[Rushtalk] The Albatross Of Debt: The Stock Market's $67 Trillion Nightmare, Part 4

Carl Spitzer {C Juno} cwsiv at juno.com
Sun Apr 8 20:38:42 MDT 2018

The Albatross Of Debt: The Stock Market's $67 Trillion Nightmare, Part 4

By David Stockman

David Stockman's Contra Corner

March 3, 2018


The Donald seems to think that the 37% gain in the stock market between
election day and the January 26th high was all about him, and in one
sense that’s true.

Donald Trump is all about delusional and so are the casino punters. They
keep buying what the robo-machines are buying, which, in turn, persist
in feasting on the dip because it’s there and because it’s worked like a
charm for nine years running.

So doing, the punters have become downright reckless. After all, the
market was already sky high last January—-trading at 23X earnings on the
S&P 500 and resting precariously on a record $554 billion of margin
debt . Yet in order to load up on even more of these ultra risky shares,
punters have since added $112 billion to their already staggering margin
accounts, thereby helping to propel the S&P index to a truly
ludicrous 27X by the end of January 2o18.

And therein lies the true danger of the Fed’s 30-year long regime of
Bubble Finance and the $67 trillion of debt it has piled upon the US
economy. To wit, it has completely unmoored Wall Street from the main
street economy, meaning that the speculative momentum and internals of
the casino are operating in free flight: They will just keep levitating
financial asset prices higher until some powerful shock triggers another
meltdown of the type experienced during 2008, 2000 and 1987.

We happen to believe strongly that a bond market “yield shock” will be
the crash-trigger this time around and for a self-evident reason. The
central banks of the world have unleashed a credit monster—-$67
trillion in the US, $40 trillion or more in China and $230 trillion on a
global basis—and know they must finally stop the relentless monetization
of existing debt and other assets.

The leadership for that task falls to the new Fed Chairman, Jerome
Powell, who is a dyed-in-the-wool Keynesian and lifetime crony
capitalist bubble rider. Indeed, during the 45 meetings during which he
served as a member of the Bernanke-Yellen Fed, he did not dissent a
single time.

So he now owns the epic bubble generated by that madcap regime of
massive money printing and drastic interest rate repression, but through
his Keynesian beer goggles Powell is thoroughly clueless about the
resulting giant disconnect between main street and Wall Street.

Accordingly, he seems to think that there is a strong full-employment
economy on main street, when it’s nothing of the kind; and a reformed,
prudently regulated banking system at the center of Wall Street, when in
fact it’s teeming with the fruits of relentless speculation—-FANGS,
leveraged ETFs, options gambling, risk parity trades, structured finance
deals loaded with hidden risk and debt and countless more.`

In other words, the Fed’s new chairman avers that there is smooth
sailing ahead, even suggesting to Congress today that the US economy is
blessed with considerable tailwinds—including exports and fiscal policy!

We will address that tommyrot below, but what’s ahead is tumult, not
smooth. That’s because the disconnect between a flat-lining main street
economy and Wall Street’s bubble ridden financial house of cards is
blatantly unstable and unsustainable. Indeed, this fraught condition,
which Powell and his Keynesian posse fail to see, will soon give rise to
a thundering upheaval triggered by the Fed’s own action.

We speak, of course, of the planned normalization of rates with four
increases during the coming year, and the automatic pilot drive toward
an unprecedented $600 billion per year bond dumping campaign incepting
in October.

And that’s just the beginning: Powell implied today that the Fed’s
balance sheet would keep shrinking until it hits the $2.5
trillion range. That is to say, our clueless Keynesian central bankers
are fixing to dump upwards of $2 trillion of existing securities on the
debt markets.

Needless to say, the margin borrowers depicted in the upper reaches of
the chart below most definitely do not see it coming, and do not realize
that the pivoting Fed is no longer their friend.

In Part 3, we pretty much documented the disconnect: Namely, that
since the pre-crisis peak 10-years ago in Q4 2007, the inflation
adjusted S&P 500 index is up 58%, while the industrial economy has
essentially gone nowhere.

