The Scylla And Charybdis of Debt And Reflation

What is the difference between living in an old age home versus living in an insane asylum? Dinner at 4:30pm or all hell breaks loose...

Our policy-leaders are idiots from one end to the other. The unemployment rate is the biggest lie this corrupt society tells itself. We are to believe that millions of able-bodied workers all "retired" at the same time in 2008. I don't even look at the U3 (published) unemployment rate anymore, aside for a good laugh. Today's EconoDunces live by it. Because without the lie of false recovery that it conceals, they would be permanently out of a job. This time they lied to themselves.  

"Official unemployment rate per the ILO definition occurs when people are without jobs and they have actively looked for work within the past four weeks."

Sadly, what was once an economic problem has crossed the Chinese Wall to now being a financial problem. What do I mean? The policy of lower for longer interest rates for the past two decades means that debt has now supplanted employment as the primary means of economic support. Therefore traditional metrics for managing the economy aka. "The Phillips" curve no longer work. The Phillips curve linked the unemployment rate to inflation and therefore attempted to "predict" the length of the cycle. The point at which "full employment" would put an end to economic expansion. Due to mass layoffs and eight years at 0%, that relationship no longer abides. Throw in a fabricated unemployment rate and it's a recipe for policy disaster. 

Here is why interest rates are rising, because ten years later the labor market is finally starting to broaden to include those affected by mass layoffs. Kind of.  

"The least educated American workers, who took the hardest hit in the Great Recession, were also among the slowest to harvest the gains of the recovery. Now they are a striking symbol of a strong economy."

The unemployment rate for those without a high school diploma fell to 5.1 percent in July, the Labor Department reported Friday, the lowest since the government began collecting data on such workers in 1992"

Here below in blue is the labor participation rate for workers aged 25-54. The "official" unemployment rate is in red. The article above states that the unemployment rate is the lowest ever for unskilled workers. And we also see below that the overall official unemployment rate of 3.9% is the lowest since Y2K. 

Yet we see here that the labor participation fell for eight years straight, and is still below where it was during the entire prior two cycles. Multi-decade low "unemployment" is somehow now synonymous with generational low labor participation. 

Here we see the 25-54 year-old labor participation rate (blue) with the Fed Fund rate (red). Trumpflation still sees labor participation near generational lows, yet rates keep rising because "unemployment is at 20 year lows". The fraudulent unemployment rate is sending false signals about the ability of the economy to absorb rate hikes.  

Now if one is an optimist, meaning denialist, they would conclude that this nascent two year "reflation" will continue until such time as the labor participation rate recovers back to 2007 and then on to Y2K levels. Even though we see above that in 2007, the labor participation rate never recovered back to the Y2K peak. We also see that interest rates are rising in lockstep with the late stage capitulation to McJobs. 

Which gets me back to the point of this post. The cycle is no longer tied to the employment level. It's now tied to the overall debt level. Because as jobs improvement drives interest rates higher, it now is impinging upon the prior eight years of 0% debt accumulation. Meaning that "reflation" and economic recovery is now stymied by massive debt overhang. 

Here we see consumer credit delinquencies (blue) with the Fed rate (red).

At this point in the last cycle rates were falling, not rising. 

The Fed made it clear this past week that their real mandate is  the inflation and deflation of asset bubbles to provide the delusion of fake wealth.

Something they excel at. 

I misspoke previously, Fed asset rolloff increases to $50 billion/month beginning in October. I said $40b.  

Desecration And Arrogance. The Last Bubble.

The alt-Christian base has become far too comfortable with saying one thing and doing the exact opposite. It's become their cynical way of life. This time they're trapped inside their own lie, which will bring maximum carbon sequestration...

Trump's net economic accomplishment for the past two years was to squander a trillion dollars to make a big bubble much bigger, by conning the sheeple into going ALL IN at the end of the cycle. And to start a global trade war that has expanded the trade deficit to its worst level since Lehman. We pick up exactly where we left off in 2016, the week he warned what would happen to the mega bubble when the Fed raised interest rates. From the perspective of the Banana Republican party, there could not be a worst possible time for the Trumptopian time bomb to implode. Because how to explain that you're a bigger jackass than Donald Trump? And who will save the party, Gary Busey? The Good Old Boy Party bet the farm on a sociopathic liar. And yet they have no fucking clue...

But how did he get his whores back into the casino to buy up his 1929 trade war and all of the other asinine risks?

Easy, throw money at them to buy votes ahead of the election. No one need wonder why risk exposure massively increased this week:

"Republicans have sped legislation through the House to expand their massive new tax law, capping their session for the year as they rush out of town to face voters in the November elections"

Democrats continued their solid opposition to tax-cut legislation, asserting it favors corporations and wealthy individuals over middle-income Americans"

All of the pent up risks are coalescing ahead of the election, amid asinine hubris on an unprecedented scale. Notice below, the symmetry between now and two years ago. The blue circle was this week two years ago when Trump warned about the "big, fat, ugly bubble".

