Just over a week ago the world was coming unglued, as enough
British citizens grew a pair and spit in the face of the EU establishment and
global elite by voting to exit the EU. The fear mongering by central bankers and their puppet
political hacks failed to deter people who have become sick and tired of being
abused and pillaged by bureaucrats working on behalf of bankers and
billionaires.
Stock markets around the world plummeted on Thursday and Friday.
The world braced for another Black Monday. The phone lines were buzzing between
central bankers around the world over the weekend as their banker constituents
demanded relief. If one thing
has been proven over the last seven years, it’s a coordinated effort between
central bankers and Wall Street banks to rig the stock market higher can work
over a short time period.
The titans of finance were able to once again confound short-sellers
and the prophets of doom with a 5% surge from the Friday lows over the next
week. It was surely a coincidence the Fed declared all Wall Street banks, safe,
sound, and capable of buying back their stocks to the tune of billions early in
the week.
These insolvent zombies were now free to borrow billions to buy back
their overvalued stocks, destroying shareholder value, while boosting executive
compensation. Poor Jamie Dimon is struggling to get by on his $27 million per
year. The Wall Street banks obliged by immediately announcing multi-billion
dollar buyback schemes to capitalize on the short-term trading mentality of the
30-year-old MBA trading geniuses who bought the news without worrying about the
actual value of the stocks they were buying.
The stock prices of the
biggest banks in the world rose in unison, as the lemming traders use the same
HFT programs and the same illogical thought process. By the end of the week,
Brexit meant nothing as far as the markets were concerned. And they are
probably right. Brexit was just the latest distraction to keep the masses
focused on the wrong things, as the scoundrels continue to pillage the wealth
of the people.
The largest banks in the world have experienced large declines
over the last year before Brexit ever entered the lexicon. Even after the
central banker induced bounce last week, the price action of the largest banks
in the world over the last year reflect an impending financial crisis. The
truth is the Fed’s report on the health of banks is nothing but propaganda to
keep the masses sedated. Without the suspension of mark to market rules in
March 2009, every major bank in the world would have been liquidated in
bankruptcy. Anyone who thinks these banks are healthy is either brain dead or
dependent upon the establishment for their sustenance.
The EU economic situation still reflects depression conditions
across most of the continent. Europe is drowning in bad debt as their largest
banks (Deutsche Bank, Barclays, BNP, all Italian banks) are effectively
insolvent and are propped up by the EU central bank. Greece was never fixed. Nothing has been fixed. The little
people continue to suffer, while the Brussels bureaucrats fiddle and delay the
inevitable implosion by replacing old bad debt with new bad debt. The idiocy of
allowing millions of refugees to flood the continent when their socialist
paradise is already bankrupt is beyond comprehension for rational thinking
people.
Brexit was nothing more than a reaction to the political
corruption of the establishment and the economic policies (bank bailouts, ZIRP,
QE, NIRP) jammed down the people’s throats by the rich to benefit the rich. The
middle and lower classes around the world have been screwed over by the bankers
and their captured politicians. The anti-establishment sentiment is spreading
like wildfire and is likely to set off a firestorm which will eventually burn
down the palaces of the ruling elite. But, in the meantime, these greedy myopic
sociopathic bastards will use every means necessary to retain their power,
control of the system and their immense riches.
The stock market is their sole gauge of success or failure. The
Federal Reserve and their central banker brethren in Japan, China and Europe
know they are running nothing but a confidence game based on their ability to
keep their debt based Ponzi scheme running for a little while longer. Their
fear is palpable. They’ve tried every monetary trick in their briefcases. They
have failed to revive the real economy, but that was a secondary goal. Their job was
to revive the wealth of their banker owners and the billionaire class who run
the show. Keeping the stock market elevated has become their one and only goal.
Confidence in clueless
academics like Yellen is dwindling. Anger is building among the hoi polloi.
