Monday, July 30, 2018

Trump's Asset Bubble Economy - Based On Irrational Exuberance- Contains Seeds Of Destruction Within It

Image may contain: text
The Trump buffoons, and Preznit "Gaslight" himself,  are busy bragging on the 4.1 percent growth over the last quarter -  the largest since a 5 percent spurt after Obama took office. As we know from previous Bull Market terminations, market crashes, irrational exuberance reigns before the fall - as it does now. Scanning over the financial headlines in both the WSJ and Financial Times the past six months all I've seen are warnings and insinuations the alarms are "blinking red" - as they did before 9/11. But too few are paying attention, they're too drunk on Gaslight's Kool aid.

Too many citizens are drunk with their seemingly flush investments, including 401(k)s and IRAs, and they are failing to see the warning lights, far less pay any attention to them. It's much too easy to just coast and enjoy the economic bounty while it lasts  - besides it's believed it's about the only positive aspect to the Trump Imperium's reign.  Most economists, even those who are citing the warning signs, grudgingly concede the dousing of regulations (i.e. citizen protections) as well as the tax cuts of last year- have ginned up the economy.  Others have rightly warned that basic economics says you do not gin up or stimulate an already humming economy because it risks inflation - and that means the Federal Reserve raising interest rates. That scenario carries the same horrific specter for the markets as crucifixes do for vampires.

The other aspect missed by too many in their stock and bond hubris, is the fact the stock market was revved up after GE was replaced in the Dow Jones Industrial Average lineup by Walgreens, after being a member company for more than a century.. 
How many are aware, for example, that that Dow was also 'adjusted' ('juiced' by might be a better term) on March 17, 1997? And by the people that invented it (Dow Jones, Inc.)? As Jay Hancock notes ('Dow Index Detaches from Reality', The Baltimore Sun, April 4, 1999, p. 1E):


A committee of green eyeshade types juiced the lineup, blackballing four down-at-heel Dow members and picking ringers as replacements. Out went Bethlehem Steel, Woolworth, Texaco and Westinghouse. In came Johnson & Johnson, Wal-Mart, Hewlett-Packard and Travelers. One -eighth of the Dow membership changed that day, but you'd never know it from looking at those mountainous Dow graphs....Without the switch, by my calculation, the Dow would have been near 9,000 last week. Not 10,000.

What Hancock is basically saying, is that the alleged stock market upon which folks are basing their retirements and long term investments is a myth. It doesn't really exist because it lacks any fixed identity, e.g of component companies, over time..  It's like a human who changes personas every so often so no one can remotely know who he is.. That may sound like no problem, but it means the human's short and long term behaviors are unpredictable and it means the same for a stock market predicated on a DJIA subject to expedient reshuffling.  It also renders the frequent citations of rate gains over long periods of time, e.g. "7 % per year"  gains or whatever, totally fictitious. Since the identity of the DJIA alters with each replacement, or substitution it can't be the same over long duration. So you can't cite a fixed average gain - which implies component stability - over decades,. say from 1987 until now.  

Indeed as a WSJ piece notes ("In GE Ouster, Dow's limits Stand Out', June 21, p. B12):

"The Dow Jones Industrial Average has ejected numerous Blue Chip companies over the past decade including miner Alcoa Inc., Westinghouse Electric Corp. and this week General Electric Co."

Nor are serious market watchers particularly happy with this state of affairs.  Robert Pavlik, senior portfolio manager and chief investment strategist at SlateStone Wealth said of the decision to drop GE (ibid.):

"Honestly, I didn't like the move. It's supposed to be an industrial average that is reflective of the overall economy of the United States, and if that's the case then why replace it with Walgreen's?"

Well, the only reason would be to juice the index, by changing its identity - again reinforcing my point that what people are investing in lacks any persistent identity. Basically, people are pouring their money into an extravagant "pig in a poke". Most ominously (ibid.):

"The removal of troubled businesses appears to have helped keep the index moving higher."

Or, three card Monte on steroids.

Having dealt with the artificial identity of the DIJA - and hence the DOW overall   and how the several replacements of member companies  renders the "market" a fiction,  we now come to the more immediate factors destabilizing this fiction. Three article alerts that appeared in March and April and remain relevant today include:

1) 'Investors Fear Goldilocks Market Is Ending', noting "Nine years into a roaring stock bull market, fund managers are paying their last respects to Goldilocks".

2) 'Bear Markets Can Fly In On Their Own'  warning "stock market bulls shouldn't be basing their bullishness on recent bullish activity."

