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2018-01-12 07:50 by Karl Denninger
in Market Musings , 368 references Ignore this thread
The Caution Light Is Lit
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You probably don't remember my postings from 2007 and especially early 2008 all that much.

One early warning marker was a very material -- and sudden -- change in online advertising prices.  The bottom fell out of the offer -- that is, while the number of impressions and "clicks" didn't change much, what I did see was a very large, step-function sort of change in revenue distribution.

The amusing part of it back then was that at the time Google was basically the whole market.  They still are, to a large degree; that's their biggest product of course, although Facesucker is more material now than it was then.  Google, however, didn't admit to any sort of material change in what they reported in the quarter.  Exactly how that slight-of-hand worked and was real is rather beyond me, as I noted at the time, but heh, nobody goes to jail these days so who knows if what was "reported" was reality or not.

It's happening again.

The last time the shift led the collapse in the markets and economy by about six months.  I guess that's how long it took before what was really going on managed to become impossible to hide any more.

It's most-interesting that this time it is occurring in the middle of what is being considered one of the biggest stock market and economic booms and cheerleading of all time.  Indeed, one could cleanly make the argument that it's "bigger" than the 1999/early 2000 boom, certainly if you start looking at valuations, margin debt and similar we're beyond those numbers.  You'd expect that if this was actually true then "the rising tide would lift all boats" and those numbers would be going up -- and quite-materially so.

There have been small dips in this indicator that I have noted since the 2008 crash, but they've not been particularly large.  This one is, approximately of the same magnitude to what I saw in early 2008, about two months before Bear Stearns blew up.  Of course that was "isolated" and the market came roaring back when Bear Stearns blew too, only to go completely to hell about six months later.

There aren't enough sample points to be able to look at this and say "heh, this one's a good signal"; it may not be.  But when you get a rate of change that strong and that fast, as dramatic as it was the last time it was real, you'd unwise to simply overlook it just as basically everyone did in 2008.

PS: There's a nasty divergence in high-yield credit too, which also shouldn't be happening if the "roaring successful economy" is what is being proclaimed.  That too was present in early 2008, but it waved off as aberration then as well..... How'd that work out for you?

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Thorvold
Posts: 208
Incept: 2013-09-12

NY
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McClellan provided a nice chart of the dip in the corporate high yield bond A/D line yesterday as well as some historical commentary:

"The SP500 had its final price top in October 2007, and we had warning of that from the NYSE A-D Line which had peaked in June 2007. But the High Yield Bonds A-D Line peaked all the way back in May 2007, giving even earlier warning that liquidity was starting to be a problem."

I wonder if the Fed will exacerbate the plunge when it does come, as it did back then, and then deny it.
Bodhi
Posts: 185
Incept: 2008-02-23

Georgia
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I anticipate a lot of sage commentary from the more financially astute contributors on this forum. With the DJIA soaring through 25000, along with the cryptocurrency mania, I have the same queasy feeling as in the late 1999-early 2000 period. My business is still doing OK, but I'm keeping a tight rein on spending.
Goforbroke
Posts: 7205
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Time to feed the chickens.
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Shadowtrader agrees from a technical standpoint, although he got it shoved to him for the last two weeks.


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Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our Light, and not our Darkness, that most frightens us. -- Marianne Williamson
Lanny
Posts: 74
Incept: 2010-12-21

Canada
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Like you've said before: the markets are all running on the temporary steam called "human psychology", it is growing because the majority of folks think that way (and so they continue to buy). Sure if one looks there's still old fashioned ingenuity out there, entrepreneurial go getem', smart investment, and eventual profits... but nowadays, the ponzi scheme mentality is the lie that everybody believes and that is what is driving it all. As you say, the math doesn't work. But... squirrel! ("Where???")
I've been listening to you since '08, you are right on many things.
Thanks for sharing about the online advertising price change, good to know.
Little_eddie
Posts: 1105
Incept: 2009-04-30

Delaware
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I have crude oil (WTI) at about $10 more then the marginal buyer should be willing to spend for it's end products (gasoline, diesel,etc) right now. And those that have to buy are spending more then they really want to.

The last time it was this high was 2013-14 and 2008.

So I'm seeing the same thing here.
Inline

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Think of how stupid the average person is, and realize half of them are stupider than that. - George Carlin

Click
Posts: 76
Incept: 2017-06-26

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I've said this before, and it's worth repeating: nobody really knows when the moment of truth arrives and the market reverses. I can tell you this, however, the majority must be wrong in order to set up the forces necessary for an epic crash. My uncle ( a man who became a millionaire during the Great Depression ) said it best back in 1981, "America is going to recover because the crowd thinks it won't". He went on to become so filthy rich. I always liked to visit him back then so I could view his gun collection. By 1990 his gun collection alone had so valuable that it had to be housed in vaults or the insurance company would not cover it.

