Sheep To The Slaughter

February 18, 2015

Let’s start with a pair of pictures; which, when viewed together, describe exactly how Central banking gone wild has destroyed capital markets. Certainly, for a generation; and if the worse-case scenario ultimately unfolds, permanently. On the left is the Baltic Dry Index, from its inception in 1985 through today. Actually, the 556 price pictured on the chart – representing an all-time low - is a week old; as this morning, it is down an additional 7%, to 516. For those not aware of what the Baltic Dry Index measures, it is the broadest global measure of seaborne trade activity, incorporating both the volume and price of shipping. To its right is the oxymoronically titled “Investors’ Intelligence” survey, depicting the amount of equity investors that are bearish on the market. As you can see, it is not only at its all-time low, but well below the “bearishness level” of historic equity tops in 1987, 2000, and 2008. In other words, the implicit “puts” serial money printers and market manipulators like Greenspan, Bernanke, Yellen, Draghi, and Abe – to name a few -have so dumbed down investors, they no longer believes anything can dampen equity valuations.

Likely, even monetary lunatics like the aforementioned are starting to realized that in today’s “peak debt” environment, nothing can materially improve organic earnings; at least, the legitimate, non-”adjusted” earnings sanctioned by Generally Accepted Accounting Principles, or GAAP. Nothing, that is, but cheap debt funded by ZIRP, QE, and other monetary chicanery; which, when combined with the “confidence” inspired by eternally “supported” stock and bond markets, funds

everything from unprecedented capacity overexpansion; to stock repurchases (which don’t increase earnings, but earnings per share); margin debt expansion – per the below, horrifying chart; and an insane, dotcom-like IPO market, as exemplified by the ridiculous valuations of GoPro, Shake Shack, the Grilled Cheese Truck, and shortly, Snapchat. Yes, “Snapchat” – which essentially is used for posting lewd pictures on the internet – is expected to be valued at nearly $20 billion! In contrast, like it or not (I HATE it); the world’s largest gold miner, Barrick Gold, is valued at $14 billion.

Of course, all such lunacy truly accomplishes is the piling on of additional layers of debt; and of course, nosebleed equity valuations in an historically weak economic environment. In other words, the proverbial crack addict has been administered mega-doses; and thus, must be perpetual “fixed,” with increasingly more lethal doses, to prevent instantaneous crash. Not to mention, he must be monitored 24/7, for when he gets “in trouble,” requires emergency medical attention, or both. Essentially, said crack addict – er, “financial markets” – are but zombified remains of once vital institutions; which, without fresh blood transfusions – in the form of limitless Fed credit and PPT market support – will instantaneously keel over. Such is the plight of all Ponzi schemes; which lose all ability to function independently; and the more they are “blown up,” the more long-term, horrifying economic and market dislocations they cause. Moreover, the larger such schemes become, the more devastating societal wealth disparity spreads; in turn, yielding heightened social unrest, ultra-left political movements, and geopolitical instability. But don’t worry, the “wealth effect” is indeed occurring – for the “1%.”

We’re told the “99%” have benefitted as well; that is, if you believe explosive growth in subprime auto financing, undischargable student loans, and food stamps “benefit” the recipients – much less, society at large. In fact, I read this morning that care of a stagnant economy, the inflationary impact of relentless money printing, explosive regulatory growth (everywhere but Wall Street, of course), and the inexorable exodus of high quality jobs to points East, the percent of “millennials” (i.e, people in their 30s) starting their own business has plunged from 26% to 23% in the past decade, yielding 19,000 fewer new businesses per month (rendering the BLS’ “birth/death model” nothing more than a sick accounting joke). But don’t worry, if they can get out of Mom’s basement, and out compete savings-less 60 year olds for a job at McDonalds, they can perhaps pay off some of their $28,000 of student loan debt – up a whopping 55% from the $18,000 average of a decade ago.

