Bank earnings could be very complicated, as many could face more delinquencies than forecasted

 

U.S. banks will significantly struggle to understand and interpret how their residential mortgage portfolios will perform this year, because borrower-assistance programs “bailouts” during the pandemic have clouded who will be able to pay when the very gracious forbearance periods and enhanced jobless benefits expire. I believe that lenders should be bracing for significant losses across most credit products, but mortgages stand out because the share of those loans in forbearance has continues to rise.

The key difference: the mortgage forbearance program is imposed by U.S. agencies that back the vast majority of housing debt and it does not require borrowers to show proof of hardship. That has made it difficult to tell who enrolled out of real need; including those who will never be able to resume payments and the con-men who took advantage of the Covid-19 forbearance opportunity! [I have 4 tenets who work for the Department of the Navy, who never got laid off, but have not paid their rent in over 8-months, they were never furloughed or laid off? They are leeches!]

So no one really knows how many of these folks who are in forbearance are actually going to be able to recover, and how many of them are also going to go into a serious delinquency cycle.

Some of the biggest U.S. mortgage lenders like JPMorgan and Wells Fargo may talk about mortgage trends when they start reporting 1^st quarter results on Friday.

 

About 2.7 to 2.9 million U.S. mortgage borrowers, were in forbearance programs as of 01/06/2021 according to the Mortgage Bankers Association (MBA). The numbers began rising toward year-end but remained far below the 8.6% peak in June, MBA report indicated.

The homeowners who remain in forbearance are more likely to be in significant distress, with fewer continuing to make any payments and fewer exiting forbearance. More than 58% the borrowers in forbearance have been forced to request extensions since October. Those who have remained in forbearance since the start of the bailout programs are the least likely to re-emerge, credit-monitoring service TransUnion recently stated. When all of these bailout plans stop, they will likely NOT have the ability to repay!

Banks and bank-investors should be worried about a repayment Wile Coyote cliff when relief programs expire.

Most of the increase in forbearance requests have come from customers with Ginnie Mae-backed mortgages, the MBA report indicated which caters more to 1^st time homeowners, and those with low-to-moderate income, than its peers Fannie Mae and Freddie Mac.

Please remember that these (3) government-sponsored firms have offered 12-month payment holidays through March 2021. Banks including Chase, Wells Fargo and Bank of America Corp offered similar relief and are allowing borrowers to tack missed payments onto the end of their debt, rather than face balloon payments when forbearance ends.

 

Massive DEBT deferments (forbearance) could cripple bank earnings / reserves and weigh on economic growth

 

Quite interesting (I see this as a good thing, but economically a negative), as it appears that US consumers unexpectedly paid down their credit cards debt in November...according to the latest Consumer Credit (G.19) report, in November revolving debt, i.e., credit card debt, shrank for a 2^nd consecutive month declining by $787 million following the $5.5 billion drop seen in October. This means that in the first 11 months of 2020, US consumers have paid down a record $115 billion in credit card debt (thanks to over-generous stimulus and over-generous unemployment compensation). 

The flip side, however, is that as revolving credit dropped, non-revolving credit increased, as in November US consumers increased their student and auto loans the two largest components of this category by over $16 billion...bringing the total November change to $15.3 billion, well above the $9 billion increase expected by economists. Meaning that even as Americans turned frugal on their credit cards, they went to town on loans made where either the Federal Government has some implicit backstop, such as student loans which will likely be discharged in part by the Biden administration, or where they used the cash to buy new cars, iPhones, and other crap, which is also understandable when one can take out a loan with a maturity is well beyond the viable life of the actual goods being purchased (meaning the borrowed would be upside down in said loans). 

So is the real implication from both is that no-one either the lender or the borrower expects that the loan will ever be repaid (could be another government-forgiveness where all are made whole), something which cannot be said about credit card debt (at least for now).

We continue to see a massive disconnect between the markets and the economy, between the elite and the working-class

We continue to see a massive disconnect between the markets and the economy. After years of Central Banker interventions, stock markets have soared to record highs, while economic growth has remained in the cesspool. And sentiment remains extremely high!

Currently, once again Wall Street analysts (especially CNBC cheerleaders) are projecting record stock markets in 2021, with stock prices rising another 14% to 24% and earnings surging into new record levels. Such is the question I have discussed previously, given the incessant hype that the so-called “the stock market is ultimately a reflection of the economy.” The detachment of the stock market from underlying profitability guarantees poor future outcomes for investors. But, as has always been the case, the markets can certainly seem to remain euphoric and irrational longer than logic would expect; said massive detachments never last.

The stock market is NOT the economy. But the economy reflects the very thing that supports higher asset prices “real corporate profits” this detachment is now a key factor for real policymakers and investors as we head into this new year. Throughout last year, we have experienced a sharp widening of an already massive gap between financial markets and the economy. A rapid rise in asset prices from the March 23^rd lows took major US indices to record levels into the end of 2020, even before the news on Covid-19 vaccines. Combined with even more and more accommodative central banker policies, these policies enabled record debt issuance at historically low levels of compensation for creditors.

