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Bombs Going Off One Level Down

It’s been a strange couple of weeks. US stocks are not far from all-time records, both nominally and adjusted for inflation. Home prices are soaring – up 33% y-o-y in the Bay Area, to take just one of many possible examples. A casual observer might assume that things are going great.

But one level down on the headline ladder it’s a very different story. The list of ominous events and trends has suddenly grown a lot longer. Among the bombs that went off last week:

Detroit declares bankruptcy
For years, analysts have been looking at the balance sheets and pension funds of dysfunctional entities like California, Illinois, Chicago, Detroit, and Oakland and wondering how much longer they could con the markets into believing that they were in any way capable of paying off their debts or making good on their pension obligations. Last week the first domino fell, as Detroit declared chapter 9 bankruptcy. The legal wrangling has just begun but initial bargaining positions have the city trying to eviscerate pension benefits and force massive haircuts on muni bond holders. If they succeed even partially, then the hundred or so other functionally-bankrupt cities may see this as the path of least resistance. The result: Turmoil in the muni market, which is generally considered a near-risk-free cash equivalent. See Avalanche of city debt downgrades and eventual bankruptcies coming up.

Corporate revenue growth stalls
Google and Microsoft both reported disappoinging revenue growth and their stocks tanked. Revenue is harder to fake than earnings, so it’s a more reliable indicator of big trends. Tech bellwethers reporting weak revenues implies that the economy is itself weaker than we’ve been led to believe. And corporate profits, which have provided much of the fuel for rising equity prices, can’t keep rising if revenues plateau. See The party may be over for tech stocks and Earnings season starting to look like a disaster. 

Portugal and Spain descend into chaos
Both countries are finding it impossible to cope with life in a relatively-strong-currency regime. Unemployment is at capital “D” depression levels, home prices are plunging, voters are restless. Portugal’s government can’t pull together a working coalition, and the most popular party opposes the continuance of austerity. But the alternative to austerity is an exit from the eurozone. See Portugal political crisis: no end in sight. 

Spain’s leaders, meanwhile, seem to have reacted to the economic crisis by trying to steal as much as possible while they could get away with it. Apparently they went to the well a few too many times and now the resulting scandal has reached all the way to the top. With much of the existing government implicated – but still in power – it’s not clear who will be left to do whatever it is that should be done about the economy. See Spain: scandals, lies, graft, and kickbacks

There’s more, including massive, insanely ill-timed layoffs in Greece and the IMF calling China’s policies “unsustainable”. But all of it points to slowing – and maybe negative — growth in the US in the coming year, which would make stock and real estate bubbles seem, in retrospect, a bit out of place.

44 thoughts on "Bombs Going Off One Level Down"

  1. sooo. when it does fall… remember that the dollar is fake, work together to live, and use science and tech to improve life. We already know the problem, its time to find the solution. and yes in terms of the old ways of the dollar, you work for FREE. The doll-hair is over

  2. What I find interesting about all of this is that these “bombs” are evidently not considered bombs to the financial markets.

    Take Detroit: Its financial plight is not a surprise and has been considered inevitable and imminent since 2008. (Remember Obama pledging to not let Detroit go bankrupt in a speech during his first Presidential campaign?) Furthermore, the dollar amounts involved (currently believed to be about $20 billion) is literally a rounding error at the national level compared to GDP (about $16 trillion), debt (at least $17 trillion depending how it’s calculated), deficit spending (about $1 trillion annually) tax revenues (about $2.4 trillion), and even the monthly stimulus by the Fed (about $85 billion per.) It’s just hard to be concerned about Detroit. Besides, doesn’t it seem more likely than not that Detroit really will be bailed out? The first inkling I saw about that was on Fox News about 2 days after the bankruptcy filing. It was, basically, that since GM was brought back from the brink by government intervention maybe Detroit could be too. A bailout of Detroit would be a boon for the municipal bond market and help lower the borrowing costs for other municipalities so they can postpone a similar fate. What’s not to like?

    Corporate revenue growth stalls: With such an active Fed, the wait-and-see game never stops. Revenues have been dropping for at least the last 4 quarters, but remember “the US economy is slowly improving,” so either they should start to pick up (buy low, sell high) or QE will continue until they do (buy high, sell higher).

    Portugal and Spain descends into chaos: That’s also old news. Maybe unemployment is even worse now, and housing prices even lower, and voters are even more restless and angry about corruption, but everybody knows Europe is a socialist nightmare that’s been heading for implosion for years, so what else is new? Besides, the ECB hasn’t even started its own form of QE, so how bad can things really be?

    Ill-timed layoffs in Greece: The fact that there are still some Greeks who still have jobs to lose is actually an upside surprise for the markets.

