandemic I was at a multi-national payments company and one of my co-workers told me it considered itself “tech”. No, it’s a payments company.
If it walks like a duck and quacks like a duck, it’s duck. It doesn’t magically become something else just because it’s given another name.
Mobile measurement attribution companies like Appsflyer, Singular, Branch, Adjust, et. al. I think that they’re all tech companies.
But I cede that I have not heard any of them quack.
The weekly IWN matches this rotation per March ’21.
Couldn’t agree more.
When i see a quack approaching, i duck!
When interest rates are negative or zero, the hunger to make a profit is so great folks pile into these stocks hoping they will go up and give them a “profit!” Perish the thought that stocks are a way to finance a company and to share the risks and profit from producing anything.
If one looks at the fundamentals of these stocks, they never should have seen these prices.
I consider this hunger for a “return,” as desperate as it is, to be a mental illness. The “hidden hand” of price discovery by supply and demand (and dividends paid) has been gone out of the markets for years.
This has all been predicted a long time ago, but simply shouted down by the mentally ill crowd.
The emperor has no clothes. The mentally ill cannot see that.
Wolf，China’s Shanghai stock market has begun to rebound, starting from the lowest 2865 points on April 27 and closing at 3320 points today. However, the future trend is still unpredictable. China’s stock market is not in line with China’s rapidly developing economic peers.
The SSE peaked in 2007 in a blistering bubble and today is still down about 50% from the peak. That’s what you get with stock market bubbles, such as the US bubble that peaked last year.
For further information, check out the long-term chart of the Nikkei, and the long-term charts of the markets in Italy, Spain, et. al
Given what’s going on in their RE market and combine with this, I wonder if the Chinese also have this forever sunny optimism/hopium now about stock and housing markets similar to most in the US?
US stock market bubble is much bigger than China’s was at the 2007 peak.
RRPs is spendable money sooner or later. They are depositers’ money and haven’t been neutered. Q T is something else
Wolf,
With Respect to FED rate hikes in the near future, do you think that we will see more stock market down turn , or you think we already reached the bottom?
The stock market isn’t anywhere near a bottom. Not even close.
Getting back into SRTY with the Russell 2000 bounce to 1750. It might go to 2100, but I absolutely agree with Wolf that it will be revisiting 1638 and lower.
It is our job to profit from the decline.
“The stock market isn’t anywhere near a bottom. Not even close.”
Mr Wolf’s reply is a hoot. If only my crystal ball was as clear as his, although I think he would be better served by his magic 8 ball.
There seems to be a lot of hot air regarding Fed policy. Someone please explain to me how the government, in its current form, can fund itself without Fed QE?
Good luck coming up with an answer, because there isn’t one.
Fed QE will continue because it has to continue. The market will most likely be over SP500 > 5300 at year end because QE will be larger than ever.
I’m not the tin foil hat wearing conspiracy theorist here, I’m the one looking at the cold hard facts. It’s not the market that is going to collapse it is the purchasing power of currencies that will collapse.
MyLadyHumps,
Hahahaha, got another one… a real tightening denier. The Fed can’t…, the government can’t… By now, tightening deniers, in the middle of tightening, are just too funny.
Agreed! Not even a little bit close. Try 80% fall in all indexes. They need this to bring in CBDC (Central Bank Digital Currencies). This is synonymous with digital concentration camps!
The major China indexes also peaked in February 2021. The SSEC, the Hang Seng for Hong Kong, etc.
The Nikkei index for Japan peaked in February 2021 but managed to match the top (and come out 0.3% higher) again in September.
The European and American stock indexes lagged the Asian ones in this global market top.
But it was the bond markets that peaked first. US broad bond index funds (i.e. total return of the bond market) peaked in August 2020, and a broad international bond index peaked in December 2020.
This site isn’t about politics but it’d be remiss not to note that the US had a change of presidential administrations in late January 2021 also.
Basically it seems that the business climate changed in late 2020, leading to the markets turning, the SPAC burst as private equity dashed for the exits, and now the broad bear market we have today…
> ” … the US had a change of presidential administrations in late January 2021 also.
Basically it seems that the business climate changed in late 2020 …”
Maybe meaning the hucksterism underlying the preceding era began to be apparent or exposed? Not that I’m a breathless fan of either political team. They have few real answers, and I’m ready to dump both.
It’s not partisan.
The Everything Bubble needed to pop, and any minor change whatsoever probably would have done it.
Not every change of administration triggers a market crash or recession, but many of the bigger market peaks have taken place within months-to-a-year of a change-of-administration:
1968 market peak 1-2 months after Nixon election
1972 market peaked 1-2 months after Nixon re-election
1976 peak again 2 months before Carter election
1980 peak in Nov, around time of election (Reagan)
1987 Oct crash (13 months from ’88 election) – outlier?
2000 Aug dot-com peak (Bush-Gore contested election)
2008 Great Recession (Obama elected), market peaked Oct ’07
2020 Pandemic Crash (Nov 2020 Biden elected), Feb 2021 early top, Dec 2021 final top…
Regardless of which party has the reins, it seems the market doesn’t like “difficult” election transitions.
The psychology changed for whatever reason. It’s included all over this article.
Hard to avoid politics. CONGRESS spent the trillions. The fed is merely their tool for getting it done.
What did they expect sending out $1400 checks while production was shut in? If you wanted inflation, that would be the way to do it. More money chasing the same or fewer goods is the very definition of consumer price inflation!
What did they expect making unemployment checks especially juicy, compared to working for a living?
Harrold: Better than starving to death.
Now do PPP…
Now do defense spending for decades…
Now do corporate subsidies and tax breaks…
The elites thank you for focusing on the crumbs thrown to the average american
who gives a rat’s ass about China’s market? Anyone who believes the CCP will allow profits from their economy to flow out to foreigners as dividend payments is delusional.
If you are never going to earn a dividend from a stock don’t own that stock. Get a grip man, you are talking about communist China, I’m mean really, what is wrong with people, you have lost all common sense.
MyLadyHumps,
OK, try Japan, Spain, Italy, Germany (DAXK not DAX which is a total return index), and a bunch of others. Go look and you shall find.
@MyLady –
I don’t invest in China, for reasons similar to yours, but during a Global Everything Bubble, watching the major international indexes gives clues about what’s going on. Just as some US sectors “lead” and tend to pop first, there are some international indexes that also tend to lead. And I think the Chinese crackdown in 2021 contributed strongly to the global speculative mood-change.
The major Chinese index as a 6,000 in 2007 and has never recovered to even half that amount.
The destruction of the Yuan is what we’re seeing. The stocks are only going up for the locals in China. Probably someone hedging the fall in the Yuan and buying Chinese stocks at the same time.
Going up? The SSE composite is right where it was in 2007. 15 years of ups and downs, going nowhere.
The Yuan has appreciated against the USD by around 10% since 2007? Not a lot, but I am not seeing a crash.
Please, please, please, please buy our mainland China securities, say the US financiers and banksters. (They are of Ponzi-companies that are legally insolvent and rapid!y putrefying financially like 2008, sub-prime mortgage backed securities. LOL.) Those who want to buy them should buy nice, periodically submerged Florida, Everglades real estate instead! They can then at least harvest and sell Burmese Python skin boots.
Wolf
I cannot disagree with you.
But look at the indexes so far this week including today!
BAD news has become GOOD news like in the era of QE!
The assumption from the financial media is that yield on the Bonds are ‘falling’ anticipating recession which may be already here! They think Mr Powell will chicken out and reverse the course, like before!
They also assume that inflation will be contained soon, which is very unlikely! Inflation popping up after 41 yrs of deflation will not be that easy, especially by this Fed which way behind, too little late! The ‘neutral’ rate has to be above the prevailing rate. Mr Powell assumes that rate will be 3.8% at the end of this year. Many experts believe it should be in the range of 5-6%. Any input on this issue? Thank you
“But look at the indexes so far this week including today!”
No one can say anything about these markets without being proven wrong the next minute.
The S&P finished in the red yesterday (Wed), and just dipped into the red today (Thu), this minute, and who knows where it will end up today. Tuesday was a bounce following the huge drop last week. Monday was closed. So far this week, this was a very disappointing dead-cat bounce following the drubbing last week.
Wolf
Indexes end the day in solid green!
