Losing Ground In Flyover America

The cowardly dithering in the Eccles Building is sucking Wall Street punters into a vortex. And it promises to be the mother of all bubble implosions.

There is no other possible outcome for a stock market that is trading at 24X reported earnings in the teeth of the most enormous headwinds ever accumulated.

The intensifying global deflation/recession lapping upon these shores gets more ominous by the day. Yet that’s only the half of it.

When you take an unvarnished look at the domestic economy, the real skunk in the woodpile becomes apparent. That is, the casino is essentially capitalizing earnings as if recessions have been outlawed and the nirvana of Keynesian full-employment has become a permanent condition, world without end.

Today’s bubblevision meme that all is well because the Fed judges the economy to be strong enough to absorb 1% money market rates some time next year is just a manifestation of that permanent full employment delusion. After all, earnings always collapse during a recession—–so implicitly there is not one in sight as far as the eye can see.

Then again, why would any one credit the Fed’s insight into the future, or even its grasp of the present? In its April minutes, for example, it noted that the world financial dangers that caused it to pause in March have now eased.

No they haven’t. As detailed below, the only thing that changed is that China went through another flash bubble in the commodity space that is already done and gone.

In fact, the Fed has never, ever anticipated a recession——even when we were in month 118 of the 1990s technology and dotcom bubble.

Likewise, it had no clue that the housing collapse was coming and was shocked by the September 2008 Wall Street meltdown. And now it has had to revise sharply lower every single GDP forecast it has made in the years since the crisis.

 

Here’s the thing. The Fed’s paint-by-the-numbers Keynesian incrementalism leaves it blind to the underlying rot in the US economy and to drastically over-estimate its capacity to maintain a stable growth equilibrium.

In fact, corporate America is being strip-mined by Fed-fueled financial engineering and flyover America is sinking irretrievably into debt, dependency and shrinking living standards.

You can’t capitalize that at 24X. And most certainly the fools who occupy the Eccles Building have no clue about the storms that are coming.

The idea that international conditions have eased, for example, is sheer idiocy. Take the most recent anomalies out of the Red Ponzi.

It appears that its latest bubble in iron ore and steel inflated white hot and then plunged abruptly——all within the span of less than 100 days.

And it did so in the context of excess capacity that is out of this world. That is, China has 1.3 billion tons of steel capacity and sustainable demand for 400-500 million tons at the very best. So ordinarily its industry fundamentals would have crushed prices and margins for a long time to come.

Instead, a massive surge of credit funded speculation in China’s incipient futures markets during February/March caused iron ore to rise from $40 to $70 per ton in a few weeks; and daily trading volumes to spike to such manic levels that they actually exceeded annual consumption.

Worse still, the speculative run-up in the futures markets caused idle steel mills to be re-opened—–they very opposite of the hundreds of millions of steel mill tonnage than needs to be closed.

During the past four weeks, by contrast, these same speculators have gone into a selling and liquidation frenzy, and prices will soon be back under $50 per ton. The whole episode had nothing to do with economics; it was just another eruption of China’s $30 trillion credit volcano.

Likewise, there has been a flash housing bubble, especially in the largest cities where prices briefly soared by upwards of 60% on a year over year basis. Again, this occurred in an economic backdrop that is is drowning in empty apartment units. By some estimates that monumental surplus numbers upwards of 60 million units, and the reason for it explains the bubble anomaly.

To wit, China’s tens of millions of real estate speculators do not want the units occupied in order to keep them shinny new; they are being purchased in lieu of stock certificates or, for the matter, lottery tickets, on the theory that real estate prices will rise forever.

In that same vein, word now comes that China’s northeastern harbors have become a parking lot for oil tankers. It seems that China loaned the OPEC have-not’s, such as Venezuela and Nigeria, upwards of $100 billion against the value of future oil deliveries. But the bulk of those loans were made when oil was above $100 per barrel, meaning that in order to avoid default these borrowers are now paying-in-kind (PIK) nearly three times more oil than was implicit in the original deals.

