Banks are a place where you store your cash, right? Not exactly.
When you deposit money in a checking or savings account, you aren’t just letting the bank hold it on your behalf. You are lending the bank that money and the bank is borrowing it.
That’s why deposits show as a liability on the bank’s balance sheet.
We think of banks as lenders, and they are, but they’re also borrowers. They make money by lending at higher rates than they pay as borrowers, and by leveraging their deposits via fractional reserves.
Modern Central Banking
This is obvious if you think about it.
How can your bank simultaneously a) promise you can withdraw your cash on demand and b) lend that same cash to someone else?
That’s possible only because they know only a few people will want their cash back on any given day. And if cash requirements are more than expected, they can borrow from other banks or the Federal Reserve, as needed.
Modern central banking and regulatory practices have practically eliminated the old-fashioned bank run. It still happens occasionally, but the system can absorb it.
That’s because, while depositors can withdraw cash from a given bank, it is hard to withdraw from the banking system. Even if you buy gold, the gold dealer will probably deposit your cash in their bank, leaving the system exactly where it was before.
The System Is Vulnerable
Now, the system can be shaken up if too many people decide to hold physical paper money, or they transfer deposit money into other instruments banks can’t leverage as easily.
Central bank reserve requirements also play a role. The banking system is far more elaborate than the most complicated Swiss watch but it just keeps on ticking… until it stops.
Something weird happened in September, for reasons that remain a little murky. The repurchase agreement or “repo” market seized up.
I’ll spare you a plumbing lesson; all you need to know is that repos are really, really important for overnight funding.
Without them, it’s very hard for banks, brokers, funds, and other market participants to square their books. Modern banking simply wouldn’t function and the system would shut down.
Now, this wasn’t a catastrophe. The Fed injected some liquidity and everything seems okay for now. The important part is that it shouldn’t have happened and worse, apparently no one saw it coming.
Shades of 2007–2008
We had a string of similar hiccups in 2007–2008. All were manageable but eventually they added up to something much worse. So, this wasn’t a good sign for market stability.
That’s the problem with unconventional monetary policy. It may solve your immediate problem but create bigger ones later, as French economist Frédéric Bastiat said. We now know the Fed’s 2017–2018 rate hikes, concurrent with the balance sheet reductions or “QT” (quantitative tightening), were probably too aggressive, as even the Fed now tacitly admits. I said at the time they were running a two-factor experiment with unpredictable results. Could we now be seeing them? And if so, are they over?
No one knows, but the Fed looks rattled. And a rattled Fed isn’t what we need.
* * *
I predict an unprecedented crisis that will lead to the biggest wipeout of wealth in history. And most investors are completely unaware of the pressure building right now. Learn more here.
Job Openings Plunge To 18 Month Low As Slide In Quits Confirms Job Market Slowdown
Two months ago we concluded our analysis of the July Jolts by reminding readers that “JOLTS is 2 months delayed, so we wouldn’t be surprised if the next few months JOLTs is where the real ugliness lies.” That’s precisely what happened.
Just in case the last few declining payrolls reports weren’t sufficient to indicate that the US labor market is cooling rapidly, the latest JOLTS released today by the BLS confirmed that US workers are going through a decidedly rough patch, as the total number of job openings tumbled, and after last month’s 7.051 million total was revised sharply higher to 7.301 million, it tumbled again, sliding by 277K to 7.024 million, below the 7.063 million expected, and the lowest number in 17 months, since March 2018.
Yet even with the slowdown in job openings, there was still more than 1 million more job opening than unemployed workers; in fact there have now been more US job openings than unemployed workers for a record 19 consecutive months.
Unlike last month, though, when there was a modest decline in the rate of hires, in September the number of hires rebounded by 50K to 5.934 million, which still was modestly above where the payrolls implied number suggests:
The rebound in hiring, and the upward prior revision, meant that from an annual contraction, hiring once again levitated into expansion, rising by 4.7% in September, up from from a revised +1.0% increase in August.
