Friday, January 15, 2016

Things Will Only Get Worse Before They Get Better....Maybe Facts And Valuations Do Matter

Things Will Only Get Worse Before They Get Better

Here is a sobering fact: the stock market just did something it's only done three times in the last century. On Wednesday, stocks entered a correction — a 10% drop from recent highs — for the second time in the last six months, which is a rather short span. The last three times this happened so quickly were in 1929, 2000, and 2008. If those years look familiar, it's because there were big market crashes during all three.

Despite an oversold condition, the market has not yet been able to stage any sort of short term stabilization.  

The nature of the current decline raises some serious doubts about what has been a constructive longer-term view.

Global stock markets have lost $3.17 trillion in just eight days of trade. More than half of that pain belongs to Wall Street, with U.S. common stocks off $1.77 trillion, and non-U.S. stocks losing $1.40 trillion in the year-to-date calculations. The S&P 500 itself has lost $1.33 trillion year-to-date.

Something has definitely changed in the market: while for the past seven years (a period largely coincident with an easy, ZIRPing or QEing Fed) every day would be greeted with numerous research pieces, all urging traders to buy the dip, and to otherwise stay invested in stocks, now all the equity firms have turned their back on the S&P, first Goldman, then JPM, then UBS, then every other equity trader has urged clients not only not to buy the dip any more, but to sell.

Having been abandoned by equity analysts, perhaps investors could find some solace in the Treasury analyst community. Alas no: as Bloomberg notes this morning, citing independent Treasury strategist Marty Mitchell, "our concern is that things will only get worse (effects of commodity super-cycle, bankruptcies, debt defaults, hedge fund redemption/failures, global economic slowdown, equity weakness, global debt deleveraging, etc, etc) before they get better."

The raging bulls were so sure of themselves a few months ago. Valuation measures were for suckers. This time was different. We suddenly sense a little panic amongst the big Wall Street traders. Not so much scorn and laughter being directed towards those that dare to think outside of the mainstream box.

I wonder if the brainless twits and shills on CNBS will be telling their audience that the S&P 500 is now lower than it was in May 2014. That's right. Anyone in the stock market over the last 20 months hasn't gained a penny. The S&P 500 is now down 11% from its all-time high in May 2015. Only 40% or 50% more to go to reach fair value.

Remember the can't miss hot stocks being touted by Wall Street and their CNBS mouthpieces? The IPOs were being rolled out like crazy in 2015 and the stocks would soar to heights not seen since the good old Dotcom bubble. 

Let's take a look at those fantastic can't miss opportunities of a lifetime:

GoPro – Down 83% since August
Twitter – Down 65% since April
Fitbit – Down 63% since August
LinkedIn – Down 27% since March
Netflix – Down 20% since December

And of course there are the heavyweights that everyone must own:

Amazon –D
own 17% in last two weeks
Google – Down 10% in last two weeks
Facebook – Down 14% since November

FANTAsy stocks are in trouble with FANGs down 11.5% year-to-date and Tesla plunging over 17% since the holidays... the last pillar of US equity market strength has officially broken...

Maybe Facts And Valuations Do Matter!

And this is just the beginning folks. The heavyweights are overvalued, overbought, and over owned. They will need to fall at least 50% to be fairly valued.

Decades of insane regulation, government debt, and astonishingly destructive monetary policy have resulted in a society where it is now easier to consume than produce. Prosperity is not complicated. People figured out thousands of years ago that if you wanted to do well, you had to produce more than you consumed. But the American system is the exact opposite, favoring those who recklessly borrow and spend, rather than those who work hard and responsibly save. The President of the United States boldly accused everyone who doesn't share his view as just making things up. In his words, "Anyone claiming that America's economy is in decline is peddling fiction." This is an extraordinary (and delusional) statement by the so called leader of the free world.

The government's own numbers show that they are completely insolvent, to the tune of nearly $18 trillion.

The annual reports for the Social Security trust funds show that they are rapidly running out of money.

The Federal Reserve's own balance sheet shows that it is precariously under capitalized, with net capital less than 1% of total assets.

The Census Bureau's data shows that the earnings for middle class Americans are stagnating.

The Labor Department's numbers show that the number of Americans who have dropped out of the work force hasn't been at this level since the Carter administration.

USDA figures show that the number of food stamp recipients is near an all-time high, simultaneously when the number of homeless children in America is at a record high.

And all of this, at a time when trust in government is near an all-time low.

These are all facts, not the fiction our so called leaders peddle!

The only fiction is pretending that this story has a happy ending.

While a responsible Fed is theoretically possible, we haven't seen anything close since Paul Volcker left. For now, it is imperative that we stop blaming laissez-faire policies for our problems,  and recognize the real causes of this crisis.  Our economy is artificially stimulated, power-biased, corrupt, and manipulated. Almost nothing about it resembles true free-market capitalism. Spread the word. Until this is widely accepted, necessary economic change will never happen.

Without Fed-provided liquidity, bubbles would be tame or non-existant. Growth would be smoother. Instead of dramatic cycles of boom/bust, we would see small fluctuations and stable growth.

The stuff Fed heads proffer in public is either a sign that they don't have a clue, that they disagree, or that they say whatever they find useful at the moment in their relentless efforts to manipulate the markets and get investors and traders to buy, buy, buy. At this point in time banks are again taking the same risks that triggered the 2008 financial crisis, and they're understating these risks. We all know how this ends.

The S&P 500 has now dropped over 9% in the past 2 weeks. Despite that, the VIX has risen to just 25.22. Since 1987 (the VIX' inception was in 1986), there have been 129 days on which the S&P 500 was down as much as 7% over the past 2 weeks. The current VIX reading is the lowest of any of those days. Based on the magnitude of the S&P 500′s decline, the VIX has risen by a historically small amount.

Once the effects of monetary stimulus disappear in the US, the weakness of the economy will suddenly be obvious to all concerned. Despite recent stock market carnage, the reaction by the VIX has been a relative yawner. All we really care about are the cold, hard numbers. And if history is any guide, investors, who have demonstrated a rather complacent reaction to the decline so far, may very well get a wake up call before this slump has run its course.

It could be that once a financial market hits the zero bound in interest rates, it's like crossing the event horizon of a black hole – there is no going back. ZIRP has been grossly unfair to savers, especially seniors and it has introduced all sorts of distortions into the economy that have rendered  it dysfunctional in many aspects. Most recent gains have been made through financialization and thus the participants in those gains are confined to those who are in a position to play that game: well connected banksters, hedge funds, private equity funds and VC's. Every market is so heavily manipulated that price discovery is completely broken and asset allocation decisions are inherently foundationless.

It's all about "The Fed Put" and the utterances of central bankers. Entire media frenzies erupt over the slightest shift in timbre of the wording of an FOMC statement.  It doesn't matter what the fundamentals are because if a microscopic number of appointed committee members (a few dozen worldwide?) decide that the fundamentals (a.k.a "reality") won't suit the agenda, they'll simply issue some policy to override it.

After the current round of central bank initiatives fail, the next logical step will be to target money velocity and discourage any uninvested bank balances. This would imply that negative rates won't just be a matter between the money center banks and the Fed window, it'll creep into depositor accounts which has already started happening in Europe.

If somebody comes up with a defense mechanism that preserves wealth under negative rates, cash verbotten, no gold, capital-controlled zero-yield economy, that sidesteps the game, they will simply change the rules to make whatever that is unprofitable or retroactively illegal.

That's where we're at and things are only going to get worse before they get better.

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