They are sick of getting pissed on, while the politicians and bankers tell them
it’s just rain. Brexit was another crack in the ice. I was not surprised by the
stock market recovery. When Bear Stearns collapsed in March 2008 the market
sold off but quickly recovered all its losses. Six months later the world blew
sky high. Jim Cramer and his slimy ilk were bullish the whole way down.
Brexit is just a symptom of the disease eating
away at the fabric of our global economy. Lehman’s collapse was not
the cause of the 2008 worldwide financial crisis. It was just the excuse for
something that was going to happen no matter what. Bad debt, bad bankers, bad
regulators, bad politicians, media cheer leading, and a willfully ignorant
populace were a toxic combination – and it’s worse today.
The always thoughtful and honest John Hussman
points out the coming stock market crash will have nothing to do with Brexit or
any other excuse used by the mainstream media to obscure the truth. It’s the
extreme valuations that will result in the stock market falling.
First
things first. While the full attention of financial market participants is
focused on “Brexit” – last week’s British referendum to exit the European Union
– the singular factor to recognize here is that the vulnerability of the
financial markets to steep losses has very little to do with Brexit per se.
Rather, years of yield-seeking speculation, encouraged by central banks, had
already brought the financial markets to a precipice prior to last week’s vote.
It’s not entirely clear whether Brexit is a sufficient catalyst to burst the
bubble, as we recall that the failure of Bear Stearns in early-2008 was followed
by a period of calm before the crisis was sealed by Lehman’s failure, and
numerous dot-com stocks had already been obliterated by September 2000, when
the tech bubble began its collapse in earnest. We’ll take the evidence as it
comes, but we’re certainly defensive at present, for reasons that have little
to do with Brexit at all.
The Brexit “recovery” was touted by the CNBC apparatchiks as
proof all is well. They dare not point out a 10-year investment in Treasuries
will net you a 1.35% yield (the lowest in history) and almost guaranteed
capital losses. They certainly won’t pontificate on stocks being priced to
deliver negative real returns over the next 10 years. You won’t hear any warnings about home prices now
exceeding the 2005 peaks in most major markets, just prior to a 30% collapse.
Commercial real estate is also at bubble levels. Every asset class is
overvalued. There is no place to hide and the average Joe is unwittingly
unaware of the danger looming just over the horizon. Hussman explains the peril
awaiting the unprepared.
The
high-level churning in global financial markets since late-2014 represents what
we view as the top formation of the third speculative bubble in 16 years. For
the U.S. market, valuation measures most reliably correlated with actual
subsequent market returns pushed to the third most offensive extreme in history
at the May 2015 market high, eclipsed only by the 2000 and 1929 peaks
(see Choose Your Weapon for a ranking of
various measures, and the chart series in Imagine for
a current perspective). Because this speculative episode has infected nearly
every asset class, rather than favoring tech stocks or mortgage securities as
in previous bubbles, the median price/revenue ratio across individual U.S.
stocks actually pushed to the most extreme level on record in recent weeks,
before promptly retreating on Friday.
Brexit doesn’t matter. Japan’s deflationary depression doesn’t
matter. The fraudulent US jobs recovery and falsified inflation figures don’t
matter. The Chinese real estate collapse doesn’t matter. Low oil prices
destroying the economies of Middle East countries, Russia, Venezuela, and
Brazil don’t matter. Double digit unemployment and civil chaos across Europe
don’t matter. Speeches by Yellen, Draghi, and Kuroda attempting to prop up
markets don’t matter. Mainstream corporate media propaganda about economic
growth doesn’t matter.
The latent risk is already in place. Total global debt is now
$70 trillion higher than it was in 2007, a 50% increase. Real median household
income is lower than it was in 2007, while rent, food, healthcare, and taxes
have risen dramatically. QE, ZIRP, and a myriad of other Keynesian “solutions”
have failed miserably, while piling unpayable debt on top of unpayable debt.