Perception carries the day! Bad news is the ‘good’ news to front run!
Who knows, what will be tomorrow, in Fed managed casinos!?
Which investor can put his capital to work in this environment!?
I adopted the ‘swing’ trading between long and short inverse ETFs.
Not for the Novice. Do the same with calls and puts in different time frames! Mkt is for nimble traders and NOT investors! I do buy div paying stocks/ETFs for the long term.
Yesterday in front of Senate Mr. Powell said rising rate may cause recession. Today in front of the House members, he said recession is NOT inevitable!
Powell’s statements aren’t contradictory if that is the point you are trying to make.
There should have been a huge rally after the sell-off in June. Where is that huge rally?
During the dotcom bust, in the middle of plunging 78%, the Nasdaq rallied 35% in the summer of 2000. I expect a huge massive rally — and I’ve been saying it — because bear markets come with huge massive rallies. This has nothing to do with anything except the psychology of bear markets.
And yes, the Fed will tighten till inflation comes down — and it may well cause a recession — and if inflation doesn’t come down, the Fed will tighten further even if there’s a recession. The Fed is focused on this inflation, not a recession. People need to understand this.
With the trend being more retirees than workers raising the Fed funds rate will help quite a lot more people than it did way back in the early 1980’s when the workers greatly outnumbered the retirees. This is also a big negative for the Fed’s inflation fight.
Been telling my kids that we will all be living in my paid for house,to survive . But the think I’m losing my marbles ,all under 40 age group have never seen hard times . As fed was bailing water out of a sinking ship .As I remember early 80 s were toughest of all ,as farmers took it up the as**** .This will be much worse ,boots on the ground
This article tells me everything I need know about the next easing cycle. The phony tech stocks were the only prop for ‘growth’. Without the fake ‘growth’, the entire financial Ponzi collapses. ZIRP and QE are only months away now, likely by the end of the year.
Tops are fueled by narratives and bottoms are put in place by fundamentals. Don’t believe the bottom is SP500 at 2.5 price to sales.
When brk- b gets there ,possible buy ,if earnings don’t tank
sunny129 said: “Inflation popping up after 41 yrs of deflation will not be that easy,”
——————————————
WOULD YOU PLEASE STOP REPEATING THIS RIDICULOUS PROPAGANDA.
Better watch out, with these high flyers coming down so hard, the chalatans and hypers are out in full force making their media tour to tell you why these are all hidden gems and get in on the “dip” now. Been seeing more of Cathie Woodshed lately. Hard as they might try, now they are telling the FED to back off on QT..how pathetic
This seems like a problem that will take care of itself. The hypesters can’t run on mere oxygen forever, and their “investors” can’t either. They will be wrung out of money like dish-rags.
This retrenchment SHOULD be about true value discovery, price discovery. Many are those, not ready for that.
I get the impression that Mr Powell doesn’t like Joe Biden so interest rates will continue to go up.
If inflation is 9% and interest rates are 3%, that still means -6% interest rates.
Cashboy,
Opposite. Biden has been begging Powell to get inflation down because inflation has turned into a political bitch for Biden. It’s the single most worrisome issue for Americans. And Republicans are making hay with it, as they should. Biden reappointed Powell likely with an agreement to crack down and get inflation out the way before Nov 2024. Not sure if that’s even possible, but that’s the plan. In other words, Powell has White House backing for the higher interest rates and QT. Hence the 75-basis-point hike earlier this month, and likely another one in July, plus more on the way. Biden lost a year before following finally the Reagan script on inflation.
For what’s it worth,Danielle DiMartino Booth also stated Powell is a Republican at heart and dislike MMT and how he was used political pawn with the last and current administration so he wants to tighten and will stick with it all in the meanwhile giving the market a different perception or leave them wondering. Not sure if there’s any truth to this but it’s an interesting view nonetheless.
> Biden lost a year before following finally the Reagan script on inflation.
Too late, I suspect, for his (or his party’s) political salvation. but there are a lot of wild cards out there, this season.
It’s probably a good thing that the Reagan script kept Paul Volker as Fed Chairman until August 11, 1987, especially when his deficit spending started to get out of control. Paul was appointed by Carter on August 6, 1979.
Biden is a milquetoast. He should be in Powell’s face demanding that he ratchet up interest rates and kill inflation now. Not next month. Not later this year. NOW. A shock and awe increase of 500 points would immediately destroy inflation completely.
If Biden thinks inflation is a bitch wait until he has to deal with rising unemployment.
Inflation ravages 330 million Americans. And they’re ALL pissed off.
Unemployment only affects the people who lost their jobs. In a regular recession, 2-3 million additional people might lose their jobs.
So which would you rather have: 330 million pissed-off people or 2-3 million pissed-off people (and 328 million happy people who feel better because inflation has been beaten)?
Wolf, you are precisely correct about the political preference for recession over inflation. I am less convinced, however, that it is the better economic choice; hysteresis and the social ills of unemployment are highly problematic.
Well, Wolf, DC more or less kept 20 years of ZIRP in place (all the time courting the cancer of inflation) because employment *growth* was too slow.
(“Suboptimal” in the parlance of the credentialed incompetents like Zimbabwe Ben Bernanke.)
I hear what you are saying about how the pain of inflation is diffuse (everybody’s prices go up…although switching/forbearance is also possible) and how unemployment pain is focused – and the political impulses that result.
But, at the end of the day (or 20 yrs ZIRP) I think the main lessons are,
1) That DC/Fed is a fairly crappy central manager of the economy – in the name of “optimizing” the economy, the Fed has birthed an endless cycle of phony booms and inevitable busts.
2) a) Money printing transfers the value/power of savings to the government from its earners (essentially) invisibly…until the ruinous deluge comes.
2) b) The G can reliably be counted on to substantially squander the wealth it steals in 2)a). (20 yr wars lost, failed health agencies, entitlements as ruinous political bribes, etc)
3) because of #2a, DC has preferred the forger’s printing press to the taxman’s gun for 20 yrs.
Wolf for president,you got my vote
Biden doesn’t “do” anything…. its a Committee of ‘others’ that decide everything.
It looks like Liz Warren has already found the scapegoat (Powell) for the next recession stating that interest rate hikes will throw the economy off the cliff. Keep in mind this is the same person that wants all student loans to be forgiven!
She’s not wrong. Interest rate hikes will throw the economy off the cliff, doing nothing will throw the economy off the cliff, lowering interest rates will throw the economy off the cliff. The economy is going off the cliff regardless. You can only do so much with monetary policy
I definitely saw the hydrogen and EV stocks stop working after going up when Biden got elected. That was March 2021. It was countertrend and frustrating, so I saw it early but didn’t know why.
Why? Well mostly because they had no earnings and in many cases no revenue.
You really are a class act! I watch Bloomberg News and CNBC here in Britain and they get some proper bells on that say inflation ain’t going nowhere fast that all this talk about second hand vehicles (remember?) was nothing but a coincidence. I trust these economists even less now Wolf, cos you’ve nailed it time and again. Respect to you from Stoke on Trent, England.
Wolf,
Thank you for explaining these technicalities in a clear and precise way. I really understand reverse repos now.
Ditto
Thanks again Mr. Wolfster for your on going attempts, mostly ignored far shore, to educate WE the PEONs who have had not only ”not much” but apparently, ”lately” NOT EVEN ANY ”education” in financial and economic aspects/parts of the economy(s) in which we spend our entire lives at least, for most of us,,, ”trying”…
Time and enough to make any person who wants to make a ”financial contract of any kind” have to prove they know what they are ”agreeing” to do…
OF COURSE I understand full well that our ”lords and ladies” of the oligarchy do NOT want this education for ALL of WE the PEONs…
But, very clearly, THEY are WRONG to want WE the PEONs to be ”ignorant” or ” MORE ignorant.”
THIS will be very very clear in the next few years,,,, or, possibly decades while the entrenched oligarchs who have NO understanding continue on the current ”path.”
This is an embarrassingly information-rich society, and has been all along. Nobody in any elite ever took a book out of my hand. To the contrary. It was always right there, and incredibly cheap. but I share your admiration for Wolf. he pulls it all together so amazingly!
My wife started ordering dog food through Chewy some years back. I thought, “Hmmm. How is this company possibly making money selling and shipping heavy bags of dog food for cheaper than the crappy dog food on the shelf at the grocery store?”
