This past week (I’m writing Saturday afternoon) was a perfect “new normal” period, in which essentially all news flow was violently negative, yet TPTB made sure “markets” suggested otherwise. To that end, I last month discussed how “oil, Greece, and the Fed” were the three most dangerous near-term market factors; and since then, the headwinds surrounding all three are significantly direr, with no end in sight.
In Greece, to call this week’s Euro Group meetings an unmitigated disaster would be the understatement of the century, as it devolved into name calling, petty threats, and Greece trying to pull the wool over its creditors’ eyes. Even perma-cheerleader Barrons‘ headline this weekend blares “Greece needs a miracle to avert financial disaster”; while sadly, it’s not just Greece, but the entirety of Europe. And trust us, when the inevitable “Grexit” occurs – likely, by summer’s end – the political, economic, and social ramifications will be as “unmanageable” as they are catastrophic.
In the oil markets, the newly formed, U.S. government led “oil PPT” – whose footsteps have become as blatant as the gold Cartels’ – is desperately attempting to “save” the only industry that has produced (high-paying) jobs, profits, and economic growth since the 2008 financial crisis. That said, WTI crude is still just $57/bbl, down 50% from last summer’s peak; and given the high cost, massively leveraged nature of the majority of shale producers, one of the top executives at Weatherford International – an oilfield service company I covered for many years on Wall Street – claimed at least half of all U.S. fracking companies will be bankrupt by year end.
Despite the largest rig count plunge in U.S. history, lower 48 oil production remains at a record high level – and is expected to remain there for months to come, given the utterly massive inventory of uncompleted wells waiting to come on line. Meanwhile, U.S. crude inventories aren’t just at an all-time level, but have literally surged “off the charts.” And each day oil prices remain this low, the pressure on financially strapped frackers to monetize those wells becomes stronger – particularly in light of U.S. government tax incentives set to kick in this summer. Meanwhile, OPEC kingpin Saudi Arabia not only is producing at its highest level ever – from its highest ever rig count – but claims to have zero inclination to reduce production any time soon. Throw in the likelihood of perhaps 1.5 million barrels per day of Iranian oil hitting the market later this year, and you can see why Exxon Mobil’s CEO this week predicted oil prices would remain subdued for several years. Which, frankly, would simply keep them in synch with the horrific supply/demand imbalances of essentially all industrial commodities; including lumber, aluminum, coal, and iron ore.
And then there’s the Fed, which this coming Wednesday has yet another “momentous” policy setting meeting. At its March 18th meeting, the Fed set “new lows of idiocy and cluelessness“; in validating the “most unequivocally dovish FOMC statement in memory” – issued by Whirlybird Janet in her February 24th “Humphrey-Hawkins” Congressional testimony – yet kowtowing to the horde of Wall Street/MSM “recover-ists” by taking the word “patient” out of the actual statement. In its place, they simply said ‘consistent with our prior stance of being patient, we don’t expect to raise rates at the April 29th meeting’; but given that the economy has since weakened dramatically – mythical “bad weather” and all – they have put themselves in the odd corner of having to say at each meeting that they won’t raise rates at the next. In other words, unless the 120 taxpayer funded lackeys at this week’s meeting can wordsmith a better way to dispel the notion of an imminent rate hike, yet continue to hold out hope of its possibility, the odds-on favorite for this week’s language will be “consistent with the near-term concerns noted in our March 18th policy statement, we don’t expect to raise rates at the June 17th meeting.” Of course, how they handle the topic of low oil prices, Greece, and the ambiguous “other factors” they have cumulatively blanketed to be “transitory” is another issue altogether. Not to mention, as – “coincidentally” or not, the first look at first quarter GDP growth, which their own tracking model has pegged at ZERO – is scheduled to be published at 8:30 AM EST, just 5½ hours before dissemination of the updated policy statement.
And then, of course, there’s the newest “pink elephant” in the room; i.e., the massive, 1999-like equity bubble the Fed has inadvertently catalyzed. Or more accurately, the Fed, the ECB, the BOE, the SNB, the BOJ, and the PBOC. Even the Venezuelan stock market has gone parabolic, Weimar Germany style; and it’s only a matter of time before the real losses being “enjoyed” by Venezuelans, care of the collapsing Bolivar currency, are shared by citizens of “first world” nations like those in Europe, Asia, and North America.
Again, here at the Miles Franklin Blog, we can’t emphasize enough that we are NOT financial advisors; and thus, NOT making market predictions or recommendations. And when it comes to global equities – and sovereign bonds, for that matter – when we claim conditions are ripe for the “crash to end all crashes,” we are simply referring to the aforementioned real losses that will inevitably be visited on the most objectively overvalued markets in history; as inevitably, no matter how much money Central banks print – or how much “support” markets are given, overt or covert – “Economic Mother Nature” always asserts herself, and always wins.
That said, at some point one would have to be silly not to acknowledge that not only have equity valuations exceeded the 1929, 1987, 2000, and 2007 highs amidst the worst economic environment of our lifetimes, but so has margin debt, M&A activity, and countless other tell-tale signs of a speculative bubble. And whilst retail participation in the U.S. (and likely, Europe and Japan) is near all-time lows – explaining CNBC’s lowest ever ratings – in China, it has now reached full-blown mania proportions. Frankly, had I seen what I’m about to show you when I wrote last week’s “one chart that says it all” – of the parabolic growth of financial “bubbles” in general, as measured by valuations two or more standard deviations above normal – I would have had to re-write the article entirely. As, care of the People’s Bank of China’s complete lack of “sophistication” in managing bubble inflation, in just nine months’ time – amidst the utter implosion of China’s economy – it has replicated the entire experienced of late 1990s America, and then some.