3) From The Financial  Times , April 17, ('IMF Sounds Alarm On Excessive Global Borrowing') :

"The world's $164 trillion debt pile is bigger than at the height of the financial crisis a decade ago, the IMF has warned, sounding the alarm on excessive global borrowing.  The fund said the private and public sectors urgently need to cut debt levels to improve the resilience of the global economy, and provide greater firefighting ability it things go wrong.

Fiscal stimulus to support demand  is no longer the priority the IMF said Wednesday in a report published at its spring meetings in Washington. "

Let's note here that "support demand"  referenced in the FT account means support of  "aggregate demand", i.e. getting citizens to spend more - which was the basis for the Trump-GOP tax cuts. This was an incredibly bad play given how much these cuts will add to the deficit, going forward, and how little they would contribute in terms of a job picture then already near full employment. And as the WSJ's Greg Ip showed, they will now increase the trade deficit as well, approximately $35 for each $100 increment in the budget deficit.  Since the tax cuts are now conservatively estimated to add $1. 5 trillion to the deficit, you can do the math for the trade deficit using Ip's ratio. 

Why does the U.S. run a trade deficit? Well, because "it consumes more than it produces while its trading partners collectively do the opposite."  Ip notes "another way of saying this is that the U.S. invests more than it saves while other countries save more than they invest."

The FT piece on the IMF warning goes on noting what is most worrisome:

"World borrowing is more than twice the size of the value of goods and services produced and 225% of global gross domestic product. This is 12 percentage points higher than the peak of the previous financial crisis in 2009."

And the U.S. is singled out as a primary debt offender, e.g.

"Vitor Gaspar, the director of fiscal affairs at the  IMF, singled out the U.S. for criticism, saying that it was the only advanced country that was not planning to reduce its debt pile - with the recent tax cuts keeping public borrowing high.

The fund urged policymakers to stop 'providing unnecessary stimulus when economic activity is already pacing up' and called on the U.S. to 'recalibrate' its fiscal policy and increase taxes to start cutting its debt

This previous significant reporting is relevant to the following more recent  WSJ reports:

1)'Markets Flash Caution For Stocks' (p. B1, April 14-15):

Evidence for crowded positioning, elevated valuations and fears that growth may be losing momentum.

2)'The National Debt Is Worse Than You Think', (p. A18, April 18)

"Today's outlook for revenue growth is based on policy that's unlikely to pan out. The CBO estimates that if current policy continues the cumulative deficit will rise a further $2.6 trillion over the next decade, to a staggering $15 trillion.

'3)Supply Starts To Crimp Growth' (p. B1, April 25)

Economic data are showing a strained supply side.  Set against global demand, supply chains are 'struggling to keep up'. This is increasingly a global phenomenon. 

4) 'Don't Get Hung Up On Yields' (p. B16, April 25)

Yields marching higher comes at an odd time, since the recent economic news hasn't been great. But what it also shows is that investors are operating with blinders on and ignoring events, such as the rise of right populists in Europe, and staggering global debt,  that they ought to have on their radar. Too much irrational exuberance, including using leverage to purchase more stock shares. 

 5) In GE Ouster, Dow's Limits Stand Out' (p. B12, June 21)

See earlier description of effects.

6) 'Consumer Spending Rise Has Dark Side (p. B1, July 16)

The Federal Reserve reported outstanding consumer credit debt rose $24.6 billion n May from a month earlier, or nearly double the $12.8 billion economists expected.

6) 'Tariff Threat Gets Closer To Consumers' (p. A8, July 18)

Massive increased costs on a variety of consumer products from cars and car parts, to furniture, to mobile phones, home improvement items, networking gear and seafood.  Takeaway? Consumers may have to go into more credit card debt to afford the higher prices of durables, especially, if their wages continue to stagnate. 

7) 'Fed Shouldn't Ignore Yield Curve' (p. B9, July 23)

The Fed isn't worried about the yield curve, for the same reason it wasn't worried before the 2008-09 financial crisis, but it should have been. (The yield curve is the difference between shorter and longer term Treasury yields - a key indicator for the future of the economy.)

"Today evidence abounds  - from supertight spreads, to negative yields, to high stock valuations to the popularity of structured products - that investors are willing to take risks to capture yield."

More irrational exuberance!