There is no doubt that corporations [many – many zombie firms] took the FED up on both near-zero interest rates and a guaranteed buyer of bond issuance. In 2020, investment-grade bond issuance hit a record with total non-financial debt soaring to all-time highs. Such was occurring at a time when revenues and profits were plunging off a cliff.

That data includes the record levels of “junk bond” issuance. Issuance in 2020 was up 87% year over year. Of course, the issue is that over the next few years, there is a mountain amount of debt coming due. If rates rise markedly, as if the market demands payment for the massive increased relative risk, refinancing could become problematic. Also, if the economy fails to have a real robust economic recovery as the cheerleaders on Wall Street expect.

There is a significant contagion currently which I discussed last weekend “Zombies-firms” they are firms whose massive debt servicing costs are higher than their proforma profits but are kept alive by relentless borrowing at near 0% a massive macroeconomic contagion. Zombie firms are far less productive, and their existence lowers investment in better well-positioned firms, and employment at more productive firms. In short, a huge negative side effect of central bankers keeping rates low for a long time is it keeps quite unproductive firms alive which in turn lowers the long-run growth rate of the actual real economy.

The number of “Zombie” firms in the market has hit another new high in 2020. The massive FED interventions, bailouts, and zero rates provided much-needed life support that failing firms needed. From a market perspective, the FED’s massive liquidity flows increased voracious speculative appetites, and greed-based investors piled into “zombies” with reckless abandon. These firm’s survivability is based upon a low-interest rate environment, a robust debt market, and a real economic recovery to ensure their ability to repay their ballooning debts! Now for the bad news, I believe the so-called incessantly CNBC hyped “recovery” may not be nearly as brisk and robust as the Wall Street pundits and so-called gurus expect.  Even with a weaker “2^nd Stimulus package” the underlying erosion of real economic growth from rapidly rising massive debt-loads and deficits leaves little room for error.

Unfortunately, our economy requires increasing levels of massive debt to generate lower rates of economic growth. Such is why the FED has found itself in a massive lame-ass “liquidity trap.” Now interest rates MUST remain low, and debt MUST increase faster than “bogus manipulated” GDP, to keep the economy from stalling out in real time!    I sincerely believe that the vast herd of market participants have been lulled into a false sense of security. Currently, investors are due to (FOMO) are paying astronomical prices for “risky” assets. At the same time, they are forced to accept historic low rates on “high yield” debt (aka junk bonds) relative to the risk of default.

The vast number in the herd “investors believe” they have an insurance policy against and “risk.” And it is showing up in a significant manner as nothing is more reassuring to investors than the knowledge and belief that central bankers, with deeper pockets, will buy the securities they own particularly when these buyers are willing to do so at any price and have unlimited capital. The rational investor response has been to front-load their buying but also to look for related opportunities. The result is not just seemingly endless liquidity-driven rallies regardless of the real fundamentals and deteriorating economy. This seems to have been the case this year (2020) and last (2019) until an unexpected exogenous event occurs, or if the FED tries at all to normalize monetary policy.

The resulting destruction of REAL household net worth requires a usual immediate response by the FED of zero interest rates and liquidity. Subsequently, they are forced to create yet another “bubble” to offset the deflation of the last bubble. What the FED did accomplish these past few years was creating a massive demand for “risky” assets by distorting market functions and real price discovery (if it even exists anymore). While investors may continue to surf a highly profitable FED massive Tsunami liquidity wave, for now, things are likely to get far riskier as we move further into 2021. Central banker’s deepening distortion of markets will be harder to defend in a likely recovering economy (if the vaccines actually work and combat Covid-19) amid increasing inflationary expectations. Recent surveys that show an extremely high level of investor exuberance despite the underlying detachment from reality and fundamentals is enormous. 

Former Fed-Chief Greenspam in a December 1996 speech on “Irrational Exuberance” was ignored for almost 3+ years...as whenever such detachments between the real economy and markets have occurred, investor outcomes have been very unkind to the herd and in my opinion, it is unlikely this time will be different; it will likely be far nastier in my opinion!

A crying shame...When the FED inserted itself into the economic equation to help their masters (the elite, most wealthy and corporations, and TBTF bankers) their intervention and manipulation has led to a massive rise in imbalances between the economic classes (poor, working-class and vanishing middle class). Over the past 12+/- years, as the stock indexes and stocks soared due to free-flowing liquidity, household net worth reached historic levels. If you only looked at that one line in the data, you could infer that the economy was booming. However, for the vast majority of Americans, it is not.

It is stunning to see that the median net worth of households in the middle 20% of income rose 4% in inflation-adjusted terms to $81,900 between 1989 and 2016. For households in the top 20%, median net worth more than doubled to $811,860; now wait for it...the top 1%, the increase came in at over 180% exceeding $11,500,000.