Fast forward a couple years when Chewy became a publicly traded company. I was intrigued, so I looked at CHWY’s stats. No P/E because there was and still is no E. No surprise there. But something else caught my attention… Wait, what? They have lots of debt, but no debt-to-equity ratio? How can that be? I looked at the balance sheet and figured out that this was the first time I had come across a company with negative equity while researching stocks! They still have no hope of cutting a profit shipping heavy, low-margin products to their customer’s door. They now at least have a debt to equity number, but it’s near 750! This company’s balance sheet is a dumpster fire.
Chewy will never make money shipping dog food to your door. They couldn’t pull a profit when everybody was stuck at home, so they have no hope of a profit under normal conditions. Look at the rest of the list and you see real estate companies that all lost huge piles of money during the largest RE craze in human history. An exercise bike maker that burned through a mountain of cash even when the government shut down all gyms, confined bored American to their homes, and shoved thousands of “free” dollars at each one. A music streaming service that couldn’t make money when there was nothing else to do but stream video and music endlessly. And the list goes on an on… Trillions of dollars dumped into companies who couldn’t make money even when conditions were way beyond perfection for them.
I often wondered the same thing about Chewey. It just never seemed to make sense to me what made them special. Not that I was ever going to invest in them, which requires money, but nonetheless now I at least know the dynamics behind their business… which is there aren’t any. Just like Wolf has been saying for a while now with these darlings.
Chewy must lose on dog food, and I don’t doubt they’re in the red. But they are a lifeline for some prescription meds, I wonder if they make some of it up there?
My dog’s sort-of Rx meds (sort of = he needs it to live, but pet insurance considers it a ‘supplement’ to not cover it) was averaging $225/month on Chewy. Then they started offering another brand for about $65/month. In no time they jacked that one up to over $200/month as well. So there’s gotta be some substantial overhead on meds.
They ‘donate’ any bags of food that customers report unused due death of a pet, etc. Plus they ship tins of food so crappily I can’t begin to count how many refunded cases of cat food I’ve had over the years because half arrived dented or smashed to all hell after being shipped with no more than a crumpled up piece of paper as padding. The undamaged half of the cases are still free, and I swear my Irish Guilt doesn’t let me take advantage, but its almost a given if I order tin food from them it’ll arrive shot to shit. Their customer service line is definitely domestic-based and super friendly.
Come to think of it, it really must be a terrible business model.
IMHO, the dog food is a loss leader to keep people out of other pet supply stores and buy all their goods from Chewy. The margin on meds, toys, and other goods could make up the loss on the dog food….. unless all anyone ever buys is the 40 pound sacks of dog food and skips the rest.
Dealerships don’t make a dime on the $39.95 oil changes. They make money on the upsale of brakes, shocks, wheel alignments, fluid changes, batteries, and other items discovered during the “free multi-point inspection”.
So, you ask for a refund “because tin arrived dented”….not spilled, not pierced, only dented…a can of cat food, dented…perfectly usable, and you ask for a refund? bc, why exactly? a piece of food suffered a concussion inside the can, or something?
you are one of the Karens that actually drive businesses out of business bc they have to pamper your ass. When they gonna stop spoiling you they gonna start making money. This is valid for so many companies that deals with physical goods.
This exact thing already happened in the dotcom crash. It was called pets.com.
That was the amazing thing about Amazon: unlike all its failed peers, it survived by solving the “last mile problem” of getting cheap stuff to our front doors, and still making money. That is the core of Bezos’s genius.
Pets.com was famous for a year 2000 Superbowl ad, featuring a sock puppet. I was scratching my head, how can they compete when they deliver this zero-margin thing, dog food, to your door? It reminds me of the 2022 Superbowl, crypto.com ad. That already seems so long ago.
Everybody wants to be the 1984 Apple Superbowl ad. Almost nobody is. Instead it’s a contrary indicator, like skyscraper projects.
Sure wrong : MCD, BA, SNBR..cannibalizing themselves for buyback and dividends.
Distressed finance is full of cannibals out there, betraying and throwing each competing creditor under the bus. Any flaw in a contract turns into an existential fight.
First time you saw a company with negative equity?
You sure haven’t been looking hard.
Here is a second one for you, ORCL. CNBC.com shows it as negative $6.2B as of the last quarter, an improvement form negative $8.6.
Market cap = $179B, down a lot.
ORCL differs from Chewy that it makes a lot of money, but the balance sheet still sucks.
It would have been in 2019 I think. I pretty much only look at larger profitable companies with dividends as a rule, which filters a lot of the negative equity players off of my radar right off the bat. I’m by no means a day trader constantly pouring over charts and daily stock research. My volume of research is probably high compared to your average Robinhood account holder, but low compared to serious investors. It’s generally focused away from companies like CHWY to begin with.
Starbucks also has negative equity. I was floored when I read that here in the comments a few months back. Had to look it up myself. Another company hollowed out by massive debt to fund stock buybacks.
1) Anti bubble backbones are born to send the markets down.
2) We might return to the congestion area of Anti BB #2, before
testing #1, above.
3) With forever minus (-)0.50% deposit rate, along with food shortages and rising natgas, several small European countries inflation rates run between 10% and 20%.
Turkey > 80% officially, hyperinflation. Zombie Greece still survive on a ventilator in the emergency room…
4) Madam ECB is not aggressive after observing that US mortgage rates fell from 18.5% in 1981 to 2.6% in 2020, before rising to 6%, a tiny blip on the chart, a 17% retracement, a one timer to ignore.
5) Madam ECB believes that negative deposit rates are honest, superior to the 1.58% EFFR.
6) EFFR : 5.2% for over a year, between July 2006 and Sept 2007.
Half of that rate and half the distribution period : 2.4% between Jan and July 2019. Up to about 1.6% in June 2022, possibly for a year, pumping muscles for a waterfall chart.
7) If Anti BB #1 become resistance, SPX might breach June 17 2022 low, forming Anti BB #3… EFFR might breach zero, trailing madam ECB deposit rate.
My translation: trouble in EU, worse than USA.
Yep, but even bigger trouble in the land of the setting sun!!!
Vous avez raison, monsieur phleep.
Hard to say USA or EU worse, their central banks have both been behind the curve and both have over-inflated bubbles, both have high national debts so it depends on which stat (or region) you’re looking at. If anything the US has much worse and more widespread asset bubbles in more places (esp the housing bubble) and more importantly, Europeans overall tend to have less private and household debt, and much much less in certain categories (ex. educational debt and medical debt, minuscule in Europe but dangerously high in the United States). Esp in Germany and the Nordic region where they still adhere to the old idea of savings and thrift as a virtue (seen in both private and public debt). There’s likely a nasty recession in store on both sides of the Atlantic, but in some ways the US is more vulnerable to shocks esp if medical debt goes up and student loan payments resume here.
The EU is vulnerable to contagion risk from the potential breakup of the Eurozone. It’s unsustainable, regardless that the ECB said it will do “whatever it takes” to keep it glued together.
Ultimately, I expect the current EU and Eurozone to fracture with the stronger parts forming a United States of Europe. Or at least, that’s the intent of the elites running that Hotel California organization.
The US can outlast everyone else by printing money, regardless of inflation. So? We’ve got inflation, just print yet more, same result. What other currency is even close to this advantage? The US can and will ride this pony a lot longer. Relax. The politicians don’t seem to be worried about much except re-election. See?
If the US has options like the proposed dropping of the federal gasoline tax on a whim and not blinking, it’s all good.
AF,
The EU (and Eurozone) will stay together simply because it has to–it’s ultimate basis is political and social (and administrative) more than financial. Europe has tremendous and unusual diversity because of its history, and without a common union, however flawed and sloppy, transactions just grind to a halt. And recent events with Russia only reinforce the determination for European unity (even though Russia is being fatally weakened by the massive blunder in invading Ukraine–with potentially millions of Russians emigrating from a sinking ship–and will likely never recover militarily or demographically as it was before). If anything, the much greater long-term threat to European stability is China’s sheer power and scale, and its dominance as a trading nation (already richest country and biggest economy by GDP PPP, biggest trader and manufacturer). A split-up Europe would make the smaller countries esp sitting ducks in the face of esp a technologically dominant China. The EU has no choice to stay together and likely achieve stronger monetary unity, just as de-facto the US does with wealthier states subsidizing the poorer, more rural ones.