Finally, in the latest indication of the slowing labor market, we saw the so-called “take this job and shove it” indicator – the total level of “quits” which shows worker confidence that they can leave their current job and find a better paying job elsewhere – drop for the second month in a row, and in September the number of quits slid by 103K to 3.498MM from 3.601MM, the biggest monthly drop since January 2018.
The biggest bank in Europe is in the process of imploding, and there are persistent rumors that the final collapse could happen sooner rather than later. Those that follow my work on a regular basis already know that this is a story that I have been following for years. Deutsche Bank is rapidly bleeding cash, they have been laying off thousands of workers, and the vultures have been circling as company executives desperately try to implement a turnaround plan. Unfortunately for Deutsche Bank, it may already be too late. And if Deutsche Bank goes down, it will be even more catastrophic for the global financial system than the collapse of Lehman Brothers was in 2008. Germany is the glue that is holding the EU together, and so if the bank that is right at the heart of Germany’s financial system collapses, the dominoes will likely start falling very rapidly.
There has been a tremendous amount of speculation about Deutsche Bank over the past several days, and so let’s start with what we know.
Deutsche Bank reported a net loss that missed market expectations on Wednesday as a major restructuring plan continues to weigh on the German lender.
It reported a net loss of 832 million euros ($924 million) for the third quarter of 2019. Analysts were expecting a loss of 778 million euros, according to data from Refinitiv. It had reported a net profit of 229 million euros in the third quarter of 2018, but a loss of 3.15 billion euros in the second quarter of this year.
If you add the losses for the second and third quarter of 2019 together, you get a grand total of nearly 4 billion euros.
How in the world is it possible to lose that much money in just 6 months?
If all they had their employees doing was flushing dollar bills down the toilet for 6 months, it still shouldn’t be possible to lose that kind of money.
When investors learned of Deutsche Bank’s third quarter results last week, shares of the bank went down about 8 percent in a single day.
Overall, the stock price has lost over a quarter of its value over the past year.
Unless you enjoy financial pain, I have no idea why anyone would want to be holding Deutsche Bank stock at this point. As I have previously warned, it is eventually going to zero, and the only question remaining is how quickly it will get there.
We also know that Deutsche Bank has been laying off thousands of workers all over the world…
On July 8, 2019, thousands of Deutsche Bank employees across the globe arrived at their offices, unaware that they would be leaving again, jobless, just a few hours later. In Tokyo, entire teams of equity traders were dismissed on the spot, while some London staff were reportedly told they had until 11am to leave the bank’s Great Winchester Street offices before their access cards stopped working.
The job cuts, which totalled 18,000, or around 20 percent of Deutsche Bank’s workforce, were the flagship element of a restructuring plan designed to save the ailing German lender.
The day before those layoffs happened, most of those employees would have probably told you that Deutsche Bank is in good shape and has a very bright future ahead.
Just like we witnessed with Lehman Brothers, there is always an effort to maintain the charade until the very last minute.
Source: Bloomberg
But the truth is that anyone with half a brain can see that Deutsche Bank is dying. There have been so many bad decisions, so many aggressive bets have gone bad, and there has been one scandal after another…
In April 2015, the bank paid a combined $2.5bn in fines to US and UK regulators for its role in the LIBOR-fixing scandal. Just six months later, it was forced to pay an additional $258m to regulators in New York after it was caught trading with Myanmar, Libya, Sudan, Iran and Syria, all of which were subject to US sanctions at the time. These two fines, combined with challenging market conditions, led the bank to post a €6.7bn ($7.39bn) net loss for 2015. Two years later, it paid a further $425m to the New York regulator to settle claims that it had laundered $10bn in Russian funds.
At this point, it is just a zombie bank that is stumbling along until someone finally puts it out of its misery.
Times change. Once upon a time (2001, in fact), Deutsche Bank was able to book stars like Robbie Williams for its staff Christmas party, with a Spice Girl turning up too just because it was such a great party. Now, according to the FT, Christian Sewing has even cancelled the daytime coffee-and-cake Christmas reception for retired employees.
Of course saving a few bucks on coffee and cake is not going to make a difference for a bank with tens of trillions of dollars of exposure to derivatives.
