The Great Recession Blog
by David Haggith
It appears one of my most boisterous predictions last year could be about to fail (and right at the point where it looked like a success in every detail). The current stock market rally and rise in oil prices appear to contradict my big prediction of a stock market crash that would start in December. I bet my blog on that prediction. As of Thursday, the stock market has recovered to its highest point of the year, nearly back to the point from which it fell in December. It could reach that point today (Friday). If that happens, the market will erase the damage of its crash.
I’ve made a fair amount of noise and bluster about the precision of my economic predictions with a purpose. I hope to shame the numerous economists who should be able see economic catastrophe coming but who fail miserably anytime it does, even though this is their area of specialized expertise.
Most economists today do worse than fail: they actually create their own failure by engineering economic destruction under the apparent belief that they are engineering economic recovery. Their foolishness will be the entire world’s despair, so their blindness and economic denial deserves contempt and judgment. Would that they could be honest in admitting their failures, that the world might be spared their folly.
Their elitist arrogance guards an entirely upside-down understanding of economics that serves their greedy self-interest. I hope to, at least, awaken some of their followers out of this economic denial by proving that those with less economic training are able to see what is coming and, therefore, must understand economic fundamentals better than the experts who are completely blindsided … every time.
You don’t have to be a fortune teller to see a train that is already off the rails coming in your direction and, thereby, predict a crash is coming. You can even tell about when it’s going to hit you. It is not so remarkable (to me anyway) that one can see it coming but remarkable in the extreme that so many people cannot see it, even when the train is only a few hundred feet away and the rumbling is immense.
My hope is that, if people see economic collapse could be foreseen (because they read someone who foresaw it), they will be far less forgiving this time than they were last time. Too much got swept under the rug with the excuse of, “Oh well, no one can really see something like the Great Recession coming.” I, of course, am not the only one pointing out the impending Epocalypse — an economic collapse that I believe will prove to be the worst in history. So, I’m not claiming this is my loan crusade.
Of course, if I make noise about the accuracy of my own bold predictions, I may only shame myself if I’m wrong in such a public way. (But, hey, somebody has to do this dirty job of cleaning up the greasy economists, and that’s the risk that comes with my approach. Doesn’t do much good, in my opinion, to make a lot of noise after the fact about how foreseeable was the outcome of their financial manipulations.)
As I live by the antiquated concept that one needs to be honest in admitting error (something these economists excuse daily), I think one should be just as brazen in admitting when they were wrong as they were in making their predictions. As we have reached an inflection point in the US oil market, the US stock market and the overall US economy, this should be an interesting moment to test my economic predictions.
I have a few oily looking crows already lined up on the wire, cawing their contempt at me. Fair enough, should they prove right. I certainly have no reservations about doing the same thing when I see false predictions that were boldly proclaimed. I criticize economic prognosticators all the time because I get weary of their establishment nonsense. So, no hard feelings. The world needs fewer false prophets of doom and gloom, and I certainly don’t want to be counted among them. So, I’m not going to cut myself a lot of slack; but I’m going to be fair to myself in how I evaluate the success and failure, too.
Most prophets of doom and gloom soldier on with total indifference to their false predictions. I’m not that kind of person. I may seem brash when I point out where my predictions were right, since they are predictions of massive events; but I think it is fair to point that out if (and only if) I am equally bold and clear in stating when I’m wrong.
In my mind, it’s not proud to point out when your predictions are right if you equally point out when they are wrong. In that case, it is simply a matter of objective tracking and evaluation. The value in doing so is this: If I’m pretty consistently right (no one is perfect), it means you have strong reason to pay attention, but it also establishes that economists can be blamed for being wrong (and should be blamed if they are architects of the failure that everyone else suffers); they cannot cop a plea that such things were not humanly foreseeable. If I’m wrong, it means I have strong reason to shut up and go away, and I should admit it publicly.
With that purpose in mind, allow me to point out where my predictions have recently come true and where they appear to be failing with, I hope, equal objectivity both ways.
