2016: What Was And a Preview of 2017
The Market Ticker - Commentary on The Capital Markets
2016-12-26 10:18 by Karl Denninger
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2016: What Was And a Preview of 2017
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Historically speaking The Market Ticker used to publish an "annual review" including a set of predictions.  Some years worked out pretty good, others not so much.  But even the "bad" years weren't too bad in retrospect; if you make a dozen predictions and get half right over a year's time that really is quite a bit better than you might first think -- although nowhere near good enough to dub yourself Nostradamus.

As I intended in my ticker entitled In Closing from February of 2014 I've wound things back around here quite a bit.  Not completely, but materially.  The software here was at version 41.4 when I penned that piece; it is currently 45.5.  That's more than four revisions greater, since there have been a bunch of "point" changes since -- mostly bug fixes but a few enhancements too.

The post (thread) count was 228,802 when I penned that piece.  It currently stands at 231,735.  The Bar (for user-generated threads and comments, open to anyone who used to be a donor at any time in the system's history) has been reopened this fall, and for the time being I intend to leave it accessible into 2017.  You can find it from the "top" menu here if you're signed in and once had donor-level access -- or just go directly to our companion domain at tickerforum.org.

There were 7,950 Tickers posted from the inception of the site to February 2014.  Since there have been 2,777 more.  There were 650 posted this year.  However, the volume has dropped quite materially, especially in the back half; the count has been about one a day, on average since July, including a "burst" of them for the election season.

The donation system went away quite some time ago and this year the advertising system was almost-completely shut down as well, leaving it just active enough to remain "alive" from the adsense syndication system's point of view.

Here's the issue I have when it comes to continuing what I've been doing, when you get down to it: Nothing has really changed at all in terms of either outcomes or even interest among readers here.  Not one of the pinned threads more-recent than my In Closing missive has managed to reach materially over 50,000 views.  The only pieces to get any sort of "real attention" were those related to the election and of those none had a thing to do with policy.

But..... we're two more years down the road and, as I pointed out in October about four years from the detonation of our nation's finances.

A detonation, I remind you, that I've been raising hell about since the 1990s; it has been visible for that long on the horizon, and has been a focus here since The Market Ticker began publication.

Ever watch "Gran Torino"?  When you go into the bathroom with a hacking cough and blood comes up you got a big ****ing problem.  This nation has been hacking up blood for decades and we're still, as a population and nearly to an individual, looking for the "investment" that will make more money as our "response" to that.  What are you going to do with it all when overcome by events?  You can't eat your stawks, you know.

So here's the deal as I see it: Trump is not going to save the world -- or America.  He's not even going to save you.  Hell, you just watched Obama, according to the media, Trump, the Republicans and a bunch of others "stab Israel in the back" by refusing to veto a UN resolution stating theft of land is illegal.

Really folks?

Look, I get it -- the UN sucks (I agree with that, by the way) and to the victors go the spoils when it comes to war.  Go ask those displaced in Aleppo and elsewhere through the world how private property rights have worked out for them when it comes to owning a home or business.  Expropriation is part and parcel of what governments do, but why pussy-foot around with it and exactly how does doing so make you anything more than a sniveling pack of fraudsters?

If Israel is going to consider a 50 year past war justification for seizing land then seize the land, all at once, re-draw the border to encompass same and be done with it.  The idea that they can keep dicking around with this and by stealing a little bit here and there, one house or "settlement" at a time it is ok but if they did it all at once it wouldn't be is outrageous, it has been outrageous for 50 ****ing years and it doesn't change in character based on who's doing it or why.  War sucks although it is sometimes necessary but this load of crap is nothing more than finding a way to turn a short war into one that has now spanned generations and shows no sign of ever ending -- why don't we just admit that too many people like this war for any serious effort to sue for peace to be accepted?

More to the point given who's involved, since when is intentionally extending a war for five decades by jacking around instead of being decisive in your actions "noble", "honorable" or appropriate, say much less justified if you're "God's chosen people"?  I seem to remember a bunch of folks got a 40 year sentence of wandering in the desert for jacking around when it came to doing the right thing at a time in the distant past -- or so says a tale some consider to be divinely written. Have you ever bothered reading your professed Holy Book, Bibi?

I'm tired of that crap being a "cornerstone" of US foreign policy and by the way, it appears from his tweets Trump has every intention of making it worse.

Or maybe - just maybe - he'll tell Bibi to either **** or get off the pot.  Take it all, invade and kill all who resist.  At least that would be consistent.  Pile up the bodies and pay the price, politically and otherwise.

Speaking of Trump, many continue to harp on Trump having business interests all over the world and the "horrifying possibility" that some nut job with a suicide vest (or a big truck) might penetrate one of those places somewhere in the world and "damage his brand", leading to unspecified bad things.   How about a bit of critical thought on that point eh?  Let's consider the fact that (1) you can't (at any rational cost) buy insurance against terrorism or acts of war and thus (2) Trump is the first President in a very long time, perhaps the first President ever since people went to war on horseback with the King on the field of battle who has personal pecuniary interest in avoiding armed conflict of all types -- and when it cannot be avoided he has an interest in making any such conflict short with a decisive victory for our side. You see any armed conflict, terrorist or otherwise, might cost him something (like a smoking crater where there once was a hotel!)

Gee, that never crossed your mind, did it?  Why not?  Maybe you can explain exactly how that sort of view toward hostility in all its forms in the Executive, as a first in our nation's history, is a bad thing?

But put all the international stuff aside because it really is a sideshow.  The 900lb Gorilla in the China Shop is the medical scamjob and if we don't start locking people up and dismantle it wholesale, beginning right ****ing now, the rest literally doesn't matter.  Maybe the people of this country will get angry enough to start dropping medical and pharmaceutical executives in the streets with whatever they have, whether it's an SUV, a brick off the top of a building or something more thuggish -- or maybe they'll just wither and die as their feet, hands, legs and arms are chopped off while their vision fades to black from diabetes consuming them. Let's not forget that you can only die (or be put to death) once, so exactly what sort of disincentive does a medically-condemned person have against playing not-nice in the social order of things?  In short we either cut the crap when it comes to both medical "care" and stop pushing "foods" that are literal poisons or it's going to end in massive amounts of pain and death and the day when it comes is visible in the near future.  The only question is whether it comes slowly and painfully through disease, violently through the people being dispossessed of everything via "medical businesses" and taxes extracted to "give" to those people and firms leading the people to ultimately revolt -- or both at once.

The timeline on this was decades, we ignored it, it was then fifteen years (roughly, when the Ticker began publication) and we ignored it again, choosing to focus on the "joy" of electing a "black President" who the people believed would "pay my gas and mortgage" while bailing out all the scam artists in the banking sector.  For good measure we gave Obama free license to top it all off with frauds like Solyndra and "forced" medical insurance via Obamacare.  In response the pundits and markets cheered, the latter tripling since 2009.

Having squandered the time we had instead of addressing the issue we now have four to five years remaining before it all goes to Hell and we, in America, have front-row seats that are well within the blast radius.

So no, I'm not going to give you a bullet-point rundown this year.  Instead I'm going to point out that since the bond market has decisively broken on both a monthly and annual basis its 30 year bull market trendlines, meaning that turning the leverage crank to "goose" earnings in the markets is no longer possible, nor is doing the same possible for governments whether here or elsewhere and thus that game is in fact over.

Let me remind you how this crank-turning has worked for the last 30 years, since people have short memories and I've only written a dozen or more Tickers on this, say much less the chapter in Leverage on same.

30 years ago you borrowed $1 million.  The interest rate was 10%.  You needed $100,000 a year in income to pay the interest coupon.  Governments and businesses never, ever, pay off those bonds -- they roll them over endlessly when they mature.  If you doubt this then go look at both corporate and government debt on the Fed Z1; neither has ever decreased by one dime, even during the 2007-2009 crash.

Ok, so then rates drop over time to 5%.  You could take that windfall of $50,000 in interest payments saved every year when your bonds are rolled and spend it somewhere.  But $50,000 is small ball because it will take 20 years for that savings to amount to a million bucks.  The alternative is that you can choose to keep paying $100,000 a year in interest but borrow another million and spend it right now.  Guess what business and government did?  Now you have another million to "spread around", whether it makes your P/E better, is handed out in social spending or whatever.

Rates continued to fall.  Over time they fell until just recently good credits in the corporate and government space could borrow for several years at rates of 1%!  So they did.  Now it's not $1 or $2 million that's out and has been spent it's $10 million, with the same $100,000 interest payment due.

But what happens if the rate goes up just 1% from there -- to 2%?

Now you have a big problem.  You either need to come up with $5 million in cash to retire half the bonds when they roll, since you only have $100,000 for interest payments or you're ****ed.  In the corporate sphere you can no longer "turn the crank" of leverage to goose "earnings", fund buybacks of shares and similar -- you now not only have rapidly increasing interest expense you can't borrow any more money because you can't pay the coupon on it given your current level of indebtedness.

Look at the stock market, size of government and government debt at all levels.  The cost of borrowing fell by more than 90% during this 30 year time period and that means ten times as much leverage became available.  Only about half of the market and government's gains over that time can be attributed to technological progress -- that is, productivity improvement.  The rest is a mathematical function that came from the increase in leverage.  But leverage is a two-edged sword and the laws of mathematics are not suggestions; it multiplies "earnings", "profits" and similar but it also multiplies losses by an equal amount.  It is why banks blew up in 2008.  It is why companies blew up in 2000.

And that is why it will all blow up if we don't cut the crap right here, right now.  Housing. Stocks. Bonds. Government at all levels; local, state and federal.

And you, especially if you have debt.

Not one person under the age of 50 has any business or political memory of the world before the declining bond market rate paradigm established itself in the 1980s.  Not one person folks -- because they were all either children or not yet born at that time.  None have ever run a business, invested a nickel or made public policy during that time.  Since executives tend not to actually become executives before they're in their 40s and 50s, and the same is generally true for politicians, this means that essentially nobody with either political or business power has ever lived through or made policy in an environment where rates were not generally declining over time.

All the people who have done it and thus know how said environment constrains your actions are dead.

We can't hide the impact of our idiocy in the medical system and "free trade" through machinations from money and fiscal policy, whether in government or private business, any more.  We're going to take it long and hard, or we're going to stop it before it consumes us.  Those are the only two choices because we can't finance our way out of it, we can't cost-shift it to other nations and we can't do a damned thing about the laws of mathematics either.

And with that I will leave you with the fact that this coming year I intend to spend more time outside, more time writing a novel I've been working on for quite a while (the first of a trilogy) which I may choose to publish if we get our act together and thus I have some possibility of keeping some of the profits thereof and more time seeing and doing the things I enjoy, along with taking the steps to further reduce my economic footprint.

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