Deutsche Bank is the largest domino in Europe’s very shaky financial system. When it fully collapses, it will set off a chain reaction that nobody is going to be able to stop. David Wilkerson once warned that the financial collapse of Europe would begin in Germany, and Jim Rogers has warned that the implosion of Deutsche Bank would cause the entire EU to “disintegrate”…
Then the EU would disintegrate, because Germany would no longer be able to support it, would not want to support it. A lot of other people would start bailing out; many banks in Europe have problems. And if Deutsche Bank has to fail – that is the end of it. In 1931, when one of the largest banks in Europe failed, it led to the Great Depression and eventually the WWII. Be worried!
Sadly, most Americans can’t even spell “Deutsche Bank”, and they certainly don’t know that it is the most important bank in all of Europe.
But those that understand the times we are living in are watching Deutsche Bank very carefully, because if it implodes global financial chaos will certainly follow.
US Services Sector Slump Hits 3-Year Lows, Worst Jobs Cuts Since 2009
US Manufacturing surveys (PMI and ISM) both agreed that October saw a modest rebound (despite ISM still in contraction) and analysts expected Services surveys to show a similar improvement, but that was not to be
US Manufacturing PMI 51.3 – expansion (up from 51.1 prior)
US Manufacturing ISM 48.3 – contraction (up from 47.8 prior)
US Services PMI 50.6 – expansion (down from 50.9 prior and below 51.0 exp) – weakest since Feb 2016
US Services ISM 54.7 – expansion (up from 52.6 prior and above 53.5 exp)
So, once again – a mixed picture – up in ISM and down in PMI…
Source: Bloomberg
While the headline jumped, we note that 6 components are down and only 4 up…
And in case you wondered how this was possible? It’s simple as one respondent explains:
“Beginning of a new fiscal year brings a tremendous amount of spending.” (Public Administration)
Not everyone is excited:
“Our business remains at the same level. There is no expectation for new orders, since clients normally do not make capital-expenditure decisions in the last quarter. Our only expectation is with regards to the U.S.-China trade deal outcome.” (Mining)
“Business is still lower than this time last year due to tariff issues and a soft market.” (Wholesale Trade)
“Although October saw signs of manufacturing pulling out of its recent soft patch, the far-larger service sector remained in the doldrums as inflows of new work failed to grow for the first time since 2009.
“With inflows of new work drying up, firms are relying on previously-placed orders to sustain current output growth, meaning the rate of expansion could weaken further in coming months if demand doesn’t revive.
“Hence we’re seeing jobs being cut at an increased rate among surveyed companies, with employment falling for a second successive month and to a degree not seen since 2009. Such a weakening of the survey’s employment index will likely feed through to the official jobs numbers as we move toward the end of the year.
“The news was by no means all negative, however, with firms becoming more optimistic about the year ahead, buoyed by hopes of an easing of trade tensions and stimulus from lower interest rates. However, the overall degree of optimism remains sharply lower than this time last year as companies remain concerned by ongoing uncertainty about the outlook.”
Finally, Williamson notes that taken together, the manufacturing and service sector surveys consequently suggest that the US economy got off to a disappointing start in the fourth quarter, consistent with GDP growing at an annualized rate of less than 1.5%.
Using ISM data, we note that the Composite Index (whether driven by jobs mix – 14% Manu, 86% Serv; or earnings mix – 68% Manu, 32% Serv) has improved in October (with the earnings-weighted index out of contraction)…
Source: Bloomberg
Globally, Germany is the stand out in terms of collapse…
NYC Citizens Set Fire To Trash, Dump Rotting Food On Parked Police Car In Brooklyn
Emboldened by liberal politicians who are more likely to attack the police in New York City, rather than defend them, another incident of police disrespect was caught on camera Halloween night in Brownsville.
Video posted by CBS shows people deliberately covering an NYPD vehicle in trash on Halloween night, while a small group of residents sit by, laugh, and taunt the two officers that were left to clean up the mess.
One resident is heard saying “trick or treat”, followed by a slur.