The global economic collapse I predicted became a fact for most of the world
Clearly one of my two major economic predictions last year is solidly in the bag and cannot be taken from me. I bet my blog that global economic collapse would become obvious by fall, and it did. We have definitely entered a state of global economic collapse. I made that prediction half a year before when the mainstream economists were all talking about global recovery, as if it were a fact.
People in some countries like the US and parts of Europe may not be feeling the collapse much yet; but many nations that were recently rising stars are now completely fallen stars, such as Brazil, or are having a very tough time of things, such as China and the formerly great Japan. Canada, which thought it had escaped the Great Recession, has entered recession. Other areas that thought they were recovering from the Great recession, such as parts of Europe, are also back in recession. (Immigration problems have also turned out terrible in Europe as I said they would back when mass migration from Syria first began.)
While I (and probably most people) expected the US to hold out the longest and best in any global economic collapse, even the US had a perilous start to the year — one of the worst ever for the New York Stock Exchange. Bad signs for the US continue to abound; but the jury is still out on whether the US fully joins that collapse.
The verdict is in for the world, however, and I stand by my statements that it is going to get so much worse that you may hardly be able to believe what you see happening. So, I’m going to pronounce all of that a perfect full-court shot. If you want to challenge that shot, tell my why you think the world is not in a state of economic collapse. (But you’ll be challenged back.)
Auto loan defaults about to careen over a cliff
It was only a month ago that I last predicted auto loans would become a huge problem this year, just as they became in the Great Crash of 2008. That was a short-range shot, like a slam dunk. Already, news has arrived that auto loan delinquencies have reached a twenty-year high. The number of loans that are more than sixty days late has risen to 5.16% of all auto loans. It only hit 5.04% at its peak during the Great Recession.
Those numbers were not available when I said we were going to wind up in a serious default situation just like last time. My prediction was based on the fact that we learn nothing. Auto manufacturers, dealers and banks went right back to the same practices of allowing zero down payments and zero interest for many months … and those deals are being advertised as available to people with “bad credit.” That, by itself, was enough reason to predict disaster.
As I said ahead of the last crisis and say again now, you have to wonder what the manufacturers’ end games are when they are offering deals that you can walk away from with absolutely no loss after a year of enjoying the car. (Since the deals are being offered to people with poor credit, the automakers’ buyers of last resort don’t even have to worry about damage to their already dismal credit rating. It’s too far gone for them to care.) And that’s why people should be able to see something like this coming: the fundamentals are rotten. They virtually guarantee disruptive events.
How do you go back to normal financing after offering desperate deals like that? You’re either stuck offering equal or better terms again in the next year, or you have to crash your way out. In other words, you’re going to have a starkly bad year when you withdraw those extremely abnormal enticements. It’s similar to the game that was played in housing finance, leading up to the housing-market collapse. Tax payers wound up being put on the hook for the huge losses the automobile industry experienced at the end of their outrageously risky efforts to boost short-term sales.
The current delinquency problem — already as bad as the worst we’ve seen in the past — is likely to get rapidly worse, not better, because a record number of cars from expired auto leases is scheduled to start hitting the streets this month, which means used car values should fall, making it likely that even more people will walk away. It also makes the defaults more expensive for lenders, who lose recovery value in the repossessed automobiles. So, the financial engines of the auto industry are over-revving just as we approach a major curve in the road.
US credit card debt balloon rises to stratosphere
Another trend that looks like those lead-up years to the Great Recession is the rapid increase in US credit card debts. While people did a good job of deleveraging during and immediately after the official recession years — almost making me think the masses actually learned something — they have apparently returned to their bad habits.
Credit card debt rose about $71 billion last year to reach $918 billion this year. At that rate of expansion, it will be a trillion dollars by the end of the year. What’s more troubling, perhaps, is that most of that happened just in the last quarter of the year. That makes last quarter the fastest expansion since the Great Recession. (There we go again.)
