Royal Bank of Scotland to investors: 'Sell everything'

Thanks for that. McClatchy is small potatoes, but it's an example others on here can relate to, because they know the industry.

That actually did happen last year, and is still ongoing. They were being threatened with delistment, and they authorized a buyback program to juice the stock price. It worked. They merrily financially engineered a higher stock price (at a crazy valuation) -- they are still in there buying back shares to keep the stock price artificially high. Which of course can only exist in a world of leverage that has fucked up our markets.

Multiply that kind of engineering by a large percentage of the stock market, and you have a major reason why I have been saying that in my opinion valuations got insane and stocks are going to have to come down -- if not sooner, then at some point when the leverage creates a credit event -- as that kind of thing always does. McClatchy could be the poster child for understanding my posts better.

It is a company that is still almost a trillion dollars in debt and has a debt / assets ratio close to 50 percent. ... that can't exist without massive debt and rates being suppressed by a central planner so it doesn't drown in its debt.

And we are now in a bizarro world, in which they are using some of their leverage for about the least productive use imaginable -- buying their own shares back at a ridiculously expensive prices. ... on margin.

That would never happen in a world in which credit markets are left alone to determine lending risk and price it on their own. And it is not sustainable. It inevitably ends with waves of defaults and a lot of phony wealth disappearing.

Cranberry wants to avoid focusing on the actual cause of the perversion we are talking about. The Fed has its thumb on the scale. ... And the risk perversion they have created (that were explicitly TRYING to create) has caused massive misallocations of capital across a broad set of areas.

It's not even credible to try to ignore the direct cause of the price fixing that has created massive leverage and insane behavior, and speculate that everyone just made a decision to act recklessly -- to the tune of trillions of dollars of leverage -- on their own. Even if you want to try suggest that, how in the world is a company like McClatchy even able to access the debt markets as cheaply as it can?

 

"By sticking with a slow, steady path of raising interest rates. ..."

They have spent decades doing every radical thing it took to SUPPRESS interest rates. Even if you believe they are magicians -- they can some calibrate our economy (which is like trying to steer a cruise ship) optimally better than we all can by our own decisions (the reality is they have had the worst forecasting record imaginable, but you don't deal with reality) -- they went about a decade WITHOUT raising rates.

It is frustrating trying to have a conversation with you, because you will post something that is plain ridiculous and untrue. ... and then make a sweeping conclusion off of it that has no basis in reality. And finish with some, "End of conversation." derision. No, they haven't been gradually "raising" rates, cran. And in fact, when their perception was that they couldn't keep LOWERING rates (because they hit the zero bound), they resorted to radical measures that involved trillions of dollars of buying debt to keep the credit creation going.

Stop telling me what I warned you about. You have no concept of what monetary inflation is, or what I post about. We are having a discussion about an asset bubble -- in which you seemingly were at least acknowledging one (of many). And you just want to ignore the obvious. That that is a consequence (just one isolated consequence of MANY) of extreme monetary inflation -- when the Federal Reserve expands its balance sheet by more than $4 trillion dollars -- using precedented measures -- what do you think the money it creates out of thin air to do it is? What do you think the purpose of doing something that radical is? I can't have a conversation about something with someone who refuses to at least acknowledge reality.

Interest rates are a discounting mechanism. They are the most vital price in a market-based economy. When interest rates aren't price fixed (in the worst way possible -- PERMANENT suppression) by a bunch of technocrats, they discount future cash flows, and as a result, they calibrate risk. We don't have a market-based economy as long as that extreme price fixing exists -- which pushes riskier and riskier behavior to keep a phony economy from collapsing.

In 1998, I could kind of get this kind of conversation. You could have come on here and said, "Alan Greenspan is a genius. We get 6, 7 percent growth every year! He did away with the business cycles. It's a new paradigm. Hey look, my stock portfolio is going up. Did you see my new Mercedes?" In 2016, there are few people who could even try to have that conversation with a straight face. We are in a depression -- an extended period of subpar economic growth, as a consequence of this having gone on for decades -- robbing future growth to live a fanatsy. And just the meager level of growth (or lack of growth, if we are back in recession already) we are now saddled with, is requiring more and more credit creation.

 

Woops. Yeah. A billion dollars for sure. I was seeing a billion worth of junk. ... and typed a trillion.

 

Since I am back on here. ... I just had to do a double take. Pom Pom TV actually just put this on its website:

Fed policy has cost savers $7.5 billion: Study

I distinctly remember a few years ago, when I posted about how the Fed was deliberately robbing savers to try push people into riskier and riskier behavior, and I tried to get cranberry to have a conversation on point ... he dismissed it as a looney tunes conspiracy theory.

That $7.5 billion of lost savings number -- if it even is accurate -- only addresses people who want their money to be absolutely safe. It doesn't address what I think is even more tragic -- the much greater amount of money that has been pushed into extremely risky debt areas just to get anything resembling what used to be an investment-grade yield (i.e. -- cranberry's "full of shit" post yesterday).