The study I read in the WSJ showed that the value of assets for all U.S. households increased from 1989 through 2016 by an inflation-adjusted $58 trillion. A full 34% of that gain or over $20 trillion went to the wealthiest 1%, according to a Journal analysis of the FEDs data.

This 12+/- year massive great disconnect has continued much longer than even I expected. This illustrates, yet again, the unintended consequences of a central-banker ill thought policy approach.

How long before they buy the dips today

 

How long will it take for robotic Pavlov’s trading dogs...trading-bots to buy any dip today in anticipation of massive FED intervention or soothing words about the  Covid-19 vaccines...or NEW stimulus bailouts this has been the conventional trend play since 03/2019; the bots buying all dips, as the FED throws in massive liquidity to support the markets  

My take on inflation, Bitcoin's irrational move and positioning

 

Back in 12/2017 when bitcoin surged to reach what would be its then all-time high of just under $20,000, a huge number of then industry of experts calling bitcoin the biggest bubble in history were making headlines on CNBC etc. These bubble-callers were vindicated for a few years, little did they know that just three years later what they thought was the biggest bubble ever, would be surpassed 2+ times over with bitcoin now more than double its 12/2017 then all-time high on the back of global central bankers injecting over $1.34 billion of free flowing extremely cheap money/liquidity in the market each and every hour (as insane as it sounds). What is behind this epic move...with the FED now openly manipulating and depressing interest rates/yields and the CPI a “BS” useless, politically motivated indicator, bitcoin has emerged “hyped” as one of the last remaining accurate inflationary metric available to traders (perceived not reality). But that is what Wilson stated:

One of my forecasted mega surprises of 2021 will be higher inflation (and the implosion of the Bitcoin bubble) as inflation will be far nastier than many even thought possible, including the FED, expect. Currently, the consensus is expecting a gradual and orderly increase in prices as the economy continues to recover. However, the move in asset prices like Bitcoin and other Cryptos suggest markets are starting to think this adjustment may not be as gradual or orderly as expected. With global GDP output already back to pre-pandemic levels (fuzzy math at its best) as most expect GDP next quarter to soar to 5.0-6.5% Wow, figures never lie or they never misrepresent the underly picture right? for a 5-6.5% reading we would have to have a red-hot economy right....(wrong) (😊)  I see it at 2.75% at best however as we have new DEBT as far as the eye can see...King Trump signed into law the $1.4 trillion fiscal 2021 appropriations and the $900 billion Covid-19 relief deal Congress approved week...remember my friends that the equation for calculating GDP is: GDP = private consumption + gross investment + government investment + government spending + (exports – imports). For the gross domestic product, “gross” means that the GDP measures production regardless of the various uses to which the product can be put to use!

Our economy not yet even close to fully reopened, I think the risk for more massive price spikes is greater than anticipated (vis a VIX at 20.00-22.00). That risk is likely to be in areas of the economy where real actual supply may have been destroyed and the markets have priced in a light-switch scenario (that the economy will come back to pre-Covid-19 levels, like flipping a switch, I do not see it as so) as such the markets and participants are ill prepared for what could be a lackluster surge in demand at best into the 3^rd and 4^th quarters later this year!

we could see a huge disappointment [especially if the vaccines do not deliver as promised] with restaurants, travel, and other consumer/business related services...inflation could act like kryptonite for longer term duration bonds which would have a near-term negative impact on valuations for stocks should such a negative adjustment happen without warning and rather abruptly...

 

As a result of the violent inflationary price action these past months (hardly reported on by the financial media) past two months, bitcoin has surged almost 190%, with the cryptocurrency market now greater than $1 trillion (insane JMHO) as Bitcoin has blown-the-doors-off its prior bubbles. And just in case you are more visual than most and need visualization, here is how Bitcoin is now the mother of all bubbles.

 

Bitcoin’s recent performance basically dwarfs the 1999-2000 technology bubble the Bitcoin run has drawn comparisons to the dot-com bubble of the late 1990s. While the sentiment and underlying forces of both bubbles may be similar, their performance is a different story.

At the beginning of 2015 only 6-years ago, Bitcoin was trading just above $300 (I wish I had been a buyer). In early November this year, the Bitcoin price rose above $7,600. That translates to returns north of 2,200% in a matter of 1,041 trading days (a great return by any standard right). By comparison, the Nasdog was up 391% after 1,041 trading days from the start of 1995. Returns on the Nasdog peaked just shy of 1,100% after 1,326 trading days.

Bitcoin’s run has far outpaced the 1995-2000 technology bubble, and its returns have already dwarfed dot-com mania. Now, crypto advocates argue that Bitcoin has transformative fundamentals, so the returns are justified (I laughed when I wrote this). See I do not deny that blockchain is a transformative technology that will eventually revolutionize a segment of the finance industry. But the mainstream adoption of the internet in the 1990s was a massive paradigm-shift then as well. The widespread adoption of any so-called transformative technology has massive ups and downs and takes way more time than folks think it does not happen overnight.