Accordingly, China is now receiving 1.0 million barrels per day of PIK payments, and most of that is flowing into a forest of “teapot refineries” that have sprung up in its northeastern rust belt.

Needless to say, these fly-by-night refineries did not rise to meet incremental demand for petroleum product. Diesel demand last year was actually down nearly 10%, and the increase in the auto fleet and vehicle miles driven did not make up the difference.

Consequently, much of the apparent increase in global crude oil demand is being indirectly routed through another potemkin village in the Red Ponzi.

At some point soon, therefore, the massive build-up in east Asia of refined petroleum stocks from these teapots will bring oil prices crashing back into the $20s, and with it the delusion that commodities are recovering and global growth is back on track.

To the contrary, the Red Ponzi continues to deflate at an alarming rate, and it is only the leading indicator.

The veritable depression in Brazil, the plunge in Japan’s trade accounts, the sharp drop in exports and PMIs in Korea, Taiwan, Singapore and the rest of east Asia, the swirling liquidity crisis in the petro-states, 31 straight months of sales declines at CAT and other giant global equipment suppliers, the slump in German machinery and luxury vehicle exports, the near double digit decline of US imports and rail volumes—–all speak to the global recession now approaching.

Yet even if our monetary politburo had the luxury of waiting for the massive excess capacity and unserviceable debts to be wrung out of the global economy, which will take years, it is missing the boat entirely on the domestic front. Main street America is not approaching full employment; it is tapped out and sinking to ever lower economic lows.

In a sense, Donald Trump’s shocking rise toward the presidency is a far better indicator of stress in the flyover zone of America than Janet Yellen’s entire “dashboard” of labor market indicators, which mostly measure the medicated and modeled self-referential noise published by the BLS.

Here is one example.  It shows that when reported hourly earnings are deflated by a more realistic deflator than the deeply flawed CPI, the wages of flyover America have been declining for the entirely of this century, save for a few very short-lived spurts.

In fact, the average wage in constant 2015 dollars is down nearly 7% from its turn of the century level.

Real Average Hourly Earnings (SA) 1987-2016

 

(To be continued)

 

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card802
card802

To be continued…………..fuckme, that was enough for one morning.

IndenturedServant

It’s ok Card…….I have it on good authority that tRump is gonna fix everything. It’s gonna be awesome. You just wait!

kokoda
kokoda

If Trump does what he says concerning jobs, one of the results will be inflation.

susanna
susanna
bb

Card ,you do realize things are only going to get a lot better…. someday.

Suzanna
Suzanna

someday, after we are all long gone

card802
card802

Imagine how long it’s taken to get where we are today, how long before we deal with the shitstorm a brewin, to sunny days.

I agree with Suzanna, never going to see it.

artbyjoe
artbyjoe

doom and gloom says these are the sunny days.
why do TPTB hate and are afraid of deflation? deflation is the shrinkage of the number of dollars per person. that makes them stronger and more valuable. TPTB will do ANYTHING and EVERYTHING to avoid deflation.
makes you wonder which side TPTB are on. i don’t think they are on my or your side. to them you are just a resource to be extracted, just like trees and oil. things never change.

rhs jr

Kokoda, de gonna be INFLATION because TPTB been printing the Elite-Welfare-Warfare Complex trillions of new dollars each year for at least 7 out of 7. If Trump brings back some jobs, that pitiful inflation will be about as destructive as the Cows Farting CO2.

kokoda
kokoda

rhs…..printing money (electronically) has zero effect if it does not get into the general economy (money velocity) and the money supply increase in the last 7 years did not get into the economy. If Trump imposes tariffs/added costs to export to U.S. (Carrier for example) as he said he will do, then all these items will cost consumers more – this will have an immediate impact on the velocity of money.

Anonymous
Anonymous

Kokoda, You are so right again but just like in Weimar German, one day all that money laying around will be spent as fast as the owner can buy stuff and you get hyperinflation just as sure as Harpy is a lying Commie Pig.

starfcker
starfcker

Nice work, Mr. Stockman. I like this one a lot

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