Thursday, April 02, 2020

When Bulls Are Over-Anxious to Catch the Rocketship Higher, This Isn't the Bottom

Everyone with any position in today's market will be able to say they lived through a real Bear Market.
In the echo chamber of a Bull Market, there's always a reason to get bullish: the consumer is spending, housing is strong, the Fed has our back, multiples are expanding, earnings are higher, stock buybacks will push valuations up, and so on, in an essentially endless parade of self-referential reasons to buy, buy, buy and ride the rocketship higher.
The classic Bull Market reason to get extremely bullish is, yes, bearish sentiment: sentiment is terrible, and bearish sentiment is the surefire marker of a stock market bottom. The more bearish the sentiment, the more reasons to get bullish and start buying with abandon: max out the margin account, hock the farm, empty the kids' college savings, whatever you need to do but dang it, dump every cent you have into stocks when sentiment gets bearish.
Since only those of us with gray hair have actually lived through a real Bear Market, younger participants cannot imagine sentiment is bearish because conditions are bearish. The last real Bear Market was in the 1970s and early 1980s, about years ago. By "real" I mean deep, enduring and pervasive.
Each of the recessions / Bear Markets since 1982 have been relatively brief and in the downturns of 2000-02 and 2008-09, the result of extreme excesses in specific financial sectors of the economy: the tech sector in the dot-com bubble-burst and subprime mortgages in the housing bubble burst.
If you didn't work in the tech sector or speculate in tech stocks, the 2000-02 downturn wasn't that wrenching or pervasive. The 2008-09 Global Financial Meltdown affected more people because it deflated the core asset of household wealth, the home, and toppled the dominoes of banking / Wall Street's institutionalized fraud and extreme excesses of debt and leverage.
A real Bear Market is different. It's systemic, i.e. it can't be reversed with "the Fed has our back" tricks; it's pervasive, i.e. it affects every sector of the economy, and because it's systemic, it's enduring--it doesn't end in a quarter or two or even a year or two.
Real Bear Markets end not when sentiment gets extremely bearish but when all the mal-investments, inefficiencies, excesses and institutionalized skims/scams are squeezed out of the system. To the degree that the status quo works tirelessly to maintain the inefficiencies, excesses and institutionalized skims/scams because they enrich insiders and elites, then the Bear Market never ends.
The Bulls have been trained by the Federal Reserve and "buy the dip" to respond with Pavlovian enthusiasm to signals such as bearish sentiment and a whole tramp steamer of other technical analysis signals: price is stretched below the 200-day moving average, this is the signal to buy, the Fed is printing trillions, you can't lose if you buy now, etc.
It never occurs to over-anxious-to-buy Bulls that all their analogs and signal are misleading because this situation is fundamentally different. Even 1929 and the starts of the Great Depression isn't an accurate analog, as the Roaring Twenties were just another bubble of excesses in debt, leverage and risk-taking that eventually popped.
The Great Depression was exacerbated by the collapse of small banks, which wiped out savings, and the Dust Bowl (caused in part by the plowing of huge swaths of marginal land to increase production, all of which was funded by debt that could never be paid back).
The reason why sentiment is bearish is because the situation--the popping of a vast, 20-year expansion of excessive debt, leverage, state/monopoly abuses and risk in an unprecedented Everything Bubble--is definitively bearish. Sentiment is bearish because reality is bearish, and taking that reality as a bullish signal to buy is delusional.
No, no, no, cry the Bulls: the market discounts reality, and therefore it's time to buy, buy, buy because we're already turning the corner. And how do we know this? Because sentiment is so bearish! This self-referential dependence on sentiment readings and signals rather than on reality is the key dynamic in delusional bullishness.
An abundance of Bulls over-anxious to "buy the dip" to catch the rocketship higher is not evidence of a bottom, it's evidence of a top. At the bottoms of real Bear Markets, few are anxious to buy the dip because sentiment is bearish. All those who were so anxious to buy the dip based on bearish sentiment have been wiped out and are now cubby-holed somewhere, reliving past glories when they made fortunes buying the dip because the Fed has our back, sentiment was bearish and the 5-day EMA blah, blah, blah.
Case in point, every institution's favorite stock of the past decade: Apple. Interestingly, Apple's operating earnings have been flat for years--never mind what the global lockdown will do to aspirational longings for $1,000 smart phones.
Yet plateauing operating earnings meant nothing to Apple bulls, who doubled the stock's value because.... another tramp steamer full of bullish hyperbole.
Everyone with any position in today's market will be able to say they lived through a real Bear Market. The trick is to survive the bullish echo chamber and have some capital left to deploy when all the bulls so anxious to buy the dip will have vanished.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Wednesday, April 01, 2020

