.... the gathering gloom.

Plenty of people -- including obviously the stock market and its commentators -- believe everything will be ok.

Deficits don't matter.

The government cannot go broke.

There will never be a loss of confidence.

I travel quite a bit.  Like most people I have my habits -- places I like, things I go to do and if I enjoy them I'll go back and do them again.  This means I see patterns and, unlike many, I tend to notice them immediately.  Perhaps its a blessing -- or perhaps a curse.

I just got back after one such trip; one I've made before and Sarah and her boyfriend both came as well (her boyfriend has not been on this trip before, but she certainly has.)  They traveled separately but we met up and had a good time.

If you're in the market you ought to be making up a big fat list of things to be short -- or at least be out of the things you've had and are long of, particularly when you can get a 5%+ risk free return in the short end (the 13 week bill, for example) of the Treasury market.  I was stunned at the deterioration I saw in consumer behavior from just a month or so ago on my prior trip, and gob-smacked at the change over three months or so back when Sarah and I were out at Wolf Creek, also a place I like to go on a repetitive basis (for skiing, of course.)

There was evidence of it then on our travels which were over a large part of the same path we took back in September for our trip out to the Grand Canyon.  That which was jammed full was not, and yet there wasn't a serious price delta between those two trips; that is, while there had been lots of inflation over the previous couple of years (and it was obvious) there wasn't anything that was a sort-of "trigger moment" associated with the change, and being winter .vs. late summer, ok, maybe it was seasonal and frankly, the delta was small.

This time it wasn't small and in addition there were serious price hikes that were attempted -- and appear to have had an instant impact.

I'm talking about sit-down fast-casual places I like when traveling and lots of others do too in that they're always slammed to the point that if you want to eat there during the dinner hours I hope you like their "get a sort of reservation on their app" thing or sit at the bar if its just one of you -- because if not you might be waiting an hour.

Well, that was gone.  And not a little gone either.  The place had plenty of tables with no wait and the parking lot had lots of spaces too.  But it wasn't one place -- on the way home I stopped at another I've been in a dozen times over the last five or so years, again, at dinner time, and a third of the tables were empty.

But what else was shocking?  A roughly 40% total price increase over a couple of years ago and of that 10+% that just got tacked on with all the menus having just been reprinted in the last couple of weeks.  It appears that last grab for cash finally hit people's pain points and they stopped showing up.

I also saw "fast food" style places co-located with fueling stations on the highway shuttered and boarded up -- and that's entirely new, and of other chains I pay some attention to during the same times in the afternoon and evening their parking lots are half-full or less.

Yes, this is "shoulder season" -- or is it?  Not really.  Its graduation season and a lot of people are in fact traveling for precisely that reason; in another few weeks it will be the start of "traditional summer" with Memorial Day.

Folks, there are no rate cuts coming because there can't be into this government spending level without an explosion in inflation.  Without taking on the place in the federal spending game where all the money is going (that's health care) there is no fix.  Attempting to work around it with more offshoring, more robots, more data centers (and "ai" in them) and similar won't work either because you can't print money -- you can only print credit and to obtain money someone has to do something of value for someone else in excess of its costs.

When costs ramp that excess closes and eventually goes negative -- and at the point it does that activity becomes uneconomic.  If you continue to do it through various machinations such as the government playing handout games you run the risk of an exponential runaway and collapse.

But what you should keep in mind is that never in reasonably-modern history do markets let you get to that endpoint.  They didn't in 2000 or in 2008 either.  All the hollering about "subprime being contained" proved to be nonsense; the underlying bubble that "supported" the charade was seen through before the endpoint and the market imposed its own view of things whether policy makers liked it or not.

Mature fast casual dining and chip companies selling for 70x earnings are fantasy-land nonsense and yet both are the case right here, right now.

I get it that nobody likes the implications of prices having to collapse by a third to come roughly into line with incomes, but its fact.  Further its at least double that in the capital markets because common stock always has an element of leverage in it (otherwise why would it sell at a "multiple" of earnings at all -- and yet it always does, does it not?)

The believe that The Fed "must" or "will" step in and prevent such a reversion to the mean is absurdly common -- after all, they have stepped in through the last two decades (or even more) but in doing so each time they've made the imbalance worse and now the exponential nature of such deficit spending and debt load are here rather than a future problem.