Brant Lee,
That’s classic MMT nonsense and a big reason why the modern monetary theorists have led the US into the inflationary disaster we’re now stuck in. No, we can’t just “print more money” here, and if anything the dollar being a store of value in intl. exchanges makes us more vulnerable, it angers investors and traders and loses that status if inflation wipes out the purchase power with it. If it was as easy as just “printing more money” then every great power throughout history would’ve solved it’s problems by just running the printing presses. But the Romans, Ottomans, Brits and other once-ruling powers and empires collapsed and often disintegrated in major part due to inflation. No currency can last a sustained collapse in confidence from domestic and foreign buyers and users, and part of what’s forcing the Fed in a more Paul Volcker direction is the need to show they’re serious about protecting the dollar. Not to mention that runaway inflation leads to massive social unrest and bloody riots, and in a country like the USA with 400 million firearms..
Miller,
I’m just saying that’s been the strategy and the government and the Fed have taken full advantage of the circumstances with no regard for the fallout. We haven’t seen any legislation to correct the ongoing scheme to pack the wealth into the pockets of the elite. Their people will sit pretty forever way above the carnage.
The once ruling powers you mention all had standards of backed currency, mostly gold and silver coin. They didn’t have the option of replacing it with print and digital exponential while no one was looking or perhaps they could have stretched out the inevitable like the US government is doing.
Miller,
You’re describing the elite point of view. Unless China is going to occupy Europe, there is no reason why those countries can’t have a prosperous future without it.
I don’t live there but consider it a disaster. I presume the majority still favor it but don’t actually know. I’ve read reports which claim the polling goes this way.
Regardless, once the majority of the public’s living standards start declining which is guaranteed to happen just like it is in the US, public perception is going to change drastically. The elites know this but don’t care what the public thinks and will continue down the path of a political superstate.
My prediction is that the bear market will splinter the EU and only some countries will end up in this political union. But one way or another, the EU as it exists now either forms a political union or falls apart.
On June first “Chewy” CHWY closed at 23.49 and now sits at 34.59 – a gain of $11 a share or a 47% increase. It is still valued at 14 to 14.5 Billion. It is not in an “index” so its not getting purchased by index funds as 401K contributions SO the mighty questions are “traders” really just playing “pump” and dump. Float is approx 420 Million shares , $11 increase a share = there has been a $4 BILLION inflow of money into Chewy since JUNE 1st. Thats a ton of cash, don’t tell me this is “short” covering, I don’t buy it. The list goes on and on for all the over “imploded” stocks. TRILLIONS back “in” junk stocks. to the group and wolf, any thoughts on why this stuff is getting “bought” if we are going into a recession?? Also don’t give me that the “market” feels “jpow” is going fold and not raise rates, just dont get it, what am I missing?
If Chewy ever makes any profits, it would be a good stock to consider, but until then, it’s in the watch list with PETS.COM.
“don’t tell me this is short covering”
It’s most likely short covering. This stock has huge short interest… About 23% of CHWY’s float is shorted per MW. The stock peaked just shy of $120 in (drumroll) Feb of 2021. Remember, percentage up does not have the same impact as percentage down. Take a $100 stock, drop it 50% to $50, then gain back 50% and you only have $75. An $11 rally after dropping 3/4 of its peak value is still only a small blip on the overall chart. Markets go up and they go down. Speculative stocks like this are even more volatile, but the eventual future is clear for CHWY. It has no future.
@ Will: This part is incorrect: “…there has been a $4 BILLION inflow of money into Chewy since JUNE 1st. ” Money doesn’t “flow” like that, and there has been NO net “inflow of money into CHWY”, because every share buyer who “put money in” gave that money to a Seller who “took money out” — each and every trade.
There has been a paper-wealth-effect increase in apparent shareholder value for holders of CHWY, just because a few buyers were willing to pay an extra $11/share for CHWY, and sellers were happy to oblige. That is all.
And Chewy, the company, certainly got no cash from those trades (unlike in an IPO or secondary share offering).
With a market cap in the $10-billion range (mid-cap territory), even after losing half it’s value last year… if CHWY isn’t in some indexes … that’s a red flag. Unless you think it’s about to go into an index? Then maybe it gets a bunch of buyers. But I’d wonder what Argos Holdings GP LLC is going to do – they own 79% of the total shares…
It will be interesting to see the physiological effect when people start seeing how much their 401K’s have dropped in value. A lot of paper wealth is going away in a hurry.
I am already seeing a lot of “toys” hit the market. They are usually the first things to go when people start struggling financially. They buy those boats and RV’s and such, with the idea that they can always sell them and recoup their money if they need to… but that does not work if the economy gets bad and the supply of toys for sale is too large for more frugal market.
In the early 2000s my brother in law sold timeshares like gangbusters in a gorgeous resort area. He took back the paper himself. Around ’08 he was in distress. He reckoned consumers’ payments to him were the first kind of thing to be stopped (along the lines of what you posted here). He was invested in that layered luxury-resort economy too: pretty soon he lost a motel.
Next thing I knew, people were mailing in their house keys to the banks, and vast tracts of real estate were sitting empty.
This time, who knows? Likely the Wolfster will be first to sniff it out, though!
Did u watch David Farber and John Kerry visiting Alberta and Sechelin
island.
PRICE DISCOVERY, which is now working very well.
If you hold the view that the market has been consciously and deliberately pumped with little more than hot air since 2009—via stock buybacks, fiscal and monetary pumping, loosening (not tightening banking regs.) etc.—then the current market “turbulence,” “debacle” (however you want to name it) should come as no surprise. The wonder is that it took this long for the market to start deflating back to economic reality.
So much so-called gains were froth (unless sold off to bigger fools). That is my starting point for viewing this period, not regret over supposed losses. The biggest fool was the public because it must pay in some way for all this foolishness and the supposed free ride it had. It was, in effect, simply borrowing against the future.
So over the past 14 months or so the Fed drained $2.2 mil via RRPs. Do we know how much liquidity was added via QE during this time period to arrive at a ‘net drainage’ estimate?
Is it presumed CPI during this era would have been even worse absent RRPs?
In terms of hammering down inflation, are we not talking about QT and FFR increases in terms of years, not months?
I can’t even get involved in talking about the market performance day to day. This is going to be a long slog.
** Re above I meant $2.2 TRIL not mil **
Yes, Wolf has covered that topic repeatedly. Check out his topical links at the top of the site.
You can probably get a good start here: https://wolfstreet.com/2022/04/21/peak-balance-sheet-feds-assets-dip-to-5-weeks-ago-level-end-of-qe-end-of-an-era/
BTW, I disagree that RRP is truly a “drain”. The Fed is providing short-term bills as assets in exchange for cash, but only overnight. Those assets get rehypothecated in complex shadow-banking credit chains. There may be more credit piled up in the system from the RRPs than from the cash that was allegedly “drained”! In terms of liquidity this is not the same as a permanent sale off the Fed’s balance sheet.
It’s also quite interesting that despite the surge of inflation, and the market swoon with yields surging, the Fed’s RRP balance continues to swell. Seems that there’s more excess cash out there than ever!
Will you be following the unwinding of the FED’s balance sheet, Wolf, and posting about it on your site? I recently saw a guy posting about how the FED’s balance sheet has actually increased in June, but I thought they were supposed to start shrinking it this month. I wonder if anybody is keeping them honest.
I post on the Fed’s balance sheet once every month or two.
There are just too many braindead moron bloggers out there spreading BS to get clicks. The balance sheet goes up and down weekly due to the MBS. So if some ignorant braindead moron blogger doesn’t know that and spreads BS about that, you should never go back to that site. Period. That idiot is lying to you to get clicks.
These ignorant braindead bloggers are setting themselves up to get ridiculed with every article I post about the balance sheet.
FYI: On Jun 22, the balance sheet was down by $31 billion from April 13. Including the itty-bitty little increase of $2 billion this week due to MBS.
As I said many times, MBS transactions take 2-3 months to settle, which is when the Fed books them. If some braindead ignorant blogger doesn’t know that, never go back to that site. Period.