It could, of course, just be that people are flush with more jobs and higher wages, so they have increased their credit purchases. That would indicate consumer confidence about the economy’s future is rising. (That is, if any of this expansion of credit-card debt is based on rational thinking, versus just rampant desire for more stuff at any price down the road in Neverland.) However, the company that created this report says otherwise:
“With 7 of the past 10 quarters reflecting year-over-year regression in consumer performance, evidence is mounting to support the notion that credit card users are reverting to pre-downturn bad habits,” CardHub CEO Odysseas Papadimitriou said in a statement. (CNBC)
Alas, we learn nothing … maybe:
Consumer confidence not as exuberant as we were told
If people were buying more things on their credit cards because of greater confidence in their ability to pay for them in the future, that would be reflected by a corresponding growth in sales; but sales were not good in the last quarter of 2015 and are getting worse. That indicates people actually bought fewer things and still needed to use more credit. That’s a bear print in the muddy economy if there ever was one. Expansion of credit use when purchases are declining sounds like people in desperate times, not like people just buying more stuff they cannot afford because they learned nothing the last time around.
While we were told, based on opinion polls, that consumer confidence made a nice rise during the past month, a look at consumer activity tells a much different story. Retail sales in February actually fell by 0.2%. Services held flat. January sales were also revised sharply downward from a 0.2% decline to a 0.4% decline.
Declines were experienced in furniture sales, electronics and appliances. The decline affected department stores and supermarkets … but also online sales. Not surprisingly, the decline even included a drop in automobile sales. (You see, there is no end game to a 2015 filled with ludicrous enticements. You’re just borrowing from future sales with that kind of activity, and that future is now here with fewer sales to show because of it.)
The decline in consumer activity was matched last month by a decline in wages. Imagine that, immediately after we heard wages made their first uptick in years, which we were supposed to be happy about, we hear that wages are going down again, and the uptick was revised down, too:
The drop in February [wages] was pretty sharp…. The wage situation does not get as much attention as the headline number and the unemployment rate, but it’s evidence that the economy is basically flatlining. (CNBC)
Stock market rally has highly questionable underpinnings, but its making me look bad
Some of those declines in the economic environment look good for my predictions, but it is the stock market rally that appears to be killing me. The rally, which I did expect, is going higher than I had expected if it’s just a bear-market rally (meaning just a big bump on the path down). I expected the market would bounce about halfway back up to its starting point after such a huge fall in January. (Nothing is ever a smooth line in the stock market, whether it’s a bull market or a bear market.)
Now that the market is nearing the point at which it began its crash, things are looking good for the crows on the wire who say I didn’t know what I was talking about when I also bet my blog on a stock market crash, which I said would begin in late December, 2015, and grow worse in the new year.
Nevertheless, the market did crash (and right on schedule), and it did start its crash by going up right on the day when I said it would do that before it went over the cliff. So, is this a prediction victory or a failure? I lean towards somewhat of a failure if the market fully recovers and keeps going up because the most important part of my prediction was that this crash would take us into the Epocalypse — the real abyss that results from all the compounding of debt we’ve added to the pit we found ourselves in during 2008 and 2009.
Look beneath the hood of this rally, though, and things don’t look so shiny for the crows. A fair part of rising stock prices is due to companies buying back their own stock (and using credit to do it) in order to pump the price up by creating their own demand. You can keep firing your stock values up with major buybacks for awhile, but that’s a non-sustainable game. It’s a game for board members and CEOs who are looking out for their own short-term best interest and never for the long-term best interest of the companies they manage Maybe it will buy a few month’s reprieve for the market, but I think those shenanigans are nearing exhaustion, too.
This debt-financed, greedy game is not much better than a Ponzi scheme. Borrowing from the future to buy your own stocks back does not, in itself, create value, even if it does drive up your stock price. That’s a quintessential bubble — big and round and shiny, but completely hollow inside. The numerous companies now doing this are just pumping up the price of their stocks by creating their own demand incestuously. This game, employed throughout 2015 is now shifting in a manner that looks more and more like the kind of activity you might expect from self-serving CEOs who think implosion is imminent, so they want to cash out now.
First, consider that executives who are paid in stock options are inflating the value of those options at a time when corporate sales are in significant decline. They have certainly not earned this rise in the value of their options. It’s allowed by board members, who are also major stockholders, who are eager for short-term gain in hope of selling before the manure hits the spreader paddles.
