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The Economy: “The Dam Is Breaking”, Introduction

Wednesday, November 2, 2016 17:39
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(Before It's News)

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“The Dam Is Breaking”, Introduction

by Brian Maher

“We got the bearish signal… The dam is breaking. You can feel it.” The ursine signal, according to bond fund manager Jeffrey Gundlach: The S&P 500 slipped below 2,130 on Monday and the previous Friday. Then it closed at 2,111 yesterday. It’s down another thirteen points today, we add en passant. If Gundlach is right and the dam’s about to break, it could break hardest on Hillary. The S&P’s performance between July 31 and Oct. 31 has proven a reliable crystal ball on elections since WWII.

“Going back to World War II,” notes Sam Stovall, chief investment strategist at CFRA, “the S&P 500 performance between July 31 and Oct. 31 has accurately predicted a challenger victory 86% of the time when the stock market performance has been negative.” And the crystal ball’s showing a Trump win… The S&P ended July at 2,173. It ended October at 2,126… 47 points lower.

More omens gathering for Trump: Gold’s soared over 2% since FBI director James Comey’s announcement last Friday. It spiked almost $18 today alone, to $1,309. Many consider a vote for gold a vote for Trump. And the Mexican peso- another Trump fortune teller- is getting shellacked today. It plunged to its lowest level in over a month.

The very stars and planets can be seen aligning for Trump… Yesterday’s ABC News tracking poll gave Trump a one-point lead over Hillary nationwide. That’s the first time he’s posted a lead in that poll since May. Meanwhile, the RealClearPolitics average of recent polls now has Trump just 2.2 points behind. Hillary had a seven point lead only two weeks ago.

Pat Caddell is a veteran Democratic pollster. And sticking to today’s dam metaphor, he sees a lot of aqua in Hillary’s future: “This dam is about to break,” he told Fox News. Caddell’s predicting Trump by landslide (or deluge?). He sees this election much like the 1980 campaign when Reagan came from behind late to win.

Jim Rickards is also calling the election for Trump-  with a caveat: “Our expectation is that Trump will win the election on Nov. 8. However, that forecast is a close call. The election will be close, and Clinton could win despite our expectation.” Whoever wins, WikiLeaks really flustered the fish with its job on Hillary…

The CBOE Volatility Index- VIX, or the market’s “fear gauge”- has risen each of the past six trading sessions alone, advancing on the surging tide of electoral uncertainty. It spiked at 20.43 yesterday, before settling down to end at 19.32 today. The last time the fear gauge closed that high: June 27. Four days after Brexit. 

On Oct. 18, Jim warned, “any indication that Trump is pulling even- due to Clinton email leaks, health issues or a final debate stumble- will send the stock market into a tailspin.” Seems Jim’s got his own crystal ball polished up nice and shiny.

We see the Fed punted on a rate hike today- to the shock of someone, somewhere, maybe. But they meet again next month. And Fed fund futures are now predicting a 78% chance of a hike- up from 60% before today’s yawner.

Interesting fact: When Yellen raised rates last December, stocks sank 10% over the next two months. Sticking with today’s metaphor, we don’t know if the dam is going to break tomorrow… next week… or over the next few months. Or if it’s going to break at all, for the matter of that. But it sure seems the pressure’s building… and by the day, too. Just ask investors. Just ask Hillary.

Below, David Stockman shows you the catalyst that could break the dam wide open. And why a Hillary win would make it worse. Read on.

“The Dam Is Breaking:

Hillary’s Just The Beginning Of Crooked”

By David Stockman

“If Hillary survives WikiLeaks and stumbles across the line ahead of Donald Trump next week, she won’t be the only crooked thing afflicting the nation during the next four years. The crooked stock market is fixing to deliver some punishing blows, too.

That’s because the stock averages are now floating precariously in the nosebleed section of historical valuation, waiting for an unexpected shock to send them spiraling downward. Indeed, I believe the market could drop 40% or more from current levels, and that it could happen in a sudden violent plunge. That’s a reflection of just how absurdly overvalued the stock market has become under the Fed’s mutant regime of bubble finance.

The S&P 500 closed yesterday at 2,111, about 50 points lower than where it stood approximately 90 days ago after the post-Brexit dead cat bounce.

Still, Wall Street prefers to believe that once this short-term election-centered uncertainty fades, the long awaited outbreak of “escape velocity” is still just around the corner, and that when it finally materializes it will fuel a sharp reacceleration of earnings growth. But that’s an exercise in eyes-wide-shut optimism. There is no basis whatsoever for it in current trends or any plausible scenario for the next year or two.

