Difficult to keep the bubble fully inflated

Aug 19, 2015

- By Bill Bonner

Bill Bonner
Tivoli, New York

Dear Diary,

China stocks fell hard yesterday - down 6%. Our research team in Beijing is downcast.

"Nobody here wants to hear about stocks," they tell us.

Meanwhile, the junkiest part of the bond market in the US has taken a dive...following the commodities market. Earnings on Wall Street peaked out two quarters ago...and now are headed down.

And the only thing left holding up Wall Street is probably insider trading.

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Bloomberg reports the activity on Wall Street as if it were meaningful:

    U.S. stocks fell as concern over slowing growth in China and other developing nations amid a deepening commodities selloff overshadowed improvements in America's housing market.

    Freeport McMoRan Inc. dropped 3.1 percent as copper prices tumbled. Wal-Mart Stores Inc. fell 3.4 percent after cutting its annual earnings forecast, while Home Depot Inc. added 2.6 percent after boosting its outlook. Homebuilders extended yesterday's rally, with Lennar Corp. and Toll Brothers Inc. pacing gains.
Of course, it's supposed to be meaningful. Investors are supposed to look ahead and tell us what stocks are worth. But the market is rigged.

Recent sale figures from America's retailers show how deep the rot has become. Overall, sales have been going up at an alarmingly slow rate - just 0.5% since '07. In the 2000-2007 period they went up 4 times as fast. In the '90s recovery, they went up 6 times as fast.

Especially rotten are sales at America's 4 largest mall retailers - Macy's, Kohl's, Sears and JC Penny. Together, their sales are falling at a 10% annual rate or four times faster than the fall in department store sales generally. What is interesting about these four companies is that they have been among the most aggressive of the market manipulators. Between 2005 and 2014, these companies earned a combined total of $13 billion. But they spent $34 billion deceiving investors about the true value of their firms, while pocketing billions for themselves.

But if you're counting on the markets to reveal the right price for a stock, you may have a long wait. To steal a phrase from Keynes, the cronies can falsify the data longer than you can remain solvent.

The feds rig the credit market. The cronies rig the equity market.

Here is how it works. The cronies take money that doesn't belong to them (shareholder money) and use it to buy their own shares. This pushes up their stock - triggering bonus targets. And now they have more collateral - their own over-priced shares - so they can borrow more money.

John Hussman elaborates:

    As Albert Edwards at SocGen has often observed, not only do buybacks increase at rich market valuations and dry up in depressed markets, they are also typically financed by issuing debt. What drives buyback activity is not value, but the availability of cheap, speculative capital at points in the business cycle where profit margins are temporarily elevated and make the increased debt burden seem easy to handle.
The cronies wouldn't be able to rig stock prices without the feds' ultra-low interest rates. Putting the price of money below the 'natural' rate turns every number in capitalism into a lie.

Look what has happened to retail space. Do you remember 1990? It wasn't that long ago. And as we remember it, there was no shortage of places to spend money. But in retail, as in dotcoms, houses, mortgage-backed derivatives, oil and commodities, cheap financing makes over-doing it irresistible. Retail space doubled since 1990 even though household income actually fell. We now have about the same household purchasing power as Germans...and 4 times as much retail space per person.

What are they going to do with all that space? Mall vacancies were about 5.5% in 2007. Now, they're over 9%.

Why? Households are still wary of taking on debt. That leaves corporate America and the government to do the borrowing. Only government and corporations are willing to keep pouring good money after bad, in other words. Small wonder. It's not their money!

Yes, dear reader, consumers have pulled back. Their incomes have gone nowhere (or down!) since the crisis of '08-'09. They don't have any way to increase spending - except by going further into debt. And they saw what happened to them the last time they did that.

So, that leaves the feds...and the corporate sector.

The federal government, however, doesn't seem to be taking its responsibility very seriously. Deficits have gone down - to just 2% of GDP. That's only one-fifth of the fiscal stimulus back in 2009.

As for monetary stimulus, it's gone way down too. The QE program is on hold. Of course, a fair amount of monetary liquidity leaks in from China and the EU, but not enough to keep this credit bubble fully inflated.

That leaves Wall Street running out of time...and money. Corporate debt yields are rising and stocks are beginning to roll over. So the cronies take advantage of the summer lull to rig the markets...but it might be the last time for this go-round.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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