To wit, consumer goods output is still down 5%, manufacturing output is
down 2%, total industrial production including utilities is up
by just 2% and business equipment output has crept forward by less
than 3%. Even inflation-adjusted S&P 500 earnings are up by only 8% per

Nevertheless, the erroneous theory abides that the industrial sector is
a relic of your grandfather’s economy, and that production of energy,
metals, forests, farms and factories are not all that important:
Services will carry the day!

We tend to wonder, of course, as to where all the income to buy  rising
levels of food, fuel, consumer goods and capital equipment from abroad
is supposed to come from, if it’s not made here; and also how the
growing ranks of workers at nail salons, Pilates studios and golf
resorts are to be paid, if industrial sector value added and income is
not growing apace.

In fact, not withstanding the addition of $15 trillion of new debt to
the nation’s public and private balance sheet since Q4 2007, which in
the Keynesian method of economic reckoning did add modestly to
measured spending and therefore GDP, the services sector simply didn’t
take up the slack.

The graph below measures everything—the industrial economy and the
services sector including government—and it tells essentially the same
flatlining story.

Indeed, you can’t get a more comprehensive and reliable measure than
real final sales (which removes the distortions caused by inventory
stocking and destocking cycles and inflation). Yet real final sales
have expanded by only 15.2% since the Q4 2007 peak. That’s just 0.6% per
annum, and that a “recovery” does not make—at least by any historic

Thus, during the peak-to-peak cycle of the Reagan/Bush era (Q2 1981 to
Q2 1990) real final sales grew by 3.5% per annum, and during the 1990s
cycle by 3.3% per annum. Since then, however, all the money pumping in
the world—from the Fed’s $500 billion balance sheet in 2000 to the $4.5
trillion recent peak—has not moved the US economy forward at more than a
snails pace.

To wit, the peak-to-peak growth rate of real final sales during
the phony Greenspan housing boom was just 2.5% per annum; and during the
10-years since the Q4 2007 peak, it has slowed to just 1.4% per annum.
Indeed, if you throw in some Kentucky windage for the government’s
understatement of inflation, you basically have a flatlining 1% economy
on main street and a soaring bubble economy for the 1% on Wall Street.

Likewise, the true facts of the labor economy tell the same story. Back
in Q4 of 2007, the US nonfarm economy employed 237 billion labor hours
at an annualized rate. Yet after ten years of Jobs Friday ballyhoo on
bubble vision, the figure for Q4 2017 came in at 251.7 billion labor
hours or just 6.2%higher.

That’s right. Notwithstanding a cornucopia of low-paying, part-time jobs
in hotels, restaurants, ball parks, retail stores, temp agencies,
nursing homes, day care centers etc, total labor hours utilized by the
US economy have grown at just 0.6% per annum over the last decade.

Yes, like everything else, total labor hours took a big hit during the
Great Recession. Total hours employed dropped by more than 7%, but the
failure to rebound in the historic manner is precisely why the current
so-called recovery is so very different.

During the 1980s cycle, for instance, labor hours dropped by 3% from the
Q2 1981 peak to the Q4 1982 bottom, but then rebounded smartly from
there. For the cycle as a whole, which ended nine-years later in Q2
1990, total labor hours expanded by 2.0% per annum, notwithstanding the
big dip in 1981-1982.

Likewise, the peak-to-peak growth rate of total labor hours during the
1990s cycle—the longest in history—was 1.8% per year.

After that, however, the job-generating facility of the US economy
headed straight south. The growth rate for both cycles since the year
2000 has been just 0.6% per annum.

Needless to say, the punk growth of labor hours during the current
so-called recovery has not been made up by a surge
of productivity, either, or some kind of early arrival of the
vaunted robot age. In fact, labor productivity growth during the current
cycle has been barely half of that recorded during the previous three
business expansions.

Thus, during the 10 years since the Q4 2007 peak, the labor productivity
index has risen by just 12%—-again a far cry from the 58% gain in real
stock prices over the period.

On an annualized basis, that amounted to just 1.1%. And during the seven
years since Q4 2010 after the post-recession economy stabilized, the
productivity growth rate has skidded to just 0.7% per annum.

The trend over the last seven years, especially, is simply off the
historical charts—-meaning that it’s not a real recovery in any
meaningful sense of the word. For instance, during the 9-year
Reagan-Bush cycle, labor productivity grew at 1.7% per annum, and then
accelerated to 2.0% annually during the 1990s cycle and to 2.8% per
annum over 2001-2007.