Once again, I note the significance of being able to say (as I have with almost all the bad news that is coming down the pike now) that the last time stock buybacks got this insane was right before the Great Recession. Repurchase authorizations have risen 41% over the same time last year. The $165 billion dollars in repurchase agreements set for S&P 500 companies this quarter now nearly reaches the record set in 2007.
The devil is in the details of these expensive, debt-financed buybacks. Many of the buybacks in the 2016 surge are targeted to help only insider investors. That’s one of the insidious shifts from what was happening in 2015. Instead of buying back shares on the open market, some corporations have repurchased shares almost exclusively from the major owners of the company.
For example, LPL Financial Holdings, a Boston brokerage, decided to substantially increase its own debt to buy back shares from TPG Capital, one of its major stock owners. Out of 5.6 million shares bought back (at a cost of a quarter billion dollars), 4.3 million were owened by TPG. Much of the rest of the buyback was from other major investors in LPL. The remaining smaller stockholders whose shares didn’t get bought back now have a lot more interest in a company that now has a lot more debt.
In other words, it’s conceivable the smaller stockholders could simply be left holding the debt now that the major players cast votes to use company credit to buy themselves out! If that’s what the present rise in the market is about, it could fall very hard and fast when it does fall. The big players will have already saved themselves and then can just let things go.
It certainly looks like the big guys at the top are looking out for each other by using company credit so that they can dump shares quickly without causing any loss to the value of shares. (I don’t know that to be the case, but that’s what it smells like to me. It looks and smells like the kind of greedy rot that abounds before an economy implodes.) It may just be that there are such large fortunes that the major investors are seeking to save by buying themselves out with company funds that its creating an enormous short-term completely debt-financed rally.
So, while the market is looking more and more like a bull market each day, the intolerable rot and the stench underneath make me think most of this rally is due to these kind of buybacks that only help the principal owners jump off the train and land on a cushion just before it launches off the bulkhead of a missing bridge.
Oil teetered toward my predicted plunge then smudged my face
My most recent prediction was that the perfect storm would hit the oil industry in the Ides of March (by which I colorfully mean mid-March, not specifically March 15, the day when Caesar died). Exactly as we hit March 15th, however, oil prices started to fall again, breaking a fairly good rally in the first half of the month. That looked good for my recent prediction for oil. Prices dropped for two days. What looked better for me was that they started dropping due to the exact forces I have been saying would dominate in the pricing of oil and to which I have been saying people should give more heed:
Oil dropped for a second day as Iran bolstered crude exports. Russia signalled the Persian Gulf nation [Iran] won’t join major producers in freezing output to reduce a global glut. (Financial Review)
That exactly matches the way I said things would fall out this month — that Iran would definitely not agree to cap its oil production, but would, instead, ramp up its oil production.
However, that decline in prices was short-lived, as oil prices shot right back up on Thursday, boosting the stock market closer to the point from which it fell. Nevertheless, I think the market’s rotten underpinnings, the sour financial underbelly of recent automobile success headlines, and the great economic malaise that settled over the planet last year, are just a few of many forces that will prevail over the US economy and stock market … but back to oil:
If you’ve been reading this blog for awhile, you were not surprised at all if you read the following on Wednesday, as I did:
“Iranian production climbed last month by the most in almost two decades following the end of sanctions, OPEC said on Monday. US supplies probably rose last week, keeping stockpiles at the highest since 1930…. Iran increased output by 187,800 barrels a day to 3.13 million a day in February, the biggest monthly gain since 1997, OPEC said in its report.”
That’s just Iran’s most recent increase in production. One source said that, over the course of a month, Iran increased production 30% (though I did not find confirmation of that elsewhere). Suffice it to say, Iran has no intention of curbing production. And that is one big reason I have given when countering numerous experts who think the supply problem is ending.
I think you just saw the beginning, and phase two of the oil glut is about to get underway … but will it begin that fall in the middle of March? I’m left hanging for now. (I write this, even as the immediate facts seem to be proving my oil prediction wrong, but I’ve never been one to simply parrot what the majority wants to believe or to say something just to be popular.)
