Thursday, November 17, 2022


Wall Street has weaponized denial against the stoned masses, and they wouldn't have it any other way. Everyone gets to invent their own ending.

For now...

Once again, the end of year lull is a con man's paradise. Ahead of the New Year reality check, Wall Street is free to futurecast whatever science fiction they want, unquestioned by CNBC, which is now competing with Disney+ for viewers. 

It's that time of the year when Wall Street issues their annual forecast for the coming year. Unfortunately, it's also that point in the cycle, when Wall Street's annually extrapolated forward earnings estimates have the veracity of a Magic 8 Ball. No surprise, Wall Street consensus calls for an INCREASE in profits during the coming year of roughly 5%. Yes, you read that right. Ed Yardeni is hitting the crack pipe even harder this year with a +9% forecast.

Here's what Wall Street consensus estimates "forgot" to include:

1) Fed over-tightening

2) Housing collapse

3) De-leveraging

4) Recession

In other words, there is no cycle risk embedded in these predictions. 

As a proposed antidote to this level of impending criminality, Zerohedge this week posited what they believe to be "The Most Bearish" prediction for 2023. I leave to the reader the pleasure of parsing Wall Street bull shit inter-laced with Zerohedge bull shit to obtain your own conclusion. Suffice to say, the "most bearish" prediction also omits all of the risks I mentioned above.  At worst it predicts 15% additional downside for stocks from this year's low and 11% downside for earnings from this year's earnings. 

Here is how that looks graphically for stocks:

What it all comes down to is that Wall Street predictions are ALWAYS linear extrapolated from one year to the next. They use spreadsheet models with assumption parameters and then they plug in whatever numbers they want, in order to reach their conclusion. What passes for serious investing based upon "fundamentals" are blind guesses at the unknown future. Because what else could they be, Nostradamus? And for most of the cycle those guesses are in the ballpark simply because during economic expansion, growth is linear.

Until we reach the end of the cycle. 

Below is what Wall Street's "worst case" scenario for earnings looks like from an historical point of view. It's barely even visible relative to the big jump in earnings post-pandemic. Meanwhile, a repeat of 2008 is not even slightly an option based upon current forecasts and positioning. And yet, we are contending with a CPI at 40 year high and the Fed is still tightening into a Tech wreck/housing collapse. During those two prior debacles, they were ALREADY easing at this point in decline. 

Which gets us to the topic of over-tightening. This week, Fed officials have been taking turns pounding markets lower after last week's "dovish" CPI print of 7.7%. Today it was James Bullard's turn to put the kibosh on the pivot/pause fantasy, going above and beyond the call of implosion:

"Bullard suggested that the rate may have to rise to a level between 5% and 7% in order to quash inflation, which is near a four-decade high"

Not even ONE dunce in the media has pointed out that debt levels have sky-rocketed over the past two years and interest rates have DOUBLED year over year, meanwhile, the Fed balance sheet hasn't changed year over year. Which means they are crushing the middle class to protect the Casino class.

It's history's biggest policy error without any question, taking place in broad daylight. 

Which gets us to recession risk which is currently obscured by the high CPI readings. In the 1970s recessions it took several months of recession BEFORE unemployment began to rise. That is typical inflationary labor hoarding behavior, when real wages are negative and the economy is running at maximum  end of cycle capacity. However, today's pundits always point to the strong jobs market as THE sign that the economy is doing well. This week's retail earnings are another widely ignored warning. 

As is the inversion of the yield curve, now at a 40 year high:

Same article from above, further down:

"On Wednesday, Esther George, president of the Kansas City Fed, said in an interview with the Wall Street Journal that a recession was likely given how rapidly the Fed has tightened credit.

“I have not in my 40 years with the Fed seen a time of this kind of tightening that you didn’t get some painful outcomes” she said.

In summary, who do you believe?