 

Bitcoin has tripled in value this past year “2020”, growing steadily even as the stock market plunged in the early days of the Covid-19 pandemic. Investors have been drawn to it like moths to a flame (they will fly to close to the flame), as well as other cryptocurrencies have all rallied as the US dollar has significantly weakened. With the FED expected to leave interest rates near zero for several more years, bitcoin has been winning new followers. 

 

This is not bitcoin's first significant spike Bitcoin has seen. It had a strong run in 2017 and hit a then-record high of more than $20,000. But its price plummeted to just over ~$3,000 by early 2019 as China continued its crackdown on cryptocurrency. It then rebounded to ~$8,000 in May 2019. It soared past ~$20,000 in December, climbing rapidly in the past month into year’s end...and now it has gone more than parabolic!

Bitcoin fans are extremely adamant that the recent price rally has just started its moon-shot higher. From a technical standpoint, this current rally certainly appears to have gone vertical/parabolic. I believe failure at the new current highs would represent a clear technical divergence pattern between price and its RSI.

Additionally, the current giddy locoweed induced rally that started on December 20^th consisted of a massive $10,850 rally cycle. The previous rally from October 20^th to December 2^nd consisted of another huge $9,200 rally phase. I believe this current rally phase from December 11^th could be an E-Wave “5” rally (almost equal to the E-Wave “3” rally range).

If my technicals are correct, this final rally cycle could come crashing downward after reaching these peak levels (or it could stall right here) the level comes in at $47,150 (likely capped at $47,750-$48,400). My Bitcoin chart highlights the incredible price rally that has taken place over the past 3+/- weeks. It also highlights two clear price rally phases creating an A-B-C price wave pattern.

My daily Bitcoin chart highlights the two, almost identical in size, which has created a possible price peak top above $40,750. It also highlights the technical divergence between price and its RSI indicator in the lower pane. I believe this current peak may become a near term top in Bitcoin possibly resulting in a serious downward price correction Bitcoin has only solid technical support near ~$20,500 to ~$22,500. If Bitcoin prices collapse from the recent peaks.

Interestingly I have heard hardly a bearish remark about bitcoin, or a bullish comment [expect from myself] on the U.S. dollar in weeks. Investors and speculators are clamoring for any dollar replacement asset without regard to price or risk; something similar to what we saw in March 2020, but the actions were reversed; traders were fervently selling any asset they could find to hold cash. The charts and sentiment readings (which are extremely high) suggest the cash is trash mentality might be running on vapors. If I am right and I am betting that I am with my money (As I am SHORT GBTC & RIOT), things will look significantly different as we progress into the weeks and months ahead than they do today. I would not expect to see risk assets crashing down to retest the 2020 lows immediately; (I am referring to the S&P 500 near 2,190, crude oil under $10 etc.

Nevertheless, the speculative froth in these markets is reaching ridiculous heights and perhaps the most obvious display of this is the parabolic bitcoin frenzy / fever.

 

I have noticed that gold / silver and bitcoin generally trend follow each other but when the trends reverse it usually starts with gold then the action bleeds into bitcoin. With gold failing to break overhead resistance this past week after turning down from its August 3^rd (2,072.30 highs) and the U.S. dollar trying to hold support (DXY at $87.50-88.30) the risk of being long and wrong in bitcoin is quite real. Also according to sentiment readings on the greenback only about 17% of market participants are bullish on the greenback, which is usually a sign of an very overcrowded belief. What would risk assets, particularly bitcoin, look like if the dollar ralls from here?

Remember my friends...You do not have to be in the know or massively smart to make money 😊 in the stock market; you just need to think differently. That means I do not equate an parabolic “up” market with a “healthy” market and vis versa all markets present opportunities to make decent money!

Gold is under pressure even while record highs have been established in both bitcoin and the Dow as we have seen that Gold prices have fallen below key levels ($1,900 per ounce) and investors would like to know which assets are likely to outperform as safe haven assets in 2021 (JMHO). Gold was trading under pressure (since topping in August 2020) as stock markets make new highs and market valuations in bitcoin surge to levels that many thought-were-impossible. Adding support to my bearish premise is the uptick in yields seen in the U.S. Treasury market. Yields on the 10-year note have made a clear break above the lower highs that were established in June 2020 and this is a critical factor that must be monitored by precious metal investors this is important because rising trends in Treasury markets often serve as an pre-indicator of potential weakness in precious metals as the sector remains woefully deficient in terms of its ability to generate investment yield.

These trends can be viewed as another market surprise indicator given the recent rise in Covid-19 deaths (over 4000 a day) that has emerged following the holiday season and As I have remarked global lock-down measures are unlikely to have much of a near-term impact if workers cannot afford to follow such restrictions.  It is highly unfortunate the macroeconomic picture has not helped matters and the latest U.S. labor report shows that job-growth has reversed for the first time in April as the U.S. is facing a huge net jobs decline of 10 million since February and this comes after the implementation of a mew paltry $600 stimulus check being sent out which will likely have an insufficient impact on the country’s consumer spending activity. In essence, these worse-than-expected jobs reports interestingly failed to inspire significant gold buying activity and it now looks as though the upcoming potential for more stimulus packages “bailout giveaways” might be the next driver of gold prices as has the massive increase in the money-supply!