The officers calmly show restraint as they are left to clean up trash filled boxes, broken eggs and rotting food. The officers were in the midst of responding to a domestic dispute call and were upstairs at a residence long enough for their vehicle to be vandalized.
“A lot of people call 911 in this neighborhood. They’re holding us up,” one officer said.
A nearby bodega owner said he saw the vandalism take place, but that (surprise) he was unable to give detailed descriptions of the suspects. He also said that the boxes atop of the police cruiser were momentarily set on fire, prior to the cell phone video of the incident beginning.
“It was eggs and things put on it and also the boxes they were set on over fire,” the bodega employee said.
Police have been continued targets of disrespect in New York City, with some prominent cases involving citizens dumping buckets of water on the police.
“Our great police are being disrespected, even with water dumped on them, because a mayor and governor just don’t have their backs,” the president Tweeted out last Friday.
“New York’s Finest must be cherished, respected and loved.”
Retired NYPD Detective Sergeant Joseph Giacalone said: “It’s not a prank in any sense of imagination. I mean, what they do is they slow the response time down to this patrol car or wherever they need to be which puts the public safety in danger.”
President Donald Trump “has great courage” and “faces down the fake media every day,” said Sen. Rand Paul (R–Ky.) on Monday. At a Trump 2020 rally in Lexington, Kentucky, Paul called upon media to out the whistleblower who first raised objections about Trump’s July call with Ukrainian President Volodymyr Zelenskiy. Paul also asked colleagues in Congress to make both the whistleblower and Joe Biden’s son Hunter testify.
“We also now know the name of the whistleblower,” said Paul. “I say tonight to the media, ‘Do your job and print his name!’ And I say this to my fellow colleagues in Congress, to every Republican in Washington, ‘Step up and subpoena Hunter Biden and subpoena the whistleblower!'”
Ugh.
Paul’s enthusiastic and near perpetual support for Trump actions continues to bum out many libertarians—who had hoped Rand would turn out more like his father, former Sen. Ron Paul—and limited-government conservatives, for whom the Kentucky senator was a bright spot back when the Tea Party movement showed promise and principles. In the #MAGA era, Paul has become one of the biggest cheerleaders of Trump-style Republicanism and a tireless defender of the president’s perspective.
“Glad Rand Paul could find a purpose in Washington once it became clear that the right doesn’t care about the size of government,” quippedHotAir blogger and anti-Trump conservative Allahpundit yesterday. “Nothing says ‘libertarian’ like [checks notes] intimidating people who allege abuses of government power.”
“I am seriously struggling to find consistency between the purported libertarian philosophy of Rand Paul and his desire to place a lawful whistleblower in harm’s way,” tweeted national security lawyer and legal pundit Bradley Moss.
Even Rep. Justin Amash (I–Mich.)—one-third of the once libertarian-leaning Republican trio that included Rand Paul and Kentucky Rep. Thomas Massie—had what seemed to be a criticism of Paul’s Trump rally comments. On Monday night, Amash tweeted:
Libertarians, constitutional conservatives, and classical liberals believe in protecting whistleblowers to expose government corruption. Trump Republicans believe in exposing whistleblowers to protect government corruption.
Paul himself was once a more robust defender of whistleblowers and advocated expanding protections for them. Back in 2014, Paul told a Campaign for Liberty conference audience that he was considering ways to “expand the whistleblower statute to government contractors,” not just employees. “We’ve got so many millions of government contractors that when they see something wrong, they should be able to report it without repercussions,” he said.
On Monday night, Republican 2020 presidential candidate Joe Walsh called on Paul “to have the courage to immediately find the other Rand Paul,” the one Walsh “used to admire.” He also accused Paul of being “emasculated by Donald Trump.”
“I know this is gonna piss a whole bunch of people off but Nope. I’m done with Rand,” tweeted libertarian podcaster Jen Monroe. “He’s no different than any other garden variety Republican.”