Iran, I said, would be one of the three storms that would converge to form the perfect storm on an ocean of oil. Iran has now made its rejection of the production freeze abundantly clear so that several news sites announced in the middle of this past week,
Iran’s rejection of the freeze deal and the rise in Iranian production have put an end to the rally.
Victory of my prediction declared by others! Oops. They spoke too soon, too. It put an end to the rally for a few days, but the rally returned full force on Thursday.
If you’ve been reading The Great Recession Blog, you have also heard me say that all the excitement over Russia’s agreement to curb its production was nothing but stupid euphoria in the first place. I’ve noted all along that the cap agreed to between Russia and Saudi Arabia was explicitly conditioned on all other major producers agreeing to do the same, which I’ve maintained is not going to happen.
Iran has been one of the biggest producers in the region, so Russia would seem to have been saying that Iran would have to capitulate with the agreement if Russia is to stay in it. The other major producer that would probably have to capitulate would be the US.
Now that Iran and Russia have met to talk about Iran joining the production-freeze agreement, and Iran has stated clearly that it won’t, it is possible that Russia will back out based on the conditions it laid down at the start. The US has only increased production, even as smaller companies have gone out of business; so there is not a lot of reason to believe Russia or Saudi Arabia will hold to their production caps, much less reduce production.
The more important point I’ve been trying to make, however, is that it doesn’t matter even if all nations on earth agree to cap production at current levels. They are still overproducing, so the oversupply gets worse even if everyone agrees to hold rigidly to this agreement. That’s why I’ve said the excitement over the agreement seems particularly dizzy. It’s the kind of blind euphoria that allows for a crash that almost no one sees coming.
Another one of the three storms that I said would start to converge on the price of oil around mid March is a global storage problem. Tank farms would start to reach capacity, and this week’s news told of the following:
At the Cushing, Okla. storage hub, stocks climbed to about 67.5 million barrels, nearing its working capacity of about 73 million. (MarketWatch)
So, we are not quite at this major tipping point, yet, but we are clearly getting close. Cushing is one of the main oil storage hubs that I mentioned when predicting the perfect storm would hit oil prices around mid-March. (In hindsight, I should have said “could hit.”) That means pressure against the oil market is building toward a climax as I said it would, too; but it may take these tank farms another month or two to get to that point where they have no choice but to reject oil for current delivery at any price because they have nowhere to put it. That would leave my timing a little off. Again, we’ll know soon enough.
It is when the major hubs mentioned in my earlier article hit their top working capacity, that oversupply will become a significantly bigger problem. It’s one thing to produce more oil than you need. It’s an exponentially greater problem to have nowhere left to put it all when it is something that can’t just be stockpiled on the ground.
This should become a fascinating scenario. How will producers handle it when there is nowhere left to put their burgeoning supply? They will certainly reduce production at that point because lack of storage will force their hand. It’s all one more reason why talk of production caps is meaningless. We are rapidly coming to a point where production reduction will be absolutely forced. (But will the storm come together with the timing I gave it?)
The interesting thing to watch as we near that time will be to see how the major oil players battle that out — who reduces first or how much they are willing to drop prices individually in order to avoid being the one to make the first major production cuts.
Obviously, my inclination is to believe there will be another round of price wars, rather than just major agreed cuts in production on the Saudi, Russian, and Iranian fronts. So, grab the sissy bar because the ride gets crazier up ahead. If production cuts are forced because there is nowhere left to store the oil, that could hurt oil prices more than increased production would hurt prices. If prices stay the same while production has to be reduced, that still means oil companies lose more money because they are selling less oil at the same low price.
So far, we have witnessed tens of thousands of layoffs in the oil industry, about $100 billion in cancelled investments, several company closures and bankruptcies, and about a dozen companies that have cut or eliminated dividends. And the costs of all that are trickling out into the communities that built up around America’s oil boom, causing problems in other industries, not just in the financial industry or in the stock market.