 

For precious metals traders, this is important because of the effects these possible outcomes might have on future money supply. Since February, M-2 money supply in the U.S. has taken off like a rocket ship reaching levels above $19 trillion in November 2020. If these trends continue, we are likely to see sustained arguments supporting the bullish prospects for gold and silver because these are the assets that have traditionally provided market protection from these types of economic pressures in the past.

So, is bitcoin's massive liquidity-fueled explosion here to stay for good? I cannot say with 100% assured as anyone who claims otherwise is a liar and a charlatan, but all my technicals and fundamentals are flashing “Danger-Danger Wil Robinson” as there are growing liquidity warning signs explaining that the contrarian bear catalyst in 2021 will be rates not profits (also a likely bullish rebound in the greenback), so keep an eye on early warning signs that rates are turning bearish for risky assets!

Inflation in the real world is all around us: inflation spook the FED and balance sheet bulls (food prices at 6-year highs, up over 20% in the past 8 months alone, then there is energy inflation and durable good inflation and house/rent inflation)

The bursting of the bubble remains the biggest risk to the bullish premise, the as the 12+/- years associated with a massive backdrop of maximum liquidity and technological disruption has caused maximum inequality & massive social and electoral polarization…and value of US financial assets have soared (Wall Street) now stand at almost 6.2x the size of real GDP.

I see many massive bubbles that could come crashing down like Wile Coyote (Bitcoin, TSLA, and many zombie firms; however Bitcoin is biggest asset bubble ever it is also worth noting that investor price action is increasingly speculative (IPOs, SPACs), as the overall wealth gains for the elite and most wealthy are obscene... but extreme asset bubbles are unfortunately a natural end to destructive bull markets of past 12+/- years; bubbles (e.g.) in risk asset prices have been ignore rising rates!

            

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Some WISE OWL weekend thoughts (01-10-2021)

Over 18-months ago on the back of massive FED intervention, I predicted a melt-up in financial assets, and then I stated that I saw an equally tremendous market implosion...however I thought that implosion was stating in February 2020, and I failed to clearly see the massive FED & Government intervention in March resulting in a 55-to-65-degree parabolic rise to new highs...as all major stock indices globally are trading at record highs.  And as a result, real stock/index valuations have never been more stretched than any time in history as we can see from the Market Cap to GDP (the famed “Buffet Indicator”) has never been higher.

Nor has the market’s overall price-to-sales ratio:  The SPX-500 is now more overvalued than ever seen before via this measure; SPX-500 price-to-sales ratio is well above its dot-com bubble peak (WOW)... The chart below, from Ned Davis Research, shows that price relative to sales for the SPX-500 is at a record high, “well in excess of what they were in 2000 or 2007 at those peaks,” Other measures, like the median price to earnings ratio which excludes the very skewed effects of very profitable (like Apple) and very unprofitable firms like mega zombies show the SPX-500 overvalued by nearly 33% versus the typical valuation level seen since 1964.

But the SPX-500 is in my opinion vastly overstating earnings due to massive stock buybacks and another financial fuzzy math engineering! (for newbies: corporate buybacks reduce shares in circulation, increasing earnings-per-share even if overall profits have not risen and they mask deteriorating revenues and profits). Therefore, looking at the ratio of market valuations to overall profits suggests that real “apples to apples” comparison of P/E ratios are 70-80% above the long-term average.

So, will my prediction of a 25% to 45% plunge in equity prices this year come to be? Time will tell. But as extreme as that kind of drop may seem, history is on my side. Whenever massive and I mean massive debt has been the fuel for massive equity gains and enabled market multiples to distort upward to what I see as very unsustainably excessive levels which is what has been happening now on an unprecedented level a very and I mean painful correction to clear out the manipulative excessive speculation and bad debt and malinvestments have always followed. As I have previously written those who preserve their hard-earned capital throughout the coming crash will have the opportunity to redeploy it at very decent terms as the next recovery cycle begins. 

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We saw this past week pre-options-X week that Santa finally delivered (with massive sweets and no-stocking coal) with a strong rally this past week, pushing the markets to all-time highs. Interestingly, despite the now “Blue Sweep” of the Georgia elections, the markets quickly turned from worrying that such would be harmful to “great this means more deficit and reckless government bailout spending” as we saw that the markets quickly dismissed concerns of higher taxes by justifying it with more stimulus and more massive deficits. It was clear that the market participants especially the newbies quickly justify paying higher prices for risky investments. A proverbial greater fool type of market where no-one loses and winners abound; as for the time being memories are deficient as I noted last week, as it seems that everyone feels that there is no risk associated with chasing the markets and prices higher as the FED has your backs and there will always be a greater fool. As markets continue to levitate, investors are becoming overly confident that the markets are a one direction trend. But therein lies a massive risk as confidence breeds complacency. In the near-term, the bullish trends remain undamaged. 