    The IMF calling China’s policies “unsustainable”: Who listens to the IMF?

  3. As an aside I heard from a real estate agent that “the banks don’t have money”. A customer wanted to cash out a 100,000.00 cashiers check and the bank said it would take over 10 days to get the “cash”. As bad as fiat money is, the paper variety seems to be short, it is just digital now. And the FDIC commercials drone on constantly about keeping your “cash” in the bank “where it is protected”. Insanity is where worthless paper is now “scarce.”

    1. I had a similar experience. I tried to cash a $25,000 check (and receive cash) from my bank a few months ago. I was told that the bank (Compass) did not have the greenbacks and would require at least three days notice to raise that amount. And this was no small branch in the outskirts of town. It was a branch located in downtown Houston. Paper money is indeed now “scarce.”

  4. The problem isn’t the Government’s debt, it’s the private sector debt, which is twice the governments. The downfall was caused by the capitalist private sector being deregulated and all its debts that can’t be paid will not be paid.

    Isn’t it time we addressed this issue and stop with all the phony austerity talk and Keynesian solutions, and get on with shutting down too big to fail and having a write down of outstanding debt.

    The only people who don’t like this solution are the people sucking off of this debt, and that includes the Congress that is being lobbied to keep it going.

    1. If it wasn’t for the artificial manipulation of interest rates, nobody — private or public — could get in to as much debt as this country has.

    2. It is a combination of both…thanks to the liberal/progressive/dimocrats that changed (AGAINST all advice) the banking and lending laws 2 years before Bush left office. The consumer part got semi-sorted out…but the government continues to grow and extend it tentacles into every part of our life,..and suck more money out of us. The printing press and the buying $85BILLION by the government/Fed each and every month is killing us! But I thoroughly agree that the “too big to fail” notion is counterproductive!!! Bad behavior fiscal should NOT be rewarded!

  5. The stock market is ruled by international capital flow and from money trying to find a safe place to park itself. Plain and simple the stock market rising has nothing to do with the economy. Govt. debt failing (bonds) and time deposits paying zilcho interest have hardly any appetite.I’m one to think the stock market will go much much higher just based on these facts alone. This is not to say it will not crash and burn at one point. It’s just not time yet. Look for Europe & Japan to fall first then it will be our time.

  6. In as much as bombs are going off below, I am preparing myself for anomic breakdown.

    The Free Dictionary defines an·o·mie or an·o·my (n-m) n.

    1. Social instability caused by erosion of standards and values.

    2. Alienation and purposelessness experienced by a person or a class as a result of a lack of standards, values, or ideals: “We must now brace ourselves for disquisitions on peer pressure, adolescent anomie and rage” (Charles Krauthammer).

    [French, from Greek anomi, lawlessness, from anomos, lawless : a-, without; see a-1 + nomos, law; see nem- in Indo-European roots.]

    Reading of lawless abandon in today’s news, I’m starting to focus on virtue, which I define as the admirable qualities of Christ, and ethics, which I define as economic, that is oikonomia, regard for the property and person of others, whether it be spiritual or philosophic or material, political or monetary.

    I spend a lot of time reflecting on the Economy of God. Living Stream Mininstry and Google Books recommend Wtness Lee on the Economy of God. The central lane of the entire Bible is God’s economy, which is His household administration to dispense Himself in Christ into His chosen people that He may have a house, a household, to express Himself, which household is the church, the Body of Christ (1 Tim. 3:15). The word for economy, oikonomia, is used in the book of Ephesians three times. In 1:10 and 3:9 it is translated as “dispensation,” whereas in 3:2 it is translated as “stewardship.” God’s dispensation is His arrangement, which is His plan or purpose, His household administration.

  7. A shame about Detroit….now ask yourself, what if Detroit could print its own money….hmmm? …………think: Maybe thats what USA is, a big Detroit with it own printing press

    1. What killed Detroit is de-industrialization. And we’ve actually de-industrialized the entire country, but at the national level we’ve papered it over with massively expanded debt, both public and private, which is now only manageable due to debt monetization. So, yeah, in a sense the US really is Detroit with a printing press.

      1. A thought: What killed Detroit is that they spent more than they brought in. Debt killed Detroit, simple as that.


        1. Check out the top Economy story, “Now that Detroit’s gone bust, is your city next?” and you’ll see how the rapidly shrinking population base played into the financial troubles. Lost jobs = lost populace, and the jobs went overseas.

        2. When capital can move public debt incurs and capitalism fails in the originating locality. It’s as simple as that, Mr. simpleton.