Speaking of minimum wage jobs, I still can’t believe the utter madness of last month’s historically fraudulent NFP employment report. This morning, the largest ever monthly PPI decline was reported – both including and excluding energy costs; and yet, amongst the biggest “crisis month” in years (oil prices, Swiss Franc peg, ECB QE, Greece, etc.), the BLS not only reported booming jobs growth, but one of the largest increases in real wages on record! Of course, much of the latter is due to the myriad, one-time, mandatory minimum wage increases instituted by a number of jurisdictions, care of Federal strong-arming. Ultimately, these increases won’t enable recipients to pay their bills significantly better; and more importantly, will cause employers to accelerate layoffs over the long-term – particularly when economic activity declines, as this morning’s horrific industrial production, manufacturing, housing starts and permits, and mortgage/refinancing data clearly depict. Not to mention, the aforementioned all-time low in the Baltic Dry Index, and largest ever plunge of the North American Rig Count.

Regarding today’s theme of how Ponzi schemes must be forever expanded to prevent instantaneous collapse, the aforementioned housing starts and permits data was significantly worse than even the headline number – as multi-family (rental) unit construction continues unabated, whilst single-family permitting and starts continue to plunge. In other words, the “crowding out” effect of an inflated housing market unable to support new homeownership is causing relentless price pressure on the single family housing market the Fed predicates its “recovery” on. Not only that, but the Fed’s desperate gambit to lie and manipulate its way to the “promised land” of a measly quarter point rate hike later this year is causing a massive plunge in “recovery prospects”; as following the fraudulent NFP report – and manipulated increase in the 10-year Treasury yield from 1.6% to 2.1%, mortgage and refinancing applications have utterly collapsed, per today’s data depicting 7% and 16% weekly plunges, respectively. “All eyes” are supposedly on today’s FOMC minutes publication – which, too, will be doctored to enable further market manipulation. However, as always, “Economic Mother Nature” will not be impressed; and thus, will continue to wreak her deflationary, job-destroying ways on the real world. Bringing us back, as always, to the giant pink elephant in the room; i.e, how long can money printing, market manipulation, and propaganda forestall the “unstoppable tsunami of reality?”

And if the aforementioned examples of manipulation, moral hazard, and immorality aren’t enough to motivate a full-scale exit from fraudulent, overvalued, paper financial markets, get ready for the mother of all “sheep to the slaughter” factoids.

To wit, this horrifying survey – from history’s largest bailout recipient, Citigroup – depicts just how zombified the global “investment community” has become, in today’s era of non-stop Central bank meddling…

“Over 65% of respondents said they believed action from central banks in Europe and the U.S. would be the principal force driving credit index spreads – and surprisingly, in a year with major political catalysts in Europe; and ongoing regional tensions in the Middle East and Russia; only 4% of respondents felt that geopolitical risk would be the major factor driving spreads.”

Yes, my friends. Roughly two-thirds of all “investment professionals” could care less what’s going on in the world; from economic collapse, to war, social unrest, and even the potential break-up of the Euro and default of Greece’s $400 billion of debt. So long as Central banks continue to print money and support stock and bond markets, all will be well; as clearly, they have been so successful at predicting economic activity and stabilizing financial markets. Frankly, it’s like reading Mein Kampf - as I’m doing now – in real-time, not realizing the script Hitler wrote was an actual “recipe for disaster.”

And here we are, 15 years after reaching “peak debt”; seven years after the global financial system broke – to be put on permanent life support; and three years after full-scale money printing, market manipulation, and propaganda became official government policy; we live in the most heavily indebted world in history; with the weakest economic conditions in generations; and worst outlook for such in, perhaps, centuries. Meanwhile, part and parcel to said “policy,” the “barometers” of such ill-tidings, gold and silver, have been suppressed to unprecedented levels (relative to outstanding fiat currency supply) – at a time of record physical demand; and shortly, plunging physical supply. And thus, we ask, will you be the “sheep to the slaughter” – or the potentially “new 1%” that avoid it?


Courtesy of

Andrew ("Andy") Hoffman, CFA joined Miles Franklin, one of America's oldest, largest bullion dealers, as Media Director in October 2011. For a decade, he was a US-based buy-side and sell-side analyst, most notably as an II-ranked oil service analyst at Salomon Smith Barney from 1999 through 2005. Since 2002, his focus has been entirely on precious metals, and since 2006 has written free missives regarding gold, silver and macroeconomics. Prior to joining the company he spent five years working as an investor relations officer or consultant to numerous junior mining companies.

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