8) 'Stock Outflows Swell In Flight For Safety' (p. B13, July 27)

Investors are fleeing U.S. stocks at a rapid clip  as continuing market volatility and trade tensions pushes them to seek safety among less risky assets such as U.S. Treasurys. The exodus coincides with the implementation of the first round of tariffs between the U.S.  and China.

9) 'Stocks Are Up Despite Troubles' (p. B1, July 27-28):

Four primary risks exist now to the market's momentum: i) higher bond yields, ii) global economy - debt impacts, iii) Trump's trade war, especially new tariffs, iv) European politics.  Investors aren't pricing in much of a drag from the rest of the word, wrongly."

10)'Save Interest For Rainy Day' (Martin Feldstein,  p. A17, July 27):

"The downturn is almost certainly on its way. The likeliest cause would be a collapse in the high asset prices that have been created in the exceptionally relaxed monetary policy of  the last decade. It's too late to avoid an asset bubble. Equity prices have already risen far above their historical trend.  The price -earnings ratio of the S&P 500 is now more than 50 percent higher than the all time average, sitting at a level reached only three times in the past century.

The inevitable return of these asset prices to their historical norms is likely to cause a sharp decline in household wealth and in the rate of investment in commercial real estate. If the P/E ratio returns to its historical average, the fall in share prices will amount to a $9 trillion loss across all U.S. households."

Feldstein's argument - given the preceding  - is that it is essential to keep raising interest rates (the Federal funds rate) to at least 4 % over the next two years, to have room to maneuver out of a recession and stock crash should  these occur. And again, all the alarms are blinking red, despite the hubris and denial of so many, inebriated by irrational exuberance.

Arch-forecaster Nate Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warned (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

But even if Silver's statistical projections don't get you roused, the highlights of the preceding six months should, if you've taken the time to read them.  This brings us to collation of the information and then asking the question: Okay, the Trump asset bubble economy is like the "Titanic" heading for the iceberg, so what will be the signs of imminent sinking?  What warnings will we have?

Actually, very little if you're not already paying attention  - including to three things that could trigger a massive deleveraging: a) Trump's insane trade war, b) the ever mounting global debt c) the unwinding of  the Fed's remaining $3.8 trillion in QE (quantitative easing) assets.

In the first case the situation is vastly more perilous than either the political pundits or corporate media let on.  The fact Trump had to go to a Depression- era program to snatch $12b of taxpayer money for a bailout (sorry, Mnuchin, that's the word I'm using) is not a good sign.  It is indeed only a temporary fix and not a very good one. If it doesn't work - and it won't - then what?  Added to that, only a few of the more insightful farmers in flyover country appear to grasp it isn't just a loss of current revenue to pay their outstanding debts, but a loss of their markets - i.e. in China, Mexico which they'd spent years cultivating. Once those markets are gone to competitor nations there will be little, if any, chance of regaining them. That means permanent debts - many farm foreclosures- and little money for more bailouts.  (Apart from which many other trade sectors, e.g. the fishing industry, may also be looking for gov't handouts by then.)

It is also well for people of any sense to treat ALL Trump's statements on trade as LIES.  I cite here the WSJ piece, 'Europeans Dispute Trump Trade Claim' (July 28-29, p. A5)  in which we learn:

"While Mr. Trump told an Iowa crowd Thursday that "we just opened up Europe for you farmers", officials in Brussels later said he did no such thing."

Adding later:

"The U.S. side 'heavily insisted to insert the whole field of agricultural products', Mr. Juncker told reporters immediately following the meeting, 'We refused that because I don't have a mandate and that's a very sensitive issue in Europe."

Part of what he was referring to was GMO crops, a very "sensitive" issue for the EU citizens indeed..  In any case, given Trump's claims were palpable bullshit, the farmers again are left with no outlets for  their produce. Their wares will then keep piling up in silos, storage bins while other nations, like Japan, step in and reap the benefits.  Chance of getting their original markets back after Trump's trade war games are over? Slim and none.

Meanwhile, the mounting global debt has reached stupendous levels and already been warned abut by the  IMF which took a dim view of the U.S. tax cuts,  that only added to that debt.  As per a Bloomberg report from May, "the U.S ran a $466 billion current account deficit last year, meaning it imported far more than it exported".  In addition, the U.S. remained the "largest driver of global current account balances in 2017, running the world's largest deficit and adopting policies - i.e. a shift to much larger deficits via tax+ cuts - likely to increase imbalances in coming years."

