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2018-10-11 07:48 by Karl Denninger
in Market Musings , 289 references Ignore this thread
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In early 2007, more than a year before it all went to Hell, I started writing The Market Ticker with a series of articles that exposed outrageous behavior by banks -- including Washington Mutual, which later failed.  These firms featured paying dividends out of money they didn't have, essentially "capturing" additional debt (for which they'd be liable in one form or another) to sustain the payouts.

This was a very solid indicator that the market had essentially backed itself into a corner from which it could not escape.  Stock prices were supported by these "payouts", in that it's very hard for the price to collapse when you have such a yielding instrument.

But when you are paying out more than you are making in operating cash flow the act is a fraud because you cannot sustain that payout, and to claim otherwise is a lie.  Continued into the indefinite future it must cause the failure of your firm; this is a mathematical fact and yet I challenge you to find that disclosure in 10K and 10Q reports.

The SEC and other regulatory agencies have never once, to my knowledge, jailed or otherwise brought criminal charges against any firm for doing this, yet it is exactly identical, in factual terms, to promising that you can jump over the Empire State Building.  You can't, and these firms cannot either, into the indefinite future.  It's impossible.

Buybacks are an inherent fraud upon the public for two reasons: First, they claim to be issuing options and restricted stock to executives at current valuations which, of course, means that there is only value to the executive in them if the company prospers in excess of the current performance.  This is a lie when there is a buyback because when you shrink the denominator the price of the remaining shares rises ratably irrespective of performance.  That's fraud.  Second, they quite-arguably constitute illegal insider trading in every instance because the executives who benefit from same mathematically are the ones voting on the buyback and who have inside information on both the intent to do so and the outcome while obtaining the shares subject to same.

Today we have both dividends being paid out in excess of operating cash flow and buybacks being paid in excess of operating cash flow.  Both are being funded with debt accumulation exactly as was the case in 2007.

There are many who argue that this is "not a big deal" and that debt levels are "reasonable."  Oh really?  They said that in 2007 too, and look what happened.

Today we have an even more-perverse problem due to the EU (specifically, German) rate curve.  Draghi's policies have effectively capped the long end of the US rate curve, which is quite serious indeed -- if "curve inversion" matters.  Who knows if it still does, of course, but it looks like we're going to find out.

What you need to keep in mind in a debt-fueled bubble like this, however, is that valuations do not matter until someone pokes the wrong place with something sharp.  In other words there is exactly no boundary on price -- at all -- but in addition there is no value behind any price.

That's why, when reality returns you get a crash rather than a small dip or "correction"; the forward projections have all been frauds driven by the claim and belief that one can do uneconomic things forever and simply accumulate debt into the indefinite forward future without consequence.

This is the "Illinois head-in-sand" syndrome, where you can pile up a couple hundred billion in forward pension obligations against a ~$40 billion budget -- an impossible-to-fulfill obligation yet the market has not yet called "bullcrap!" on that and collapsed the economy or state government, despite the mathematical impossibility of meeting those obligations.

Then there's the fact that Trump has shot his wad, along with Treasury in compounding the business frauds with monetary shenanigans.  Of course nobody is calling smiley on that, but they all should be.  But heh, it's all good when you run 6%+ monetary expansion during a boom!  Why that's not blowing bubbles! 

smiley

smiley

smiley

Likewise the rest of the so-called "market" is doing the same thing, but just remember how it ended in 2008.  Last time around this was concentrated in housing; a large piece of the economy to be sure, but really not that significant when one looks at it in terms of percentage of the whole.  The key was that the '08 disaster was a larger bubble, in percentage terms, than the 1999/2000 tech bubble -- it had to be, in order to "re-inflate" it.

This time around it's damn near everywhere, from firms like GM to Tesla to your favorite tech firm like Netflix.  It's much larger, and as a result when the fatal stab comes the outcome will be far worse, just as it was in '08 .vs. 2000.