Back in the late 70s and early 80s you could have bought just about anything and turned a huge profit within a decade. I remember buying a custom, American made, Fender guitar for less than $200 bucks. That same instrument is worth north of 10k now. I also remember the nice lady down the street who had to eat catfood to keep from going hungry. People make choices, and people live with them. Since 2008, basically the same situation has occurred. What I picked up for practically nothing in 2008 has gone up so much that it feels obscene. Everything but gold. That was a bad investment, and I only hold it now as "insurance"... and, because, gold will once again skyrocket when the time comes.

What I learned from my uncle was watch closely what the retail investor is doing and thinking, because most likely it is they who signal the tops and bottoms. "Value" is an ever changing subjective opinion which is driven by the herd. And knowing what (or who) drives the herd is one of the keys to surviving the downturns and profiting from the bubbles. What I see now is the retail investor who was burned back in 2008 either getting back into the markets or thinking about it. I often hear, "I wish I didn't get scared off from investing during the 'The Great Recession'" and "I should have never got out of the stock market".

To me, this signals that the majority have missed the best part of the party. I'm not saying that, for example, the Dow couldn't go to 35000. It could. Easily. Why? Because the system is so corrupt and the markets are not driven by true price discovery.

Members of my family have followed my advice by staying IN the market. But what I now tell everybody is: if you missed the beginning of the markets like Bitcoin, FANG and high-end real estate, don't bet the farm now. Bet only what you can afford to lose or don't bet at all. In fact, personally, I no longer buy or even deal with some companies because they are just so obscenely corrupt. I'm not telling anybody where to draw the line, but everybody should think about what it means for the markets to be driven by outright fraud, racketeering and cartelism.

I think that's why I like reading Karl's blog, because he has the integrity to point out the scams.
Tsherry
Posts: 1012
Incept: 2008-12-09

Spokane WA
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I re-read the following a few times a year. I have done this since it was originally posted on March 28, 1989.

"The Origami Game

Like wriggling puppies in a pen the children worked. To the background hum and ceaseless crease of paper was added the happy and continual burble of children's voices. It was not a large room. And made smaller by the mob of children it should have seemed smaller still. Nor was it an orderly room as the bustling of little hands filled what few unoccupied places there were with crumpled scraps of paper.

But this was the Origami game and within the seeming disorder there yet reigned an unseen plan. Anyone who wanted could play and the game had been going on for generations. Simply put children who wanted to play merely showed up at the room at the time that they wanted to get in the game and if there was a game in progress they could join in. Or wait for the next game to begin.

At the door the children would pay such of their allowances as they wished and bought a selection of paper. Every day the paper that was provided for the game was from a different source. So that one day there might be pink and yellow typing paper. And hard card stock. Or perhaps only plain white notebook paper with the three holes. Or it might include delicate tissue papers in exotic colors. Each child selected the paper he or she liked best and went in to play. Some swaggered in with handfuls of paper and the cocky attitude of a conquerer. Others who could only afford a few sheets held them tightly to their chests like precious treasures as they gingerly threaded through the room looking for just the right spot to settle. Many had played before and often and so casually returned to their accustomed places with such paper as they had had luck with in the past.

The rules were elegantly simple. With whatever paper you could afford to bring to the game, or whatever paper you could trade for once in the game, carefully fold and create the loveliest, or the most practical, or most creative and exotic figure or shape that you could in ten minutes. You could enter as many figures in any game as you could make in that time. All finished entries were then judged on the curve by all players participating in that game. Winners were awarded gold stars next to their names.

The stars could be exchanged at any time for candy. Any unused stars that a person might accumulate by games end could be used in any later game or on any later day. In that way each child could eventually get at least some candy. Now the candy, like the paper, was provided from a variety of sources. So on any given day it might be all taffy, or it might be sourballs and chocolate drops. But normally there was a fair selection of types and tastes. And like the awarding of gold stars, the gold star to candy exchange value was determined by the vote of the contestants. A chocolate caramel might be three gold stars, and a lollipop might be only one. On another day, however, an all day sucker might go for ten gold stars. But it was fair. The contestants themselves judged all entries and the worth of the candies. Everyone had an equal chance. And very few ever went home without at least some candy.

But this day was different. You see the game was not limited to little children. Anyone who wanted, be they teenagers, or adults, or the smallest first grader could give it their best effort. And with the vote of all of a given games contestants being the judge, no one had any special advantage.

