Saturday, May 9, 2020

Dead Money @ Peak Bullshit

The last and biggest bubble we face is the bubble in total bullshit and attendant addiction to printed money. This is the bubble that is about to explode with extreme dislocation. My assumption is that we have now seen peak stock market for the foreseeable future...

For those who say that no one can predict the future, I am merely predicting that massive amounts of bullshit are about to explode. I don't know if that necessarily makes me prescient. 

Among today's predictions, Wharton money printing expert Jeremy Siegel is saying we will never see the recent lows again and I am saying we will never see the recent highs again (inflation adjusted). Two diametrically opposed predictions. If I am right, then sooner rather than later those who believe that printed money is the secret to effortless wealth are about to shit a massive brick. 

I would point out that when new NYSE lows reached this same level in October 2008, the final market low was five months and -50% lower (equal weight). The key difference being THAT was a recession and THIS is a depression.

I realize that predicting peak stock market is a bold assumption given the amount of money printing taking place, however, my overall belief is that we have now achieved FULL Japanification. The Japanese Nikkei reached its peak in early 1990 - thirty years ago. Since that time - notwithstanding epic money printing and a 200% debt to GDP ratio - the old high still stands. Inflation adjusted of course, the REAL annualized return is much lower.

The Nikkei is currently at 1986 levels, the year I graduated from high school:

From a top down perspective I believe that we have achieved peak debt, peak tax cuts, peak profit margins, peak revenues, peak stock buybacks, peak valuation multiples, and peak corporate bailouts. Which means that overtaking the February highs will be challenging for years if not decades to come. On an inflation adjusted basis. 

The age of plundering the middle class for fun and profit is over.

"Mass bankruptcies, empty planes, cautious consumers and an increase in the corporate tax rate to as high as 29% were part of a vision Fink sketched out on a call this week. The message from the leader of the world’s biggest asset manager contrasts with the ebullient tones of a stock market that has snapped back from recent lows."

From a bottoms up perspective, these are the U.S. industries that I believe are on the verge of consolidation and bankruptcy over the coming year(s). Most of these industries will survive however, the equity holders will be wiped out, as will much of the debt:

Airlines, cruise lines, commercial real estate, mall retail, half of all restaurants, oil producers, commodity miners, some industrials (GE, Boeing, GM, Ford), profitless small caps, hotels, casinos, homebuilders, and most banks.

Of the remaining sectors, I believe that the healthcare sector is about to come under severe regulatory price controls. Staples, utilities, and defense stocks are now massively overvalued. 

Large cap Tech is a mega bubble ready to implode deja vu of Y2K. 

Here we see the Dow Internet index has round tripped to the February highs, however, the VVIX is back to where the most extreme part of the March collapse began (wave iii). Which portends much more extreme volatility this time around:

Post-crash, I expect the sectors that rally first will be gold miners, semiconductors and small cap value ex-banks. This not investment advice, merely observations that I will adjust as we go forward. 

As for the overall market, I believe that the inflation-adjusted peak was achieved in February at the Corona blow-off top. From this point forward, I believe the market will swing in a very wide range. Meaning that stocks can be rented but not owned. This being the top of the range. I believe central banks can keep the bottom from falling out entirely, so perhaps the range is -60% lower, not as low as the Great Depression decline of -90%. Although the Nikkei above lost -80% at the lows. 

All of which means that the stock market based retirement is now a widely believed popular fiction. The only way most people will retire is via Social Security which is why policy-makers need to make the changes ASAP to shore up the system. Corporations have failed society via health, wealth, and environmental destruction on a biblical scale. 

Meanwhile, public pensions are on the verge of mass insolvency as well, as payouts far exceed returns and contributions. Overly-optimistic predictions have put these state and local programs at risk of implosion. Ironically, Mitch McConnell's state of Kentucky is the WORST off in terms of under-funded public pensions. So maybe he will come around to a state and local bailout after all. Nevertheless, it will be a fraction of what is really needed. 

The biggest mistake ALL public pensions have made is to over-invest in stocks and bonds and make asinine predictions of future returns in the 6-7% range in an extreme deflationary environment. Most of these money managers will not successfully navigate the extreme deflationary/extreme inflationary paradigm we now face. Inflation-adjusted returns will likely be negative for years. In addition, state tax collections will collapse.

The vast majority of people who believe in rampant lying, extreme greed, money printing, bailouts for the rich, and mass delusion are merely call options on a multi-decade super-cycle. Massively levered to King Donny and his reign of circus. 

Useful carbon. In the American tradition.