Here in the States, I have long written of the “deformations” – to use the great David Stockman’s description – caused by four decades of unfettered money printing and financial engineering – including the massive oversupply destined to plague the global manufacturing industry for years to come. However, even these horrific issues are rapidly being overshadowed by the deformation of financial markets; as at this point, essentially every metric of valuation, leverage, and sentiment has far exceeded those of the 1929, 1987, 2000, and 2007 tops. And again, as opposed to each of those “roaring” economic times, America’s economy is at its weakest of our lifetimes – featuring exploding debt and entitlements spending; flat lining GDP; a four-decade low in real income; and oh yeah, zero interest rates for the past seven years. Let alone, amidst a terrifying global environment featuring plunging commodities and currencies; the potential for major wars in the Middle East and Ukraine; the perhaps imminent break-up of the European Union; and an accelerating “de-dollarization” campaign led by dozens of angry, Anti-American nations.
Even so, watching the tech dominated NASDAQ surge past its internet mania high despite the entire index – “ex-Apple” – anticipating declining earnings; accompanied by the S&P 500, where earnings and revenue “misses” are hitting new post-2008 highs; biotech stocks with not a prayer of ever earning a penny; and even the Russell 2000, comprised of the smallest, most speculative stocks imaginable, I can only watch with incredulity. Let alone, as staid restaurant chains become internet stocks; and money-hemorrhaging garbage like Tesla, amidst record low electric car sales and plunging oil prices. Quite obviously, as I have been cataloging for the past three years, the omnipresent PPT is the single biggest reason history’s most pervasive “buy the dips” mentality has been ingrained into investors’ consciousness. And with each passing day, the algorithms utilized to create these hideous deformations become more and more obvious – from the “dead ringer,” to the “hail mary,” to programs specifically programmed to correlate with the Yen, VIX, and other isolated markets. Always bullishly, of course; as opposed to gold and silver, where the paper ETFs, futures, and mining stocks “representing” them are constantly tied to whatever market happens to be falling at the time. This, by the way, serves a dual role – in not only smashing PM prices and sentiment, but providing fodder for the MSM to “write it up”; one day, for instance, claiming “gold down due to surging dollar” – and the next, “gold down due to plunging dollar.”
Yesterday, the aforementioned, massively bearish Greek and oil news engulfed the headlines whilst the PPT was doing everything in its power to generate a new S&P 500 all-time high; much less, the much less than expected, 0.2% decline in durable goods orders, once government defense spending is excluded. To that end, non-defense, ex-aircraft durable goods orders have now fallen for seven straight months, with March’s decline being the worst in nearly three years. But it’s not just the absolute level of stock prices that’s so scary, but the gutting of corporate America in its pursuit. To wit, we have long discussed the catastrophic long-term ramifications of the secular decline in U.S. capital expenditures – replaced by cheap-debt financed stock buybacks, incentivized by company-destroying stock options and the selfish desires of ruthless “activist shareholders.” However, it’s far worse than that; and kudos to Stockman for his fantastic descriptions of fraudulent earnings; insane M&A valuations; and shareholder value destruction; as epitomized by this week’s unbelievable surges in McDonalds stock, simply due to announcing “plans to announce” a corporate restructuring; and, in true 1999 style, the overnight “re-making” of Amazon.com into a new age cloud company, as it reported yet another quarter of horrifying losses in its core retail business.
Yes, my friends. All the signs are there, that this has become a full-blown, global stock (and sovereign bond) bubble – orchestrated entirely by Central bank money printing; overt and covert market support; and the psychological implications thereof. And this, amidst the worst economic environment of our lifetimes, getting worse with each passing month. And of course, per the title of today’s article, said Central banks have not only lost much – if not all – of their credibility since the 2008 crisis, but have also used up their “ammunition” to fight further crisis, having already exploded their balance sheets and taken rates to zero – or lower – long ago. And for the icing on the bubblicious cake, none other than “Nobel Prize winning” economist Paul Krugman officially blessed history’s most destructive financial mania this week, in making perhaps the most un-Nobel Prize worthy statement ever; i.e., “bubbles may be necessary to make up for insufficient demand, high unemployment, and sluggish growth.”
And one more note, off topic, before I go. Late this week, Eric Sprott’s PHYS and PSLV gold and silver bullion closed-end funds have made a $900 million hostile bid for Stefan Spicer’s GTU and SBT gold and silver bullion closed-end funds. SBT is very small and illiquid; and thus, the impact of the offer is more difficult to ascertain as of yet. However, GTU’s discount to NAV plunged from 10% earlier this week to 5.5% at Friday’s close, which is certainly material. As long-time readers know, I have long warned about owning these funds – particularly GTU and SBT, because the underlying metal is not redeemable; because the Cartel clearly naked shorts them to make sure they trade below net asset value; thus, preventing them from executing the secondary stock offerings that would enable them to purchase more metal. However, I’m very curious to see how this transaction turns out, particularly as shareholders are pushing to make PHYS and PSLV’s redeem-ability more efficient. If somehow these funds can push back above net asset value – which, of course, remains to be seen, “Admiral Sprott” will again have the ability to attack the Cartel where it hurts them most; i.e, with large purchases of real, physical metal. Here at the Miles Franklin Blog, we’ll wait and see with baited breath!