Thursday, August 11, 2016

The Most Dangerous Market Of Your Lifetime

Investors in equities - those imaginary certificates that signify ownership of a portion of a company or corporation - are giddy.

Stocks are near all-time highs with prosperity and class envy writ large on every tick higher.

Sure enough, these investors are shrewd operators of finance and business, many having earned their degrees from the highest academic schools in the world, the diplomas proudly displayed on the walls of their hedge fund offices and trading areas.

So, why would they possibly be worried about anything, particularly, the value of their holdings?

Simply put, there just aren't enough of them partaking at the font of wealth pouring out of Wall Street. Making matters more complicated and distressed is that the executives of the companies in which their wealth is concentrated have been buying back their shares at an unprecedented rate, making the shares of stock available smaller and smaller, but also boosting the price of those available, traded shares.

It's an easy supply and demand formula: fewer shares available makes them more valuable. In effect, if companies are inclined to take back their shares at inflated prices (a de-issuance, if you will), those remaining shares have to represent the entire value of the company.

Thus, a company could theoretically buy back all the shares but one, leaving that one share of stock to account for the full value of the company. In the case of an Apple or Google or any of the thousands of billion-dollar market cap companies, that one share would be "valued" at some absurd number, like $285 billion.

In such a hypothetical case, the problem arises when the owner of that $285 billion share of stock wished to unload it, convert it to cash or some other assets. Who would be the buyer? And would they actually pay the offered price (the ask) in such an illiquid market?

Obviously, the seller of that massive share of stock might have to offer a discount, and a big one. Instead of $285 billion, the seller might be forced to accept $140 billion, or less, in event of a liquidity crisis, which, incidentally, is what stock buybacks are creating. Since there hasn't been adequate demand for shares since the financial crisis of 2008-09, companies have resorted to buybacks just to keep their companies afloat, many of them becoming less and less profitable over time, making the price of their stock even more ridiculously valued.

When the rush for the exits begins in earnest, the big-time hedgies and fund managers will be bidding directly against each other, each with the same goal, to dump corporate paper assets in exchange for something more sturdy, ostensibly government bonds or hard, cold cash.

The markdowns, margin calls and defaults will be spectacular and this market, this unsustainable fantasy created by zero and negative interest rates, central bank stimulus, and government dumbness and numbness will be exposed to real supply and demand economics in a swan song for greed, manipulation, and wealth concentration.

That this will occur is unmistakable. Everything does not go up in price all the time, forever. The business cycle has not been abolished, neither here in the US, nor in Japan, China, the Eurozone or anywhere else.

Central banks are currently backstopping the entire Ponzi scheme of the stock market with interest rate swaps, repos, direct investment, and options manipulation.

It can't continue forever, though it can continue for a long time. It's a deadly and dangerous game, putting at risk the entire economy of the planet, or, at least that portion of the planet that wants to play along.

Increasingly, the as the musical chairs are being removed one by one, players are opting out and moving elsewhere. Largely, the lower and middle classes aren't playing at all. They're invested in necessities, cash, maybe collectibles, precious metals, and real estate.

Eventually, the sheer volume of trade by the 99% not in the stock market and incensed by government policies which seek to impoverish them further, will outweigh the phony prices for stocks listed on the NYSE and NASDAQ.

The stock market will suffer a severe breakdown at some point. The trick is not to know when that breakdown will occur, but to continue to prepare for its inevitability.

Most will not be prepared. Those who have prepared may or may not proper at the expense of everyone else, because the chaos - political, economic, social - will be astonishing.

The Boy Scouts of America issued their motto many years ago and it applies today: Be Prepared.

Be a Boy Scout.

Wednesday's Washout:
Dow Jones Industrial Average
18,495.66, -37.39 (-0.20%)

5,204.58, -20.90 (-0.40%)

S&P 500
2,175.49, -6.25 (-0.29%)

NYSE Composite
10,774.98, -29.53 (-0.27%)

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