Month: November 2019

Via WolfStreet.com,

The phenomenon works – until it doesn’t. What’s astonishing is how long it works.

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

There is a phenomenon in stock markets, in bond markets, in housing markets, in cryptocurrency markets, and in other markets where people attempt to get rich. It’s when everyone is pulling in the same direction, energetically hyping everything, willfully swallowing any propaganda or outright falsehood, and not just nibbling on it, but swallowing it hook, line, and sinker, and strenuously avoiding exposure to any fundamental reality. For only one reason: to make more money.

People do it because it works. Trading algos are written to replicate it, because it works.

It works on the simple principle: If everyone believes stocks will go up, no matter what the current price or the current situation, or current fundamental data, then stocks will go up. They will go up because there is a lot of buying pressure because everyone believes that everyone believes that prices will go up, and so they bid up prices and chase stocks higher.

I call this phenomenon “consensual hallucination” – “consensual” because everyone eagerly smokes the same stuff in order to be able to get the same hallucinations everyone else is having, and to be part of the movement, because they believe that this movement will make them rich, and if enough people have this consensual hallucination, and if algos are programmed to trade with it, then it works wonderfully.

Until it doesn’t. The moment it doesn’t is when this hallucination begins to fade. And what happens then?

One of the most fascinating places were consensual hallucination is beautifully at work – until it isn’t – is in the entire cryptocurrency space. At first there was just bitcoin. Then more people invented their own cryptos and started selling them to others for real money. By now there are 2,350 cryptos listed on coinmarketcap.com. Everyone can create their own cryptos and attempt to sell them.

But in order to sell them and push up prices and make money, the creators have to get enough people together that eagerly transition into this consensual hallucination – the feeling that everyone is pulling in the same direction, and that this thing is going to go up and make everyone rich if everyone believes that everyone believes that it will make everyone rich.

There is no fundamental basis for any of these 2,350-plus cryptos to have any value above zero, from bitcoin on down.

But as the folks in the crypto space have found out, this consensual hallucination can suddenly wane, as enough folks are starting to cash out because they no longer believe that everyone believes that this thing will go up further. And suddenly, once they come out of this consensual hallucination, they worry that this sucker is going down. And they try to get out.

This is when prices begin to decline, or plunge, and these dropping prices pull more people out of their hallucinations with a sort of rude awakening, and they sell in order to hang on to what they still have left, and this pushes prices down further and yanks more people out of their consensual hallucinations.

It works wonderfully on the way up, and it can last a lot longer and be a lot more powerful than folks who haven’t smoked the same stuff think possible. But at some point, it turns into a treacherous and gut-wrenching mass-awakening.

To pinpoint when consensual hallucination begins to fade and more people come out from under it is the hardest thing in the world. Since consensual hallucination is by definition not rational, there is no particular rational cause, by definition, for it to end.

But consensual hallucination is not permanent. And it ends. It might be an extreme event that shakes people out of it, such as a severe recession or a financial crisis. Or it might be something more mundane, such as the perception that now is a good time to sell that then begins to spread.

If rational reasons had been allowed to rule those prices, they would have stopped rising a lot sooner. And some things, such as cryptos, would have withered on the vine.

At some point, people do come out from under this consensual hallucination. This can happen very gradually and unevenly, or suddenly and all at once. History is full of both events. And often it’s a combination, at first gradually and then suddenly, or vice versa.

The world is full of stock markets where this has happened:

• The Japanese Nikkei index is down 42% from the peak in 1989. This 30-year saga had several big plunges and lots of long phases where stocks were just meandering lower, interrupted by rallies. Japanese stocks are a superb example of consensual hallucination through 1989, followed by a treacherous and gut-wrenching awakening.

• China’s Shanghai Stock Exchange is another perfect example of consensual hallucination that people eventually came out of. That market peaked in October 2007, then plunged as people came out from under it, then soared again but not quite has high, and today remains 52% below the peak 12 years ago.

• There are many other similar examples, including Italian stocks that are down nearly 60% from the peak in 1999.

• Or French stocks, down 18% from the peak in 2000.

• Or Spanish stocks, down 40% from the peak in 2007.

The cryptocurrency space has gotten crushed since the end of 2017, amid the enormous multiplication of cryptos.

In the US, the whole stock-market system is laid out to promote consensual hallucination.