The U.S. rightfully and properly ignored deficits to staunch the Great Recession and pull the nation back from the fiscal- credit  abyss, i.e. via stimulus spending ($797 b) in 2009 . But Washington not only failed to wipe out the red ink when the economy rebounded, but added much more via massive, uncalled for tax cuts. Now the red ink is a red tsunami and the entire global debt has rendered most assets suspect, or under water, meaning based on using leverage for purchases.

Bottom line: this current economic "explosion" is built on quicksand. You cannot base a sound economy on exploding debt. Rising debt also threatens to weaken the global power of the U.S. as it increasingly depends on foreign investors to lend money to the Treasury. As of now, the Chinese own 5.7% of all U.S. Treasury securities to the tune of $1.2 trillion. Americans had better pray every night Trump doesn't piss them off in his goofy trade war to the extent of calling in those markers.

In addition, we know that tax cuts added to an already stimulated economy can destabilize it into depression or serious recession. As I pointed out in my Nov. 29 post from last year:

"Calvin Coolidge signed into law the Revenue Act of 1924, which lowered personal income tax rates on the highest incomes from 73 percent to 46 percent.  Two years later, the Revenue Act of 1926 law further reduced inheritance and personal income taxes; eliminated  many excise imposts (luxury or nuisance taxes); and ended public access to federal income tax returns. The tax rate on the highest incomes was reduced to 25 percent.

The result was a speculative frenzy in the stock markets, especially the application of structured leverage in what were called at the time "investment trusts." In September 1929, this edifice of false prosperity began to wobble, and finally crashed spectacularly in October,  1929."

But. most of us suspect the immediate trigger could well be the Fed's unwinding of the 3+ trillions for easy money during the QE era.  As The UF puts it:

"As reported by Business Insider, a report from the global head of Société Générale's asset allocation team projected that the unwinding of easy money policies and broken politics in Washington will cause  today's market to unravel."

The 'broken politics' refers to an inability to resolve issues like the debt ceiling and out of control spending, especially with inadequate revenue coming in owing to addle- brained tax cutters.  And already Preznit Gaslight is threatening a government shutdown if he doesn't get his cockeyed "border wall", expecting the Dems to give in to his extortion.   The next debt ceiling increase is likely to exceed $22 trillion, and the money still to be unwound from the Fed's QE program is nearly $4 trillion.  Adding money for DoTurd's border wall would be one more spark to ignite the final unraveling of his "great" economy. Put it all together and you are looking at a major catastrophe ready to happen, never mind the current economic growth happy talk dominating much of the press.

The Forecaster goes on to note that other sources predict an even more dire end to this Bull, viz.:

"Legendary investor Jim Rogers says we're about to suffer the biggest stock market crash in our lifetime. And he believes it could happen later this year."

The UF goes on:

" Why should we listen to him?  The 74 year old not only helped found one of the most successful hedge funds of all time, he's made a number of market calls including the last housing crash. As Rogers observed, the debt that fueled the last downturn is nothing compared to the debt we've piled up since then. Over the last 10 years our national debt has more than doubled. His advice, 'Be worried!'

Would a stock crash- recession be the worst thing to happen? That depends on your perspective and political tribe affiliation.  Especially if you're a member of the Trump personality cult. If you're delirious about Trump and love his deregulation, tax cuts and so on, you will be hysterical after a 50 percent crash, followed by recession. You're best bet now is to stock up on anti-depressants.

For the rest of us, such events - horrific as they may be - finally portend an end to Trump's  "Teflon" cover via a fake economy based on asset bubbles and stock buybacks. As WSJ columnist Greg Ip put it regarding the current expansion based on debt and fumes (my terms), "this benefits Mr. Trump since it makes a recession less likely before he faces voters again in 2020."

My bet?  A stock crash either this year or next, coupled with Mueller's probe finding for conspiracy of the Trumpies with Russkies, will finally send this deadbeat pretender and traitor back to whatever crack in hell from which he crawled.

See also:


"The typical American worker now earns around $44,500 a year, not much more than what the typical worker earned in 40 years ago, adjusted for inflation. Although the US economy continues to grow, most of the gains have been going to a relatively few top executives of large companies, financiers, and inventors and owners of digital devices. America doesn’t have a jobs crisis. It has a good jobs crisis."



"Now, the post-tax-cut numbers are coming in, and you’ll be shocked, shocked to learn that America didn’t get that pay raise after all. In a widely read column last week for Bloomberg, Noah Smith pointed to statistics from PayScale showing that so-called real wages — your paycheck, but adjusted for inflation — actually fell in the just-ended second quarter of 2018, by 1.8 percent."



No comments: