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Let’s Have Lunch With The Mad Hatter

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Investment Research Dynamics

I’m trying to free your mind.  But I can only show you the door.  You’re the one who has to walk through it.   – The Matrix

The overnight comuterized stock market futures trading systems mysteriously “broke” once again as the futures were heading south (see this and this).   This  glaringly overt intervention reeks unmistakably of desperation.

Corners of the global economy – and specifically the U.S. – are collapsing behind the smoke and mirror cloak of ebullience emanating from a sharp bear market dead-cat stock market bounce and from absurdly manipulated data reports on employment and housing.

I was looking at a daily graph of AIG earlier today and comparing it to a couple other insurance company stock charts (Allstate and Progressive).   Contrary  to other insurancestocks, AIG has not participated at all in this stock market bounce.  In fact, it’s been hitting new 52-week lows almost everyday since early February.

The same problems that caused a temporary systemic collapse in 2008 are back in full force again.  Only they are much larger and much more insidious because rules were changed in a way that enabled the big financial firms to better disguise their Ponzi schemes.   AIG is the born-again poster-child of this evolving financialized nuclear melt-down.   I was chatting with a colleague earlier who told me that a  contact of his at the Company said that everyone who stayed on at AIG after 2008 are now being let go. Something ominous is going on there…

The Kansas City Fed survey reported today that its index has dropped to 7-year lows.  Yes, the Government reported today a bounce in durable goods, but it was driven by a huge order for aircraft parts from the Dept of Defense (great, we’re preparing for war in the Middle East).  Here’s what the real economy looks like:

While the Government insults our collective intelligence with tall tales of 5% unemployment and Janet Reno lobbies the public on the view the economy is improving, the actual numbers coming from Main Steet show an economy slipping into recession. Treasury yields continue to compress. This is not the signal that it’s time to take out a 100% mortgage from a private lender and overpay for a crappy house, it’s the unmistakable onset of economic collapse.

Today both Dominos Pizza (12%) up and Lending Tree (up 22%)  spiked up after “beating” their earnings.  Here’s what was missed in the reporting:  Dominos trades at 16x EBITDA and Lending Tree trades at 25x EBITDA.  This is sheer insanity.  Oh, by the way, TREE’s trailing EBIDTA is “adjusted,” which means EBITDA  after the financial Kreskins at the Company add back all of the recurring “non-recurring” expenses.

It’s incomprehensible the way the market can ignore the bad news piling up.  JP Morgan admitted earlier this week that it is woefully under-reserved against defaulting energy loans it was unable to unload onto the market.  Bloomberg News featured a story today which reports that “the biggest wave of oil defaults looms as the bust intensifies” – LINK.   I think this is already becoming a hidden problem in the financial system and it explains why we seeing financial firms like AIG (credit default swap issuer) and DB (lender to defaulting energy companies) not participating in this bear market bounce.

We know that the middle class is running out of money – “more subprime borrowers are falling behind on their auto loans”  and “Retail Apocalypse: Major US Chains Closing 6,000 Stores Nationwide” – but Restoration Hardware yesterday told us that upscale shoppers have stopped spending money now as well.

The “Minsky Moment” occurs when too much borrowed money has fueled too much asset valuation speculation.  The market will no longer absorb increasing levels of debt and the current borrowers can no longer support what’s already been borrowed.  A severe collapse in asset values ensues.

In early 2015 the Government allowed Fannie Mae and Freddie Mac to offer 3% down payment mortgages.  This is because the system had run out of borrowers capable of taking down a 5% mortgage.  Later in the year the Government began offering a zero-percent down payment program.   Private, non-Government pools of capital are offering  reconstituted versions of the type of mortgages which led the collapse in 2008.  The mortgage market is now searching for the last non-mortgaged stragglers who can still fog a mirror and are willing to overpay for a chance at the American dream.

Currently we are seeing the Minsky Moment swarm the energy market and begin to engulf the auto loan market.  Soon it will start creeping into the housing mortgage market.  The gerbil is almost dead but it’s still making the wheel spins albeit slowly.  Not surprisingly the stock market is looking at the gerbil as it dies and interpreting any sign of life as a reason to party on…



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