"Raise toner cartridges!"
"ChairSatan, they've blasted the laser printers and the toner cartridge is destroyed!"
"Use the keyboard -- the KEYBOARD!"
"ChairSatan, the margin is too great and the clerk is on line 1 with terms for your surrender...."
Last night Japan imploded, down over 1,100 points.
Helping accelerate the decline was the China PMI which was under 50 (negative, that is), throwing cold water on the China will save the world crowd. In point of fact, China has been losing their battle with credit games for over two years -- but these sorts of shifts take time to come to fruition.
Let us remember that margin debt has risen to outrageously ridiculous levels. This means that the clerk is going to be making some calls, if they haven't already started being received.
As I have said over the last couple of months this has the nasty feel of still air just before a big tornado comes ripping through -- or like 2007, or like early 2000.
Not only is margin debt ridiculously high, much of which is likely out to hedge funds (speaking of which, how many piled into that Japanese trade, turning the crank on their leverage as "profits" expanded) and now are looking at losses that are likely in the 5-7% range over one night? I'll bet the list contains a few names and well-known ones.
CNBC is pumping just like they were last time... and the time before that. "The declines are not nearly as bad."
Who remembers that in 2007 the same pattern initiated, with the Asian markets leading.
Then the losses were "magically" recovered and the market roared higher, finally posting its apex in the fall.
Today the market moves much faster. I would not be even slightly surprised if the instabilities that central banks have intentionally put into the system go "prompt critical" this year.
I'm sure there will be many who will dismiss this as "Oh that Denninger, he's just a perma-bear."
My riposte is simple: While the extraordinary madness of crowds can take manias much further than anyone could ever believe, the math is never wrong.
I've been warning people that all is not well in the world.
This morning I'm standing on the red button.
We are, right here and now, sitting on key support for copper. If it fails, and given the pattern I believe it will, we're going under $3 and could see an all-on crash in copper prices.
Why is this important? Because it's a measure of industrial demand -- that is, industrial production on a global basis.
Europe is a damned basket case. That their markets haven't collapsed are testament to the litany of lies promulgated by central bankers and politicians. But lies only are effective for a while and always eventually lose their luster.
Portugal is out of money. Spain's pension system is effectively all in Spanish government debt; zero diversity. Ireland's banking system, along with most of the rest of the continent, is about to roll over again and the idiots over in Europe, just as here, refused to force their banks to take the bogus leverage and swap crap out and shoot it after 2008. Politics trumped arithmetic -- for a while.
But politics never wins over arithmetic in the end; it is a poor substitute for fact.
There will be more intervention -- that much is a certainty. But note that even big companies like P&G are now extending payment for suppliers; the firm now wants 75 days to pay. What happened to 2% 10, Net 30? I'll tell you what happened to it -- it disappeared in a puff of bogus accounting games and "machined" earnings. When huge corporations start playing this game the end of the line has arrived.
Buried in that article is a nasty little ditty -- major companies are now taking 60-100 days to pay. That's outrageous.
What's worse is the so-called "earnings surprises and beats." Never-mentioned is the fact that companies have been buying back stock like crazy over the last few years, often with borrowed money rather than operating earnings. That is, they're increasing leverage and then so-called "analysts" are screaming about how "cheap" their stock is. In a word:
Now we have a problem. The economy has rolled over in Europe and they are locked in a deep recession fed by Germany and to a lesser extent France -- nations desperate to prevent their banks from being exposed as grossly insolvent. The ECB is going along with this because it has more worthless bonds in the kitty than its capital, which means that it is insolvent too.
The premise that Bernanke and the ECB have run is that low rates and "QE" style games will prompt a "recovery." Five years+ into this mess that is now known factually to be a blown thesis!
But admitting the truth means accepting that we have in fact been in a grossly ugly recessionary -- or even depression -- environment for the last five years that has been intentionally and fraudulently covered up by artificially low rates, market distortions and deficit spending enabled by the chief drug pushers themselves. The political implications of doing that are unacceptable, so it doesn't happen. Not here, not there.
