An Ominous Warning Sign…

11 comments

Posted on 9th March 2014 by Administrator in Economy |Politics |Social Issues

Guest Post by Bill Bonner

Wow! Peace for our time, the media reported yesterday.

The stock market celebrated with a 227 point jump in the Dow. Gold slouched away.

We would have thought that every possible stock buyer had already placed his order. Where did the money come from to push the indexes even higher yesterday?

It was borrowed. That’s another record that has been broken lately: margin debt. Never before has so much money been borrowed specifically to buy equities.

As a ratio of GDP, margin debt only saw these heights twice before in recent history: in 2000 and in 2007. In dollar terms, total margin debt stood at $481 billion at the end of January – 20% higher than it was at the peak of 2007… and nearly 3% of GDP.

But be warned: Hearts and records break from time to time, but never without some pain. The crying begins immediately after a broken heart. After a record high S&P 500, on the other hand, it can take some time.

700 Times Earnings!

So many records are breaking in the tech sector it sounds as though a beer truck smashed into a recording studio. Facebook set the pace. First, with its own public offering; and then, with its purchase of mobile text messaging outfit WhatsApp.

Who would have thought that a free app – used by young people to send insipid messages to one another – could fetch $19 billion?

Now, anything seems possible. Maybe trees really do grow to the sky. Maybe there are silver linings without clouds. Maybe biotech stocks, recently priced at 700 times earnings and up 16% so far this year, are still bargains.

And maybe… just maybe… Janet Yellen knows what the hell she’s doing.

Speaking of earnings, they too are in record territory. Recent earnings reports for S&P 500 companies showed profits at their highest level since 1946 – 30% above the postwar average.

Earnings went up about 10% over the last 12 months, while sales went up hardly at all. This, too, must be a record of sorts; for the first time ever US businesses seem to be able to produce immaculate earnings, unsullied by actual sales growth.

Degenerate Capitalism

Reported on the front pages of the Wall Street Journal and the Financial Times (the two journals of record for the late, degenerate capitalism of the 21st century) is another record…

From the Wall Street Journal: “Blowout Haul for Buyout Tycoons”

The nine founders of the four listed US private equity groups took more than $2.5 billion between them last year, both papers reported… with Apollo Global Management’s Leon Black alone receiving $546 million.

This surely must be a record. More than half a billion in compensation for a single year. And what a business model! Sharp private equity firms buy lame companies, borrow beaucoup money in their names, and then resell the debt-saturated companies to naïve investors!

Oh… did we forget something?

Oh, yes… Ben Bernanke and another world record! Without record intervention – including more than $3 trillion in liquidity from the Fed’s inexhaustible well – poor Mr. Black might have found few takers for his stray cats and dogs.

Meanwhile, consumer price inflation has set a record of its own. Not by going up, mind you, but by going nowhere. Bloomberg reported last month:

The personal consumption expenditures price index, minus food and energy, rose 1.2% in 2013, matching 2009 as the smallest gain since 1955.

Consumers, without the pressure of a rising CPI behind them, have shown little ability to join the party. Instead, they shiver in their rooms and wonder how to pay the electric bill.

As reported in the Wall Street Journal yesterday, they spend more on what they need than on what they want. Spending on health care and fuel rose in January, as consumers “cut back on discretionary products.”

That makes us think that something else is broken – not a record, but the economy. And with so many things broken, we can’t help but wonder when the whole shebang falls apart.

Regards,

Bill

11 Comments
  1. Welshman says:

    Celebrus Capital just bought out Safeway Corp. on the cheap. Celebrus bought out Albertsons some time back. These grocery companies are somewhat unionized and the employes make around 42,000 per year in California. They have to compete with the likes of Walmart, Target, Walgreens, CVS, who are doing more invasive food items and taking their customers away. Traders Joe and Costco also eat big time in these grocery chains.

    Once Celebrus guts Albertson and Safeway, loads more debt on their dying corpse, all these grocery clerks will be doing minimum wage jobs and drop out of the middle class.

    The self-checkout seems to be a dead end, as nobody seems like the scheme, I know I don’t. I like to BS with clerks, give one a little human contact. My wife and I also grow about 20% of our food and have a dozen chickens, which doesn’t save any money, but it is good to know how to fend for yourself.

    I close on my 7ac. mini-ranch March 18th. The ag well tested 97 gals. per min, water was at 46 ft., drew down to 64 ft when running and the well is 140 ft. deep. Well guy gave me two thumbs up, so I guess that means “Good Well”.