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Amgrace
Posts: 2314
Incept: 2008-02-15

New Castle, PA 16101
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I think this is a "poke in the wrong place.":

The whole article is a great read
(http://www.atimes.com/article/has-the-de....
but this blew my mind ($12 Trillion borrowing by EU banks from American Banks!):

As the credit of European banks deteriorates, US regulators require American banks who lend to them to put up more reserves against their exposure. That raises the cost of refinancing the $12 trillion or so of European bank borrowings from American banks, and it probably has led to a reduction in credit lines. European banks, in return, have to charge exorbitant rates to customers for hedging.

The crunch hit at the end of the third quarter, when European banks short-term credit line in US dollars had to be renewed. Data for the volume of interbank lending arent available yet, but the cross-currency basis swap between Euros and US dollars the spread that banks charge their customers for expanding their balance sheets to provide foreign exchange hedges suddenly widened.

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American politics as a system has ceased to function, because the system has gone from representing people to representing money. And that is something that can only go well as long as the people have at least some of that money. - Automatic Earth 3/17/2010
R0nnybaby
Posts: 3
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So, for an ignoramus who has zero time to follow any financial news, but who believes that this prescription is overall correct; what's an easy medium-long term way to trade this expectation?
Tickerguy
Posts: 154622
Incept: 2007-06-26
A True American Patriot!
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Sigh....

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Winding it down.
Acebarefoot
Posts: 378
Incept: 2009-05-20

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That's a very interesting article. I wonder what Kudlow has to say about that.
Tickerguy
Posts: 154622
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A True American Patriot!
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My answer to Kudlow:
smiley

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Winding it down.
Acebarefoot
Posts: 378
Incept: 2009-05-20

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ROnnybaby,

If you are asking that question, you have no clue just what is coming.

It's like saying "I know a CAT 5 storm is off shore and headed our way, what is a way I can ride the storm out at my place and have the place look better as the storm is blowing through."

If you think what I just asked ^^^^ is stupid, then stop and think about your question above.(If you are even still around)
Keenan
Posts: 286
Incept: 2013-01-11

Western PA
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Meanwhile, the self-described "very stable genius" blames the FED for raising rates:

https://www.bloomberg.com/tosv2.html?vid....
R0nnybaby
Posts: 3
Incept: 2018-01-23


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Acebarefoot

Oh no, I'm reasonably well-prepped: mostly sustainable rural farm living, sufficient ammo, etc. Never hurts to have some extra cash. I'm also prepared to leave the US should that become necessary, but I'm not convinced we're there yet. I just have zero time or inclination to learn how to interact with the market, as I generally stay out of shark-infested waters.

We pulled out of the last crash (for now,) we could certainly pull through the next one, (and the one after that, etc.) before "THE BIG ONE." If there's an easy way to make a few bucks in the meantime, I'm all for it.
Whitehat
Posts: 744
Incept: 2017-06-27

The People's Republic of New York
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the reason that lug nuts like R0nnybaby feel safe enough to ask the question is that all of our past crashes did not break the country or the system in an apparent way to them and we eventually blew another bubble to create a new scam mechanism to spin the wheel of misfortune again.

if you listen to his type carefully, you also hear a sub clinical desire for another war or something or at least an acknowledgement that world wars fix it when the wheel bearing will not allow another spin. this is based in the accident of geography that Americans does not seem to feel the effects of war on the continental property. so after a war, it is party on and actually during as so few citizens actually fight. that is only for poor people to do, another belief of the aspiring financial mogul middle class.

our discussions must remind everybody that it has gone too far systemically, and the war model is as well as being far off, not a good bet in a much more high tech, industrialized world. translation, our opponents can throw nasty **** at our homeland too and actually live here with the resources to dish it out.

everyone learns eventually.

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There are two ways to be rich: One is by acquiring much, and the other is by desiring little.
snow, seasons, distance and dirt roads: SSDD
"Be not deceived; God is not mocked; for whatsoever a man soweth, that shall he also reap" (Gal. 6:7)
Redjack
Posts: 97
Incept: 2018-01-29

Iowa
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I get that sometimes.