          1. The capitalists(banks) were bailed out of their debt (CDS, ABS,CDO) and then the market to borrow froze leaving the cities, states, small businesses to fend for themselves when the banks would only lend to large institutions, like the US and Germany. The debt they bought was passed on to you the tax payers. It looks like the capitalists are rapping the government to me, which you the tax payer.

            The FED is buying their debt to allow them to free up capital, but it hasn’t trickled down to the rest of the economic community because trickle down has never worked.

            Capitalism has failed many times but when you reward failure, well you get an economy similar to Japan’s, except Japan protects their manufacturing and we still follow stupid free trade ideology that no one else in the world does.

            FDR financed the stimulus then by taxing the capitalists to pay for their bad economic behavior and we had prosperity until the capitalists were able to buy our government and change the rules again, so here we are, again.

  8. John – here’s why Detroit is soooo important: The municipal defaults will come one by one – cities and towns, and then probably states. People will eventually see that government debt is garbage, and thus will begin the implosion of the bond market. And it will be many, many years before these cities are loaned one red cent again. Imagine how tight money will be then. Government and municipal bonds safe? As safe as Hiroshima at ground zero!

  9. On the day that Detroit went into default the SP500 hit a new all-time high. We’ve been told that all we need is a trigger to cause a crash. It wasn’t Detroit. It wasn’t Cyprus. So far Spain and Portugal have had no impact on US markets. Italian bonds were marked to one step above junk and that had no impact either. Bond yields are dropping for the last week or so at about the same rate as they went up for ~3 weeks. Japanese bond yields are also down a bit in the last week. This was to be the worst reporting season in a long while as virtually all companies are either missing expectations or dramatically reducing forward estimates. Our markets are soaring. In 1929 a smallish Austrian bank didn’t have enough cash on hand and there was a bank run. It spread to the next town. And then the next. The rest, as they say, is history. Makes you wonder what it will take to trigger the collapse that we all know is coming.

    1. Some triggers require great pressure. This does not bode well for us. That line that ties our currency to the fabric of our economy is stretched by debt. The flexibility of fiat currency has its limits under pressure. No one knows how much. It is just as if we decided to walk on thinning ice in the middle of a very big lake.
      In the end the break will panic our government into printing extremely massive amounts of fiat currency which will buy just enough time to implement Martial Law.
      With that comes total control, rationing, travel restrictions, the dept of Homeland Security blossoms, and those internment camps can house real extremists (Patriots). When money is feared (you’ll understand when that time comes) you’ll wish you were already set up far away from ANY city, on some good land with good water and some timber. Without the means for basic self reliance your needs will be supplied by our ruthless, relentless, incompetent, overbearing government. Again they’ll promise solutions to our problems if we will only cooperate, but people will suffer more than you can imagine. Famine in America? Yes. You’ll also learn a much greater respect for Christianity and Christ, where ever you are when that time comes.

      1. Good thinking. Everyone in USA should read “When Money Dies” by Fergusson who writes of what it was like to live in Wiemar Germany in the early ’20s. Also check out the 25 facts about Detroit current on ZeroHedge today. It is not by accident that I live in a small town (population 375) over 100 miles from the closest “bigger” city in the middle of some of the best farmland in the US. We understand the importance of GGG.

  10. ok yah i get what your sayin. theres the show for the public then theres the side show and the side show is the real show.

  11. Great recap, John. Another support being pulled: growth in money supply (M2) has slowed from 11% at the beginning of this year to less than 3% (13 week change, annualized; from Bob Wenzel of Economic Policy Journal). Yep, the wheels are a comin’ off this train right about now!

  12. I’m betting that all those cities have hundreds of $millions if not billions in their CAFR accounts they’re not talking about… probably more than enough to guarantee pensions and be able to continue reasonable operations.
    You see… about 30+ years ago, most towns and counties began shifting from relying on tax revenues to investing for income… those are the CAFR accounts.
    Worth investigating… would certainly blow the windows out of any bankruptcy talk.

  13. Thanks John for your excellent blog. You really nail it with every post. The best headline you had this week was the former head of the BLS saying the real unemployment rate is over 11% not 7.8%. The lies just go on and on.

  14. how did the old song go? “you say my friend, were on the eve of destruction”……The only thing holding the market up, is the wide spread belief its gonna tank; everyone knows this thing shoulda fallen over like a rotten shed years ago…..its amazing how long it can go on because no one wants to go through the pain….its a game of let’s pretend a little longer. The Minsky moment cometh my friends, maybe a week, maybe a year, maybe 5 years? how could it hold that long? ” lets just pretend its all ok and keep printing” the boomers are retiring and selling their stock to buy walkers a diapers soon, eventually

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