The starting point is the inertial forces already in play, which are all in the wrong direction. Back in September 2014, for example, reported earnings came in at $106 per share. Well, Goldman Sachs has now reverted its projections for the year downward from $110 per share to $105. They also dropped their 2017 target to $116 from $123.

So reported earnings aren’t inspiring much confidence. But there is hardly a stock research analyst or strategist on Wall Street who makes allowance for even the possibility of a soft-patch – like the 1.3% average growth in real GDP that we’ve actually had for the past four quarters running- let alone an outright recession.

So you’d think they are smoking something down in the canyons of Wall Street! In fact, they are. It amounts to the delusionary perception that the machinery of the bailout state is still in good working order, and that even if the economy should stumble, Washington will be at the ready with emergency fire hose in hand.

Stated differently, the apparent complacency about recession risk on Wall Street is rooted in the view that recessions are short-lived and Washington has your back with whatever stimulus it takes to reflate the economy and financial markets. So the real smart thing to do is look through any transient business cycle fluctuations and base valuations on the long run.

I think that assumption is profoundly wrong, and may well constitute the true black swan of the coming financial bust. That is say, the market is blithely expecting another reflation party in the event of a rough patch. After all, for three times during the last 25-years, speculators have been massively rewarded for buying busted stocks, junk bonds and real estate loans or related options and derivatives at the bottom of the cycle. It happened in 1991 when speculators scooped-up hundreds of billions of financial debris from the busted S&Ls for cents on the dollar. And that became the prototype for similar bottom fishing expeditions after the crashes of 2000-2001 and 2008-2009.

Indeed, while the idea of the “Big Short” has been popularized by the spectacular returns earned by a few intrepid traders who saw the sub-prime securitization fiasco coming in 2006 and 2007, the multi-billion winnings of Michael Burry, Steve Eisman, Gregg Lippmann and John Paulson were actually small potatoes compared to the windfalls captured by the Big Longs during the last three cycles.

What will be very different this time is that there will be no quick Washington-driven artificial reflation of the financial markets. The early birds are going to choke on the false lures, not feast on the bottom crawlers…

Even as the FBI’s probe of Huma/Weiner’s laptop was happening behind the scenes during the last several weeks, an even more important eruption was quietly gathering steam in the world’s bond markets. The casino gamblers who have made a killing front-running the central banks have begun to fade the trade. That’s a financial Rubicon. It marks the beginning of the end of central bank omnipotence. It also coincides with the other vector of market-threatening development- the post-election paralysis of Imperial Washington and it’s incapacity this time around to bail out Wall Street when the next black swan arrives.

Indeed, the catalyst for the next stock market crash will surely, and ironically, be the fracturing of the world’s monumental bond bubble. It was the massive and sustained repression of sovereign bond rates by QE-addicted central banks that set off the stampede for yield and return among fund managers. That the Fed is out of dry powder and marooned on the zero bound is evident enough. But maybe the real black swan shock is going to arrive on the fiscal front…

You can’t find hardly a single pop-up portfolio manager on bubble vision these days who does not expect a “hand-off” from the Fed to a giant infrastructure and fiscal stimulus package early in the next administration. That new outpouring of Keynesian goodness, in turn, is projected to restart the lagging wheels of corporate CapEx and revive animal spirits in the C-suites.

I have a newsflash. The Imperial City will soon descend into dysfunction and paralysis like never before. When the current Presidential campaign reaches the bottom of the gutter, America will be virtually ungovernable. So when the next financial crisis comes along, Washington’s response will be the very opposite of the panicked “stick save” which happened in September-October 2008.

Right now there are two crucial features to keep in mind. The first is that Donald Trump is quickly proving himself to be the most spectacular unguided missile ever to hit American politics. He’s run such a scorched earth campaign that even if Hillary wins, she’ll be bruised, battered, blooded and delegitimized in the eyes of a huge slice of the electorate.

At the same time, Speaker Paul Ryan has moved swiftly to disavow the GOP standard bearer and save the House Republican majority. He is rather certain to be successful in that endeavor because the overwhelming share of House elections are not won based on today’s voter sentiments- especially among the so-called battleground constituencies- but on yesterday’s state house gerrymanders. So if Hillary wins, she’ll go to the Oval Office in a giant cloud of disrepute and with no mandate whatsoever; and a GOP majority back to Capitol Hill bent on endless investigations, complete legislative obstruction and ready for an Impeachment trial at the earliest excuse. So there will be no Wall Street bailouts coming out of the Imperial City’s killing fields. That much is real certain.”



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