After a month-long choppy process, the SPX-500 finally set a new all-time high in the near-term [remember this is triple witching options-X week] MACD signals and money flows are decent, suggesting prices could rise higher in the near-term. However, while the MACD, and money flow, are positive, the market remains significantly overbought on multiple time frames which suggests that while markets could rise, it could be somewhat limited relative to the real inherent risk lurking just below the surface. On an intermediate and longer-term basis, the markets remain grossly over-bought and very overextended. The only other times I have seen these massive amount of overextensions in recent years resulted in the loss of “all” of the recent short-term gains rather quickly. Almost everyone is incredibly “bullish” about the prospects for massive market gains in 2021 with hopes and prayers for massive “new” stimulus, infrastructure spending, and a real working vaccine that will eliminate the Covid-19 contagion...this comes as 10-11 million of Americans are still unemployed, but they expect that the real economy will shift into a “Golden Age” not seen since the 1950s despite being embroiled in a 12+ /- FED massive bull interventionist and manipulated market based on massive free-flowing money, from the March lows in 2009 at 666.30 on the SPX-500 to Fridays closing high of 3,825! However, therein lies the problem that no-one wants to address this openly and logically; as there have been only two previous periods in history that have had the necessary ingredients to support a rising cycle of interest rates, inflation, and economic growth over an extended period; and this cycle has no such ingredients!

Ø  The first was during the great infrastructure cycle when the country became accessible from coast to coast via railroads and automobiles. America began shifting from an agricultural to a real industrial powerhouse economy; as we entered WW-I 

Ø  The the second cycle was post-World War II. As this terrible war left America the proverbial last man standing after France, England, Russia, Germany, Poland, Japan, and others were devastated (seems like we as a nation are bolsters via incessant wars). It was then that America found its most substantial run of economic growth in its history as the “boys of war” returned home to start rebuilding what they had just destroyed.

So, I hope I do not have to impress upon you that our once-great industrial nation is no longer the manufacturing powerhouse it once was, and globalization and massive corporate greed has exported our once decent middle-class and working-class jobs to the cheapest labor sources abound and now through robotics and almost endless technological advances that continue to reduce the need for human labor which in turn significantly suppresses wages despite massive productivity gains. Today, we see that the number of workers between the ages of 16 and 54 participating in the labor force is near the lowest level relative to that age group since the late 1970s. Worse yet my friends we have seen that a structural and demographic contagion continues to drag on real economic growth as nearly 25% of the population is now dependent on some form of governmental assistance a massive travesty in my opinion. So, without mixing words the ingredients required for a l sustained level of more robust economic growth and prosperity are definitely NOT available.

When the real economy is expanding organically, the real demand for capital increases as business increases production to meet rising demand. Increased production has historically led to higher wages (absent for the past 40+ years), which in turn fosters more aggregate demand. As consumption increases, so does producer’s ability to charge higher prices (this is inflation) and for lenders to increase borrowing costs. (Currently, we do not have the type of inflation that leads to more robust economic growth, just inflation in the real costs of living that weakens consumer spending, as we have seen rises in food prices, energy prices, rents and home prices, property taxes, education, durable-goods, health-insurance, and healthcare in general)! It is unfortunate that consumption that is dependent solely on increases in debt, or give-away stimulus programs, has a real negative impact on real growth. Currently, the so-called economic gurus being pranced about on CNBC hope and pray that with the “BS” so-called “Blue Wave,” more stimulus, massive new deficits, and infrastructure spending is soon on their way and that all will prosper. Goldman Sachs just upgraded their estimate of GDP (a bogus number) now based on the expectation of another $750 billion to $1 trillion-dollar deficit stimulus package.

The massive surge in deficit spending, combined with the pick-up in short-term demand for construction and manufacturing processes will only give the appearance of economic growth, and it will fade quickly, and such action will likely propel the FED and the “bond bears” on the wrong side of the very crowded trade. Mark my words my friends these “one-off” inputs into the economy will fade quickly after implementation as real organic productivity fails to develop (and the question remains will we be forced into this bailout economic trap). While many hopes these programs will lead to an ongoing economic expansion, a look at the past 40-45 years of fiscal and monetary policy suggests it will not (though the masses believe it will again be different this time)! Please remember from my past analysis and writings that you cannot create real economic growth when financed by massive deficit spending, massive credit expansion (debt enslavement) and a reduction in savings; all you can do is temporally create the “mass-illusion” for the economically uneducated of growth in the near-term, but the surge in massive debt reduces both productive investments and the output from the real economy [economics 101 my friends]. As the economy slows, wages deteriorate, forcing consumers to take on more leverage “debt” and decrease their savings rate (their disaster cushions and retirement). As a the result, of the increased leverage, more of their income is needed to service their reckless debt, which requires them to take on more and more debt becoming debt-slaves a very nasty vicious cycle! Of course, the bulls wanting and demanding more and more government and FED bailouts argue this time is different and inflation is NOT a real threat. 