The dividend slashers include some major companies, such as Conocophillips and Chesapeake Energy Corp. Says Conocophillip’s chief executive, “We believe it’s prudent to plan for lower prices for a longer period.”
Oil companies are not planning as if the oversupply in oil and resulting plunge in prices will end anytime soon, so why should stock investors? The same scenario is playing out in Canada and in Europe, where Spanish and Norwegian oil companies are also slashing development plans and payouts. Chevron is cutting back new-production spending by 26% and is looking at borrowing money to pay its dividends.
And if you think the price of oil is not having a major impact on major banks, read this article from Zero Hedge on additional tricky deals that are happening in stock buybacks that banks are promoting as a way of getting themselves out of this trouble. Things are getting extra slimy behind the scenes just as they did in the pre-Great-Recession days when Goldman Sachs convinced clients to buy stuff Goldman knew was junk.
Finally, there is this news today on the price wars in oil:
Three months since the U.S. lifted a 40-year ban on oil exports, American crude is flowing to virtually every corner of the market and reshaping the world’s energy map. Overseas sales, which started on Dec. 31 with a small cargo aboard the Theo T tanker, have been picking up speed…. The “growing volumes of exports” from the U.S. are now “spooking the markets,” Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd. in London, said in a note…. With American stockpiles at unprecedented levels, oil tankers laden with U.S. crude have docked in, or are heading to, countries including France, Germany, the Netherlands, Israel, China and Panama. Oil traders said other destinations are likely, just as supplies in Europe and the Mediterranean region are also increasing. (NewsMax)
So, the score on my oil predictions for March would be that I was right in predicting Iran would not join the pact and was right in predicting that that tank farms would continue to move toward maximum capacity, even though Russia and OPEC members capped production because the US also would not join such an agreement. Clearly, it has done the opposite. That much is now established fact. However, I am not yet right on the impact on prices, which is the important thing.
I said you would see the perfect storm begin in mid-March, and the storm clouds are shaping up. (I didn’t say that you’d see it climax mid-March, but you’d see forces starting to drive down the price of oil, and those forces would build into the perfect storm.) That means, if the price of oil doesn’t start going back down soon, I’m wrong (at least on the important part).
If those storm clouds are looking worse at the end of March, I’ll have to question if I was just wrong in my timing or if I’m also wrong about another big drop in the price of oil. Being off some in timing would not be much of an error in this case, but being wrong about the direction in the price of oil would make me completely wrong about the oil storm.
(Note, however, that I have not bet my blog on my recent prediction about the price of oil. I think I bet $10, but the crow I made the bet with didn’t go for the shiny lure. Since he didn’t take my bet at the time when it was offered, it won’t be offered again now that things look to be in his favor.)
Is the Epocalypse coming?
That’s the big question. I’m more interested in seeing whether my predicted stock market crash turns into a short event or turns into the longterm Epocalypse that I have envisioned it will become. If the stock market makes a full recovery of all of its losses since its December high point and then keeps moving above that point as a bull market, then, I was partially wrong: it did crash and somewhat spectacularly, having been noted by almost everyone as the worst January since the Great Depression. That’s no small event, and it did so with exactly the right timing, too; so, I don’t think that’s a shabby prediction.
However, record-shattering as January was, a crash that bounces right back up and steams along as if nothing happened, is hardly the Epocalypse that I have said it would become. (When I bet my blog on a stock market crash, however, I did not bet it would reach the level of an economic apocalypse. That is a statement I added later. I simply bet the US market would crash.) Missing on the important stuff while getting the details exactly right, is worse than getting the big picture right and missing on the details.
Keep watching. We’re getting close to a time of revelation as to whether my predictions of an economic apocalypse are right or not. The rises in stocks and oil prices are speaking against me, but the very clouds I pointed to and said would gather are getting closer and darker, and stock market dealings are getting slimier. So many things have played out exactly as I’ve said that I think it all bears a little watching to see if the bigger vision of the Epocalypse starts shaping up, as well as whether the last detail about the price of oil falls into place.
And, while you’re here, invite a few other people to watch my battle with the crows. There is nothing like a good crow fight.