The Wonderful Insanity of Globalization

So here's an April Fools congrats to globalization's many fools.
The tradition here at Of Two Minds is to make use of April Fool's Day for a bit of parody or satire, but I'm breaking with tradition and presenting something that is all too real but borders on parody: the wonderful insanity of globalization.
Like the famous emperor with no clothing, globalization's countless glorious benefits have been flogged by neoliberal elites and its corporate media shills with such relentlessly manic enthusiasm (let's call it what it is: a form of greed-fueled insanity) that the average worker has come to accept the wonderfulness of globalization as a natural force much like gravity: it's inescapable.
Meanwhile, the globalization emperor has no clothes. Globalization has generated a wonderful (satire alert) insanity in which efficiencies and fragilities are ignored and fatal excesses are deemed worthy of frothy praise: look at the emperor's fine garments!
This is how we've reached the level of insanity in which 90% of essential medications and their components are manufactured by our geopolitical rival. Other examples of the insanity of globalization are too numerous to list, but let's consider the route that the vaunted supply chain actually takes to get Product A from China to an American consumer.
According to the holy scripture (pun intended) of globalization, comparative advantage overcomes any inefficiencies due to long supply routes: if the $100 product can be made in China for $50, then the enormous profits reaped by moving production to China more than make up for any transport inefficiencies or systemic fragilities created by the long supply chain.
In the happy story of globalization, cheap container ships merrily haul billions of dollars of profitable goods across thre Pacific for next to nothing in costs. Perhaps, but let's look at a real-world transport route from China to the U.S. for one not-very-costly product which was air-freighted.
Please gaze in awe at the incredible efficiencies of a global supply chain that ships the product from Beijing, China, to ZhengZhou, China, to Incheon, South Korea, to Anchorage, Alaska, to Louisville, Kentucky, to Ontario, California, and from there to its mid-Pacific destination, Honolulu, Hawaii.
The obvious efficiencies of "the last 10,000 miles" are, well, so obvious they need no further elaboration. Even with jet fuel cheaper than soft drinks, the cost of flying, staffing and maintaining aircraft costing tens of millions of dollars is non-trivial, but apparently all that flying across oceans and continents and then back again is a truly excellent means of reaping enormous profits for everyone involved.
Or not. So here's an April Fools congrats to globalization's many fools.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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Monday, March 30, 2020

Pandemic Pandemonium: The Tides of Globalization and Financialization Reverse

Central bank free money doesn't create collateral or creditworthy borrowers, and without those foundations, the decayed, rotted shack will collapse.
In terms of consequential trends, the pandemic is not a cause, it's an accelerant of shifts already under way before the emergence of Covid-19. Put another way, the tide had already reversed, but now it's visible to all.
The twin drivers of neoliberal inequality, globalization and financialization, are now ebbing, much to the dismay of central banks and the elites that neoliberalism's golden twins enriched at the expense of everyone else.
Globalization ceased expanding some time ago, as diminishing returns set in. The low-hanging fruit had long been picked, and Wall Street's relentless arbitrage of labor costs, environmental laxity and corrupt governance had long since stripped the globalization tree not just of fruit but of bark and foliage.
Wall Street's equally relentless commoditization of assets, debt and leverage had also reached diminishing returns, unsurprising as financialization is the core driver of globalization's ruthless exploitation.
While the conventional media has long focused on offshoring of jobs and factories, the truly monumental profits were raked in by commoditizing assets, debt and leverage on a global scale.
Thus guaranteed-to-default subprime mortgages were deceptively bundled as "low-risk" securities and sold to pension funds in Norway in 2008, this being a mere tip of the iceberg of fictional capital sold off to marks and rubes globally.
The collateral is gone, baby--if there was anything other than fictional collateral to start with. All those collateralized debt obligations (CLOs), neatly bundled auto loans, junk debt based on illusory future returns from fracking companies--it's all gone, and the bagholders are looking to the central banks to bail them out by buying all the putrid sewage of financialization.
The problem with financialization, of course, is that it creates no real goods or services. It is nothing but an elaborate skimming of value produced by others, a looters' paradise that siphons most of the gains into the hands of a few financial puppet-masters.
Globalization's gains were also sluiced into the hands of the few, while neoliberalism's propaganda machine spewed the bogus benefits of globalization: cheaper jeans and TVs, and toasters that might last a year if you're lucky. The nation's essential industries were sent overseas with one goal and one goal only: maximize profits for corporate insiders, their political lapdogs and the top 5% who own most of the shares.
The pandemic has done nothing but knock down the brightly painted facade, revealing the decayed, rotted shack of reality. Globalization and financialization always served one goal: maximizing the profits of the few, by any means available, at the expense of the many.
Now that the collateral is gone and the tree of globalization has been stripped bare, there's nothing left to exploit except the unlimited largesse of predatory finance's best buddies, central banks.
Only chumps, rubes and marks think they can get something for nothing, yet here we are, rubbing our hands with glee at the Fed's trillions in free money. Yee-haw, free money for everyone, but especially for the most exploitive and predatory of financialization's looters.
Sorry, but there is no free lunch. Every dollar of the Fed's freshly printed trillions will eventually be taken out of the purchasing power or collateral of the holders of Federal Reserve currency.
Just as the way of the Tao is reversal, the tides of globalization and financialization have reversed. Central banks are shoveling sand against the tide, and in their hubris-soaked delirium, already declaring victory.
Central bank free money doesn't create collateral or creditworthy borrowers, and without those foundations, the decayed, rotted shack will collapse. The pandemic has released a tightly coiled pandemonium that will play out in the years ahead.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Sunday, March 29, 2020

