This past Friday the coveted FAANG stocks (e.g., Facebook™, Amazon™, Apple™, Netflix™, Google™ et al) did something every BTFD trader should notice with great concern, if not fear. The reason for it is two-fold, first: the movement came out-of-the-blue, with no distinguishing catalyst other than speculation. (i.e., some will note a downgrade or other event, but to date, these types of warnings or events have done little, if anything, over the past.) And second: It happened on a Friday leaving a suddenly stunned BTFD cohort to parse and stew trying to comprehend just what, and more importantly: why it happened. Because, said differently: It was a total “WTF just happened?” trading day for all too many.
While many “conventional” indicators of US economic vibrancy and strength have lost their informational and predictive value over the past decade (GDP fluctuates erratically especially in Q1, employment is the lowest this century yet real wage growth is non-existent, inflation remains under the Fed’s target despite its $4.5 trillion balance sheet and so on), one indicator has remained a stubbornly fail-safe marker of economic contraction: since the 1960, every time Commercial & Industrial loan balances have declined (or simply stopped growing), whether due to tighter loan supply or declining demand, a recession was already either in progress or would start soon.
Italy has one of the most indebted governments in the world. It’s borrowed over $2.4 trillion. Its debt-to-GDP ratio is north of 130%. (For comparison, the US debt-to-GDP ratio is 104%.) But the situation is actually much worse. GDP measures a country’s economic output. However, it’s highly misleading. Mainstream economists count government spending as a positive when calculating GDP. A more honest approach would count it as a big negative. In Italy, government spending accounts for a whopping 50%-plus of GDP. Remove that from the calculation, and I suspect we’d see how hopelessly insolvent the Italian government truly is. In other words, Italy is flat broke.
There’s simply no respite for chain restaurants. Industry-wide, same-store sales fell again in May. The last time, same-store sales actually rose year-over-year was in February 2016. On that basis, the chain-restaurant recession is now in its 15th month, the longest downturn since the Financial Crisis. In May, same store sales fell 1.1% year-over-year. Same-store foot traffic fell 3.0%. Food sales were down, and alcohol sales were down, according to TDn2K’s Restaurant Industry Snapshot, tracking sales at 27,000 restaurant units from 155 brands, generating about $67 billion in annual revenue. But the average amount of the check per person increased by 2%, and not because they ordered more food and booze, but because prices rose.
Tesla Inc. TSLA, +0.42% on Friday became the world’s No. 3 car maker by market capitalization, surpassing Germany’s BMW AG BMW, +0.56% and getting further ahead of U.S. competitors General Motors Co. and Ford Motor Co.
It was a week that saw Mario Draghi cling stubbornly to ultra-dovish monetary policy, the UK’s Brexit strategy thrown into even greater disarray after Prime Minister Theresa May’s failed election gambit, and the former Director of the FBI essentially testify that our President is a scoundrel. And then there’s the Middle East… In the midst of it all, after trading at a 24-year low 9.37 Friday morning, an abrupt reversal had the VIX ending the week at 10.70. Looking at the S&P500’s slight (0.3%) decline for the week, one might be tempted to think comfortably “boring.” Market internals, though, were anything but boring or comforting. Friday’s session saw the Nasdaq 100 (NDX) swing wildly. After trading to an all-time high 5,898 in the first hour of U.S. trading, the index sank over 4.0% to 5,658 before closing the session down 2.44% at 5,742. Amazon traded in an intraday range of 1,013 to 927.
In her June 2 interview with Putin, Kelly noted that all “17 intelligence agencies” of the U.S. government concurred in their conclusion of Russian guilt and how could Putin suggest that they all are “lying.” It’s an argument that has been used to silence skeptics for months and apparently is so useful that no one seems to care that it isn’t true. For instance, on May 8, in testimony before a Senate Judiciary subcommittee, former Director of National Intelligence James Clapper conceded publicly that the number of intelligence agencies involved in the assessment was three, not 17, and that the analysts assigned to the project from CIA, FBI and NSA had been “handpicked.”
What was Trump’s transgression? Had he levied new wars abroad without congressional authorization? Had he ordered mass surveillance of the American people in contravention of their 4th amendment rights? Had he cracked down on free speech or assumed the power to issue new laws from the presidential chair ex-cathedra? Had he locked people up in internment camps, confiscated people’s gold, suspended habeas corpus, or ordered prisoners of war to be tortured? No, at least not more than other presidents before him. Rather, Donald Trump had done something allegedly much worse……
The problem, of course, is the surge in asset prices remained confined to those with “investible wealth” but failed to deliver a boost to the roughly 90% of American’s who have experienced little benefit. In turn, this has pushed asset prices, which should be a reflection of underlying economic growth, well in advance of the underlying fundamental realities. Since 2009, the S&P has risen by roughly 220%, while economic and earnings per share growth (which has been largely fabricated through share repurchases, wage and employment suppression and accounting gimmicks) have lagged. The stock market has returned almost 80% since the 2007 peak which is more than twice the growth in GDP and nearly 4-times the growth in corporate revenue. (I have used SALES growth in the chart below as it is what happens at the top line of income statements and is not as subject to manipulation.) The all-time highs in the stock market have been driven by the $4 trillion increase in the Fed’s balance sheet, hundreds of billions in stock buybacks, PE expansion, and ZIRP. With Price-To-Sales ratios and median stock valuations not the highest in history, one should question the ability to continue borrowing from the future?
As our politicos creep deeper into a legalistic wilderness hunting for phantoms of Russian collusion, nobody pays attention to the most dangerous force in American life: the unraveling financialization of the economy.Financialization is what happens when the people-in-charge “create” colossal sums of “money” out of nothing — by issuing loans, a.k.a. debt — and then cream off stupendous profits from the asset bubbles, interest rate arbitrages, and other opportunities for swindling that the artificial wealth presents. It was a kind of magic trick that produced monuments of concentrated personal wealth for a few and left the rest of the population drowning in obligations from a stolen future. The future is now upon us.