This Week in Barrons – 4-30-2017:
“Who knew that being President would
be this hard?”… Pres. Donald Trump – 4.28.2017
Markets can NOT go Down:
The ‘Trump Trade’ is at the point of being
over the moon. But there are so many
things connected to the equity markets, that if the markets were allowed to
fall, the ripple effect would be huge. There
are pensions, insurance companies, and sovereign wealth funds (to name a few) that
count on the markets being stable to always rising – but there’s more to this
story. First, let’s review our numbers:
- 1 Billion =
one-thousand Millions,
-
1 Trillion =
one-thousand Billions,
-
1 Quadrillion =
one-thousand Trillions,
-
$1 Trillion =
U.S. Credit Card Debt,
-
$1.4 Trillion =
U.S. Student Loan Debt,
-
$3.4 Trillion =
U.S. Annual Tax Revenue,
-
$14.4 Trillion =
U.S. Mortgage Debt,
-
$19.0 Trillion =
U.S. Annual GDP,
-
$19.9 Trillion =
U.S. National Debt, and
-
$628.8 Trillion
= Currency and Credit Derivatives.
The world runs on credit. Virtually everything you see from the moment
you get up in the morning is only there because of some form of credit. 97% of all houses are financed via mortgage
credit. All of the roads were financed
via a township bond sale – that’s credit. The gasoline held in storage tanks was
financed via the futures spot market – that’s credit. The truck that delivered the gasoline was
part of a fleet financing deal along with the 30-year lease that the convenience
store has with the gasoline company itself – that’s credit. Somewhere in virtually every supply chain,
credit has been applied – and make no mistake, if credit stops – everything stops.
That is why Warren Buffet called credit derivatives
the "financial weapons of mass destruction." The Bank of International
Settlements(BIS) is showing $700 Trillion in global credit derivatives, and if
you add in credit default swaps and other instruments – the total derivative market
is about $1.5 Quadrillion.
A derivative (simply put) is a contract
between two parties whose value is determined by changes in the value of the underlying
asset. Those assets can be bonds,
equities, commodities or currencies. The
majority of the contracts are traded over the counter – where details about
pricing, risk measurement and collateral are less ‘transparent’ to the public. In other words, a derivative does not have
any intrinsic value, and is essentially a ‘side bet’. People are betting on anything and everything,
with Wall Street acting as the largest casino in the world. After the last financial crisis, our politicians
promised us that they would do something to get derivative trading under control,
but instead the size of the derivative bubble has reached new all-time highs –
with the top 25 U.S. banks having more than $236 Trillion in derivative
exposure.
To bring this into perspective, let’s say
you’re a pension fund manager and you’re worried about the value of your stock
investments because they are now well over $20 Billion. So, you go out and buy a derivative contract
(maybe a lot of ‘put options’), to use as an insurance policy against your
stock portfolio going down in value. The
organization from which you bought the derivative contract doesn't want that
risk on their hands, so they sell your contract to another organization – and that
goes on and on. Just like each single ounce
of SILVER on the COMEX exchange now has over 300 paper claims against it – that
single pension plan derivative has approximately 200 contracts written against
it.
Now, suppose the derivative contract was
written in such way that: “XYZ company agrees to make ‘whole’ the entire pension
fund, if the underlying stock portfolio falls by more than 25 percent in any 3-month
period". Then say the market falls by 26 percent, and triggers that
derivative contract. The first
organization that wrote the derivative contract is going to say: “Sorry, we've
sold that contract to ABC company”. And
it just so happens that ABC company figured that the market would NEVER drop by
more than 25 percent - so they sold bets AGAINST the entire portfolio dropping
that much to an average of 22 other companies and pocketed the premiums. Hopefully the premiums that they collected
are enough to pay off the original pension fund, but normally they are
NOT. And that’s just one little pension
plan. There are over one quadrillion derivatives
out there; therefore, any drastic fall in the markets would trigger a systemic
collapse the likes of which have never been seen.
Then there is the credit creation piece. If you have a portfolio of stocks, you can use
that portfolio as collateral to create credit. The higher stocks go, the more credit that can
be created. And leave it to Wall Street
to pervert this concept as well. If you
can use your portfolio as collateral to create a $1B in credit with one lender,
then why not use that same portfolio to create the same collateral at (on
average) 10 different lenders?
