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2018-10-11 07:48 by Karl Denninger
in Market Musings , 292 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! 




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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