Paul still advocates against endless and unauthorized military intervention and is willing to vote against popular but flawed legislation (he was one of only two senators, for instance, to vote against the prostitution-ad criminalizing bill FOSTA last year). But Paul is also—seemingly increasingly—willing to not just look the other way when Trump acts contrary to constitutional principles and trashes free markets.
FREE MINDS
A teen’s joking post about taking out a hit on a high school staffer prompted Pasco County, Florida, to arrest him on charges of solicitation to attempt murder. At a press conference, Pasco County Sheriff Chris Nocco said “it doesn’t matter what the intent was. When you do it and post it on social media, the crime is committed.”
Nocco admitted that law enforcement knew of no actual problem between the teen and the staff member and that they believe the teen had no intent to carry out the crime, nor the means to fork over a $100,000 payment for the hit.
FREE MARKETS
Surprising no one who has been in corporate meetings…
Microsoft Japan gave its employees a four-day workweek (with five days' pay), and it also made a bunch of meetings half as long. Productivity grew by 40%. https://t.co/758J5z7Yy9
The popularity and quick rise of TikTok “is forcing Americans for the first time to consider living in a world influenced by a Chinese-backed social media network.”
Not satisfied to merely convict a 55-year-old woman of permitting prostitution and revoke her massage business license, Delaware prosecutors also filed civil charges against her for the same conduct. She was found guilty in the state’s Superior Court and the state is seeking the maximum available fine of $300,000.
In the largest single-day commutation in history, Oklahoma Gov. Kevin Stitt, a Republican, has commuted the sentences of 527 people serving time in the state for low-level offenses.
Protecting and serving:
Columbus, OH: Averaging 2 arrests a day, the newly formed community policing team, renamed&retrained VICE cops, have arrested 110 sex workers for prostitution https://t.co/MmzlHSAX6n
Between 1990 and 2016, the share of the world’s population with access to the internet rose from zero to 46 per cent. It is expected to rise to 52 per cent by 2020. https://t.co/Utm2adJSgn
President Donald Trump “has great courage” and “faces down the fake media every day,” said Sen. Rand Paul (R–Ky.) on Monday. At a Trump 2020 rally in Lexington, Kentucky, Paul called upon media to out the whistleblower who first raised objections about Trump’s July call with Ukrainian President Volodymyr Zelenskiy. Paul also asked colleagues in Congress to make both the whistleblower and Joe Biden’s son Hunter testify.
“We also now know the name of the whistleblower,” said Paul. “I say tonight to the media, ‘Do your job and print his name!’ And I say this to my fellow colleagues in Congress, to every Republican in Washington, ‘Step up and subpoena Hunter Biden and subpoena the whistleblower!'”
Ugh.
Paul’s enthusiastic and near perpetual support for Trump actions continues to bum out many libertarians—who had hoped Rand would turn out more like his father, former Sen. Ron Paul—and limited-government conservatives, for whom the Kentucky senator was a bright spot back when the Tea Party movement showed promise and principles. In the #MAGA era, Paul has become one of the biggest cheerleaders of Trump-style Republicanism and a tireless defender of the president’s perspective.
“Glad Rand Paul could find a purpose in Washington once it became clear that the right doesn’t care about the size of government,” quippedHotAir blogger and anti-Trump conservative Allahpundit yesterday. “Nothing says ‘libertarian’ like [checks notes] intimidating people who allege abuses of government power.”
“I am seriously struggling to find consistency between the purported libertarian philosophy of Rand Paul and his desire to place a lawful whistleblower in harm’s way,” tweeted national security lawyer and legal pundit Bradley Moss.
Even Rep. Justin Amash (I–Mich.)—one-third of the once libertarian-leaning Republican trio that included Rand Paul and Kentucky Rep. Thomas Massie—had what seemed to be a criticism of Paul’s Trump rally comments. On Monday night, Amash tweeted:
Libertarians, constitutional conservatives, and classical liberals believe in protecting whistleblowers to expose government corruption. Trump Republicans believe in exposing whistleblowers to protect government corruption.
