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2019-08-20 15:30 by Karl Denninger
in POTD , 1 references

Come and get it!  On sale!


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2019-08-20 12:26 by Karl Denninger
in Monetary , 129 references
[Comments enabled]  

It is quite clear that the United States and indeed world economies are facing a "foldback" moment among the developed world.

China and Japan are leading the charge.

The EU and, on a trailing basis, the United States, are following the Far East economies off the cliff.

This act of insanity can reasonably be called treasonous.  It's only not treason formally because we're not at war.


Rather than deal with the outrageous distortions that the Japanese government had put into the economy over a couple of decades when their "miracle" blew up the Japanese Central bank and government conspired together to try to 'lift" the economy.  It didn't work.  What it did do was keep a lot of people who should have gone bankrupt in business.  But the price of that was the literal destruction of their markets and vitality.  In maintenance of this charade, a hole that was dug deeper and deeper, the Japanese Central Bank now owns some 70% of all exchange-traded ETFs!  Get that one through your head folks -- of all the "bundled things" traded in Japan on the so-called "stock market" there is no longer a market; the Central Bank owns the majority of all "basket" asset-class listings.

Why even have an exchange under this paradigm?  Simply for optics, the loss of which might cause an instant and irrevocable panic.  How long can this be maintained?  Right up until too many people call bullcrap on it at the same time.

Now take China.  Their scheme has been both simpler and more-obscene.  They "financed" their "growth", which was mostly made possibly by stealing technology both overtly and through "forced transfers", with printed money backed by the government.  There was no entrepreneurial force, no risk of actual loss, and thus no reason for any sort of allocation of capital based on risk and reward.  Rather the strategy is to vacuum it all up to force the starvation of other opportunities and, if that doesn't work then since they're a Communist nation they can slap capital controls and censorship on anything or anyone they wish at any time.  Push comes to shove they'll run you over with a tank.

Back in the 2011 timeframe it was clear that the insanity in Europe specifically was going to result in hard defaults.  The rate of printing bonds beyond tax revenues was accelerating as always happens in an exponential series and since China was emitting currency, intentionally undercutting everyone else on exchange rates along with stealing anything they wanted the government response of "picking up the slack" rather than slamming the door on China's fingers with wage, IP theft, currency and environmental parity tariffs was quickly leading all of Europe in a spiral toward the drain.  The worst of it was in places like Greece, but even Germany was not that far behind.

Enter the ECB which declared that it would do "whatever it takes" -- well, what it "took" to temporarily stave this off was a monstrous bond-buying program and the destruction of the bond market in Europe, in that now you have an utterly enormous percentage of the government bonds there trading at negative interest rates.  This of course instantly destroys capital if you buy one and hold it to maturity.  But bonds are no longer used as a coupon source; they're now a speculative trading vehicle, destroying their essential purpose, which is to discount forward time preference for government expenditures.

The destroyed capital from negative issuance is of course filled by said governments, which makes it a self-reinforcing feedback system!  That is, the more bonds that can be "sold" at said negative yield the less the government ultimately spends as the yield goes further negative!  It's a very clever way of adding trillions of taxes via stealth while allowing the banks to play on margin with a 0% reserve and thus, as long as the trend continues, they make enough money to stay alive.

If you've figured out that this is a chimera and will blow up -- you're right.  It will.  But not before it cranks asset prices higher across the continent.

We're doing the same thing here.

You'd think asset prices going higher has no downside.

You'd be wrong.

Look at the stores closing around the country and behind many of those closings is skyrocketing rent.  Why?  Asset prices -- specifically, the cost of their building.  The cash value of an asset that is often financed is inversely controlled by the rate of interest on the money required to buy it.

Nearly all commercial real estate is leased.

The same is true for housing.  We all need housing.  While it sounds like your house going up in value is good it actually is bad unless you intend to die and leave not the house but the money to your heirs.  Not that even doing that helps, since your heirs will need somewhere to live too and the jacking of asset prices means their money disappears faster!  Indeed this is the classic lose:lose for basically everyone, because if I buy a house for $200,000 and later can sell it for $400,000 I still need somewhere to live and as such the replacement house has also likely doubled in price.  Further, as the value of said house has gone up so do, in most cases, the property taxes!

Now it is true that someone who gets older and can and wishes to "downsize" can capture some of that.  For example let's say I have a $500,000 house, which is 50% overvalued (that is, it should be $250k) due to these games.  If I am willing to cut the size of my house in half and thus buy a $250,000 house (or downgrade the quality of fixtures in the replacement, etc) I can pocket the other $250,000.  But -- I really did give up something to do that, and further I still overpaid -- that replacement house should have been $125,000!