It's not helped by the fact that "new math" doesn't bother to explain how exponents work in the real world despite the fact that every single 8th grader in the world should instantly recognize that the games being played both can't and aren't working.
China stoked their idiocy with ridiculous building for which there is no demand. All of that was fueled with cheap credit too, which is even easier to make happen in a communist nation. But the economic "expansion" that enabled this to happen without the BS ball going up and exploding is now slowing down as the weight of this lending presses its thumb on the scale. Within the next year or two that bubble should burst with catastrophic consequences. Never mind the internal and demographic problems.
Japan, for its part, thought it could "QE" its way to prosperity. The irony is that they have thought this for 20 years and it has failed. Their "big experiment" will also fail; their problems are structural and attempting to evade the decisions of 20 years previous in turning their banks into zombies -- exactly as we're doing here and Europe is doing there -- cannot be backed out of the equation. There is a small element of panic showing up over in Japan already and that's likely to grow.
Add to all of this the quiet repeal of the immediate disclosure portions of the STOCK act here in America a few days ago. That's right -- while America was watching people get their legs blown off in Boston our Congress made "sorta legal" once again insider trading by.... Congress. The "debate" over this change took a literal 10 seconds in the Senate and a whole 14 in the House. Neither chamber bothered with debate at all; it was passed by unanimous consent in both chambers.
All of those who claim to stand for transparency and proper government, including the man who I publicly supported for Congress in Michigan -- Kerry Bentivolio: Go **** yourselves. This is exactly the reason that nobody should respect any member of Congress, ever, period. Unanimous consent means just that -- each and every member of Congress stands guilty of not only accepting but explicitly supporting insider trading by Congress.
One final fact: Artificially-low interest rates actually hurt lending. Why would you lend someone your capital for less than a reasonable return? There's only way you'd do that -- if someone else was backstopping your supposed "lending." That's what printing credit is all about if you're "too big to fail", but the fact of the matter is that the cost comes out of everyone's pocket and as a result real firms with real prospects for real performance are shortchanged and those who would either be lenders at a market rate of return refuse to engage in the market.
Worse, those with good ideas refuse to hire and build businesses because those people, who actually can perform basic arithmetic and understand exponents, know they will get hammered to pay the bills for those who got uneconomic loans and will not be able to pay.
In this environment actual economic growth is factually impossible.
"Here it comes."
This needs little explanation, really.
Simply put, CAT is almost-certainly right given Copper's view of the economy on a forward basis and the rest of the equity market is probably wrong.
Sell in May?
You might be a bit late by then.
The DOW hit "all-time new highs" all last week.
Isn't it redundant -- and stupid -- to use "all time" and "new" in the same phrase?
Yes, it is -- and about as stupid as believing in this "rally".
The facts are that last night Japanese machinery orders fell 13% in January, despite the Japanese government pledging to "beat deflation" with new monetary operations (read: printing money) that has driven the Yen weaker by some 20% in the last couple of months. That move started in December and as such should have been reflected in January's order figures -- if anyone believed it in Japanese business.
They clearly don't.
Then there's China. They have a major property bubble problem, which is what always comes when you start printing cheap "money" (really credit) and allowing it to go into the real estate market. In China's case it's built to the point of literal cities with nobody living in them. That will eventually burst, and when it does you've got trouble. China has the "luxury" of having an effective command economy since they're a communist nation, but even that won't change the laws of mathematics.
Finally we have Europe. It's a basket case. Europe has failed to deal with its banks, it has failed to deal with its budget deficits and it is still trying to find a way to "pull forward demand" to fill fiscal holes. It's not working because it can't -- the leverage was never taken out. Not there and not here.