And don’t drag this BS into here because it reflects on you.
I think a “Hall of Shame” list of braindead ignorant bloggers (with evidence) or at least specific braindead postings by otherwise competent writers might be of great value.
The advertising sponsors, and readers, who feed the marketplace do not seem to be punishing error the way that they once did. Blame Google? Blame entrenched human biases?
I have my own corporate-media “Hall of Shame” list, for reporting that not only wasted my time but which I could prove to be in error simply by checking a couple primary sources. There are very few media sources that DON’T end up on the list. Maybe that’s why I spend more time here!
My goal in life is to stay off your list :-]
“And don’t drag this BS into here because it reflects on you.”
That wasn’t my intention, I was merely wondering if you were going to report on their QT progress because of the fact that I don’t trust anybody else.
OK, I went to the source; the Fed.
“Each week, the Federal Reserve publishes its balance sheet, typically on Thursday afternoon around 4:30 (Eastern Time) p.m. The balance sheet is included in the Federal Reserves H.4.1 statistical release, “Factors Affecting Reserve Balances of Depository Institutions and Conditional Statement of Federal Reserve Banks,” available on this website.
federalreserve dot gov / releases / h41 / current / h41 dot htm
Yesterday’s release, “Total factors supplying reserve funds”: which is from Wednesday, 22 June 2022. Published @
$8.983985 x 10^12 (or, just under nine trillion bucks)
Fine print underneath: “Note: Components may not sum to totals because of rounding. Footnotes appear at the end of the table.”
It is published out to seven digits. Pretty close, eh?
can we call them IBM bloggers?
kinda goes with the acronym these days, eh?
Agree completely Wolf! For capital preservation I started a gradual sell off starting early 2021: losers first, then, gradually, low ROI and up each month. Finally reached goal of 85-90% cash by end of Oct. Looking at the charts you can see there was another mkt drop-off that started around Nov 10-12.
Not smart enough to play short/options game. Kept some commodity/energy stocks, a small amount of precious metal hedges. Perhaps moving investments to foreign exchanges not straight-jacketed by sanctions.
My concern now is less a complete market collapse and more so the risk that financial assets will be appropriated by a desperate gov’t/broken banking system in extreme (or politically unpalatable) systemic collapse. Good ole Bush II quietly established mechanisms for doing so post Cyprus scare.
Your concern will most likely be realized at or near the end of a major bear market, not sooner.
As long as the US government (I presume you live in the US) can borrow at “reasonable” rates, no motive to do that. It’s when the USD is crashing, rates have “blown out”, and the government has no method to fund the Empire and “bread and circus” that it will get desperate. US will probably have ceded its leading geopolitical role (to China) by then too and might be in a major “hot” war.
That’s when all kinds of things will be tried or used. Selective spending cuts including defaulting on aspects of the “social contract”, tax increases, foreign exchange and capital controls, unilaterally extending maturities on UST at artificially low rates, mandating purchases of UST after markets have crashed to “protect” the public from the collapse which has already happened, mandating asset repatriation (2nd “benefit” of FACTA) to support the USD and UST….you get the idea.
There is no place (no exchange, no platform, no asset) on the planet immune to such moves when a government grows desperate. Confiscations in “emergencies” (sometimes with increasingly elastic definitions) have been happening since ancient times. In a sense, it is the core definition of “government.” But all kinds of spin and hoopla revolves around this unavoidable fact.
I was thinking near to short term. A simpler way of putting the matter – there are buying opportunities globally. However, one often has to find brokers with access to the proper exchanges (i.e., Schwabb et don’t have access or it’s way too difficult working through the brokerage bureaucracy). Of necessity, this also requires access to foreign currency.
Anyone buying on a foreign exchange better understand the custodial risk they are taking. I don’t know what would happen if the custodian or securities dealer became insolvent.
I’m not even familiar with any legal precedents in the US. I’ve read what’s supposed to happen, but in the event of a real “black swan” event (hint: the upcoming major bear market which will almost certainly include one or more crashes), someone might find their assets frozen and tied up in court for years.
I presume you are referring to the USG. Most citizens of other countries have the luxury of ignoring their government’s decrees, as long as they aren’t physically vulnerable and their assets are in another jurisdiction.
Agree. Thnx for feedback.
There is a logic to all of this. Yet, because of unpredictable psychological factors/black swan events and effects lags, it moves along a very jagged trajectory.
Anyone else spot the recurring theme from three of the dumpster fire stocks mentioned above?
NFLX, Spotify, Peloton.
Same CFO🤣🤣
Not all at the same time I hope.
It shows what a social aquarium these people wind up in. Sort of like Washington, DC.
Cluster F Officer?
Wonder if the business model that results in no prospects for profit, ever, that burns cash at at three times the rate that new issues and borrowing can possibly replenish, with an investor class that is no more sophisticated than roulette wheel bettors,….could it be possible that any or all of these are at the root of the collapse of these distant mirages? Maybe?
Nah, they’ll rebound any day now, just buy the dip and give that wheel a real good spin.
Some of the ideas were high-fliers, outliers that might have worked: suitable for side bets, as one might bet various long shots in a horse race. That’s what, in a way, venture capital does (with more diligence and a hand in how things are managed). But “diversifying” across these stocks does not diversify against what happened: market risk (risk from something exogenous to the market itself: a credit crunch). It was not all completely insane. Anybody would love to have bought into the FAANGS on Day One.
Wolf, just wondering what do you think of Luke Gromen’s prediction that Powell will pivot by Q3? He also mentioned that we can’t go to 5% because US would not be able to cover its debt obligation due to plummet in tax receipt. I think you might have written something before debunking this view, just curious what you think of his general take on FED’s pivot even with sustain high inflation rate.
Phoenix_Ikki
No wonder the indexes ended in solid green today. Lot of assumptions that Mr. Powell turn around soon(?). On that reason. mkts are front loading!
Will he control before turning around, very unlikely!
Will wait for June number in early July! Also how much earnings surprise to the downside, especially future guidance!
Historically, whenever the unemployment is below 4.5% and the inflation is above 4.5%, recession has ensued within 6-12 months!
Mr. Powell is again talking ‘hawkish’ from one corner and the ‘dovish’ from the other corner of his mouth!
“Mr. Powell is again talking ‘hawkish’ from one corner and the ‘dovish’ from the other corner of his mouth!”
No, he’s not, that’s just the same delusional BS we keep getting from the likes of Cramer and the other pump-and-dump artists so long as there are enough delusional FOMO fools and retail investors to get suckered in as the bagholders. The Fed has no choice but to tighten hard and go full Paul Volcker, if anything even more aggressive than Volcker since JPow and the Fed board are doing QT on top of interest rate hikes. As Wolf has pointed out, runaway inflation is by far the greatest threat to not only the economy but our entire system and society. If uncontrolled, inflation will demolish the US dollar, wreck confidence domestically and internationally and lead to social unrest (in an already bitterly divided country with 400 million firearms and counting). Federal Reserve tightening will lead to a deep recession likely in early 2023, but that’ll be temporary and a far better alternative to USD collapse, loss of confidence and literal blood in the streets with an eroding dollar and purchase power. It’s short-term pain (long-term gain) vs. the far worse disaster uncontrolled inflation would be.
Powell can’t pivot. Housing costs (owner equivalent rent) is 1/3 of CPI. Powell will have to keep hiking to bring housing costs down.
“He also mentioned that we can’t go to 5% because US would not be able to cover its debt obligation due to plummet in tax receipt.”
A 5% rate will not offset the 8.5% inflation so they actually need to go higher. They will probably use alternate methods to slow the economy.
I would never use the word cannot with the Federal Reserve or the Federal Government. They have a printing press it can always pay its bills. The question is what will the fiat they print will be worth and who will accept it as payment.
Watch what they do not what they say… lol
The Fed/Gubermint wants inflation higher than the market rates so they can inflate away the value of the debt. The nominal amount may never go down much (in say 10 years from now) but the future nominal amounts after adjusting for inflation will be much smaller as a % of GDP or whatever acronym in used in the future. This is the only way out except for default/jubilee. It won’t be described like this but some future economic historian (if we still have them) will say this is what happened.
If this is not accurate please tell me what I am missing.
Thanks,
Jaded and concussed.
