This Week in Barrons – 8-28-2016:
“If your government believes that the best way to eradicate trillions of dollars of debt is to spend trillions more — you might live in a nation that was founded by geniuses, but is run by idiots”… Jeff Foxworthy
I listened to your economic talk this week, and I think Jeff Foxworthy is right – “We are living in a nation founded by geniuses but run by idiots.” For example, you actually said:
“We are 70% confident that Fed Funds will be between 0% and 4.5% at the end of 2018, and 30% confident that they will be outside that range.”
o So interest rates will be between 0% and 4.5%, unless they’re not?
- “Our members agree to indicate that they would continue to closely monitor global economic and financial developments."
o Isn’t that their job?
- "The Committee will wait to take another step in removing accommodation until the data on economic activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand."
Ms. Yellen, as hard as I try to understand what you said, I’m struggling to figure out where I am on the ‘genius to idiot scale’ – after all:
- I MUST show my ID to board an airplane, cash a check, buy liquor, or check out a library book – but NOT to vote for the President of the U.S?
- The harder I work – the more taxes I pay, and the more government regulation and intrusion I get. However if I didn’t work, I would be rewarded with Food Stamps, WIC checks, Medicaid benefits, subsidized housing, and free cell phones.
- It seems that your (the government’s) plan for getting people back to work is to provide non-working people 99 weeks of unemployment checks without any requirement of them to prove that they were seeking gainful employment.
- It seems that your (the government’s) plan for savers and faithful mortgage payers living on a budget and denying themselves the newest big-screen TVs and gadgets, is to have the government forgive the debts of those who overspent on homes, time-shares, wall-sized TV and cars?
- I’m wondering how you (the government) rationalize stripping me of my Constitutional right to privacy under the guise of making me feel more ‘safe and secure’.
Yes Ms. Yellen, we are truly living in a nation that was founded by geniuses but run by idiots. Chris Wiles more accurately translated your talk on Friday as the following:
“Nothing catastrophic has happened yet, so we (the FED) have decided to continue screwing responsible savers with interest rates that are at 5,000 year lows so that:
- This dangerous asset bubble can persist,
- The federal government can continue indebting future generations,
- And commercial banks can continue making tons of money,
- Because we are shit scared that even the tiniest 0.25% increase in interest rates will completely derail this totally fragile economy,
- And that would be really bad for Barack Obama and Hillary Clinton.”
Finally, according to the Bank of America, the Central Banks now own $25T worth of financial assets. That’s more than the entire GDP of the U.S. and Japan combined. Ms. Yellen, what if you and the other Central Banks are NOT buying all of this stock and corporate paper to prop up the stock markets, but rather buying it for a coordinated takeover? Could this be the way that the governments take control of the companies?
I only know of 3 ways that the future unfolds. One is that the major nations agree on a total ‘Bretton Woods’ style reset with debts getting annulled and currencies getting devalued. Another is that a big ‘event’ (war) changes things. And choice #3 is that the Central Banks coordinate and continue to buy up everything – and (in the end) the surviving nation state owns everything.
None of these are wonderful choices, but we’re in too deep to ‘work this off’. Something quite major has to happen. Ms. Yellen, I think you’re desperately pushing for the ‘event’. And we are one mistake away from a hot war with another nuclear nation. But if you can't get the ‘event’, I think you'll keep buying up anything that isn't nailed down until you work out (with China) a true global monetary reset. Otherwise, if we don’t get the reset or the ‘event’, then it’s estimated that in 10 years you (the governments) will own controlling interest in everything – and living proof of a world conceived by geniuses, and run by idiots.
- 2nd quarter after-tax corporate profits fell by 2.4% rate, inventories fell by $12.4B, but consumer spending jumped by 4.4%.
- 2nd quarter earnings per share of S&P 500 companies were 18% lower than 2 years ago.
- Last month, subprime auto delinquencies increased 17%, and net losses soared by over 28%.
- Last month total revenue at publically traded corporations continued to decline, after reaching a peak in 2014.
- 2 years ago, the S&P 500’s price to earnings ratio was below 19, and today it sits over 25.
- Annual GDP (Gross Domestic Product) came in at an anemic 1.1%.