Wall Street’s “research” reports are designed to promote it. Big-money interests that are heavily invested in it promote it. Warren Buffett promotes it. The President promotes it. The Fed promotes it.

The Fed promotes the idea that it has surgically separated stock prices from economic and business realities by trying to get everybody to believe that everybody believes that it has succeeded in doing so, that no matter what, stock prices will always go up. If that doesn’t work, and markets drop anyway, then everyone believes that everyone believes that the Fed will prop them up.

The entire financial advisory industry promotes it. Brokers promote it.

Corporate earnings data is out there for everyone to see, but no one wants to see it. Instead, everyone wants to see and believe the fairy tale that Wall Street and Corporate America spin with such skill. That can take many forms, such as promoting “adjusted” earnings that have obviously been adjusted for the sole purpose of driving share prices higher.

Or promoting “forward earnings growth,” which means earnings growth sometime in the future, and it is always huge, and everyone knows that as the reporting date moves closer, those expectations are lowered. But it’s those distant, wildly inflated “forward earnings” that are used to figure “forward” earnings per share estimates, that are then bandied about as rationalization for the gravity-defying stock prices.

That these “forward” earnings are the biggest hoax out there isn’t new. Everybody knows that everybody knows that they’re dragged out to bamboozle, well, exactly whom? Everybody else?

But it works – as long as everyone believes that everyone believes that this will drive stocks higher. Many people believing in the same thing creates momentum, and momentum creates more momentum, and chasing this momentum creates even more momentum. But then something invariably happens, and the process falls apart.

What’s astonishing is just how long consensual hallucination lasts, and how shocked and appalled people are when it ends.

*  *  *

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Confirming earlier reports, moments ago Fitbit announced that it has agreed to be acquired by Google LLC for $7.35 per share in cash, valuing the company at a fully diluted equity value of approximately $2.1 billion. The purchase price represents a 63% discount from its $20/share 2015 IPO price (and even more from its opening price of $30.40).

After starting out strong out of the gate, FitBit’s revenue growth first slumped, then stalled at around $1.5 billion.

“More than 12 years ago, we set an audacious company vision – to make everyone in the world healthier. Today, I’m incredibly proud of what we’ve achieved towards reaching that goal. We have built a trusted brand that supports more than 28 million active users around the globe who rely on our products to live a healthier, more active life,” said James Park, co-founder and CEO of Fitbit, who waited about 4 yours too long before hitting the sell button.

“Google is an ideal partner to advance our mission. With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and make health even more accessible to everyone. I could not be more excited for what lies ahead.”

“Fitbit has been a true pioneer in the industry and has created terrific products, experiences and a vibrant community of users,” said Rick Osterloh, Senior Vice President, Devices & Services at Google. “We’re looking forward to working with the incredible talent at Fitbit, and bringing together the best hardware, software and AI, to build wearables to help even more people around the world.”

Fitbit was one of the original wearables companies, and has sold more than 100 million devices.

After the transaction, Fitbit will continue to remain platform-agnostic across both Android and iOS.

The transaction is expected to close in 2020, subject to customary closing conditions, including aapproval by Fitbit’s stockholders and regulatory approvals.Qatalyst Partners LLP acted as financial advisor to Fitbit, and Fenwick & West LLP acted as legal advisor.

Fitbit’s stock surged from a little over $4/share when the rumor first hit earlier this week, before being halted at $6.18 this morning ahead of the takeover announcement.

 

 

Nancy Pelosi has done it.

Without a single Republican vote, the Democratic leader has passed a resolution endorsing her impeachment inquest and setting forth rules and a loose timetable allowing it to proceed in an even more public fashion. In a 232-196 vote that underscored the bitter partisan divisions in Washington, Pelosi’s Dems were joined by 0 Republicans (and the chamber’s only independent, ex-Republican Congressman Justin Amash), while 2 Dems – Reps. Jeff Van Drew (D-NJ) and Collin Peterson (D-MN) – defected and voted ‘No’ with the Republicans. They both represent districts Trump won handily on 2016.

After weeks of public hearings, some have argued that it’s possible Gordon Sondland pressured the Ukrainians to investigate the Bidens, perhaps going off the reservation to pursue a crusade independent of his superiors (perhaps operating under the assumption that they would be happy with the results), Bloomberg reports.