With this much counter party exposure (and trails
no one could ever follow) it now makes sense why the easiest solution to our
credit derivatives problem is just to have our Central Banksters keep this
market up – at all cost. The constant
need to ’Feed the Beast’ with ever more credit – demands that Central Banks continue
to purchase financial assets. If they
don’t, this all stops and we enter an outright depression. After all, Central Banksters didn’t purchase
over $1 Trillion worth of stocks and corporate bonds in Q1 because they were
good investments. They bought them to
keep the ponzi scheme from crashing.
So, what’s to stop the markets from rising to
the moon? Not much really. Maybe the Central Banksters will decide not to
play anymore and stop their buying – then markets will fall. And if they wanted to be nefarious and take
down the world – all they’d have to do is start selling assets. Some believe that's exactly the reason why Donald
Trump was ‘allowed’ to be President. The
theory is that ‘the powers that be’ put Trump in office because they're going
to pull the plug on the global economy – press the ‘reset’ button, discharge
all debts, revalue all currencies, and we just start over. Until that time comes, we continue to rise
higher, and the Trump Trade is alive and well and going to the moon.
The Markets:
“Nothing is for certain except death
and taxes, and now they’ve changed that!”
This week (courtesy of SK) President
Trump unveiled his tax reform outline that called for: dramatic tax cuts, a simplification
of the tax code, and even changes to the inheritance tax. His outline proposed lowering the individual
tax rate, doubling the standard deduction amount, halving the corporate tax
rate, modifying the tax treatment of pass-throughs, expanding child and
dependent incentives, and eliminating both the alternative minimum tax and the
federal estate (death) tax. The
announcement said nothing about incentives for infrastructure spending, or the controversial ‘border adjustment
tax’.
-
For Individuals, the proposal replaces
and lowers the current individual tax rates from 10, 15, 25, 28, 33, 35, and
39.6 percent – to a three-bracket range of 10, 25, and 35 percent.
-
For Deductions, the plan would eliminate
all individual tax deductions except for the mortgage interest deduction and
the charitable contribution deduction.
-
For
Family Incentives, the proposal calls for unspecified tax relief
for families with child and dependent care expenses.
-
For
the Estate Tax, the plan calls for elimination of the federal
estate tax.
-
For
the Alternative Minimum Tax (AMT), the proposal calls for abolishing the
AMT, calling it a complicated and unnecessary addition.
-
For
Businesses, the plan calls for cutting the corporate tax
rate from a high of 35 percent – to a flat 15 percent rate.
-
For
Small Businesses, the proposal calls for a 15 percent tax rate
for pass-through income.
-
And
for Repatriation, the plan calls for
a one-time tax on repatriated profits at a yet-unspecified tax rate.
This week was also the first view of our
nation’s growth rate. GDP (Gross
Domestic Product) is the single leading economic barometer for each nation. In the history of economic rebounds, the past
8 years in the U.S. have been among the slowest in GDP growth. For all of 2016, the U.S. GDP only expanded
at 1.6 percent - the slowest pace of expansion in a five-year period. So,
this week we had our first glimpse at GDP estimates, and the number came in at
+0.7 percent. Inside the number the
details were horrible with employment costs soaring and consumer prices rising
well above their estimates. The widely tracked GDPNow model from the
Atlanta Fed showed that economic expansion slowed to an even slower pace of 0.2
percent. The Atlanta Fed went on to say
that the first quarter real consumer spending growth FELL to 0.1 percent and
durable goods sales FELL 1.11 percent.
As for the equity market, after those two monster up days on Monday and Tuesday, the
market ran smack into the resistance of the all-time highs posted on March
1st. Last week I suggested that they might have some issues getting up
and over that hurdle and Wednesday, Thursday and Friday showed that to be true. It isn't unusual for a market to
struggle when trying to overtake an all-time high, and they might just be
bouncing us along sideways as they regroup for another shot at it. But we
do need to consider, as we come out of earnings season – what will be the
stimulus for taking this market higher? Remember
the old adage: "Sell in May and go away?" Unfortunately, the only
big events I see on the horizon aren't that market friendly – one being a real
war with N. Korea. So, this week I’m
looking for a bit more fade to the downside before any real attempts are made at
setting new all-time highs.
Tips:
A curious situation is setting up between
gold (and silver) and the miners themselves.
The above graph compares the price of gold (black line) to a typical
mining company (Barrick Gold – ABX). You
can see how the yellow line plunges when compared to the black line. Gold is in the early stages of a bull market,
and has many fundamental forces lining up to drive it higher. I believe that the gold and silver miners will
turn around and catch-up to the increase in price of their underlying metals. Gold is coiling to move higher, with the
various bear raids ending in frustration. With U.S. GDP growth crawling along at less
than 1 percent, this is a fertile environment for gold, silver, and miners of
all sizes.
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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