With corporate profits plunging, all economic indicators flashing red,
consumers tapped out, confidence in leaders waning, and stock valuations at
extreme levels, the plunge through thin ice is inevitable. The trigger is
inconsequential, as Hussman points out.
“Imagine
the error of skating on thin ice and plunging through. While we might examine
the hole in the ice in hindsight, and find some particular fracture that
contributed to the collapse, this is much like looking for the particular
pebble of sand that triggers an avalanche, or the specific vibration that
triggers an earthquake. In each case, the collapse actually reflects the
expression of sub-surface conditions that were already in place long before the
collapse – the realization of previously latent risks.
Finding the specific trigger that causes the skaters to plunge
through the ice isn’t particularly informative. The fact is that catastrophe is
inevitable the moment the skaters ignore the latent risk or rely on faulty
evidence to conclude that the ice is stable. The fracture in some particular
span of ice is just one of numerous other spots that might have otherwise given
way if the skaters had chosen a different course. Hitting that spot creates the
specific occasion for the underlying risk to be expressed, but an unfortunate
outcome was already inevitable much earlier.”
The dead EU bounce produced by central bank coordination, Wall
Street buyback announcements, and hedge fund HFT machines buying the most
shorted stocks, appears to have run its course. These rigged markets do not
reflect fundamentals or valuations. They are controlled by traders and central
bankers. Their movements are based on technical criteria programmed into Wall
Street supercomputers by Ivy League MBAs. Their lemming-like behavior works
well on the way up, but not so good on the way down.
Deteriorating fundamentals, a
two-year topping distribution, and declining liquidity has set the stage for a
market plunge. As Hussman points out, in a technical market where all players
are following the exact same playbook, when certain levels are breached the
bottom will fall out of this market and no one will step in to buy. It’s a long
way down to fair value – at least 50%.
But for investors, the main
objects of focus should be the condition of valuations and market action,
particularly the status of market internals, and the position of the major
indices relative to various trigger points that might result in concerted
selling attempts by trend-followers. That’s particularly important since
value-conscious investors will likely have little interest in absorbing shares
at nearby prices.
The general public always underestimates the danger at market
tops. Things have been going swimmingly well for those with substantial assets
to gamble in the markets. As we entered 2008 the “experts” on Wall Street, in
academia, and in the financial media predicted smooth sailing and 10% annual
returns in perpetuity.
They called Bear Stearns a hiccup on the road to riches. The
enormous mortgage control fraud being perpetrated by the largest banks in the
world went unnoticed by Bernanke and his band of merry bankers. Paulson acted
cluelessly. Bush muddled along in his moronic trance. Until the ice gave way
and hundreds of millions went under and have never come back up. Brexit is a
large crack in the ice. Italian banks are the next crack. Muslim refugees are a
crack. Declining oil prices are a crack. There are dozens of potential triggers
for the inevitable clearly foreseeable catastrophe.
As we saw with the Bernie Madoff Ponzi scheme, it can go on for
years with the willful disregard of regulators and co-conspirators (JP Morgan),
the denial of reality by investors, and the illusion of stability provided by
the Ponzi masters. Once stress is applied and too many investors ask for their
money at the same time, the collapse is sudden and catastrophic.
Hussman knows the EU is a Ponzi scheme, their banks are
insolvent, and collapse is inevitable. The EU leadership is attempting ever
greater distortions to avoid the catastrophic collapse. Britain just asked for
their money back. Referendums loom in other countries. They will not be the
cause of the collapse. The fundamentally unsound and increasingly bankrupt
system is the cause.
Think of
the EU, in its current ill-structured form, as a kind of Ponzi scheme, and
Britain as the guy who just asked for his money back. There are undoubtedly
greater prospects for near-term disruption after last week’s vote, but the
hallmark of a Ponzi scheme is the attempt to use progressively greater
distortions in order to preserve a structure that is fundamentally unsound and
increasingly bankrupt.
Reprinted from The Burning Platform.