Despite being the richest country in the world, food poverty has become a real problem during this Covid-19 pandemic. This will likely leave us with the next food inflation crisis “that is looming” as central bankers are mindlessly injecting a record $1.4 billion in liquidity into capital markets every hour. Soaring food inflation hurts the poor and working-class and will likely result in social destabilization; the question is where will it start?  

I am looking for a dollar rebound (DXY, UUP)!  Despite reassurance from lecherous central bankers has emboldening investors that have been feasting on FED locoweed for years now to add significantly to their risky assets (stocks, mostly zombie firms). Regardless of what he says Powell has confirmed the FED plans to continue their role as the great massive asset-bubble inflator and bullish market enabler. Every time the FED signals additional easing or that it will keep rates low well into the future it raises the ability of other central bankers to do the same and governments add to their fiscal stimulus packages. This is why those demonizing the dollar may be dead wrong as all fiat currencies that are under pressure from this expansion of the money supply.  Central bankers across the globe have been able to lower their rates (many into negative levels) or add additional stimulus without causing their currency would crater. The fact that so many loans across the world are based and loaned in dollars means countries and businesses must buy dollars to repay their ballooning obligations. In my opinion, this puts a bit of a floor under the deteriorating dollar!

Our proverbial US “drunken-spending-sailors” are carrying the world on our economic shoulders. Rather than pay rent, or making their mortgage payments, auto-payments, during the Covid-19 debacle as it seems from the exploding trade deficit numbers that we have seen that Americans are taking a significant portion of the bailout monies they get from Uncle Sam and buying imported goods.

Not only is the current FED policy totally uncalled for (JMHO) but it does little to strengthen the real economy or address our real ballooning economic problems. What it does do is continue to prop up asset prices, enabling zombie firms to remain alive and significantly encourage risk-taking and massive malinvestments.  Due to the artificially historic low cost of credit (and massive debt increases) and an unsustainable increase in the money supply...bubbles are forming everywhere.

Their actions these past 4-years suggests that the global the financial system was in big trouble even before Covid-19 entered the picture and the pandemic has been used to shift blame and focus away from the governments and central bankers that have implemented very flawed economic processes that enrich the elite/most-wealthy at the expense of the taxpayers and working-class. What we have been witnessing is not a failure of injecting enough liquidity into the system, but that liquidity is being diverted from where it is needed most. The idea more liquidity can make up for a solvency problem is unrealistic and turned failing firms into zombies. 

Unfortunately (unbeknownst to many) the market has reached what I believe is a massive tipping point where profits are no longer needed to generate a return on investments as crazy as thet seems. These Hindenburg type of bubbles represent a major disconnect from reality. Firms borrow money extremely cheaply (close to 2%) by issuing “BS” corporate bonds, then they use it almost solely for massive corporate stock buybacks and shareholder dividends, thus furthering the massive disconnect between the value of stocks and the economy that resides in the real-world!

The recent rise in stocks is also linked to the expected future economic relief packages (front-running) that will soon roll out of Congress. Also, the FEDs massive easy money policies strongly favor’s big business; resulting in the destruction of many small and medium-sized business (advanced by Covid-19). We have yet to see the massive economic contagion resulting from folks working from home will have office buildings vacancies or the total devastation online shopping has unleashed upon local retail property owners as the fact that many businesses cannot pay their rent or mortgage payments due to displacement and the Covid-19 pandemic has a significant lag time.

Reflect back on economic-101 in the Austrian business cycle theory, malinvestments are poorly allocated business investments, A strong case can be made that we already suffer from far too much leverage in our markets, and this rate reduction these past few years only encourages savers suffering from historic low-interest rates to take on more and more risk in search of higher yields. I have pointed out in many of my writing that historic low-interest rates do not extend down to low-income individuals with poor credit and far too many folks fall into this category. Instead, over time these historic low-interest rates fuel inequality and punish the poor and working class.  Government, FED, and Wall Street money is driving this trend. While retailers close and buildings go empty across the land new buildings are being put up on speculation and bogus public-private partnerships are plowing vast sums of money into projects geared to compete with those that already exist. the fact is all across our great land the FED is putting the small guy out of business.

At some point to reestablish true price discovery it will be necessary to break the well-ingrained habit of buying the dip. This method of investing has worked since October 19^th, 1987 wherein the Dow dropped 22.5% in a single daily session. That is the day the actions by Greenspam galvanized the mantras buy the dip and do not fight the FED. Greenspan did this by affirming the FED would be there to serve as the primary source of liquidity to support the economic and financial system as they were economic demi-gods. This new trading premise “buying the dips” is now fully ingrained in the robotic algorithms embedded deep inside the bot-computers that significantly too much of the stock market's action these days. 