Paul himself was once a more robust defender of whistleblowers and advocated expanding protections for them. Back in 2014, Paul told a Campaign for Liberty conference audience that he was considering ways to “expand the whistleblower statute to government contractors,” not just employees. “We’ve got so many millions of government contractors that when they see something wrong, they should be able to report it without repercussions,” he said.
On Monday night, Republican 2020 presidential candidate Joe Walsh called on Paul “to have the courage to immediately find the other Rand Paul,” the one Walsh “used to admire.” He also accused Paul of being “emasculated by Donald Trump.”
“I know this is gonna piss a whole bunch of people off but Nope. I’m done with Rand,” tweeted libertarian podcaster Jen Monroe. “He’s no different than any other garden variety Republican.”
Paul still advocates against endless and unauthorized military intervention and is willing to vote against popular but flawed legislation (he was one of only two senators, for instance, to vote against the prostitution-ad criminalizing bill FOSTA last year). But Paul is also—seemingly increasingly—willing to not just look the other way when Trump acts contrary to constitutional principles and trashes free markets.
FREE MINDS
A teen’s joking post about taking out a hit on a high school staffer prompted Pasco County, Florida, to arrest him on charges of solicitation to attempt murder. At a press conference, Pasco County Sheriff Chris Nocco said “it doesn’t matter what the intent was. When you do it and post it on social media, the crime is committed.”
Nocco admitted that law enforcement knew of no actual problem between the teen and the staff member and that they believe the teen had no intent to carry out the crime, nor the means to fork over a $100,000 payment for the hit.
FREE MARKETS
Surprising no one who has been in corporate meetings…
Microsoft Japan gave its employees a four-day workweek (with five days' pay), and it also made a bunch of meetings half as long. Productivity grew by 40%. https://t.co/758J5z7Yy9
The popularity and quick rise of TikTok “is forcing Americans for the first time to consider living in a world influenced by a Chinese-backed social media network.”
Not satisfied to merely convict a 55-year-old woman of permitting prostitution and revoke her massage business license, Delaware prosecutors also filed civil charges against her for the same conduct. She was found guilty in the state’s Superior Court and the state is seeking the maximum available fine of $300,000.
In the largest single-day commutation in history, Oklahoma Gov. Kevin Stitt, a Republican, has commuted the sentences of 527 people serving time in the state for low-level offenses.
Protecting and serving:
Columbus, OH: Averaging 2 arrests a day, the newly formed community policing team, renamed&retrained VICE cops, have arrested 110 sex workers for prostitution https://t.co/MmzlHSAX6n
Between 1990 and 2016, the share of the world’s population with access to the internet rose from zero to 46 per cent. It is expected to rise to 52 per cent by 2020. https://t.co/Utm2adJSgn
With the market breaking out to all-time highs, the media has started to once again reach for their party hats as headlines suggest clear sailing for investors ahead.
After all, why not?
The Federal Reserve cut rates for the 3rd time this year.
The Fed is also back in the “QE” game of buying bonds.
“Assuming we are correct, and Trump does indeed ‘cave’ into China in mid-October to get a ‘small deal’ done, what does this mean for the market.
The most obvious impact, assuming all ‘tariffs’ are removed, would be a psychological ‘pop’ to the markets which, given that markets are already hovering near all-time highs, would suggest a rally into the end of the year. “
This is not the first time we presented analysis for a “bull run” to 3300.To wit:
“The Bull Case For 3300
Momentum
Stock Buybacks
Fed Rate Cuts
Stoppage of QT
Trade Deal”
All the boxes have been checked.
Even more important than these supports, is the overall psychology of the markets. As Doug Kass recently noted, investors “want to believe.”
“’Price has a way of changing sentiment.’ – The Divine Ms M.
They want to believe that the trade talks between the U.S. and China will be real this time.
They want to believe that there is no ‘earnings recession’ even though S&P profits through the first half of 2019 are slightly negative (year over year) and that S&P EPS estimates have been regularly reduced as the year has progressed.
They want to believe that stocks are cheap relative to bonds even though there is little natural price discovery as central banks are artificially impacting global credit markets and passive investing is artificially buoying equities.