People think there is a magic pill, bill, or fund that will will protect them from TEOTWAWKI.

Telling them "Learn a physical skill that can be used when the grid goes down. Live in a place with food, water, and decent shelter to survive the same. Get out of debt and don't go into more". is not what they want to hear.

Kind of like my MIL not wanting to stop eating potato chips with Type 2 diabetes.
Flappingeagle
Posts: 2879
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The question was asked as how to make some money on the coming crash. The short answer, buy some puts 4-6 months ago when they were dirt cheap.

I have a good number of out-of-the-money long-term put options on the high flying tech stocks. I have said this a few times before so it is not a secret.

In a huge crash I will make out like a bandit UNLESS the crash is so huge that the exchange cannot pay me...

Flap

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Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave the Rat Race to the rats...
Thelazer
Posts: 182
Incept: 2009-05-11

Davenport, Fl
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I don't want it, not advocating for it.

But I see a very big crash and shortly there after all manner of what not being thrown at it and a "AMAZING" (kick the can, but no one will admit to it) recovery.

Were heading into election season, in the middle of the first Republican president in some time.

Expect all manor of silly games.
Bluebird
Posts: 1856
Incept: 2008-05-02

SW Ohio
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The heading at the top of the page, shows where the markets are going.
Aztrader
Posts: 8082
Incept: 2007-09-10

Scottsdale, AZ
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The other big issue is the high frequency trading computers. They trade on momentum and not fundamentals. Yesterday, we saw what happens when the momentum goes the other way. I watched the DOW dump over 400 points in the matter of 2 hours. Add in the fact that the fundamentals are completely insane and this is what happens when the bubble gets to big. When stocks like Costco are trading at 32 times earnings, then you have to take notice. There is so much leverage out there that isn't marked to market, something has to go wrong here. Trump wants to blame this on the Fed, but these interest rates never should have stayed at zero for more then a couple of years. They protected wall street and gave them the ability to issue billions in more leverage to make believe the economy was growing. I have been telling the investment committee I am on, that there is no organic growth in our economy. It's all about stock buybacks and Non-GAAP accounting. That made me the least popular guy in the room....
Acebarefoot
Posts: 378
Incept: 2009-05-20

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Thelazer,

I agree that they will throw EVERYTHING at it due to the elections(especially since Trump owns this now with all his bragging), but I would put odds VERY HIGH that it won't matter.

In 18 years this will be the third time the markets take a substantial drop, and with the media wanting more left wing politicians the media will be merciless on this next drop.

Couple that with the fact that there are not many financial tools left to "prop things up"...."prime the pump" (basically borrow more money, but choose whatever term you want) and things will get interesting in a hurry.


There is always that chance of a slow grind down, but I would put those odds low since this next drop will most likely be a "confidence crisis" related to countries and governments who have taken all this debt on to keep the charade going a little longer.

Interest rates are moving up causing issues with swaps overseas. Our borrowing costs are beginning to move up. Fed is pulling liquidity from the "punch bowl" (market). Medical monopoly is roaring and devouring large sums of money from society. A large part of our population is on some sort of government assistance and is a rage monster that needs very little to go off. It's more lucrative to be a politician than own most businesses, etc. We have a lot of balls up in the air that are being juggled that are unhealthy. Something will be the straw that causes the camel's knees to buckle. When it does it will be big.
Argos
Posts: 7984
Incept: 2008-03-23

The Green Mountain State
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What can we say, Aztrader? It wasn't like Sarah Conner was popular at the end of "The Terminator," or for any of "T2" for that matter.

:)
Zappafan
Posts: 3102
Incept: 2007-11-30

Atlanta
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I wouldn't worry about making a few bucks, if this is the big one. I'd worry about turning your bucks into goods of tangible value - bullets, farmland, etc.