Fast forward two years:
"Under my presidency, don't worry about bubbles. I've only bankrupted a handful of casinos, so far. And the Fed can raise rates, quantitative tighten, and implode Emerging Markets all they want, just as long as a man is in charge"

The people who believe this shit deserve to get wiped off the fucking map. This has clearly turned into a DNA level problem, with a DNA level solution.   

Trumptopia:

The very nature of speculation is to attempt to predict the future. It's a fool's errand of the highest order. I speak well from experience. Be that as it may, it's a far larger fool's errand to ignore the recent past. Because one need not "predict" what has already happened especially when it pertains to asset bubbles. 

And yet, that appears to be the situation that this amnesiac society finds themselves in time and again. The willful delusion to ignore how blithe complacency and unfounded trust ended in the past. 

I would be remiss in pointing out that September 2008 was not the problem. September was a lot of short-covering ahead of the main event. It was October when the wheels came off the bus...

"I'll Take Smoking Crack For Everything, Alex"

The 1929 Smoot-Hawley tariff war rally is ending. It was a major victory for Twitter, and a colossal failure for the trade deficit. The only way the trade deficit will shrink is if the rest of the world is growing faster than the U.S. When the U.S. is growing faster than the rest of the world, imports grow faster than exports, which means that most of the tax cut "stimulus" is going overseas. This has been the biggest circle jerk in human history. 

10-Year Note Speculators sharply raised bearish bets to new record high
S&P500 Mini Speculators sharply advanced their bullish bets to highest in 19 weeks
VIX Speculators sharply raised their bearish bets to 46 week high

MW: Highest Consumer Confidence Since September 2000

"That’s the highest level since September 2000 — near the end of the Internet boom. It’s also close to the record peak of 144.7 set in May of the same year."

"High" is the only way to describe confidence right now

Pot stocks are the new leading "economic" indicators

Gamblers enter the fourth quarter with NAFTA in question, the mid-term elections in question, Trump's presidency in question, the global economy in question, China trade wars in question, Italy in question, forward earnings in question. The only things not in question are accelerating rate hikes, accelerated balance sheet rolloff, and record bets that this gong show lasts forever, which happens to be 90 days from now. 

In summary it's a denialist paradise:

The third quarter began with a selloff due to $50b in tariffs on China. And it peaked concurrent with $200b of additional tariffs. The quarter was book-ended by trade war escalations.

What's not to like?

The past year can be summarized as follows: A six month tax cut rally ending in volatility explosion. Followed by a six month trade war rally. You can't make this shit up.  

In the meantime, breadth has eroded and leverage has increased. Note where VIX futures positioning was in February - it was neutral. The hammer is cocked with far more powder this time:

Did I say six month trade war rally? Here below is the 1929 analog. Notice above that while the nominal S&P 500 made a new high, breadth (red line) did not confirm. It followed a path more like this one:

Fortunately, this time around Trump is "winning" the trade war.

On Twitter

"Trade wars are good, and easy to win"

The rest of the world is deja vu of early 2016 global implosion:

Germany:

China Tech rolled over post-Fed

Pot stocks are done, so this is the new "safe haven"

New record Wall Street bets that Ponzi reflation continues "forever" aka. December 31st.

Powered solely by the Twitter Mind Trick for weak-minded fools...

The stakes are as high as confidence

Financials left the fake reflationary party this week

Bueller?

Shock Doctrine 2.0: Nothing Left To Sell

In summary, this week their daughters went under the bus. There will be hell to pay...

Social acrimony is reaching a fevered pitch. The divide between the two Americas could not be more stark this week. One side of America feels sympathy for a gang-raping frat boy. The entire rest of the world is just now realizing that America is captured by entitled frat boys. Nothing will improve until the Banana Republican base wakes up to the fact that they've been voting against their own economic interest for almost forty years straight. This will be their final lesson. Entitled frat boys are not the solution, they are the problem. The base will be shocked to learn that their latest Frat-Boy-in-Chief is not their saviour. Quite the opposite.

I just saw a headline on Zerohedge claiming that "Poverty, Crime, Feces: The Worst Cities In America Are Run By Democrats". Sounds bad. How to explain this?

Here's how to explain it: Almost ALL of America's largest cities vote Democrat:

"Clinton captured the largest metros. She bested Trump with 55 percent compared to 40 percent of the vote in metros with more than one million people, and won eight of the ten largest metros. These metros accounted for more than half the vote and generate two-thirds of America’s economic output."

What this means is that the author of the Zerohedge post is conflating correlation with causation. It's America's dirty little secret that the inner-cities are hell holes of intractable poverty and have been for decades. Only now that the same fate is befalling the rest of the country is it becoming "an issue". 

The author of this disinformation goes on to say that Democratic control has caused the downfall of Baltimore and other once great cities. Here is what the first son of Baltimore had to say about causation:

Baltimore Orioles Chief Operating Officer John P. Angelos:

[M]y greater source of personal concern, outrage and sympathy beyond this particular case is focused neither upon one night’s property damage nor upon the acts, but is focused rather upon the past four-decade period during which an American political elite have shipped middle class and working class jobs away from Baltimore and cities and towns around the U.S. to third-world dictatorships like China and others, plunged tens of millions of good, hard-working Americans into economic devastation, and then followed that action around the nation by diminishing every American’s civil rights protections in order to control an unfairly impoverished population living under an ever-declining standard of living and suffering at the butt end of an ever-more militarized and aggressive surveillance state (emphasis added)."