Powell has repeatedly confirmed the FED and FOMC’s plans to continue as the great stock market enabler. As the massive rapid expansion of debt and credit during the past 12+/- years could not have occurred without the FED being extremely complicit.

 

Sent to subscribers last night

 

I sent this out last night to subscribers/readers 

Equality? Fairness? Logic? The NEXT market bullish catalysts...Just imagine how much higher markets can rally during the next pandemic (that kills 500,000 a nasty economic recession where 15-20 million lose their jobs or the next insurrection where the streets bleed red with American blood due to lies the ass-clowns perpetrate (like FOX-News); the rise of FED-zombie firms, the creation of more and more zombie firms...what a great market we have where the elite and most wealthy get enriched and Main-Street pays for it, and the working class gets deiminated.

Another day, another and some more sweet gains for the locoweed fasting bulls, as stocks ripped higher once more to push the SPX-500 above 3,800 for the first time, a cool 70% above its March lows.  Treasuries came under renewed pressure with the long bond yield jumping to 1.86%, leaving the 2-year vs. 30-year spread at its widest level since May pf 2017.  WTI crude rose to near $51 a barrel, gold even edged higher to $1,915 an ounce and bitcoin rocketed like a scolded cat touching $40,300 after residing near $36,000 yesterday, it settled down through the afternoon.  The VIX plunged 11% to settle below 22.5. 

There should be no huge mystery (if you listened to my reasoning yesterday) as to why the markets did not give a rat’s ass about what happened in the Capital yesterday, however disturbing, disgraceful, and embarrassing to us as a nation as it was. It is because it has no bearing on the direction of the economy, earnings, and interest rates simple right. 

 

Where is the outrage?

There was close to 4,000 yes close to 4,000 Americans died on 01-06-2021 from Covid-19 and its mishandling, and where is the outrage, as on 911; there were only 2,977 people who died, and we went to WAR; Yesterday a mob incited by King-Trump stormed the Capitol and since most were white, they were handled with kid gloves when compared with what happened with those who protested “Black-lives-matter” nevertheless, yesterday and again today the stock market managed posting new all-time highs.

 

1. Stocks: all-time highs

2. Home prices: all-time highs

3. Corporate bond yields: all-time lows

4. Mortgage rates: all-time lows

5. Fed: we need many more years of 0% rates and bond buying to boost asset prices & increase inflation.

6. Bitcoin: all-time highs

 

TSLA’s valuation vs. the other auto manufacturers!

[Toyota + VW+ Daimler+ GM+ Volvo+ Honda+ BMW+ Hyundai+ Fiat+ Ford+ Peugeot+ Subaru+  Kia+ Renault all combined]

TSLA Revenue: $28 billion vs Others $1.8 trillion

TSLA Market capitalization: $783 billion vs Others $780 billion

After a mixed bag from other soft self-serving (cheerleading) survey data so far, analysts expected ISM Services numbers to continue sliding lower in December, but instead the numbers took off like a rocket.

·         ISM Manufacturing surged to 60.7

·         ISM Services surged to 57.2 (smashing expectations of 54.5)

And all of that supposedly happened as real-hard economic data continues to deteriorate...The picture from the underlying factors paints a quite different picture with jobs tumbling...The ISM’s employment measure fell to 48.2 after showing growth the previous three months. The pickup in growth at firms that make up the largest part of the economy is surprising given the increase in Covid-19 cases and tighter business restrictions in some states. At the same time, the employment gauge contracted for the first time in 4-months, showing the ongoing drag in the job market from the pandemic. Aside from faster growth in business activity and orders, the overall index was bolstered by a massive jump in the supplier deliveries gauge. Similar to manufacturers, lead times at service providers may have lengthened because of pandemic-related disruptions to supply chains... how is that a positive??

 WE took several SHORT plays today; many are looking quite sweet

My turn wave market timing property indicators has forecasted a potential turn-window, and the technicals are getting significantly stronger, and it pointing toward a HUGE inflection period ahead, the window is tightening as we get nearer to the potential turn....and according to my wave analysis we have multiple waves converging and a major Inflection point & Fibonacci collision of price and time waves/patterns and Gann topping [Gann lines, are based on the premise that prices move in predictable patterns. Gann's theory is based on time/price movements] possibility hitting the overall markets on/between 01/08/2021 and 01/15/2021 and since we have been in strong bullish up-trend from the March lows its likely to be a bearish reversal wave...the monthly and weekly index charts are also buried in extreme over bought conditions as well!

This corrective wave could be (key-word is could, we never know what we do not know) be the start of a significant major Bearish corrective period ...my system and analysis is telling me that this could be a significant correction period lasting 21-29 trading days...with the potential for a slight retracement after the initial down-cycle then another downward corrective wave will likely play  

Ø  I am looking for a potential drop of  2000-3,000  Dow points

Ø  I am looking for a potential drop of    350 -  350  Nasdog points

Ø  I am looking for a potential drop of    250 -  285  SPX-500 points

Ø  I am looking for a potential drop of    175 -  200  Russell-2000 points