The Clinton’s recently released their 2015 tax return (as SF reminded me). Inside it we found out that Hillary and Bill Clinton donated over 96% of their charitable contributions back to themselves in the form of The Clinton Foundation. https://www.facebook.com/RTAmerica/videos/vb.137767151365/10153703671361366/?type=3&theater By giving these large sums of money to The Clinton Foundation, they not only kept the cash, but also received a large, legal tax deduction for doing it. What is extraordinary is that Hillary and Bill Clinton created their wealth by giving speeches and selling ‘access’ to various wealthy individuals. They have not created one product or one job. Not one. Amazingly, they have been able to keep virtually all of their wealth by creating a foundation (The Clinton Foundation), and making ‘charitable donations’ to their own foundation – again creating no products or jobs. Until this point, I would have thought that this behavior was strictly available in Russia and other 3rd world (dictatorship focused) countries. By allowing this behavior to thrive, we are showing the world that we are “truly a world that was founded by geniuses, but being run by idiots.”
In terms of the soaring automobile loan delinquencies, we’ve seen the movie where consumer spending soars – while government spending, business spending, and GDP are all pulling back significantly. Currently we’re selling cars to anyone that can breath and come into a showroom, and (here’s a shocker) many of them can’t pay. In 2006 and 2007, we did the same thing with houses only to find that in 2008 we had a full-blown financial crisis on our hands where Lehman Bros. got assassinated, and Paulson begged for a bank bail out. That’s when we found out that the investment banks were betting against the very same mortgage backed securities that they were selling as ‘prime’ – because in reality they knew they were horse manure. Welcome to round two.
Portugal, Spain, Italy and Greece are all in trouble. For example, Portuguese sovereign bond yields spiked earlier this month after the DBRS ratings agency warned on the country's credit rating, citing high debt levels and strains to the banking sector. If DBRS were to actually rate Portugal's sovereign bonds below investment grade (versus just warning them), it would have made Portuguese debt ineligible for purchase by the European Central Bank through its main stimulus program. And given Portugal's budget deficit of 4.4% of GDP (far above the 2.7% target agreed to by the EU), a realistic rating by DBRS would have collapsed the Portuguese economy. The EU even opted against fining Portugal, but urged them to get their deficit below the 3% GDP threshold. Similar situations exist in Spain, Italy and Greece.
On Friday our S&P market faded right down and closed at 2169. For 14 straight sessions we were in an ‘S&P box’ with a floor of 2175 and a high of 2190. On Thursday we lost the bottom of the box, closing at 2172. And on Friday, we couldn't reclaim it – closing at 2169. This could mean several things, one is that the box has expanded, and they're going to try and keep us in a range of 2160 to 2190. Or secondly, it could mean that there is enough softness in the box to allow us to retreat to 2152, and then to 2120.
We are heading into September, which is typically a rough month. As funds continue to withdraw money (last month another $6B left equity funds), the Central Banks will determine where they are willing to let the market settle. If they do a coordinated buy, we'll be back to 2190 in no time. If they don't, we'll fade in stair step fashion. But consider this headline: “Illinois Warns Of Crippling Tax Hikes, Devastating Impact if Largest Pension Fund Admits Reality”.
Things are pretty messy no matter where you look, and stocks are already at nosebleed levels. The ONLY way this market continues to make new highs is if the Swiss, the Japanese, the ECB and the FED continue to buy stocks. But it almost feels like the Central Banks are out of the ‘New All-Time High’ game and into the ‘Let’s Just Keep It Steady’ game. This week I’m going to sit on my hands until I see that 2160 is going to hold, and I’ll be only lured into taking some long trades if we get back over 2175.
Bottom line – globally, we’re in a unique situation. We have markets that belong thousands of points lower, but Central Banks are propping them up because of all the counter-party derivatives that have been written against the markets. If the markets collapse – then the economies collapse with them. Jeff you’re absolutely right: “We’re truly living in a world that was founded by geniuses, but being run by idiots.”
Some likely trades this week:
- In terms of higher: NFLX for a run into 100, LULU for a run into earnings, TLT, HD and INTC should also run higher,
- In terms of moving lower: Whole Foods (WFM) should flush down into 27, with CMG and DIS moving lower next week.
- The metals have lived through a normal pullback in the past week and I continue to like: AG, AUY, CDE, FCX, FFMGF, FSM, HL, NGD, PAAS, PGLC and SAND.
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.