Interestingly, even Trump and Bannon agree that Globalization carved out the middle class. Which is what Trump said at the U.N. just this week. 

"The United States lost over 3 million manufacturing jobs, nearly a quarter of all steel jobs, and 60,000 factories after China joined the WTO. And we have racked up $13 trillion in trade deficits over the last two decades."

Manufacturing jobs, millions:

Trump's borrowed tax cut for the rich - "paid for" with higher interest rates and stronger dollar is only making the problem far worse. 

"The good news is that imports are about to collapse"

What has happened to manufacturing in the U.S. at the hands of sociopaths, should have been the canary in the coalmine. Because the fate that met manufacturing is now befalling the remainder of the economy -  the swapping out of high quality jobs for low quality jobs. The use of ever-cheaper capital to automate or otherwise commodify the highest paying jobs. 

Poverty is feeding back as ever-more poverty due to cheap capital being recycled back into non-amortizing investment. Mass commodification of industry, which will leave no profession untouched.

One decade since the Global Financial Crisis and interest rates are still near 5,000 year lows:

At the end of all this of course awaits mass corporate bankruptcy as corporate debt is now at an all time high relative to GDP. The self-delusion of the day is that the cycle never ends and therefore cash flows from the discounted cash flow model will remain high in perpetuity. 

Sadly there is no such thing as perpetuity in reality, which means that every ten years or so, "forever" morphs back into, "aw fuck, not this again".

Corporate debt, % of GDP:

In the meantime, just more wandering in Death Valley. Making excuses for rampant greed, circus clowns, and frat boys.

FOMOC: Fear Of Missing Out On Crash

The most important lesson that wasn't learned in 2008 is that there isn't one Bernie Madoff, there's an industry full of them...

This week, escalating trade wars, rate hikes, balance sheet rolloff, and EM Implosion got bought with both hands.

The adverse outcomes of a market controlled by HFT momentum algos, are lower overall trading volumes, mass migration to passive investing, abject lack of concern for valuation, and unfounded complacency predicated upon derivatives-based market making. The tail has been wagging the dog, albeit amid periodic jarring smash crashes. It's all well and good until the global stop loss gets triggered, at which point Wall Street's well-cultivated "decoupling" fantasy morphs instantly back into a 100% end-of-cycle correlation pumpkin. 

Throughout this Jedi Mind Trick, Wall Street continues to blow smoke up everyone's ass, because as we were informed at the top in 2007, you have to dance like a hairless monkey while the music's playing:

 “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance."

The cluster of recent Hindenburg Omens suggest that it's now getting "complicated" for the tail to keep wagging the dog:

2017 was the lowest volatility year in stock market history. When 2018 rolled around, gamblers went ALL IN. In late January, billionaire hedge fund manager Ray Dalio said at Davos: "If you're holding cash, you're going to be feeling pretty stupid". That was the top: 

Subsequently, volatility exploded to the highest level in three years, as the casino crashed -10% in a straight line. The largest one day % move in the VIX since 1987. Now Ray Dalio is making the talk show rounds saying that the next global recession is a couple of years away (2020). 

To celebrate, gamblers went ALL IN. Again.

   

The cycle ends when gamblers pump and dump every asset class until their capital is exhausted. One sector after another falls by the wayside. Until finally only a handful of mega cap stocks are holding up the entire delusion.

Which is where we are now:

Despite yesterday's rate hike and warning from the Fed that stocks are overvalued, the Nasdaq crash ratio just reached a new extreme level:

This risk level can be seen via Nasdaq "New highs":

Small cap stocks are lagging badly:

Pot stocks are coming off the boil

Gamblers have been looking around hard for a new excuse to 'BTFD' and they surely found one. Even as the Fed promised more rate hikes, Emerging Markets are the new "safe haven":

"Just as the Federal Reserve steadily picks up the pace of rate increases, Wall Street’s quantitative strategists are telling clients to sell U.S. stocks and buy into emerging markets."

EM stocks can’t rally unless their nations’ currencies stabilize first"


More rate hikes is surely the key to stabilization:

"Given the 2013 taper tantrum and the 1997 Asian financial crisis, it’s a bit surprising that Wall Street is turning bullish on emerging markets now."

It's not surprising at all. The music is playing, and they have to dance. And pot stocks are no longer a safe haven from trade wars. 

Any questions?

Not only is the Fed raising rates faster, their balance sheet unwind is set to accelerate again next week from $30b/month to $40b/month. Recall that the head of the Indian Central Bank warned a few months ago to "go slow" on balance sheet unwind. That's why it keeps going faster.

"The dollar bond market will face a crisis unless the U.S. Federal Reserve slows down the unwinding of its balance sheet, according to Reserve Bank of India Governor Urjit Patel."


"Is there any way we can make this implode faster?"

I think we all see where I'm going with this...

Sadly for Wall Street, and its multitudinous Bernie Madoffs, the Ponzi cycle is over...

You heard it here first. 

And last.