We're "printing" $85 billion a month and yet can only muster a 0.1% GDP print? Let's assume we manage to "rebound" and get a 2% GDP number. We're diluting purchasing power by ~8% annually! Where is that going? Right into the middle class and below's pocketbook; like a thief in the night it comes and steals their buying power and that ultimately has to reflect in what they purchase -- and thus what people sell.
There are those who argue that the housing market has "turned." Really? Look at Las Vegas, where there are tens of thousands of homes sitting with people in them who haven't made a mortgage payment in three years! The banks can't foreclose as they can't produce the paperwork and state law was passed forcing them to do so. The hedgies have come in and bought up what little inventory there was, squeezing rents. How's that going to end when the consumer has a rapidly-deteriorating purchasing power with which to pay rent? Meanwhile consumer sales look ok for now, because all those non-paid mortgages lead to $100 million or more in retail sales that otherwise would not be made -- if I'm not paying a $1,500 a month mortgage and living "free" I sure as hell can afford a new car or a few pairs of new shooz. The key question: Is this a stable environment or is it another bubble that will bust when cap rates fall? And if the latter, and you erroneously bet on a "housing recovery", are you going to get reamed twice in a decade?
As for equities it all comes down to profits. They've been climbing in the last couple of years. But much of this is pulled forward purchasing power from non-made mortgage payments along with an unprecedented bout of whip-cracking on the backs of workers scared to death to lose their jobs into a crap labor market. Productivity gains either show up in better prices or better profits -- this time it's been better profits.
But now that trend has reversed and productivity and labor costs are going the wrong way. This is going to accelerate in a massive way, as Obamacare is hitting this year and next and for many firms, especially those with young and healthy workforces, it will double their health expenses. This is in exactly the worst place for it as youth already have a terrible employment situation -- this is likely to drive that segment's unemployment north of 25%!
The regional Fed surveys all showed an incoming recession starting last August. These indicators are usually 6 months early. What time is it?
Could they be wrong? Sure. Show me the data. Not the stock market, the economic data. There has been no change in employment statistics that have been positive. Let's look simply at the non-adjusted "employed" figures for the last four months and compare against last year.
In November 2012 we lost 490,000 jobs. In December, 489,000. In January, 1.446 million. And last month we gained 614,000.
In November 2011 we gained 83,000. In December, we lost 389,000. In January, 737,000. And in February 2012 we gained 740,000.
Which is the better set of four-month statistics?
What's the trend?
The shift, incidentally, happened in November. Up until that point employment had been mixed, but there were two months in 2012 -- September and October -- which had been markedly better than 2011. I noted it at the time and that it might be a trend change.
This is exactly what you'd expect given the Fed surveys, as they began softening in August. It takes a couple of months for people to recognize the trend change and react with their hiring -- or lack thereof.
In the end folks stocks are all about discounted cash flow from dividends. That's it. The buyback craze is amusing to watch; it builds short-term price changes on the back of leverage and people forget that they amplify losses as well as gains. They are also a declaration that management has no good place to invest operating profits, which is the worst thing that can happen to a business in terms of long-term prosperity.
In short what we have here is a market that is levitating upward not due to an improving macro environment but rather due to Fed monetary games. This can and has worked for a while, but like all sleight-of-hand games it cannot continue forever, and won't. The structural imbalances that have been built over the last four years set the table for a snapback move worse than 2008.
This morning CNBS is playing a card that we "should" put forward fiscal policy mirroring The Fed's views. These clowns actually believe that the laws of mathematics have been repealed?
Give me a break. The guy who decides he doesn't need more than 2 hours of sleep a night and starts shoving coke up his nose to achieve that outcome may indeed produce more work with less sleep and appear to be more productive.
For a while.
But eventually he has a heart attack, and the question becomes this: What are you going to do when you collapse due to the abuse you have heaped on your body and now are able to produce nothing?
Our economy is experiencing chest pains and rapidly-escalating amounts of coke are going up the nose on a daily basis.
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