If there is no value to a stock beyond what can be grifted from the public, and the grifters run out of marks, well what does that tell you?

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"Americans like to talk about (or be told about) Democracy but, when put to the test, usually find it to be an inconvenience. We have opted instead for an authoritarian system disguised as a Democracy. We pay through the nose for an enormous gvrnment, let it push us around, and then wonder how all those .. got there"
Benthere
Posts: 87
Incept: 2018-06-16

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Read the asia times article three times flowcharting it the last time to try and understand what might cause the bang moment. Gotta admit being a CPA (not a finance guru) I am mostly lost. I understand the risk the US banks have where I get lost is in the hedging and derivative morass. This sounds like a massive AIG s**tshow. Is everybody hedging the foreign exchange risk because they are required to or want to pretend what they are engaging in in this business is risk free because someone will make good on their derivative (another word for insurance?) If this is even partially right we learned nothing in 10 years, this makes Vegas seem downright prudent to visit and play.


Or maybe I am totally clueless on how things work.
Tickerguy
Posts: 154622
Incept: 2007-06-26
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The issue that is quickly arising is that when you run an export economy into the US someone has to exchange dollars (what the US pays in) to your currency. That would be a bank in your nation, mostly. Said bank has to hedge off its currency risk since a wrong-way move in FX can bankrupt you almost instantly due to the amount of leverage involved.

As time goes on that risk book gets bigger and bigger....and eventually someone notices!

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Winding it down.
R0nnybaby
Posts: 3
Incept: 2018-01-23


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Nice community you guys have here. I ask a polite, reasonable question, seeking information from people who likely have the same ideas and values that I do, as I am wont to do when I am unfamiliar with a particular area of knowledge; and in return I get insulted, belittled, and multiple snarky replies. I've been reading Mr. Denninger since post #1 and this is the first time I have waded into the forums; obviously a mistake and I won't be back.

Thanks to flappingeagle for at least attempting to provide an answer.
Tickerguy
Posts: 154622
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@R0nnybaby
Quote:
I ask a polite, reasonable question, seeking information from people who likely have the same ideas and values that I do, as I am wont to do when I am unfamiliar with a particular area of knowledge; and in return I get insulted, belittled, and multiple snarky replies. I've been reading Mr. Denninger since post #1 and this is the first time I have waded into the forums; obviously a mistake and I won't be back.

Happy to help you out with that seeing as I didn't have to clear any hurricane debris around here and thus need a bit of an upper-body workout....

 

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Winding it down.

Jack_crabb
Posts: 5539
Incept: 2010-06-25

Peoples' Republik of Maryland
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Quote:
I've been reading Mr. Denninger since post #1


Well, to jump on the pile, if you have truly been reading this forum since Post #1 - and doing so regularly - you would understand the disdain from our genial host and other TFers.

I'm just sayin'...

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Molon Labe
Where is Henry Bowman when you need him?
How many are willing to pledge this? We mutually pledge to each other our Lives, our Fortunes, and our Sacred Honor
Drifter
Posts: 173
Incept: 2016-02-11

Pacific Northwest
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The IMF is warning of a second great depression.

http://www.atimes.com/article/great-depr....

Their warning made me chuckle: like an arsonist that sets the blaze then yells fire. In spite of that warning, Lagarde is out today defending the Fed.

Lock them all up.
Zappafan
Posts: 3102
Incept: 2007-11-30

Atlanta
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More piling on ... It's never a good move when someone comes to the forum as a newbie, admits that they have zero time or inclination to study the markets, then asks us to give them trading advice for free (in a thread where it is clearly stated that since there is fraud behind everything, the true value of a company is nearly impossible to calculate once the debt games stop.)

That was a predictable outcome.

Inline

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"Americans like to talk about (or be told about) Democracy but, when put to the test, usually find it to be an inconvenience. We have opted instead for an authoritarian system disguised as a Democracy. We pay through the nose for an enormous gvrnment, let it push us around, and then wonder how all those .. got there"
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