They want to believe that technicals and price are truth – even though the markets materially influenced by risk parity and other products and strategies that exaggerates daily and weekly price moves.
They want to believe that today’s economic data is an “all clear” – forgetting the weak ISM, the lackluster auto and housing markets, the U.S. manufacturing recession, and the continued overseas economic weakness.
They want to believe that, given no U.S. corporate profit growth, that valuations can continue to expand (after rising by more than three PEs year to date).
They want to believe though that the EU broadly has negative interest rates and Germany is approaching recession (while the peripheral countries are in recession) – that the Fed will be able to catalyze domestic economic growth through more rate cuts.
They want to believe that the U.S. can be an oasis of growth even though the economic world is increasingly flat and interconnected and the S&P is nearly 50% dependent on non U.S. economies.”
The “need to believe” is a powerful force which has lured investors back into the “warm waters of complacency.” The sentiment is certainly understandable given the market’s advance which has triggered investor’s “Pavlovian” response to the ringing of “the bell.” This was shown recently by a series of charts from Sentiment Trader.
Everyone Back In The Pool
As asset prices have escalated, so have individual’s appetite to chase risk. The herding into equities suggests that investors have thrown caution to the wind.
With cash levels at the lowest level since 1997, and equity allocations near the highest levels since 1999 and 2007, it suggests investors are now functionally “all in.”
With net exposure to equity risk by individuals at historically high levels, it suggests two things:
There is little buying left from individuals to push markets marginally higher, and;
The stock/cash ratio, shown below, is at levels normally coincident with more important market peaks.
But it isn’t just individual investors that are “all in,” but professionals as well.
Importantly, while investors are holding very little “cash,” they have taken on a tremendous amount of “risk” to chase the market. It is worth noting the current levels versus previous market peaks.
Importantly, what these charts clearly show is there is nothing wrong with aggressively chasing the markets, until there is.
“At market tops, it is common to see what I call the ‘high-five effect’ — that is, investors giving high-fives to each other because they are making so much paper money. It is happening now. I am also suspicious when amateurs come out of the woodwork to insult other investors.”
Michael’s point is very pertinent, particularly today. As shown in the two charts below, investors are clearly “high-fiving” each other as risk aversion hits near record lows.
While the fundamental backdrop of the market has materially weakened, the confidence of individuals has surged. Of course, as the markets continue their relentless rise, investors feel “bullet proof” as investment success breeds overconfidence.
As Sentiment Trader shows, retail investors (dumb money) are currently pushing levels which have typically denoted short-term market peaks, This should not be surprising as individuals, with regularity, “buy tops and sell bottoms.”
Strongly rising asset prices, particularly when driven by emotional exuberance, “hides” investment mistakes in the short term. Poor, or deteriorating, fundamentals, excessive valuations and/or rising credit risk is often ignored as prices increase. Unfortunately, it is after the damage is done that the realization of those “risks” occurs.
Regardless of what you believe, a “bear market” will eventually come. We don’t/won’t know what will trigger it, but some unforeseen exogenous event will start a “flight to safety” by investors. The chart below is the “bear market” probability model from Sentiment Trader. Importantly, note the index peaks a couple of years before the onset of a “bear market.” (The last peak was in 2015)
Here is the point, despite ongoing commentary about mountains of “cash on the sidelines,” this is far from the case. This leaves the current advance in the markets almost solely in the realm of Central Bank activity.
Again…there is nothing wrong with that, until there is.
Which brings us to the ONE question everyone should be asking.
“If the markets are rising because of expectations of improving economic conditions and earnings, then why are Central Banks pumping liquidity like crazy?”
Despite the best of intentions, Central Bank interventions, while boosting asset prices may seem like a good idea in the short-term, in the long-term it harms economic growth. As such, it leads to the repetitive cycle of monetary policy.
Using monetary policy to drag forward future consumption leaves a larger void in the future that must be continually refilled.
Monetary policy does not create self-sustaining economic growth and therefore requires ever-larger amounts of monetary policy to maintain the same level of activity.
The filling of the “gap” between fundamentals and reality leads to consumer contraction and ultimately, a recession as economic activity recedes.
