Royal Bank of Scotland to investors: 'Sell everything'

Various indexes have been making new highs since late last year. The S&P 500 touched 2400 again today and backed off. The index is in the upper part of the same range it was in yesterday and the day before that and the day before that, and really the same range it has been in for monhts.

My "fantasy world" is a cartoon you created. Imagine that.

For anyone interested in something other than a stupid "scoreboard!" post. ... what this was never about for me (but unfortunately was for a couple of people), these two graphs encapsulate what I have been talking about.

​

The first graph is asset buying by central banks. The second is the S&P 500, which has followed the credit being injected lock step.

Central Banks went berzerk after the years of their interest rate suppression (in the name of juicing economic activity) caused a credit crisis in 2008. Rather than letting a deleveraging happen, they stepped in with more extreme measures than just rigging short-term interest rates -- that wasn't enough anymore given how much bad debt they had created. That meant, actually intervening in our debt markets, and then when that wasn't enough for a few central banks, skipping that indirect method of creating more and more credit and outright buying equities. In late 2015, several of those central banks took their foot off the gas -- they wanted to normalize their behavior. Unfortunately for them, that means the consequences for the misallocations of capital they have created and it is going to be nasty. ... When they started that global tightening (with the Federal Reserve leading the way by signaling that it wanted to raise short term rates if it could), by early 2016, a credit bubble in China started to pop, and our stock market buckled in anticipation of the nasty deleveraging that is going to be the consequence of their stupidity. That is what led to this thread.

In several posts, I said that stocks are going to crash -- UNLESS central banks can find a way to inflate the bubble bigger for a little longer. That is precisely what they did. After they were spooked by the sell off last year, they stepped up the asset buying again. And so far this year, they have added another trillion dollars + to their combined balance sheets. It is the equivalent of just throwing money into the riskiest markets -- putting a "put" under those markets. It is reckless.

For the bulk of the top graph, it was the Federal Reserve, via its quantitative easing programs (i.e. -- buying up debt to drive interest rates down) leading the way. When that led to a $4 trillion balance sheet, in a coordinated effort, the handed off the manipulation to other central banks in 2015, mainly the ECB and BOJ, which have gone berzerk with it (and wanted to stop, but they panicked when we got what brought on this thread and started buying debt at an even bigger clip since). Mind you, the Fed didn't sell all of the debt they bought -- they are still sitting on their balance sheet making them technically insolvent, because if they try to sell those assets they have to take a huge loss (they drove up prices when they stepped in and overpaid) -- and crash the markets they bubbled up in the process.

This year alone, the various central banks have added another trillion dollars to their balance sheets (mainly the BOJ and ECB). So yeah, US equities are still rolling along. Surprise. There are no liquid debt markets in Europe and Japan anymore, because those central banks own a huge percentage of the debt issuance and are still buying like mad. What that does is keep interest rates below zero in those places (driving up prices with their artificial demand), and forcing people to engage in riskier and riskier behavior to achieve the risk-free returns they have been robbed of for the last decade. The casino they have created exists in a variety of markets, but U.S. equity markets have been the biggest beneficiary -- with money flowing in from all around the world as those central banks rob them with suppressed rates.

This is what tweedledee is so gleeful about. We have a full-fledged pension crisis (with pension funds unable to meet their obligations because of the returns they have been robbed off) at best, and at worst, we have desperate portfolio managers who have thrown up their hands and jumped into the casino feeling they have no choice. It is going to end so badly, and a lot of people are going to suffer because of it. This stock market rally is predicated on more and more debt creation. We have a bond market bubble that is going to burst when that ends predictably, and it is going to take down the stocks with it, so enjoy it while it lasts. It is a phantom. The valuations alone we are seeing -- good companies (Apple, etc.) and huge misallocations of capital (Tesla, etc.) -- it has created, should clue in anyone. The CAPE ratio (cyclically adjusted price to earnings) is screaming massive bubble -- valuations 2 to 3 standard deviations from the norm. In this environment, valuation has been thrown out the window. All that matters is that it is nearly free to keep borrowing and gambling on risk assets with that money -- until it ends predictably. As long as they can keep injecting liquidity via more and more debt creation, though, yeah, stocks can keep going up.

 

What the fuck are you talking about? Stop talking for me. ... it's bad enough you don't ever respond to ME, but you have this shitty way of creating dumb things and attributing them to me.

Go back to 2009 and 2010 and 2011 and 2012 and 2013. ... I certainly was on top of what the various central banks were doing. I used to post about how they were creating a mess, and you had no clue what I was talking about. ... because it wasn't in your news digest.

Exactly what I was was spelling out about them NEVER being able to unwind the bloated balance sheets they were creating, and as importantly (because like a jackass you were trying to mock me) the Fed (because the other central banks aren't even pretending) trying to jawbone about rate normalization was silly --- even as they kept talking, but doing nothing, I tried patiently over and over again to explain to you that they can not allow rates to normalize. As their flawed measure of inflation has risen, they haven't even kept pace with it with their measly 75 basis points of tightening over the last 3 years.