As Bloomberg reports, the onus is now clearly on Nancy Pelosi to finish what she started. However, she is still losing in the areas where it matters most: No. 1) in the court of public opinion, where the country is roughly split on support for impeachment. That’s right: All of the Dems’ smears have had practically no impact, perhaps because the White House immediately moved to release the rough transcript, allowing the public to see with its own eyes that there was no quid-pro-quo during the July 25 call with Zelensky.

Whatever progress impeachment has made in terms of public opinion, Pelosi better prepare to lose it. Because, as Bloomberg points out, the impeachment inquiry has burst into public view. In a few weeks, public hearings will begin, and although the Dems promised the White House that Trump’s legal team would be allowed to participate, it turns they won’t be allowed to cross examine witnesses until the next round, which will be handled by the Judiciary Committee.

And even then, the Dems will have a veto over any witnesses the Republicans wish to call. Trump has been mostly shut out of the process so far, but his persistent criticisms of the Witch Hunt have still been effective, and that’s unlikely to change.

House Democrats, have been careful not to divulge their strategy, but some elements are coming into focus. By allowing Trump’s legal team to participate in the second, highly public, half of the pre-impeachment hearings, they’ve created a venue that could possibly lead to Trump testifying publicly. Or at least they set it up so that they could criticize Trump if he refuses.

It’s worth noting that the way this has all been set up, it’s almost as if the leadership assumes impeachment will fail, but has decided that the political boost they might gain by bashing Trump is worth the effort, according to the New York Times.

As one politico who spoke to the NYT reportedly said, it appears both sides have begun a “political death march” until the next election. For the Dems, that means allowing the newly reinvigorated far-left base to take the reins, at the risk of undermining the moderates who still vote in vast numbers across the US.

Via Market-Ticker.org,

Let’s get to the bottom line on all this “rate cut” nonsense.

The Fed made a fatal mistake in first promoting “fiscal” actions (during the 08 crash) and then continuing to support them well after the bottom in 2009.  This allowed Barack Obama to run trillion dollar deficits for years and, once he did so to push policies that were economically bankrupt (e.g. the ACA) and got them embedded it was faced with the reality of the creature of its own design.

It appears that Yellen thought she could leave her office with a belated “goodbye” of “normalization”, after having been complict herself, and evade the impending blow up — at least until after her chair had cooled off from her ugly ass sitting on same.

She was wrong.

Powell not only ratified Bernanke’s policy he doubled down on his and Yellen’s insanity instead of putting up the middle finger when Donald Trump was elected.  By supporting Trump’s crazy deficit spending ramp he managed to stick ~30% on the stock market at the cost of trapping The Fed, permanently, in financing deficits.

If there was no cost to the real economy or real people in doing this it would defensible.  But there is such a cost, and it falls on 90% of the population — which owns only a tiny percentage of equities.  Worse, that cost falls not only on savers but those who have a fiduciary responsibility toward safety and return, which also typically have as their beneficiaries that same 90% of the population!

Then there’s the impact on state and local governments who can’t earn that return either and thus this ramps property taxes in response.  And while ultra-low rates seem to be good in some other places (e.g. home values) that’s a chimera.

Let me explain: A boom in home prices screws basically everyone in the general public.

Think about it for a minute.

You and your wife own a small, 2 bedroom “starter” house.  You decide to have a family.  You need a bigger house.  Your house has gone up in value by 50% over the last 10 years.  Good, right?  Wrong!  The new, larger house has gone up by the same percentage; in dollars it’s gone up by much more!

50% of $100,000 is $50,000.  But 50% of $200,000 is $100,000!  Not only that but the property taxes have gone up by that same 50% and they’re due every year forevermore into the future and, what’s worse, the interest is due on the loan too.

So you say “well but I sell the $150,000 house and made $50k!”  Ah, Grasshopper, but the $200,000 house is now $300,000, and you only have $150k!  You got ****ed out of another $50,000; if there had been no price change your net requirement was another $100,000.  It’s now another $150,000 instead!  SURPRISE!

Of course the Realtor loves this because 6% of $300,000 is 50% more money than 6% of $200,000.  And the bank loves it too because they to charge a percentage interest on the principal, MSRs are typically computed not on a “dollars per loan” but as a percentage and similar.  The insurance company loves you too, because the higher “value” means premiums go up, since if the house burns or is hit by a tornado the loss is higher.  And the city loves it because millage is just a fancy word for percentage and they get it every year.