Until The Day.
The game started out as usual that morning. But sometime during the morning's play some of the bigger kids started something new. A couple of them, quite without noticing what anyone else was doing, discovered that under the rules of the game it was possible to increase the chance of winning by entering a large volume of mediocre figures and in so doing dominate the other entries, and reduce the curve of what would be considered best for any given game. This was quickly observed by some of the losers to be a winning strategy. It was therefore just as quickly copied. Well it didn't take many games for the pattern to become entrenched. And by shortly after lunch many of the littler children were becoming visibly anxious about their chances of winning any candy before the day was out. Even the most average child could quickly look up at the name board and see that a few names had more gold stars than anyone had ever seen at one time before. And there was only so much candy. Some started crying, some quietly gave up like a balloon collapsing. Others got angry and protested to the teachers who monitored the game. But the rules didn't prohibit this new tactic. And the gold stars piled up behind the names of the bigger kids.

By late afternoon it was clear that there was no way that any of the little children had a chance. Those who had traded in some of their gold stars at lunch did manage to get some candy. But the others who had fewer stars were now convinced that they were going to be quite squeezed out of any winnings at all. That's when the fights broke out. It wasn't too bad. A few had to go see the school nurse. Some of the smaller ones went home crying in their mother and father's arms. There was a great deal of loud, angry finger pointing. But for the most part the game ended without any serious disasters occurring.

A lot of the teachers and parents decided after the game that there would have to be a revision of the rules. Some wanted to limit the game to the small children. A few argued that there should be only one entry per contestant per game. Many solutions were put forth, but ultimately the only fair answer that would preserve the game ended up being that there would henceforth be an automatic limit on entries in any given game if during that game too many people started submitting multiple entries all at the same time. This was not the first time in the history of the game that the game had been disrupted and ended in discord and unhappiness.

Many years ago it had gotten so bad that some of the bigger kids ended up in the hospital from the fights. Many of the smaller children had gone home traumatized, and few if any made it home with any candy. It was so bad that for a long time the game was never played again. This time the game went on. Not to say that there weren't any hurt players or that there wasn't any suffering. But somehow, even though it should have been as bad this time, it wasn't.

A great many people came up with theories to explain why the game didn't blow up like the last time. Some of the teachers who monitored the game then credited the rule changes they made after that last bad game. Some of the parents maintained that children were more grown up than when, as children, they had played the game. Psychiatrists and journalists reported theories, and more theories. But nobody really new the answer. And now that the rules were once again amended, and order restored, the game resumed.

Still many were curious. So as each child left the game at the end of the day the teachers asked how he or she felt about the game. Now there was a little girl who seldom played the game. It's not that she couldn't or wouldn't. She played from time to time, and more often than not won. But mostly she sat quietly and read her books and ate her lunch and watched the other players. Once in awhile she would be asked by one of the other children for help and she would give it. However, she played when and as she pleased and the rest of the time seemed content to watch and read her books. This day as she left the room one of the teachers stopped her and said "You don't seem to have been upset today. Weren't you afraid like the others that you wouldn't get any candy?" The little girl, who ordinarily wore the sweetest and most angelic smile, for one moment became the very picture of fear that had earlier swept over all the other contestants. Quickly she anxiously fumbled open her lunch box. Reassured that her pre lunch time winnings were still secure she closed the box and her cherubic smile returned. Said she "Not really. After all, it was only a game. Wasn't it." And for the briefest moment you could see the hint of doubt cross her mind and then it was gone. And so was she. Happily running down the sidewalk towards home.

As I said, for a long time after the game that day a great many people worried, and theorized and fretted and postulated over the game. And admittedly the game did suffer a little bit for a while. For a time the number of players each day was less than it had been. But little by little most of them had drifted back. Some would never come back. Some never left. And the game itself has changed a little since that day. But the game goes on as it did before.

Today "Black Tuesday" is only a footnote in economic texts. After all, it was only a game."

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Omne mendacium est.
Eleua
Posts: 15183
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If KD's indicators keep the same timing, it aligns with my target where the elites sell into the wave to get out what they can and hang the Mother of All Bubbles around Trump's neck, just in time to save the Senate map in November.

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"My object in life is to dethrone God and destroy capitalism." - Karl Marx
"Destroy the family, you destroy the country." - Lenin
"Education is a weapon whose effects depend on who holds it in his hands and at whom it is aimed." - Stalin
Tickerguy
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If it's an intentional and political target aspect to this then the time for it to start going to **** would be right around March or April, with the REAL ****storm hitting in the early fall.

You get the ordinary seasonal amplification effects that often come with such events for free timing it that way too.

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Winding it down.

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