Now, the entire world sees exactly what I was saying -- markets tune them out. It's "we'll believe it when we see it; the boy cried wolf too many times, so we ain't buying it." But none of your idiotic posts from 3 years ago now. You just shift the goal posts and make up stuff and attribute it to me.

I have NOT spent the last 9 years "telling us all along that collapse was certain and imminent because of all the central bank intervention" or whatever stupidity is rattling around your head. That never stops you from from making up shit, though. This bubble really took off sometime around 2 to 3 years ago. I said so. And I was right. Earnings were declining (as in less than 0) for several years, but stock prices were going up. That is what started to create the insane valuations over the last 2, 3 years -- it was multiple expansion (on the back of margin buying), not the economy (which has been in a depression), and as a result earnings (which were declining every quarter until Q1 this year), driving things. That was when it was abundantly clear that they had lost control of their mess and that they are now left to propping up asset prices, including U.S. equities which have now run away from them.

 

The economy grew (nominally) during most of the Great Depression. Jesus, this has gotten dumb.

A depression isn't characterized by 10 year periods in which the economy contracts (the economy is constantly growing, unless something is drastically wrong). It is characterized by below trend growth. In this case, downright anemic growth. Our economy has grown miserably during this recovery. In fact, from 2008 to 2013, we saw the worst four years of GDP growth ever (including the great depression) -- .73 percent annualized. Last year, annual GDP came in at 1.6 percent. For the first quarter of this year, .7 percent. Which is kind of the point. Earnings have been anemic for years, as one would expect in a depressed economy. Yet, stock prices have reached valuations more than 2 standard deviations greater than the norm. At a time that the economy is in a depression (yes, this is a depression). At the same time, we have central planners around the world who have resorted to massive amounts of credit creation thinking it will "stimulate" us out of the credit mess they created in the first place (going on 9 years of their schemes and it has just created MORE debt and asset bubbles, not growth), various risk assets (including the U.S. stock market) have gone parabolic. At the same time, consumer and corporate credit levels have increased dramatically -- The housing bubble has been reblown. Additionally, we have $1.1 trillion in auto loans, much of it subprime. $1.3 trillion in student loan debt. Credit card debt at historic levels.

BTW. ... that is with them using a generous GDP deflator to overstate growth (for the benefit of whoever is in office). They don't even use the CPI, which itself is played with to understate actual price levels. ... but not enough to goose GDP enough for them. ... if they used CPI or PCE (not that those are non politicized numbers), the GDP numbers would be even lower. Instead, they use a deflator made up by the Commerce Department that changes depending on how they randomly weight and swap out items -- allowing manipulation.

 

In 1934 or 1935 or 1936 OR 1937 (when the economy grew at 4 times the pace annualized (that is 400 percent !) it has averaged over the last 10 years, he would have been sniffing at me about my "personal" definitions. Because he posted something dumb without have any idea what he was talking about, and I responded.

For what it is worth, a depression is a sustained period of below-trend growth. That has nothing to do with me personally. And it certainly has nothing to do with nonsensical comments such as, 'To most observers we haven't had a negative growth quarter since 2011, but who gives a shit about that?" that have nothing to do with anything.

As I said, during the heart of the GREAT DEPRESSION, GDP was growing at a pace much greater than anything we have seen since 2007. A depression isn't defined by a contracting economy (by someone talking out of their ass as usual or otherwise), although it often begins with a nasty recession, such as what the stock market crash in 1929 kicked off (and the financial crisis in 2008). It is defined by below trend growth -- an economy that is shocked that way and settles into a quagmire in which it stagnates for years.

We have had sub 2 percent growth the last 10 years and have never achieved the breakout growth EVERY downturn, such as the one we had in 2008, has as part of a normal business cycle. In fact, what worries a lot of people about that is that our recovery (sub 2 percent growth) is very long in the tooth by the standards of most business cycles, which has people wondering if we are due for the next recession -- without ever having broken out.

That subpar growth is WITH the massive credit injection I have posted about that is propping up the asset bubbles that pass for the global economy now.

Re your post: A lot of people in the 1930s were in a state of misery that most aren't today, because the social welfare programs we have today (on the back of a lot of unsustainable debt) didn't exist. That has nothing to do with how the underlying economy was doing then or now. 1 in 5 people in this country receive SNAP benefits right now. Almost that many are on Medicaid. More than 1 in 20 working age Americans receive disability benefits (so we don't have to call it relief or unemployment or something else). Most of that is not being paid for. Its precisely why we have central banks buying up massive amounts of debt to suppress interest rates and keep credit flowing -- for as long as they can stay on that treadmill. We have increased our total public debt (forget private debt, which I posted about) at an astronomical pace over the last decade. If rates were being set by a market, we couldn't afford to service the debt, let alone keep running up MORE debt. I suppose if they had done something akin to that in the 1930s (although it would have been unthinkable, and they did some radical things for their time), they could have sold out decades of their future to try to make a lot of suffering people feel a little better in the present. It still wouldn't have changed the obvious truism (which everyone is going to learn unfortunately, the two hyenas included) that the way out of a debt mess isn't to monetize more and more debt to create more and more debt on top of the debt that already has hurt the economy. It's a recipe for an even wore disaster.