How do you win?  Well, only one way: When you die!  You see, if you move you sell your bubble house but you must replace it with something, and that’s another bubble house!  The only way you “win” is when you don’t need a place to live, which only happens when you croak.

Of course the persons who really lose are those who don’t have houses already.  But don’t think for a second that being a “homeowner” means you win from a housing bubble.  Nope.

Why in the Hell would you want housing prices to go up unless you’re (1) a banker, (2) a Realtor or (3) a City or County official?  Nobody else wants prices to go up!

Why have not everyone, ex the Realtors and Bankers, rioted already and burnt to the ground both The Federal Government and Federal Reserve for this bullcrap?

BECAUSE YOU CAN’T THINK YOUR WAY OUT OF A WET PAPER BAG, THAT’S WHY.

How about health care?  The latest MTS is out and as is the usual for September they played games.  That’s a nice way of saying they intentionally didn’t pay people at the end of the fiscal year to cook the books.  It’s not like this is a new game but the shortages are pretty impressive.  About $30 billion for Medicare and Medicaid, for example.  Then there’s Veterans’ Affairs that has required $200 billion this last fiscal year but somehow, magically, only required $9 billion last month.  Uh huh, roughly half the monthly run-rate — do you really expect me to believe that?  Then there’s “Civil Defense Programs” that somehow manages to need only $826 million but has a run rate of nearly $61 billion annually.  What?

This isn’t new, Mnuchin is doing nothing different than any of the previous *******s that warmed the chair he sits in.  While last month (which is a tax payment month) reported an alleged “surplus” for the month it was damn close to even had the games not been played.  Of course that would make the red ink look even worse, so cooking-the-books it shall be.

Just wait until you see all those vendors who scream and thus have to be paid in October and November!

How does this all tie in?  Simple: The Fed is driving the asset bubble so The Federal Government can run a trillion dollar deficit and not have their budget blow in their face.  This means suppressing rates, but doing that only works to a point, because eventually the fact that you still need the loan for the house and the principal still has to be paid irrespective of the interest rate chokes off demand.

It also chokes off net investment which it is already doing and Powell got questions on that this time around.  He doesn’t have an answer other than “we’re monitoring that” but he knows damn well that the no matter how cheap the money is when you drive up the capital cost sufficiently, which is what “lower for longer” does, the acquisition for investment still can’t be paid for.

This is where the foldback comes from folks.  It comes slowly at first and the signs of it are out there right now.

As pressure builds eventually GDP and hiring will start to roll over.  Which, of course, will goad the Federal Government into trying to support asset — read “stock” prices — with even more deficit spending and even lower rates.

There’s a coffin corner lurking out there when these policies are used in that negative rates are deflationary.  Think about it — you pay $10,000 and get back (10 years later) $9,000.  That’s deflation.  Their very presence doesn’t stoke inflation it’s directly deflationary, and the further you go down that road the worse it gets.  It’s not possible to create inflation with a deflationary policy.

Powell knows damn well that problem lurks out there because Japan has done it and found the corner yet they haven’t managed to get out of it despite claiming they can “any time they’d like” for the last 20 years.

How do you get out of it?  Boost rates, force the liquidations and those who are levered all go bankrupt.  Asset prices tumble and once the malinvestment has been sorted out people can afford to buy assets with their economic surplus once again, instead of playing the “pull forward” and “turn the crank” game.

Now how ugly does that get when the biggest borrower and more than a third of what is being spent by the Government is in Medicare and Medicaid?

Very.

Better not need either, for openers.

You should have found your pitchforks and road flares in 2008 folks.

I, and a few others, warned y’all.

With Wall Street expecting the first double-digit payrolls report since May, largely as a result of over 40K GM jobs not accounted for due to the strike, and with some whispers even hinting at a negative print, moments ago the BLS surprised once again, reporting that in October, the US added 128K jobs, a huge beat to the 85K expected, with the September payrolls report revised sharply higher to 180K from 136K.

The report includes a strike-driven 41,600 decline in automaker payrolls and 20,000 temporary census workers leaving their jobs. The result of the strike led to a 36K drop in manufacturing jobs.

The unemployment rate rose modestly to 3.6% from a half-century low of 3.5%, and in line with expectations, while the unemployment rate for blacks dropped to a fresh all time lows.

Average hourly earnings climbed 3% from a year earlier, matching projections after an upward revision the prior month, though the 0.2% monthly gain was slightly below the 0.3% estimate.

Developing