Job losses rise, wealth effect diminishes, and real wealth is destroyed.
The middle-class shrinks further.
Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption.
Wash, Rinse, Repeat.
If you don’t believe me, here is the evidence.
The stock market has returned more than 100% since the 2007 peak, which is more than 2.5x the growth in corporate sales and almost 5x more than GDP. The all-time highs in the stock market have been driven by the $4 trillion increase in the Fed’s balance sheet, hundreds of billions in stock buybacks, PE expansion, and ZIRP.
What could possibly go wrong?
However, whenever there is a discussion of valuations, it is invariably stated that “low rates justify higher valuations.”
Maybe.
But the argument suggests rates are low BECAUSE the economy is healthy and operating near full capacity.
The reality is quite different.
The main contributors to the illusion of permanent prosperity have been a combination of artificial and cyclical factors. Low interest rates, when growth is low, suggests that no valuation premium is “justified.“’
Currently, investors are taking on excessive risk, and thereby virtually guaranteeing future losses, by paying the highest S&P 500 price/revenue ratio in history and the highest median price/revenue ratio in history across S&P 500 component stocks. This valuation problem was discussed last week by our friends at Crescat Capital. To wit:
There are virtually no measures of valuation which suggest making investments today, and holding them for the next 20-30 years, will work to any great degree.
That is just the math.
The markets are indeed bullish by all measures. From a trading perspective, holding risk will likely pay off in the short-term. However, over the long-term, the “house will win.”
Just remember, at market peaks – “everyone’s in the pool.”
ABC Anchor Admits Network Covered Up Epstein Evidence For Years: Veritas
A new undercover video from Project Veritas reveals that ABCNews knew of Jeffrey Epstein’s sex crimes, yet decided to ignore it according to undercover footage from Project Veritas.
Amy Robach, ‘Good Morning America’ Co-Host and Breaking News Anchor at ABC, explains how a witness came forward years ago with information pertaining to Epstein, but Disney-owned ABC News refused to air the material for years. Robach vents her anger in a “hot mic” moment with an off-camera producer, explaining that ABC quashed the story in it’s early stages. “I’ve had this interview with Virginia Roberts (Now Virginia Guiffre) [alleged Epstein victim]. We would not put it on the air. Um, first of all, I was told “Who’s Jeffrey Epstein. No one knows who that is. This is a stupid story.”
She continues, “The Palace found out that we had her whole allegations about Prince Andrew and threatened us a million different ways.” -Project Veritas
“…[T]here will come a day when we will realize Jeffrey Epstein was the most prolific pedophile this country has ever known,” said Attorney Brad Edwards.
According to Robach, “I had it all three years ago.”
Watch:
This is far from the first time Epstein’s crimes have been covered up, minimized, or ignored.
Perhaps most famously, former US Secretary of Labor Alex Acosta negotiated a ‘sweetheart deal’ for Epstein in 2008 after he pleaded guilty to soliciting prostitution from a minor. The pedophile financier was able to ‘work’ outside of prison most days, during which time he reportedly continued to abuse girls.
Additionally, the Manhattan DA’s office headed by Cyrus Vance Jr. had ‘graphic and detailed evidence’ of Epstein’s crimes when a prosecutor argued for leniency during his 2011 sex offender registry hearing, according to an April report in the New York Post.
In advance of the hearing, then-deputy chief of Sex Crimes, Jennifer Gaffney, had been given a confidential state assessment that deemed Epstein to be highly dangerous and likely to keep preying on young girls, the DA’s office admitted in its own appellate brief eight months after the hearing.
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Manhattan prosecutors were aware the state board had assigned Epstein a risk assessment of 130, a number that is “solidly above the 110 qualifying number for level three,” with “absolutely no basis for downward departure,” the brief notes.
Nevertheless, Gaffney argued that he should be labeled a level one offender, the least restrictive, which would keep him off the online database. –New York Post
While Acosta lost his job in the Trump administration over his actions in 2008, will anyone be held truly accountable for enabling Epstein’s decades-long pattern of abuse?