It’s fantasy to think that national debt, deficits or public debt in general can just be “inflated away” anymore–Wolf has covered this but in general, it’s one of the dumbest bits of pseudo-economic jargon that gets repeated ad nauseum by ignorant fools in the media. You can’t use inflation as a tool to inflate away debt when government purchases and allocations are ongoing, payments are indexed to inflation and esp when the debts just roll over to the next Treasury auction or other means to sell the debt instruments (resetsinterest anyway, and which the market determines with the yields). Even if this was possible, rampant inflation to that level causes much more damage than the debt itself would (it’s a sort of default that hits the people broadly), shatters confidence in the currency and national management and leads to social unrest. This is the real cost of things like the war in Iraq and Syria where the USA basically wasted trillions of dollars to get defeated in the desert while cutting taxes. Now the bill is coming due, and there’s no “inflating it away”. That’s delusional talk.
You’re implicitly making an analogy to the mid-1940’s after WWII.
The USG was able to use inflation to devalue the debt (from over 100% of GDP) by massively cutting the defense budget. Social spending also remained low until Johnson’s “Great Society”.
Today?
There has been no “peace dividend” since history “ended” in 1991 and only continued expansion of social spending.
Despite over a decade of (mostly fake) “growth”, the national debt and annual deficit have exploded. I attribute it to a belief in something for nothing and extended social decay.
Additionally, since USG debt is someone else’s wealth, inflating it away would make tens of millions (noticeably) poorer by destroying their purchasing power.
Any serious attempt to bring any semblance of sanity to fiscal policy will send the economy crashing into a steep recession or depression with all the social disorder that goes with it. I state this because the math doesn’t add up and the actual fundamentals totally “suck”.
Sorry, there is never something for nothing, ever.
“He also mentioned that we can’t go to 5% because US would not be able to cover its debt obligation due to plummet in tax receipt.”
Rates are destined to “blow out” when the bond bear market is more mature regardless of the impact on the budget. “Can’t” doesn’t change reality.
WHY DO I HAVE TO RESPOND TO EVERY GDF IDIOT OUT THERE, like Luke Gromen that’s selling newsletters or whatever? These people have gotten it wrong for over a year, and now you believe them??? Fine with me, but don’t drag their BS into here!
Nah not trying to drag his stuff in here, just curious but points taken. It’s good to know based on what you have been saying and the data shown Powell won’t pivot and inflation is the boogie man. Last thing I want is for any QE to resume to re-inflate the stock market or housing market back up all over again. Housing just need to crash period and zombies companies need to lay to rest.
020221, Jeff Bezos announced his departure from Amazon.
That was long overdue and a welcome breath of fresh air.
020321, I hit a pothole, and the whole world came apart.
In the Twin Cities, most of the potholes from last winter are patched up now. It is the end of June, you know?
I always make sure that I have a good line of sight in front of me when riding on the motorbike, unless I’m on a path well known, for that very reason.
Another phenomenon that is not getting enough attention is the collateral damage done to “good” stocks
We have those stupid index funds that are now overweight in the good stocks and need to rebalance so they start selling the good stocks which depresses those.
Or we just have margin calls and now to raise money, good stocks that stil have value are being sold.
Case point has been this week the commodities and energy stocks. Yes, I know, recession so less demand for energy. But why are funds like grain going down? Nat Gas and oil, yes, prices go down slightly and the administration is letting up insane trial balloons that do not increase production , only demand; or referring to commandering production resources, another insanity that may scare some. But it should not go down that much. They will make boat loads of money. And speaking of making even more money, why are coal miners going down while everyone in Europe now wants to start burning coal again and suffer global-warming-hysteria amnesia? Those guys have , no,kidding, forward PE’s of below 2 and their order book is solid until the end of next year and beyond. But they too went down this week. Because of index funds overweight on them or the need to raise money due to margin calls on those hoopla stocks going to heck.
So collateral damage . From the hoopla funds going to heck.
Moosy
But why are funds like grain going down?
Exactly!
All grains seeeds companies – Corn, Soyb, weat, DBA, BG, NTR, fertilizers+ all going down this week. B/c Recession is coming!
Some of these might have bid, mindlessly before. Still, Food shortage coming! Makes no sense! It is all traders front running! Next week they could be up! When Stocks are being sold, it is being done INDESCRIMINATELY just mindless bidding before!
I had to reduce all my commodity positions, oil but NOT natural gas. Come fall they will go up. So leap calls come handy!
This is CASINO mkts run by Fed. Any whisper/rumor will move the mkts, crazy!
What good stocks?
Forward P/E doesn’t mean squat. It’s bad enough with the trailing P/E ratio since earnings aren’t even real money but an accounting entry. As for the order backlog, mostly or entirely the result of the fake economy.
Occasionally, stocks have abnormally low P/E ratio for a reason like you gave. Mostly, it’s because earnings are about to collapse. Earnings are a lagging indicator, not
predictive.
By any historical measure, most corporate balance sheets are also either weak or complete garbage. Even those balance sheets that look (somewhat) healthy are substantially or mostly so due to artificially low borrowing costs. Just wait and see what years of rising rates and a stagnant economy due to interest expense, revenue, and profitability.
This is the biggest asset mania ever, not even close. Trying to cherry pick supposedly undervalued stocks in what will ultimately be the biggest bear market in US history isn’t likely to be a winning proposition.
I state this not being completely confident the stock mania is over. I think it is but could be wrong about that. I am a lot more confident the bond mania ended in 2020 and the upcoming multi-decade bear market is going to be one for the record books with the absolutely awful fundamentals. Stocks won’t be far behind, whether the market has peaked yet or not.
“This is the biggest asset mania ever, not even close. Trying to cherry pick supposedly undervalued stocks in what will ultimately be the biggest bear market in US history isn’t likely to be a winning proposition.”
Yes, this. One of the most ridiculous elements of this overhyped market is how even basic valuations like P/E have been not only crazy overvalued, but also effectively skewed into stupidity by the excess liquidity from QE on top of near ZIRP to make forward guidance and price-discovery all but impossible to do effectively. The Tesla mania is already going down in history in a way similar to the way pets.com became the poster child for the idiot excesses of the tech bubble on the NASDAQ that popped in 2000. Even though TSLA is a more viable company overall, its utterly insane valuation and the dumb arguments used to justify it show how detached from reality and actual value the market has become. With speculation and dumb money rewarded over thrift and hard work. The ultra-loose US monetary policy of the past decade (of the past 4 decades, really) is a contributor more broadly to the frayed social fabric the United States now finds itself stuck with.
If we have a serious enough recession, people will even stop buying Tesla’s. Virtually no one will be pissing money away on big, frivolous purchases. Then watch what happens to stocks. During GFC, I made a spreadsheet listing “good quality” stocks that were priced under $5 share. That was a big list. Ford went down to $1 and change. Tesla at over $700 now? Haha.
Everyone on the right is now blaming the stimulus check to people for inflation. Is that the real reason? What about the bond buying all these years?
Without stimulus checks there would have been a spade of suicide in the country and also a pot of business would have gone down.
Handing over cash was stupidity instead of stimulus should have been really targeted. But was that the only one to blame.
The reason was people who didn’t need the money got money that’s what created all the inflation. People who were making $499,000 a year and Covid-19 didn’t affect their business or helped it. Those type. Golf course owners.
The fact is no one should have gotten anything. How are people going to learn about preparing for emergencies if they keep on giving them money they don’t have to pay back?
This comment lol. People have been squeezed for decades. 13 million children live in food insecure homes in this god forsaken country. I’m sure it’s because their parents just haven’t been taught the right lesson yet about saving or whatever it is old people who lived through the easiest economy in the history of the world think
Fronting children into a world where one can’t afford them is the definition of brazen and stupid (even aggressive, warlike). I had the realism to not have children, because I foresaw I could not afford them, not could the environment, and I wouldn’t take the pose of an inter-generational whiner because uncle sugar or whoever didn’t provide enough free stuff. It’s precisely, exactly, laser-focused THIS: these fools are “food insecure … [EXACTLY] because their parents just haven’t been taught the right lesson yet about saving ….” The world doesn’t owe you kids and free stuff to go with it.
Helicopter money most certainly contributed to inflation. Both political parties did it, and IMHO, both were recklessly stupid.