Going the other way -- that is, upsizing, quickly becomes prohibitively expensive.  Want to have a couple of kids?  You need a bigger house.  However, you can't afford it when your existing house has gone up radically in price because the property tax has also skyrocketed and that hits the new place.  When you go to try to buy it you can't qualify -- the monthly nut including the rapacious property tax hit makes it impossible.  Oops -- no kids for you!

Of course the banks love this because a rapidly-rising market forces "urgency."  If I see houses on the market that sell in 12 hours then I'm prodded to buy that which really isn't what I want out of the fear of getting nothing at all.  This works well if you're a Realtor paid on commission but it's horrible for the average American.

If you rent then the impact of this crap is far more immediate, in that your rent starts going up dramatically. And why not?  The "value" of that apartment building doubled and thus the owner can refinance it and will.  However, that means he needs more money to pay both the note and the increased property taxes which means your rent goes up immediately and permanently.  You have no options in this case; you can't sit on the "appreciating" property as a renter and you're forced out when the rent escalation breaches what you can pay in a month.

There's a limit to this chicanery because wages have not doubled.  We're a services economy today.  As you radically increase the cost of necessary things like housing you will eventually crowd out all discretionary buying.  Today we're getting around that too -- with credit cards.  Credit card debt is skyrocketing and nobody in their right mind pays 18% interest in a world where you can only get 1% on your savings account.  Most of this debt is either foolishly taken on trying to "compete with Mr. Jones next door" or, much worse, is being taken on to buy groceries and pay the electric bill.  The "fervor" with which Apple's entry into the credit card business was met on Wall Street should tell you everything you need to know about this.

As a payment facilitator credit cards are useful.

As a means of financing they're financially suicidal.

There is a foldback point coming folks; all of this so-called "feeling" of wealth, especially in assets like housing, is very much a vaporous apparition.  The continued issuance of government debt and fiscal deficits eventually runs into the wall when the asset price appreciation that is forced into the market in nominal terms meets the reality of a lack of wage appreciation.

When this comes -- and it will -- what we'll see won't be a "correction."  It will be a crash with the worst of it coming in government "assistance" programs such as the medical scam.  If you are dependent on those programs when it occurs you're likely to wind up under a freeway overpass at best, and many will literally die.

That our government in this nation has attempted to "compete" through this competitive devaluation and money-printing process instead of slamming the door on the fingers of those nations doing it and allowing those companies who got in bed with these jackasses to suffer the consequences is, as I noted, just short of treason.

It soon is likely to not be, since historically-speaking the usual answer to these sorts of systemic collapses is war.

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2019-08-20 07:20 by Karl Denninger
in Editorial , 66 references
[Comments enabled]  

This pretty-much lays out the case...

His main focus today is Yuancheng, which sells chemicals both to the general public and to other businesses. It offers more than 10,000 different compounds, a vast and head-scratching list, everything from food additives (including synthetic versions of cinnamon) to pharmaceuticals (including the drugs used in Viagra and Cialis) to collagen, pesticides, veterinary products, anabolic steroids, and precursor chemicals used to synthesize drugs, including fentanyl.

Got it folks?

It's not just fentanyl precursors, although those are the "bad ones."  Well, maybe.  Steroids are pretty bad too, but not instantly.  Yet there's a hell of a black market for those here in the United States; they just kill you slowly instead of in a couple of weeks or months, but kill you they do.

If you really want to get down to brass tacks the best analog is the terrorist who wants to make a bomb.  He doesn't have the materials to make a bomb, but he wants a bomb.  So he goes out and tries to find people who will sell him the materials.

Many chemical substances have multiple uses -- for example, ammonium nitrate is a common fertilizer.  But if you're buying a ton of it and don't have a reasonable-scale agricultural operation of some sort questions may be in order, since you can make explosives with it too.  But these specific chemicals aren't used for other things -- they're really single-use, and their use is making fentanyl.

Fentanyl itself is relatively difficult to make from scratch.  But with the precursors it's trivially easy.  This is true of many drugs of abuse and is why, for example, they cracked down on pseudoephedrine pills in the United States, which you used to be able to buy over-the-counter in unlimited quantities.  Given enough of them it's pretty easy to extract the active ingredient and make crystal meth out of it, which can then be injected or smoked.  Nobody could possibly use the thousands of pills that were being bought for this purpose legitimately -- thus, the registries now that limit purchase quantities if you insist on buying the stuff for its original intent.

These folks simply don't care.  Further, they're deliberately mislabeling their shipments, which is proof they know the intent of the buyer is illicit at the point of destination.  Why lie about what's in the package otherwise?

There's no "trade deal" to be had with people who deliberately ship poisons into the United States and those governments who refuse to put a stop to it.

