December 1: Daily Contrarian Reads

It’s All One Single, Giant $22 Trillion Position

QE and NIRP have two predominant effects on markets: (i) relentless up-trend in stocks and bonds (the ‘Trend Factor’), dominated by the buy-the-dip mentality, which encapsulates the ‘moral hazard’ of investors knowing Central Banks are prompt to come to their rescue (otherwise known as ‘Bernanke/Yellen/Kuroda/Draghi put’), and (ii) the relentless down-trend in volatility (the ‘Volatility Factor’). The most fashionable investment strategies these days are directly impacted by either one or both of these drivers. Such strategies make the bulk of the overall market, after leverage or turnover.

OOOPS! The Donald’s Anti-Muslim Video Tweet Shows US Supported FSA Commander Destroying Statute of Virgin Mary

That particular video shared by the president is from 2013 and shows a Free Syrian Army (FSA) commander named Omar Gharba destroying a Virgin Mary statue as the group invaded a Syrian Christian town. In a geopolitical and deeply ironic twist demonstrating the absurdity and contradictions of US foreign policy, the radical Islamist commander was actually supported by the United States at the time as part of the FSA, which the media and US government deemed “moderate.”

National Debt Jumps $723 Billion in 12 Weeks—Even Yellen Worried About “US Debt Trajectory”

Even as lawmakers are trying to cobble together a tax-cut bill that would cut revenues by $1.5 trillion over ten years, the gross national debt has spiked $723 billion over the past 12 weeks since Congress suspended the “debt ceiling.” It just hit $20.57 trillion, or 105% of GDP.

The Euphoric Rise & Inevitable Fall Of Dr. Feelgood

….What most of the patients didn’t realize was that Jacobson’s magical cure actually contained between 30 and 50 milligrams of amphetamines, a mood elevating neural energizer that goes by the street name “speed.” The drugs were then combined with a jumble of other ingredients including multivitamins, steroids, enzymes, hormones, bone marrow, animal organ cells and solubilized placenta….Ever since the start of the “Great Financial Crisis” in 2008, global central banks, including the Federal Reserve, have aggressively resurrected the role and unconventional remedies of “Dr. Feelgood.”

Wealth Effects And The Pecking Order

Now this shift in relative wealth of the non-rich and the really rich didn’t start with the Central Bankers’ Bubble and its narrative of trickle-down wealth effects from monetary policy. It started roughly in 1980 with the Reagan narrative of trickle-down wealth effects from fiscal policy. And before we make overly facile comparisons with the 1920s and 1930s, this chart isn’t taking into account pensions and social security and other safety net features of the modern semi-sorta-welfare state. So I don’t know how historically abnormal today’s level of significant wealth inequality might be, whether it’s Louis XVI level inequality or simply robber baron level inequality. But I know that it IS.

Japanification Denial

Gross Domestic Product (GDP) was revised upward from a seasonally-adjusted annual growth rate of 2.945% to 3.243%. For the first time since the middle of 2014, GDP appears to have advanced (subject to further revisions) at a better than 3% rate for two consecutive quarters. That level of growth used to be commonplace, even something of an economic floor, but now is celebrated as an achievement given the rarity of its occurrence.

What Washington’s Demonization Has Wrought In Iran

An important consequence of the unrelenting, unqualified hostility toward Iran that Donald Trump has made a centerpiece of his foreign policy is described in an article by Thomas Erdbrink of the New York Times about the impact of that policy on the Iranian public.  Erdbrink summarizes the overall effect this way: “In short, it appears that Mr. Trump and the Saudis have helped the government achieve what years of repression could never accomplish: widespread public support for the hardline view that the United States and Riyadh cannot be trusted and that Iran is now a strong and capable state capable of staring down its enemies.”

The Mean Reverting History Of Profit Growth

This deviation begs the question of sustainability. The chart below is an expansion of the real, inflation-adjusted, profits after-tax versus the cumulative change to the S&P 500. Here is the important point – when markets grow faster than profitability, which it can do for a while, eventually a reversion occurs. This is simply the case that all excesses must eventually be cleared before the next growth cycle can occur. Currently, we are once again trading a fairly substantial premium to corporate profit growth.

Goldman Warns That Market Valuations Are at Their Highest Since 1900

A prolonged bull market across stocks, bonds and credit has left a measure of average valuation at the highest since 1900, a condition that at some point is going to translate into pain for investors, according to Goldman Sachs Group Inc.

Wall Street’s Phony Earnings-Driven Meme

I suppose that if something is said enough and is infrequently contested, the many think it is true! Consistently advancing and uninterrupted rising stock prices have a way of spreading fallacious arguments not grounded in fact. Here are some recent examples of that meme — namely, of an earnings-driven market — over the last two weeks, but there are many more repetitions of the meme on a daily basis.