This morning, for example, the Journal had another "people loaded up on emerging market debt in local currency, and they have taken a bath" write up. It has been ugly -- many people with 20, 30, 50 percent losses.

The Incredible Emerging-Market Debt Switcheroo

The money graf (that is invisible to cranberry) was:

Trust me, it wasn't that hard to imagine if you had considered the EVENTUAL consequences of what they were doing. And it just gets worse for those people if the Fed actually does try to normalize rates. Even just the talk of it is what cratered those emerging markets.

It also goes well beyond there, because the real problem is in high-yield developed market debt, where the reach for yield has attracted a much greater amount of money. i.e. -- the money all the McClatchys have been able to borrow.

 

A far cry from "loony toons conspiracy theories." Now it is, "Of course that is what they have been doing!"

And you don't even miss a beat.

I will be digging out that gem of a post at some point.

"I know savers can't get any yield. ... But no worries. Just put your money in a "conservative [cranberryspeak] equity fund." If you had been smart enough to have done that in 2009 [i.e. -- when the Fed was cranking up the casino] you would seen a 200 percent return!"

What could possibly go wrong?

I really do hope you are not being so "smart" and "conservative" with your money that would otherwise be sitting in a bank account or a money market fund or a CD or a short-dated treasury note or even an investment-grade bond. And I feel bad for the poor schmucks who are going to get caught offside because they didn't understand the actual risk (which is elevated right now) in a world being distorted by the excessive leverage you are talking about with utter cluelessness.

Mother of mercy.

 

If by "investment portfolio" you mean something with significant equity exposure, I hope you have at least a 5 to 10 year time horizon and don't plan on looking at it very often. That's usually reasonable advice in normal times. But probabilities are that we are facing a very significant blow off in most equities, with a chance at least that a bear market follows and lasts for a prolonged period of time. When they have lost control, and markets are on their own (and being priced in an economic environment that has to dig its way out from their idiocy), there is A LOT of deleveraging and repricing that is going to have to happen. It could way overshoot before figuring out a resting spot, too.

As for Yellen, I hate trying to predict the Kabuki theater. It's crazy enough that markets trade on the tea leave reading, not fundamentals. But I do think what happens at 2 pm and after when she flaps her gums, isn't that hard to guess this time. The only wildcard is her penchant for miscommunicating what she was trying to get across. In which case you could get anything from markets -- at least in the short term, until they send out Dudley next week to do a redo.

Regardless of a Fed Funds rate decision today, they have backed themselves into a lose-lose situation -- I don't mean "what are markets going to do next week," but in the big picture. It is remarkable given that they control credit creation. It used to be "Don't fight the Fed." Now markets are starting to shrug off their bullshit. When markets had a violent reaction after December, they came out one by one and tried to walk back what they were showing in the silly dot plots -- 25 basis points every other meeting. Markets reacted favorably with each official getting more dovish.

Today, I imagine they will do the same thing they did prior to December after confusing the hell out of everyone for a year: "No really guys, we mean it." And then they will really spend the next several months signaling something for the June meeting (there is no press conference in April, so markets will figure they don't do anything then).

Wash, rinse, repeat. Dollar reacts upward. China starts falling apart. Oil prices get weak -- stocks will trade right with oil prices. You start seeing cracks of a high-yield debt problem. And markets have another kanipshin.

They inherently want to keep their foot on the gas. It's all that holds up the phoniness. But they are having trouble ignoring the sirens from the economy. So they they are caught between trying to prop up everything ... and trying to create enough "Fed Funds ammo" for what they think will be their ability to deal with the downward cycle (which they always see too late anyhow).

Lose-lose.

Even if that isn't how it goes over the next few months--them trying to prepare everyone for June (and cratering markets in the process). ... all we have left is a massive amount of leverage propping up asset prices in an increasingly weak economy that is producing declining earnings. So let's say we instead get something dovish moving forward instead -- they send Charlie Evans out to dance a jig and get everyone ready for negative rates. If the U.S. economy isn't already in the recession all of the data is suggesting, it is heading into one (which it was due for anyhow -- a recession following the weakest "recovery" in American history, for what it is worth). And they are sitting there with no phony ammo left to try to bluff markets with anyhow.

Jim Rickards writes about as succinctly as I post on here. But I thought he laid it out fairly well yesterday.

A Tale of Three Worlds - Daily Reckoning

One other thing. ... which is probably of more actual significance to the equity markets than the Fed Window dressing that people will parse endlessly after 2. ... As Zero Hedge pointed out this morning, companies have largely entered a buyback blackout period, meaning that the only marginal buyer of equities since 2010 (other than cranberry who has his paycheck deposited into a Netflix dividend reinvestment plan rather than a bank account) is sidelined for the next month.