I suppose a very small targeted amount may have been a reasonable idea, but even then, who would it go to? Those already collecting public assistance? Those already collecting unemployment? I have no idea, but I do know that those lower on the economic rungs are now hurt the most by this raging inflation (which hurts everyone).
It was the fog of war. Nobody knew how bad it would get, and the markets were crashing with historical depth and speed. The big mistake with no reasonable excuse was to keep the punchbowl going after things stabilized and a vaccine appeared. the Fed explicitly aimed for a target inflation above 2 percent. Why?
phleep said: “It was the fog of war.”
————————————
Why provide excuses? What was done was/is inexcusable, and the fog wasn’t thick at all.
Varughese
What about the bond buying all these years?
Exactly!
Mr. Powell was still buying MBSs 50B/M last March, claiming the inflation was going to be ‘transient’!
Now the inflation rare 8.6% and the Motgage rate is over 6%, who is going to buy these (toxic) MBSs issued when the rates were below 4%?
Fed will be ‘dancing’ around these issues along with some ‘jaw boning’ as usual!
The difference between the bond buying and the “free” handouts is that much of QE ended up in the financial markets, not mass distributed to people who spent it.
The other factor was the scale. It was complete overkill. I was grudgingly in favor of PPP, but it was badly mishandled and I won’t be again. It was also absurd to make some people whole (such as airline employees) while others collected less than their paycheck through unemployment. Finally, paying anyone more not to work (through the enhanced UE) than when they were working is totally insane.
The root cause? The way the shutdown was implemented. The combination of “free” money and the resulting shortages created this mess.
1) RRP is rising and madam ECB is tightening, while inflation is raging. Something is wrong.
2) The primary dealers keep the o/n collateral, confiscating, put it deep in their pocket, instead returning in the next morning. They are punished, paying late fees, warned, screwing up the smooth o/n operation, but they don’t care. The primary dealers don’t care, but JP does.
3) Failed is up. The dealers cause collateral shortages, because they
suspect that : Somebody is Screwing Up and they don’t know whom.
4) JP have no choice, but suck more, providing more collateral to
the o/n market to fill the gap, and prevent collapse.
5) M/M. regional banks, the shadow banks ….are borrowing every night, for one night, to finance your 8% auto loan, 20% -25% credit card loan, 6% mortgage, whatever loans… borrowing at zero.
6) But if the o/n market is screwed up, rates are going up, panic ensue and the stock markets collapse.
ME
I hope so!
LOL!
I want more Stocks to go on ‘fire’ sale, first!
Love this blog. Many are saying the recession is already here, or not far off, and that it will be the recession that will end inflation by slowing demand. If this was to occur, does the Fed not pause or pivot, and then my question… what next? And haven’t rates been raised and cut during recessions many times before, rinse and repeat so to speak? Any help here greatly appreciated….
The Fed is focused on getting this inflation under control before it completely destroys the economy. And if it causes a recession, so be it. It’s very likely that ONLY a recession can actually bring this inflation under control, and the Fed knows it, and it’s gunning for it.
But it’s not a recession that the Fed looks for, but inflation, and whether or not it is coming down.
Good description of what transpired in the stock market since early 2021. I have to admit I was not one of those who sold what used to be called the high flyers early, but I never bought them either, so it was a wash. I attribute this crazy explosion in speculation, similar to that of the 1920s, to the FRB’s zero fed funds interest rates from December 2008 all the way to November 2015 and again from March 2020 to February of 2022. Just add a few Trillion in stimulus payments and stir. It took 9 ½ years of zero rates and a few Trillion in stimulus to finally ignite an inflation problem equal to that of the 1970s.
1) JP radical hike sent the 10Y up.
2) SPY, QQQ, Dow are freaked.
3) US 10Y weekly : June 6 closed > may 2 high. June 13 is a trigger.
4) This week is red. That’s how long the 0.75% hike lasted.
Mkts front running on this news ( already, like today!)
Fed Rate-Hikes To End This Year, Followed By 3% Of Rate-Cuts & QE Wow!
Back to the ‘Happy days are here, again’ right?
But, I think the piper waiting out there to collect all the DUES has to be paid, first!
More fun when the earnings disappointments and poor future guidance
And the June Inflation number in early July!
Another 75 basis by the end of next month!
Crazy Volatile mkts will continue!
“Fed Rate-Hikes To End This Year, Followed By 3% Of Rate-Cuts & QE Wow!”
Did you just make this nonsense up? Sounds like FAKE NEWS.
Zero Hedge.
Anybody who reads Zero Hedge and believes it is uninformed. The National Enquirer is more honest and moral.
depth charge: You are right. Totally fake. I’m surprised Wolf let it through.
sunny 129,
“Fed Rate-Hikes To End This Year, Followed By 3% Of Rate-Cuts & QE”
Keep this BS outa here. This BS belongs on ZH, not here.
Do not abuse my site to spread this BS.
Got it
Thank you
@sunny129 – do you have premium ZH access? This article is for premium clients only. Or did you just read the headline? :)
@ Wolf: sunny still thinks we’ve had 41 years of deflation ………..
That was a comment made 5 days ago.
To me, the poster child of this disruptor money burning era is Uber, which looks to have had a comparable collapse in stock price as others mentioned in the article.
I’m curious as to how others see the future of Uber playing out because I don’t see how restrictive monetary policy coupled with pervasive inflation can mean anything other than continued stock devaluation and possible collapse. It seems hard to fathom, given how ubiquitous Uber has become, but barring a complete paradigm shift I just don’t see how the company manages to survive.
Uber’s an interesting case since I feel like there’s a successful business model hiding away there somewhere, if it’s execs could just get their act together and figure it out. As you point out, Uber isn’t just vaporware–it’s a very popular product and service and truly is ubiquitous, and it’s not only disrupted but utterly transformed the way people around the world get to where they need to go. Companies routinely work in systems to manage Uber calls and rides for going to and from the airport and meeting sites on business trips, and more and more neighborhoods and work-sites are built around the premise that workers prefer to uber instead of drive there themselves. So there’s an actual business there, the issue is just that the actual cash flows, revenue systems and finances are still a mess. Not a good problem to have in a tightening economy, but at least a solvable one, and certainly a much better position to be in than the speculative bubbles all over the rest of the NASDAQ and tech (and even more so in the broader economy, housing bubble and other asset bubbles).
Uber and Lyft are just TAXI COMPANIES and need to be regulated as such without any further delay in all states.
Many of these companies have a workable business model, it just costs too much to run. Taxis have worked for a long time, in certain markets. Uber and Lyft could probably slash operational costs and get to something sustainable. At this point they likely don’t need much marketing and I’d bet a large amount of money that they could reduce their IT budget by quite a bit, including headcount reduction. If their leadership can focus on that, they can probably remain viable businesses, though it might take a chapter 11 reorg.
I drove Uber for about a year about 6 years ago and I still get updates from a forum I was on back then. Chatter from drivers right now is grim, a lot of drivers are realizing that they can’t stay in business with they way gas and maintenance is costing them, and they certainly can’t manage car payments at current prices. I’d guess that smaller markets will start to die off. Drivers already have to run Uber, Lyft, and DoorDash simultaneously to get enough volume, and at these prices it seems like a number of drivers are having to drop out.
Yes, the public loved it Uber because the rides were subsidized at the investor’s expense. What’s not to love about that?
The real question is, why should a taxi dispatch service (Uber’s actual business) be worth tens of billions of dollars and be viewed as a “tech” growth company when it isn’t?
Per the post above mine, I can see it being viable in markets with an affluent and high population density In the US, that would be NYC, DC, Bay area, maybe Boston and limited coverage in other cities (tourists and central district). In ATL where I live, maybe Midtown and Buckhead but not the suburbs.
I don’t see it as scaling anywhere else, for the same reasons taxis don’t. Uber has no magical ability to change the economics of the taxi business.
The Naked Capitalism blog has published a highly informative series of articles by Hubert Horan analyzing Uber’s business in great depth.
Horan is definitely required reading if you want to know about Uber. I don’t know that he proved that there isn’t a viable model like Millet suggests. He absolutely proved that Uber can’t continue for long in its current form.