For those who believe that it will "never fail" or worse, that you'll get plenty of warning before something serious breaks I have three words for you:

SOLD TO YOU.

The insanity coming out of "financial media" on the GDP report is amusing -- but not surprising.

Real gross domestic product (GDP) increased at an annual rate of 1.6 percent in the first quarter of 2024 (table 1), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2023, real GDP increased 3.4 percent.

Here's the basic problem in this report -- the last three reports are a declining trend and the Q3 2023 number looks like a pull-forward rather than an acceleration in growth, as the overall trend from Q3 2022 looks like those two interim reports were people having "one last party."

The increase in consumer spending reflected an increase in services that was partly offset by a decrease in goods. Within services, the increase primarily reflected increases in health care as well as financial services and insurance. 

Health care and insurance are not discretionary purchases and this is extremely bad news economically as it wasn't absorbed; it  came out of everything else.

Oh, and as for inflation?

The price index for gross domestic purchases increased 3.1 percent in the first quarter, compared with an increase of 1.9 percent in the fourth quarter (table 4). The personal consumption expenditures (PCE) price index increased 3.4 percent, compared with an increase of 1.8 percent. Excluding food and energy prices, the PCE price index increased 3.7 percent, compared with an increase of 2.0 percent.

ALL of these figures, including core, are well above target -- in fact, approaching double said target.

These are extremely hot inflation numbers and they're in non-discretionary purchases which nobody can get around and extremely sticky too as car insurance is typically a six-month term with property insurance renewing annually.  There are lots of reports of 20% increases in insurance costs for autos and homes -- and in many cases they're actually higher, and this is among people without any claims.  I'm seeing it here, and I'm not in a high-risk area.  If you are, or in a place where various government policies have driven up loss rates (e.g. uninsured motorists) then you may be looking at doubles and again, no insurance means either no driving or running the risk of driving on a suspended license which, when you get caught, will mean SR-22 policies to get reinstated (and don't ask the price -- its eye-watering.)

If you're still in the camp that rates are coming down this year you're wrong.  No they're not with price indices going up like this, and yet that has been the mantra for the last six months+ in the asset markets.

I'll take the under on that and that nice, safe 5%+ in the short end of the Treasury curve looks real good compared with a likely 30%+ loss in equities or (much worse, due to it being illiquid) Real Estate.

The lie factory in the media continues with regard to the economy and markets -- and it's you who take it up the chute.

Lawmakers on both sides of the aisle have recently criticized stock buybacks, including Sen. Chuck Schumer, D-N.Y., and Sen. Bernie Sanders, I-Vt., in a New York Times op-ed and Sen. Marco Rubio, R-Fla., in a tweet storm about his plans to release legislation on the subject. As the Tampa Bay Times notes, this is something “you might expect from Bernie Sanders or Elizabeth Warren, but not necessarily the Florida Republican.”

These objections to stock buybacks are, in a word, misguided. Critics’ complaints rest on the premise that they maximize shareholder earnings to the detriment of workers and at the expense of investments in the company. But this reflects a fundamental misunderstanding of how stock buybacks work and what drives business leaders’ decisions about spending profits and deploying capital.

False.

My complaint with them is that they are frauds.

Faux Snooz continues:

When a company turns a profit, one basic way to address the balance is to buy back shares; it’s a common mechanism for companies to distribute earnings to shareholders. The alternatives are to increase investment or pay out more in dividends, the latter of which is functionally identical to buying back shares.

No it's not.  Leaving aside tax differences, which are significant, the financial and market impact of buybacks is not functionally equivalent to a dividend.

When a company pays out dividends the total number of shares does not change.  Therefore the EPS does not change either for a given level of earnings.

If you earn $1 billion dollars and have one billion shares then the EPS is $1.00.  If you pay out half of that billion dollars in dividends then the EPS next quarter, assuming you still make a billion dollars, remains $1.00.

Now let's assume you take that half-billion and buy back shares.  The denominator gets smaller.  This means that for the same billion dollars in earnings next quarter (the size of the company hasn't changed) the EPS goes up.

This is a major functional difference.  It sounds like a free lunch to many people -- EPS goes up and since the "P/E" ratio is a common way to value stocks the instant effect on P/E is for it to fall, and thus price per share will tend to rise to make P/E the same.