    9th March 2014 at 12:56 pm

  2. SSS says:

    I suppose I could have made a small fortune had I jumped on the equity market bandwagon. I didn’t, but I have improved my retirement wealth very modestly over the past two years.

    I’ve got the same feeling today that I had when the dot.com craze was underway in the late 90s, and I mostly stayed out of that frenzy. Good move. I stuck with old reliable investments back then. Didn’t make a lot, but I didn’t get burned either.

    Starting with the reinvention of financial instruments of mass destruction in the housing market, such as lower thresholds on acceptable credit scores for mortgage loan applicants, something ain’t right here. And there are plenty of warning signs, such as this article.

    9th March 2014 at 1:46 pm

  3. Zarathustra says:

    Welshman, I didn’t know that. Safeway was first raped when they were taken over through a leveraged buyout by KKR back in the 80′s

    9th March 2014 at 1:57 pm

  4. Welshman says:

    Z,

    Yes I remember that now. KKK is better run than Celebrus, maybe better rapers though.
    People are also buying less high value added items, and cooking more at home. Grocery business is on the ropes and the debt these big grocery chains carry makes one jow fall open.

    9th March 2014 at 2:18 pm

  5. Administrator says:

    Safeway went down the tubes when they hired a GE asshole to be CEO and he drove it into the ground with that six sigma bullshit.

    9th March 2014 at 2:53 pm

  6. VandalBill says:

    Albertson’s also hired a “GE asshole” drove it right into the ground. I didn’t know that Safeway was also ran by a GE hitman. Always “Bringing good things to life.”

    9th March 2014 at 3:57 pm

  7. AWD says:

    The equity market has been supported by the creation of massive debt and money out of thin air (QE). $30 trillion of debt creation since 2007 just to keep the banks solvent and the stock market pumped up. Hedge funds use the printed money to snap up assets at zero percent interest. Margin debt is at an all time high. It’s a bubble of biblical proportions. There’s never been anything like it in the history of the world. The stock market is like bug sitting on top of a soap bubble that just keep blowing bigger and bigger. We all know the bubble will blow sooner or later, and it’s going to sink all ships. I wonder every day how the whole system doesn’t implode. As Kunstler says, it’s because of inertia. I’m not so sure. Smoke and mirrors more like it.

    Global Debt Crosses $100 Trillion, Rises By $30 Trillion Since 2007; $27 Trillion Is “Foreign-Held”
    Submitted by Tyler Durden on 03/09/2014

    While the US may be rejoicing its daily stock market all time highs day after day, it may come as a surprise to many that global equity capitalization has hardly performed as impressively compared to its previous records set in mid-2007. In fact, between the last bubble peak, and mid-2013, there has been a $3.86 trillion decline in the value of equities to $53.8 trillion over this six year time period, according to data compiled by Bloomberg. Alas, in a world in which there is no longer even hope for growth without massive debt expansion, there is a cost to keeping global equities stable (and US stocks at record highs): that cost is $30 trillion, or nearly double the GDP of the United States, which is by how much global debt has risen over the same period. Specifically, total global debt has exploded by 40% in just 6 short years from 2007 to 2013, from “only” $70 trillion to over $100 trillion as of mid-2013, according to the BIS’ just-released quarterly review.

    9th March 2014 at 3:58 pm

  8. Thinker says:

    Even with the acquisition, a combined Safeway/Albertson’s has a long way to go to match Kroger or Walmart.

    Hierarchical Ranking of Chains by Supermarket Count

    9th March 2014 at 4:00 pm

  9. Hollow man says:

    We have a morality problem. Not enough of us care about the future of our children enough to care to leave them something. We have also educated them into dumassness with new teaching methods. They will not even be able to figure out what to do when it falls apart. Most everyone else will be taking what they feel they deserve. Any way they can by the gun or whatever other mean at their disposal. FUBAR

    9th March 2014 at 6:14 pm

  10. Westcoaster says:

    1.2% inflation rate? What a load of crap, just like the 6.7% unemployment rate. NONE of these gov reported numbers are even close to what’s actually going on. BTW regular unleaded in SoCal has strongly broken through the $4.00 price point at all the “majors” like Chevron.

    9th March 2014 at 9:20 pm

  11. Welshman says:

    Guess I should get the spelling right, it is Cerberus Capital Management LP.

    10th March 2014 at 6:17 am

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