Don't kid yourself folks -- China is an authoritarian society and every one of these factories and company officials are well-known to the PLA.  They know when the average Chinese person takes a crap; it beggars belief that this is not an officially sanctioned and approved action by the PLA.

Get this through your head folks: The government of China is perfectly ok with people here being killed by extremely powerful opioid drugs that they allow to be manufactured and shipped knowing they will wind up here in the US and kill tens of thousands of people a year.

The PLA are suborning murder and they know it.  Tell me again why we're coddling Apple which decided to make their phones in the nation that is murdering our citizens.  Yeah, **** you Mr. Trump and your backpedaling to "save" Apple because they stuck their manufacturing in a Communist nation while Samsung did not.

Who's decision to put their manufacturing in a Communist nation was it?  That was Apple's -- so why aren't they solely responsible for the consequences of same?

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2019-08-20 07:00 by Karl Denninger
in Federal Government , 78 references
[Comments enabled]  

There''s only one good thing that can be said for lowering the payroll tax rate: It goes to a disparate degree to those of lower earnings.  That's because you stop paying FICA entirely at a certain point (which goes up every year) so lowering that tax, which is paid from the first dollar of earnings, helps low-income working people much more than it helps higher-income individuals.

The good news stops there.

FICA (Social Security) is not, as is currently claimed, on the verge of collapse.  It is, however, running a funding deficit -- that is, it pays out more than it takes in.  This is an intolerable situation if it does not have a reasonable actuarial end date because the system has Treasury bonds that it can redeem which holds the deficit impact down only until they're exhausted.  Then it shows up immediately and in full, and what's worse is that under current law the system cannot run a deficit so on that date you get immediate and permanent benefit payment reductions or Congress must remove that limitation.

Screwing existing and near-retirees by lowering the tax rate is inviting a few tens of millions of Americans who you will screw in a few years as a consequence to go hunting for Congresspeople and the President.  Not a few kooks here folks -- we're talking about hosing tens of millions of recipients.  For that reason the obvious decision will be to void the prohibition on Social Security being a formal deficit generator; to do otherwise would be to give tens of millions of Americans a reason to commit homicide, and in addition these are people toward the end of their lives, some of whom will judge that they have nothing to lose as their life has already been spent!  Those are pretty-much the last people you want to give a reason to kill you.

But if you want to create a fiscal crisis you could hardly come up with a better way to do it and make sure it shows up in 3-5 years than to further damage the fiscal balance of not only Social Security but, much worse, Medicare.  That program is already going to blow somewhere around 2024.  Depending on how this "cut" is set up that could be materially accelerated although at this point even a 33% acceleration is only a year (funny how that works when you get close to death, isn't it?)  I suppose you could make the argument that screwing those people (Medicare recipients) is less dangerous by quite a lot than screwing Social Security recipients generally, since those who actually use Medicare and thus would be hosed the worst are those who are too sick to kill you.  That's a rather coldly-calculated point of view, but I wouldn't put it past the people in the White House or Congress to structure things that way for that precise reason.

As I've said since Obama was elected and made clear he intended to destroy what little was left of the American fiscal picture with his Obamacare scam, and the implications that flowed from it for both Medicare and Medicaid, say much less those with jobs who either directly or indirectly pay for their own medical care, if you need medical care on any sort of routine, continuing basis and there is any way to stop needing that you had better have executed on it now.

I blew this whistle back in 2009.  It's ten years later.  What I see around me is more people that are fatter, more morbid, less-able and more-dependent on that medical system teat.

It's going to go away folks and the first place where it will go away is in all the expensive stuff because that's where the money is spent.  It's not the guy who's got blood pressure 10 points over where the doc wants it and is taking a $2/month pill for that.  The $2 won't kill him or her to pay out of pocket.  It's the person who has the monstrous medical or pharmaceutical bill monthly just to stay at some state better than confined to a bed or worse, six feet underground.

There are a lot of such people -- tens of millions of them.

There is an election coming up and buying votes is an age-old tradition in this country.  What Trump needs to do is collapse the medical monopolies which would be 15% more in everyone's pocket -- not a 2% payroll tax deduction.  But he won't, because big pharma and big med, much of which is really nothing more than private equity screwing you up the ass wholesale especially when it comes to hospitals and physician's practices are just as "protected" by Trump as they were by Black Jesus.

The core breach is accelerating.

Update: Supposedly this has now been denied.  Gee, you think someone looked at the timeline involved here and noted to Trump that if they do it the odds of his second term expiring before the fiscal health of the federal government goes to crap and civil order is lost when the EBT cards stop working will fall to near-zero?  Go figure.

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2019-08-19 13:16 by Karl Denninger
in POTD , 21 references


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