What Happens as State and Local Tax Revenues Crater?

We can anticipate a federal bailout of pension funds and one-time aid to state and local governments, but bailouts won't repair the eroding foundations of tax revenues.
As we all know, the federal government can "print" money but state, county and city governments cannot. The Treasury can sell bonds to fund deficit spending, and the Federal Reserve can create currency out of thin air to buy the bonds, so federal spending can increase even as tax revenues crash.
State, county and city governments do not have this printing press. Yes, states and counties can sell municipal bonds for infrastructure projects, but they can't sell bonds to support General Fund (i.e. everyday government services) expenditures.
As a result, massive declines in State, county and local tax revenues are already baked in as sales and payroll taxes drop and capital gains taxes--an essential source of revenues for many states--are set to collapse along with the stock market.
Longer term, the other primary source of tax revenues--property taxes--will fall off a cliff as the commercial real estate bubble and Housing Bubble #2 implode later this year. Lower sales, lower employment and lower profits all undermine the fundamentals of real estate, and the institutionalization of remote work and education will gut demand for commercial space.
Real estate transactions are also sources of transfer taxes and capital gains, and as values plummet so will transfer taxes and capital gains.
Every locale has a different mix of tax revenues, but since all sources will fall sooner or later, no state or local government will escape the decline in revenues. Sales (excise) and payroll tax revenues will fall first, and capital gains will vanish as stock market losses replace gains.
In states like California that depend heavily on capital gains taxes, the holes being blown in budgets will be catastrophic. Roughly 10% of all General Fund revenues in California flow from capital gains--over $15 billion in the previous fiscal year. As noted in the California State Revenue Estimate 2019-2020:
"The amount of capital gains revenue in the General Fund can vary greatly from year to year. For instance, in 2007, capital gains contributed $10.9 billion to the General Fund. By 2009, the contribution from capital gains had dropped to $2.3 billion. For 2018, capital gains are forecast to contribute $15.7 billion to General Fund revenue--the highest amount ever."
Were this to drop to previous recession-era lows, that would open a $13 billion hole in tax revenues, completely erasing the state's $8 billion "rainy day fund" and leaving a $5 billion deficit--a sum that will only increase as sales and payroll taxes decline.
Once Silicon Valley Unicorns, Big Tech and zombie corporations start laying off highly paid staff, income tax revenues will crater as well. As the California State Revenue Estimate 2019-2020 explains:
"The highest-income Californians pay a large share of the state's personal income tax. For the 2016 tax year, the top 1 percent of income earners paid just under 46 percent of personal income taxes. This percentage has been greater than 40 percent in 12 of the past 13 years. Consequently, changes in the income of a relatively small group of taxpayers can have a significant impact on state revenues."
Many states and counties are increasingly dependent on a dominant revenue source which may well prove to be an Achilles Heel. California has increasingly come to depend on income taxes from high earners (who also garner most of the capital gains as well):
"In 1950-51, sales tax revenue made up over 50 percent of General Fund revenues while personal income tax revenue made up just more than 11 percent. That relationship has changed dramatically over time, and, for 2019-20, personal income tax makes up 68.8 percent of all General Fund revenues."
A steep decline in tax revenues isn't the end of the pain for local government. Public-sector pension funds heavily invested in stocks are absorbing shattering losses that will have to be compensated by higher contributions by cash-strapped taxpayers. If bond yields rise despite central bank interventions, bond holdings could crash along with stocks.
We can anticipate a federal bailout of pension funds and one-time aid to state and local governments, but bailouts won't repair the eroding foundations of tax revenues. Sales: down. Income: down. Capital gains: down. Vehicle sales: down. Fuel taxes: down. Property taxes: down, once bubble valuations crash to earth.
Cash-strapped taxpayers, many of whom may have lost their jobs, will be in no mood to absorb enormous tax increases to fund insiders, cronies and vested interests.
The gravy train of state and local government spending has just been derailed. The declines in tax revenues will be too steep and too enduring to support the magical-thinking hope that a V-shaped recovery will make all the blown budgets whole next quarter, much less next year.
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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