This sounds like a buyback is superior to shareholders, and thus ought to be not only permitted but every firm should do it instead of issuing dividends.

If only it was that easy.

If only Unicorns that crapped out Skittles existed.

If only.....

When you reduce the denominator it is true that EPS goes up for a given level of earnings.  But so do the losses per share when there are losses, and by an exactly equal amount.  In other words market violence, which is called "volatility", associated with said firm's results increases exactly at the same ratio.

There is no free lunch in this regard.

Second, however, and the reason that buybacks were generally illegal before the government changed the rules is that this fact is actively hidden by everyone involved -- on Wall Street, in the media, in earnings reports and the statements made by everyone involved.

Why would all these people intentionally mislead the public?

Simple: They use buybacks as a mechanism to rob you as a shareholder.

Let's take a hypothetical company that issues 1,000 shares of stock.  We'll make it nice and small.  The insiders -- that is, the founders, mostly, and other key people at the outset hold 250 of those shares; they sell the rest of them to the public.  (This, by the way, is another scam that is commonly run -- companies sell a minority of shares to the public by one means or another and thus prevent the public shareholders from ever voting out the officers and directors!  That's fraud because such a firm is not publicly-owned and ought to be flatly illegal in the so-called public markets -- if you wish to do this you ought to be limited to selling to accredited investors who understand what's going on and are willing to buy what amounts to a private placement with no voting rights -- because that's what these companies are!)

Ok, so we have our 1,000 share company with 250 of them held by inside executives -- probably half of that 250 is held by the founder who is frequently the CEO.  All good so far; the other 750 shares are enough that you, along with the other public shareholders, can vote out and eject the CEO and board.

Now the company runs and makes a profit.  So what the board does is vote to buyback 100 of the shares in the public market.  What just happened?

The public's interest of 75% of the company just got cut; the insiders held 25% but now they hold 28%!

It doesn't end there.  The 100 shares gets bonused out as "restricted stock units" to the officers and directors!  So the total number of shares doesn't decrease; now there are 350 shares in the hands of insiders and only 650 in the hands of the public.

Do this for two more years and the public no longer has any control over the board or executives since they are now a minority and cannot vote anyone out!

You just had control of the company stolen from you.

The same strategy is sometimes used by closely-held firms where you have outside minority shareholders.  The reason you have to be an "accredited" investor to buy such a position is that it is very easy for the majority holders, who are usually the founders and running the place day-to-day, to steal from you and absent some extremely strong controls you have written into the bylaws of the company if and when it happens there's damn near nothing you can do about it.  Unless you're very savvy and insist on such as part of your deal you are open to a rank ramjob that will diminish your investment by an arbitrary amount as soon as the insiders decide to screw you.

There is nothing in the law, for example, to prevent the majority holder of such a firm who is the CEO from voting to bonus out more shares to himself as part of his compensation.  This dilutes your ownership interest and as a minority shareholder you can't vote a stop to it.  The only hope you have is to sue and you will probably lose so long as the firm can show that it's making money and the executive(s) who got the bonus are substantially why it's making money.  In other words you're almost certain to take it up the pooper with exactly zero recourse, and if you do sue not only will you almost-certainly lose the company defends against your lawsuit with what is ultimately your money since it comes out of company coffers and not the CEOs personal checking account.

Stock buybacks where the executives and other insiders are getting share grants are the exact same scam played out in the public markets.  The claim that it "makes value go up" is a lie.  Until you sell your shares all you have is numbers on a screen; the lower the float in a given firm (that is, the fewer shares outstanding) the less-likely you can sell them without moving the price downward, and thus your so-called "gain" is likely to be illusory.  In addition you permanently give up your voting control piece by piece until you have effectively none; while you may still own the same number of shares the public ownership of the whole is reduced and at the point it reaches less than 50% you have no voting control whatsoever.

Buybacks, in short, are nothing more than a parlor trick.  They look real good so long as the economy is very strong and there are no recessions.  But as soon as the inevitable downturn comes you discover that not only are losses magnified exactly as are "earnings" but you have had your ability to throw management out on their ear either diminished or completely destroyed by an under-the-table trick at the same time.