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Markets are down because what Apple guided yesterday is the kind of news you get in bear markets. It is amazing that Apple said, "It was China" and stories regurgitate that today.

Last year in the Holiday quarter, China accounted for $18 billion of revenue for Apple. Yesterday, Apple prepared everyone for an $8 billion shortfall in what they had previously guided. That in itself was incredible, because no company guides the way Apple does. They track every metric possible, from foot traffic in their stores to all kinds of trends to accurately forecast sales. In any case, that $8 billion shortfall is not all coming from China. I will guarantee you that Apple's sales are not going to be 45 percent down in China. It's just a nonsensical narrative.

Apple is a hardware company. It tried to pass off hardware with a great, user friendly interface that was a selling point, for higher and higher margins and prices, while its competitors have had to remain much more cost competitive. As Apple products saturated markets around the world, and Apple kept raising prices, at a certain point, there weren't enough people in the developed markets buying those products, willing to make a new $800 purchase every 2 years for something that wasn't incrementally enough of an improvement. It is biting Apple in the ass. Apple needs a new product to justify where expectations had gotten. But iPhones ideas don't grow on trees.

Really, the only reason Apple's stock price remained so elevated anyhow had nothing to do with its sales. This handwriting has been on the wall for a while that time was running out on them. But in a euphoric environment, in which cheap money was fueling a bubble, Apple becamethe king of stock buybacks, which has become the premier method of financial engineering to blow up stock prices in a cheap money environment. Apple went on a tear buying back hundreds of billions of dollars of its stock. You can't underestimate how much hundreds of billions of dollars of a buyer who doesn't care about actual value can do to drive up a price of something. Right now you are seeing what the end game of that was all along. Those companies will inevitably have wasted a lot of their owners' money way overpaying for their own stock. That money could have been used for research or investment to try to grow the business -- to flail away and try to find the next big product that could keep Apple growing. But in a distorted credit environment, coupled with a permanently depressed economy, the incentive was instead to create an artificially inflated stock price for short-term gain. At least in the case of Apple, the company has actual income, so the money it shitted away will not leave a ton of debt on its balance sheet. That can't be said for most other companies that have gone bonkers wasting money overpaying for their own stock as the bubble became a self fulfilling prophecy, and are going to be left mired in debt (with many defaults coming).

The reason we are in a bear market is that central banks pumped in trillions of dollars of liquidity and created a credit bubble and a lot of very misallocated capital on the back of it, which we all will be paying for for years, unfortunately. They have now shifted to net removing that liquidity. We had years of quantitative easing, which pumped artificial liquidity into risk assets. We are now seeing just a small taste of what happens when they remove that liquidity -- in effect what quantitative tightening looks like. And this is with the smallest, most ginger amount of reversing it. Money is still free in real terms.

 

US State Department just moved travel to China to "level 2" and recommends increased caution.