Here we go again. The robo machines have been raging for the past two days, and by mid-afternoon we were hovering around 2045 on the S&P 500. Since that’s only 2.3% below the all-time high reached at the end of December, bubblevision’s amen chorus was back out in force, pronouncing that all is well, the momentary headwinds are fading and, yes, the bottom’s in.
Not exactly. The robo machines are actually drunk. The S&P 500 first shot through 2045 back on about November 13th, and was then on its way to 2070 by early December. It then reversed course and plunged through 2045 from above on December 10, reaching a low of 1989 a few days later. Shortly thereafter the market erupted back over 2045 on December 18th—-as it soared along an upward path to its year-end and all-time peak of 2090.
As is evident in the chart below, the zigzagging has only gotten more intense and frequent since the turn of the year. By January 2, the S&P 500 plunged back below the 2045 mark, but five days later was back above it; then it was down again on January 9, back up on January 21, and back down on January 26. So here we are on February 3 back above 2045——virtually the same spot as early November.
The market is cycling, but the economic facts on the ground are not. Everywhere the trends are getting worse, and not by trivial or debatable increments. Were the stock market an actual discounting device engaged in price discovery, it would be heading south— not in circles.
But robo machines and day traders do not weigh and assess comprehensive market and economic information, nor do they give a wit for trends; they simply careen between chart points based on headlines. And most of the headlines in question have to do with a very specific thing. Namely, some new indication that the worldwide central bank Ponzi has found yet another way to prolong the day of reckoning.
Today the headline ramp was that the new Greek government was backing off from its confrontation with the EU and looking for a 10-week “bridge” to a new deal that would have everything coming up roses by June 1. Shortly thereafter, of course, the Germans and the ECB issued a ringing “nein!” But the chart points were in for the day.
In fact, not only will that headline change 10 more times in the next 25 days as the Greek kabuki theatre runs its course toward the February 28 expiration of the current bailout program, but whatever jerry-built “compromise” that does emerge will be irrelevant, anyway. Europe and the euro are on their way to a crash landing and it is only a matter of time before the trainwreck becomes an undeniable reality.
Why? Because the European economies have been dead in the water statistically since 2008, but even the appearance of stasis in the chart below is deceptive. In fact, when you back out the unsustainable boom in German engineering exports and European luxury auto and consumer goods shipments to the house of cards in China, real GDP in the Eurozone is well below where it was on the eve of the financial crisis.
Needless to say, this is a giant problem because without an energetic rebound in GDP growth, Europe will eventually bury itself in public debt.
Europe as a whole is really only a slow motion case of Greece. The latter’s $350 billion of debt, representing 175% of a GDP that has shrunk by 25% since 2009, is now strangling Greece’s economy and social order. These debilitating conditions, in turn, have led to the election of a radical political party that did not even exist four years ago, and which will now become a potent fount of disruption and confrontation that will keep Greece and Europe in political crisis as far as the eye can see.
Indeed, the Greek revolt against the harsh rule of the European superstate rulers in Brussels is already spreading like wildfire. A comparable left-populist party in Spain called Podemos is already soaring in the polls, just as did Syriza a few years back; and given the complete dysfunction in Rome, Italy can’t be far behind.
To be sure, Europe is welcome to have whatever political brawls it chooses.The problem, however, is that these grass roots uprisings have no coherent program to address Europe’s soaring public debt problem; and for the most part represent an angry popular revolt against even the mild austerity that has been instituted to date.
So there is every reason to believe that the soaring public debt ratio for the EU-19 as a whole will continue to rise and soon move through the fatal 100% of GDP threshold. At the same time, the all-out money printing spree of the ECB has now driven yields on eurozone sovereign debt to levels that are so low as to be freakish. Today, in fact, the German 10-year bond yield dropped below 30 bps, and, even more significantly, below the yield on the 10-year Japanese government bond!
Accordingly, the juxtaposition shown below is a recipe for an eventual fiscal crash landing. With no economic growth and large current budget deficits across Europe, debt-to-GDP ratios will keep growing. At the same time, the upwelling of populism and the profound disincentive of the ECB’s massive debt purchase and interest rate repression policy will paralyze any attempts at fiscal retrenchment.
Next consider the global context. The great central bank driven commodity and industrial boom in the EM world and China is cooling rapidly. On a year over year basis, global trade growth has nearly reached a standstill—–a condition crystalized in the plummeting level of the Baltic Dry index, which is now at its lowest level since 1985-1986. This means that global deflation has arrived in earnest and that the EM engine of big cap corporate export and profit growth will soon falter badly.
Finally, recent US data make clear that once again—for the fourth year running—the so-called “escape velocity” is not happening. Indeed, the 1.8% growth in real final sales reported in a preliminary basis for Q4 last week is virtually certain to be marked down further. The December PCE and wage and salary growth numbers—which were not included in the initial Q4 GDP report— were just plain punk.
So it amounts to this. If you take the unique case of Apple out of the Q4 profits reports, earning growth—-even on Wall Street’s phony ex-items basis—has ground down to zero. Add on top of that a European financial crisis that is just getting started; a dollar that will continue to rise as the EM economies falter; the on-rushing breakdown of the China bubble; the clear failure of Abenomics to print Japan’s economy out of its doldrums; and the distinct likelihood that the recent, sharply weakening US economic trends will continue in the quarters ahead.
That does not add up to any growth at all in S&P 500 earnings during the year ahead. And it suggest the distinct possibility that the strong dollar and plunging profitability in the entire energy-materials complex will bring aggregate earnings down.
Under that scenario it is not plausible that the broad market index should be trading at 20X reported LTM earnings. That is, unless the trading is being done by robots and Wall Street gamblers, who believe they will get the word first when the central bank Ponzi finally fails.
Chances are that they will, and that’s why the market is zigzagging it way to nowhere. Its calling the home gamers to the slaughter. Again.