In particular, the last Horan article NC published was Feb 11, 2021 where he wrote
“ As previous posts in this series have discussed, much of the added rideshare capacity served the most unprofitable parts of the car service market that traditional taxis carefully avoided—peak demand periods (such as Friday and Saturday night) and lower density neighborhoods where empty backhauls were much more likely. But Uber and Lyft were laser focused on maximizing top-line revenue growth which they believed (plausibly) was the most effective way to maximize their equity value.”
Again, like Augustus said, part of the problem is that they’ll send drivers to do lousy routing. Even if you collect a huge fare to take someone from a hotspot to the burbs, you’re still driving back empty. They could certainly build a better routing model, but blindly growing as fast as possible into every market out there isn’t how you do that.
Incidentally, this is some of AirBnb’s problem- they started on the low end market in a commission based business, and now they’re furiously trying to work up the food chain so they can collect higher commissions.
Have you taken an Uber this year? The prices have become quite a sticker shock at least to me. Using Uber used to be a low cost solution. Now, they are rather expensive to use. Just a trip around town while your car is in the shop will cost you $40-50 one way. I only see them raising rates match the actual cost being incurred
Levi C. wrote: “To me, the poster child of this disruptor money burning era is Uber, which looks to have had a comparable collapse in stock price as others mentioned in the article. .. ”
Uber is sound as the Rock of Gibralter, compared to other speculative excesses like Crypto or NFT’s.
I think you have to look much further back than the 1920’s for any type of speculamania that comes close.
Now we also have a number of other crises occuring, the failed coup of Jan. 6, 2021. a corrupt and political SCOTUS, a deadlocked and immobile government unable to deal with basic problems. Social cohesion is fraying, and poor old Austerity Joe seems like a hapless place holder
waiting for the next election.
People who think a few bankers at the FED will solve the country’s problems are whistling past the graveyard.
speculamania = speculative mania.
1) European countries cancelled their oil contract with Russia, creating shortages.
2) Brent is up. USD/RUB spiked, before collapsing to Dec 22 2014 fractal zone.
3) Dec 22 2014 hi/lo is USD/RUB backbone.
4) The BRICS countries – Brazil, Russia, India, China, S.Africa – increased
their bilateral trading. in their deflated currencies.
5) The RUB currently is the strongest currency in the world.
6) Russian oil is sold to China and India at more than $30 discount. China and India are large consumers of oil. More discounted Russian
oil, less in the spots market.
7) Lower demand, large discounts, will send oil prices down.
Short cover rally Fri June 24
Is it or is PPT finally back to work? Probably have next week off planning for 4th of July holiday and figure put in some friday effort. You know how it goes, once PPT is in action, those guacamole dip buyers are not far behind. Afterward they are all going to the bar to do some pre-4th of July celebration and pat themselves on the back..I bet after their hardwork today, market will end up 800+ pts up.
First half of the year profit taking is more likely before the June CPI comes out. More profit taking than a short covering rally.
S&P 500 is back above the bear market threshold (~3830) as of today. Dow Jones never entered a bear market.
Patience!
So what did make money in Japan from 1990 – 2012/13 while the Nikkei went down and down? Also what do you think caused the rally in 2003 – 2007?
Jackson Y
The investors are furiously front running to buy the indexes b/c
1 Qtr end re-balancing along with ‘window dressing
2. 30 Billions coming to the at the end of 2nd qtr!
3. Hopium narrative from the financial media that Fed will do a turn around at the end of 3rd qtr!?
Question is will he stop rising the rate if the inflation is sticky or rising? Fed has said, it will accept recession, when containing the inflation is a priority. What they say and do are different things. Dot charts and future guidance irrelevant!?
The mkt will remain volatile and probably to the upside for the next two weeks, until earnings number come out!
Wait N see
Commodities have dropped hard in the past couple of months. This should help ease inflation pressures.
Corn has dropped 15% from its peak
Soybean oil is down 23%
Soybean meal is down around 20%
Oats is 33%
Canola over 30%
wheat is down over 30%
Oil is down about 20%
Nat gas is down about 30%
Lumber is way down
Silver down 20 %
Copper down 22%
Housing has stopped rising and has dropped in some markets.
I am guessing we should see inflation decelerate going forward. To what levels…..I do not know but I would think we have peaked for the short term.
Maybe we drop to 5% or less by the end of the year.
Anyway….what I am trying to say is the drop in commodities is good sign at taming inflation.
Maybe fewer rate hikes. It would be great if they can get inflation down to 4% by the end of the year.
That would mean fewer rate hikes. Maybe just a total of 1% more in rate hikes.
I guess it’s just me who wants more rate hikes, not fewer.
ru82
The current inflation popped up after 41 yrs of deflation. It took nearly 18 months for Mr. Volcker to contain inflation in 80s’ He had a LOT LESS DEBT to deal with, unlike now! Besides our Fed is way behind the curve. Too late and too little! May be they will get lucky, right?
Commodities were sold b/c they were over bought. Energy prices will go down gradually if demand destruction is acute and deep. Even EV manufacturing need fossil fuel. Will be in a trading range. Food commodities are unlikely go further south. Watch the ETF – DBA, There is global food, grain, seeds and fertilizers shortage + Supply chain issues! Going to get worse!
Fed’s balance sheet grew from less than 1 T to 9 T – NINE fold since ’08 increase. Same NINE fold increase at ECB
Global (4 large CBers) grew SIX fold – 5.1T to 31.5 Trillions
Total USA Debt ( Govt+business+Consumer+) is 31 Trillions
Total Global Debt————————————– 300 Trillions!
With these kinds of humongous debt, interest payment will increase.
Growth is hamstrung. Once the Debt to GDP (USA) goes over 90%. it will affect growth It is conservatively over 130%!
Don’t confuse the financialization our economy, goosed by insane credit creation to REAL productive economy! B/w the EU Banks are almost insolvent. Global banking is tightly inter-related to past globalization Debt to GDP ratio of Japan is over 300%!
Guess it could be different this time, right?
Lower commodities can help with lowering CPI, but not with rents going up like this. Powell needs to crush housing, and I believe Danielle DiMartino when she says the Fed is deadly serious about lowering housing costs and rents to reduce CPI.
If the Ukrainian harvest can’t get shipped out the agricultural prices will rise. Will also be driven up by the higher fertilizer costs.
Inflation is now spiking in services. This inflation is no longer driven by commodities.
Ghost town #2. Matthias Erzberger will sign a ceasefire
Shiller back north of 30.
Economies correct as part of the business cycle because in good times people over value assets, and take on too much debt. Recessions are the correction for that miscalculation.
In the past 2 recessions, the Government / FED has interfered with that natural cycle causing both asset inflation and over indebtedness to go far beyond what would be normal had they not interfered.
It is possible, that even without draconian interest rate hikes, the economy will collapse under it’s own weight, and recession get bad enough to cause deflation, and correct asset prices and debt ratio’s in the process.
I was filling my tank today at Cosco, and as I watched the gas pump sail past $80 I took note that even though it was Friday, in the middle of summer, there were no RV’s, or trucks with boats or off road vehicles in line for gas.
Jdog
I agree with your view points with regard to debt, economy, recession an especially Govt/Fed interference and kicking the can down, again & again!
It will be interesting to watch the transformation (+Fed/Govt responses) of current inflation, slowly dis-inflation and then deflation!
Wait N See!
That is because it was a friday. Thursday has now become the start of the weekend. I work and haul machinery in a tourist area. No shortage of them on the road….yet. Campgrounds are full, and boat ramps are still free entertainment.
Once interest rates go negative, you no longer have a financial system that is ruled by any semblance of economic principles no matter how hard one tries to act this is not true.
How about stocks (or anything) goes up when it’s real value goes up, not when the perceptions of the mentally ill desperate to get rich(er) go up?
Business cycles are a symptom of a financial system based on interest rates. Compound interest increases the frequency and magnitude of these cycles.
In the absence of such an interest free system, there is no way to detect this. Humans simply cannot GRASP something that has never been in their reality, like Americans and empty grocery STORES or a water faucet when turned on has no water,FOREVER!
Why do you think they were so desperate to destroy Libya? A gold based AFRICAN currency in a system with no usury as Mohammed commanded. And a just finished water system that would have greened the entire country.
The EU is quietly moving towards a federal superstate. There’s a vote on legislative initiative for MEPs. Which will effectively give it a house and a senate.