Indeed, in the great sweep of history, the labor productivity figures
scream out that a huge disconnect has occurred during the present
period. To wit, between 1953 and 2010, labor productivity grew
at 2.2% per annum, with all the interim booms and busts averaged-in.

That’s more than 3X the paltry 0.7% annual gain since Q4 2010.

The fact that almost any main street metric shows a gain of 2-15% over
the last decade in real terms compared to the 58% surge in
inflation-adjusted stock prices, of course, is completely lost on Powell
and his posse of central bankers, as well as the sell-side stock
peddlers on Wall Street.

And that’s because in a market obsessed with stock prices it’s all about
the delta. That is, the latest noise- and revision-ridden rate of change
from prior period that may give an “edge” to some headline reading
robo-machine or adept carbon-based speculator.

In that context, the Fed heads claim to have only a passing interest in
stock prices, but that’s one of the Great Lies of modern times; they are
absolutely obsessed with the stock averages, and therefore have
essentially spun themselves into functional economic illiteracy.

In his presentation on Capitol Hill today, for instance, Powell pointed
to the export pick-up as evidence that the US economy has continued
to strengthen.


Goods and services exports in Q4 2017  posted at a $2.419
trillion annual rate. If you squint at the chart below, you can see that
this figure is virtually the same as the $2.374 trillion rate posted
three years ago in Q4 2014. Accordingly, the only thing that stands
behind Powell’s purported “export tailwind” is the good old “pig-in-the
python” of the China-driven industrial/commodity/global trade
mini-cycle, which has now essentially gotten back to “go”.

But do not collect $200!

Over the weekend, Beijing essentially declared Mr. Xi ruler for life,
nationalized without warning the massive $300 billion M&A junk pile
called Anbang, and published data showing housing prices in the Tier 1
cities are now falling again on a year over year basis.

We do not think these actions bespeak boom times ahead for the Red
Ponzi or that the debt and speculation ridden “locomotive” of the
ballyhooed outbreak of “synchronized global growth” will prove up to the
task. To the contrary, the pre-19th Party Congress credit binge in China
is over and done, meaning that Beijing intends to get down to the
serious business of wrestling its $40 trillion credit monster to the

In fact, throw in the Donald’s impending 10% and 25% tariffs on aluminum
and steel, respectively, and the future position of the red bars on the
graph below will be lucky to even stay on the flatline.

Not only is the disconnect between main street and Wall Street vast and
largely ignored in the Eccles Building, but so is the direction of
causation. Powell and his recycled band of money printers are complacent
because their dashboards of recession-warning indicators are blinking
neither red nor even orange on most metrics.

But so what?

In the world of Bubble Finance and central bank driven financial
markets, recessions do not cause stock market corrections or crashes.
Instead, meltdowns in the casino actually cause recessions because
they trigger brutal and sweeping “restructuring” maneuvers in the stock
options obsessed C-suites of corporate America.

These desperate bids to appease the trading gods result in the
ash-canning of purportedly redundant workers, inventories, fixed assets
and busted goodwill from failed M&A deals. At length, these eruptions
of corporate restructuring actions bring the main street economy to a
screeching, but temporary halt.

As always, the issue is the catalyst for the crash in the late stages of
central bank fostered financial bubbles. And this time it’s truly not
hard to see the great bond market “yield shock” coming down the pike.
That is to say, when $1.8 trillion of supply—$1.2 trillion new debt from
the US treasury and $600 billion of old debt to be dumped by the Fed—
hits the bond pits in FY 2019, the markets will definitely clear or
perhaps “clear-cut” is a better word.

To wit, the law of supply and demand has not been repealed, and the
other two important central banks of the world—the ECB and the PBOC—
are heading for the sidelines. Accordingly, the clearing yield is going
to be in the 4% to 5% range, and in the historic context of the chart
below, the implications are self-evident.

Chairman Powell today told the Congress, in effect, “steady as she

That’s not going to happen in a month of Sunday’s, and in Part 5 we will
take a crack at essaying the financial carnage that looms dead ahead.

Reprinted with permission from David Stockman’s Contra Corner.



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