The IMF has estimated that an economic downturn HALF as severe as 2008 could cause over $19 trillion in debt to the point where the borrowers couldn’t even be able to cover interest payments. (Notice they don’t even mention repayment).
But don’t worry! Stocks continue to climb higher as I write this. Too bad there are signs the economy supporting said “markets” are imploding at an increasing pace. There are many “experts” extolling the virtues of our “greatest economy of all time” and pointing out numbers (manufactured) that justify their positions.
The fact that the “markets” are rising gives solace to many but what is being missed (or ignored) is the fact- exposed in the Wall Street Journal- that 40% of listed companies in the USA LOST MONEY over the last 12 months. Let that sink in as indexes reach all-time highs. In 2018, 81% of IPO’s were money-losers. That is the same number as the year 2000.
Let’s get a look at some of the numbers and see how real they are.
I will start with bank stocks- many of whom are reporting earnings this week. The numbers, sans Wells Fargo, have been pretty good. This leads many to believe that all is well in financial land.
If “all is well” why are the banks needing upwards of a hundred billion dollars per day to maintain liquidity? I have looked at the Fed website and noticed that the Fed balance sheet is up $400 billion in the last few weeks and the repo reporting seems to show FAR more repos (money going out) than reverse repos (money coming back). I don’t claim to have a great knowledge of how this all works but I will say that looking at the numbers there are hundreds of billions and possibly trillions of dollars that appear to be somewhere but are not showing up on the Fed’s balance sheet as far as I can tell.
Even as banks continue to record profits, the way they are doing it is as important as the result.
Let’s take Bank of America. Their revenues declined by $400 million since last year. Net income declined $300 million. That is a 9.7% loss. On the other side of the coin their TRADING revenue climbed 13% to 2.86 billion. This seems to suggest that my “the big banks are gambling casinos” theory is pretty correct.
At the end of the day net income still declined by 4% overall. The Earnings per share, however increased by 6%. You may ask how that could be possible with declining revenues and net income. It is really simple. They bought back 9% of outstanding shares, that reduced the shares outstanding and allowed them to report a great number even as their core businesses are bleeding red. UNLESS their core business now is making bets on virtually all asset classes.
We are seeing games like this everywhere. In addition, Barrons has reported that S&P 500 earnings will likely fall 2.6% for the 4th. Quarter of 2019 when all is said and done. This is the 4th. Quarter in a row with year-over-year declining earnings.
Not all is pessimistic as some technology companies are issuing positive revisions to their expectations for 4th quarter earnings. I will note, however, that the consumer discretionary sector has cratered according to FACTSET Earnings Insight from expected growth of 2.5% to a DECLINE of 13.5%. The energy sector expected a decline in earnings of 21.8% but now expects -36.8%. Materials expected a gain of 1.5% in earnings but now expects a 10.4% DECLINE. Industrials reportedly expected an earnings gain of 3%- instead they now expect an 8.5% DECLINE.
Does this sound at all like a booming economy?
Despite consumers adding record debt during the 2019 holiday season same store sales at major retailers like Macy’s, JC Penney, and Kohls all posted same-store sales DECLINES. While Target saw same store sales rise they rose less than expected and I believe offer an insight as to the problems facing many retailers today- and NO it is not the internet- actually Target’s on-line business was up 19%.
Target noted that apparel and beauty sales were up while electronics, toys and home goods sales were down. I believe this shows that more and more people are buying necessities rather than luxuries even at Christmas. This at the same time that consumers are wracking up even more debt to maintain the lifestyle that they have become accustomed to but are having a hard time keeping up with.
Another ominous sign is that on Zerohedge it was reported that 50 million Americans still haven’t paid off the 2018 Christmas debt. 50% of Americans also reported that their incomes don’t cover their living expenses- but don’t worry! The consumer is STRONG!
This may at least partially explain the record 9300 store closings in the USA in 2019- the second record year for store closings in a row and why manufacturing and shipping numbers are collapsing.
In the meantime, central banks globally continue to “print” money out of nowhere to give the illusion of solvency and normalcy. This is propping up stocks, bonds and real estate while they suppress the price of other assets like gold and silver. This is at the same time central banks (Who can click “money” into existence at virtually no cost to them) are buying gold in record amounts.
Does it make sense to anyone that it might be smart to watch what these guys are doing and follow their lead?
I have spoken to many young people lately who, I believe because of the hype on the financial game shows and a rapidly rising S&P, are getting sucked into the euphoria and buying stocks- at a time by the way, when they are more overvalued than at any time in history- including 1929, 1999, and 2008.
This does NOT bode well for future returns.
There are some tricks used by those in the media that lead to this irrational exhuberance also like:
Earnings beats… company beats estimated earnings. Never reported that expected earnings were actually lower than last year but that the forecast was lowered prior to the report so the earnings could beat expectations. Or shares can be bought back to give the illusion of an earnings beat- in any case it is always presented in a positive light.
In another P/E slight of hand negative earnings are generally EXCLUDED from index PE calculation giving the illusion of lower P/E’s than are actually being bought by someone buying an index fund.
Of course, it is never talked about on the financial game shows so hardly anyone knows that central banks are buying massive quantities of gold. Records were set in 2018 at over 670 tons of gold bought by central banks and it is expected that that number was eclipsed again in 2019.
Most people, I am finding, are grossly unaware of the repo operations, let alone what it may mean going forward. It is likely, in my opinion, that it grows and grows and could consume our current financial system that we know today. My guess is that there is likely a problem being concealed by this in the derivatives market. The notional value of the derivatives market is unknown but is believed to be over a quadrillion (a thousand trillions) or possibly double that. No amount of “printing” could fix that number- stay tuned!
It appears to me, and many others I may add, that the only way out of this will ultimately be a system reset. It appears we are far beyond any rational way to pay off the debts already rung up from persons to corporations, to cities, states and national governments. This is just debt- forget about the pension, social security and medicare promises made globally that are mostly unfunded.
I believe that anyone who has not thought about having assets that are not someone else’s liability is woefully unprepared for what is likely coming down the pike.
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