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January
09
2023
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It’s Worse Than it Looks: Beneath the Surface the Bottom is Falling Out, and People are Jumping out of Windows
This weekend, for example, I’m going to be working on a deep dive in one of my special posts for patrons into the confusing swirl of conflicting employment news that sent stocks soaring skyward today. It was really far shakier than the market wants to believe it heard. (Later this month, I’ll be giving my predictions for the upcoming year in another Patron Post.) With the ghost of Christmas past, the Santa Clause rally fizzled into what looked like stocks were simply trying to edge upward. Stocks, finally, took a leap today; but that bolt upward was expected by many prognosticators I read on the unsustainable basis that there were a lot of losses intentionally captured during December by investors who had plenty of losses to capture from last year’s stock-market crash in order to, at least, benefit from the tax write-offs. That usually results in a quick, albeit short, rebound as the surface recoils to normal after the losses have been taken off. Job flops However, the market’s moves, particularly in today’s rebound, looked desperate when you consider how the market separated out a single thread of bad-news-is-good-news as the trigger for its leap. The market glommed onto a decrease in wage GAINS, because it means one of the forces driving inflation is fading to where the Fed will stop tightening the economy sooner.
However, the market took that leap even though the 0.1% dip below expectations for the growth rate was far from being as significant as the the manifold ways the last two days of employment reports prove the Fed will have to tightening even harder for longer. In particular …
Those are intensely strong indicators that the Fed will have to tighten even harder because it is getting nowhere in reducing the inflationary effects of a tight labor market.
No kidding! Yet, the market climbed desperately up the thread of hope provided by the notion that a decrease in the rate of wage growth meant big progress that would allow the Fed to back off of its inflation-fighting agenda. (Not a chance as will be shown when I dig beneath the surface of those numbers for my patrons!) That all got twisted into what the market wanted to hear in this confused fashion:
I would say there was no realism at all in today’ convoluted interpretation of the news that immediately sent stocks soaring all day. Even CNBC anchor Rick Santelli gushed over the December jobs report, calling it “historically unbelievably good!” So, it was beyond absurd to think news today meant the Fed would stop tightening sooner. (Of course, it is unbelievably good, but for reasons no one seems to understand, including the Fed. Sere here and here.) The start of 2023 is a tipping point for a deeper dive For now, let’s ignore the stock market’s unreasonable gyrations and look at where we begin the year economically based on this week’s news alone because the truth is not at all as good as the jobs reports and unemployment numbers indicate. After a short reprieve in the market due to the rebound from taking losses finding a narrative it could use, the economic scenario says we have ample causes for going back to a falling market. I want to start with a nice recap of where the economy is by Michael Snyder, who laid out “11 Signs That The Economic “Tipping Point” That Everyone Has Been Waiting For Has Now Arrived.” Here is a snapshot summary of his list:
The two biggest factors that emerge there are the sharp fall-off in the US economy’s main driver — housing — and in retail, resulting in layoffs and even a likely bankruptcy in a once strong retailer that has struggled due, it claims, primarily to Covid-related shortages and falling consumer demand under higher prices and tighter margins. So, let’s explore in more detail the retail crash in both online and brick-and-mortar as exemplified by Amazon and BB&B. Digging deeper into retail That is a good whirlwind list to which I will add the following observation about the retail scenario: “Retail sales in the US just experienced their third-worst week in history!” You may have actually heard news that touted holiday retail sales as being strong. I know I did, but that was a veiled lie that requires digging deeper. As I’ve noted before, retails sales are measured in dollars. The growth in sales was due entirely to inflation in prices/devaluation of the dollar. Factor out the hot inflation that made retail seem good year-over-year, and you have a REAL decline in sales during the holiday season. One article in this morning’s Daily Doom noted the main reasons for BB&B’s share-crushing bankruptcy warning:
Just yesterday, an article in The Daily Doom reported,
That comes after a horrible time since the Covidcrisis for BB&B, after which it announced back in August it would close 150 stores and slash its workforce by 20% in order to massively reduce costs. It estimated those moves to save a quarter of a billion dollars. Now it’s digging deeper. Unfortunately, it also needs to borrow more money, and that comes at a much higher cost, thanks to the Fed’s tightening. So, one way the Fed crimps inflation is by helping to crush retailers out if existence. This isn’t entirely the Fed. It is also the shortages and inflation’s impact on retail; but what I said early last year would become true for zombie companies is now arriving. BB&B’s chief financial officer was one of the early ones to literally jump out of a Manhattan window and end his life this fall. That happened shortly after its CEO got ousted. So, yes, we are back to those kinds of days where a formerly flourishing company has been hit so hard, particularly by the Covidcrisis and then the Fed’s raising of its interest on credit that was floating the struggling company along, to where executives are leaping out windows, and now retail publications are putting the toe tag on it:
The company made its own branding missteps but particularly struggled along as a borderline zombie corporation during the Covid lockdowns and then the supply shortages that came afterward, and now the debt that floated it through those times is no longer sustainable. That its bankruptcy warning hit as a shock can be seen in the 30% one-day cliff-fall its stocks took. But that is the way of zombie companies that I told Patrons early last year we’d be seeing down the road: they look fine on the surface to most people until the ugliness underneath breaks through when they can no longer float on the surface tension of the debt that is supporting their image of success. Suddenly we see the monstrosity they became:
And, so the Zombie Apocalypse may be now stumbling toward us as interest rates hit a level that drives the nail into their coffins with BB&B being one of the first leaders of the zombie horde. To understand how news of surface-level rises in retail can actually mask sales that are dropping, one has to look at inflation. Inflation forces one to look beneath the surface of all reports these days that are measured in dollars to see how much of what is being reported is just inflation that hasn’t been adjusted out of the numbers. The fact is, retailers not only sold fewer items, but they made a lot less money (in profits) because they had to offer a lot more incentives to get those sales. You have to dive beneath the surface of the following kinds of rosy reports to see what is really happening:
Yeah, they spent a record number of dollars because everything is so freaking expensive with prices at record highs. But, it’s that part about the hefty discounts luring inflation-weary consumers that one must digest to know what the headlines mean. Hefty discounts mean these record sales brought lower total profits, and we see inflation hinted at, which should be a reminder that those sales, measured in dollars, did not amount to as many items sold; but the article doesn’t think to spell that out for you. That is just not the kind of nuanced thinking the mainstream media cares to spend time on. The article DOES say,
However, it doesn’t say that sales did not rise AT ALL, but actually FELL, if you factor that inflation back out of the prices sales are measured in — the same inflation that made even the surface-level (unadjusted) growth “slow” as consumers felt the brunt. What we really had was slow HEADLINE growth, which translated to sharply declining REAL growth because consumers dialed back purchase. On top of that, retailers made lower margins on what little they did sell because they had to offer steep price discounts from the manufacturers’ highly inflated price recommendations. This all means they may have actually taken losses to get that higher dollar value in total sales. (“We’re losing money on every item sold, but we’re making it up on volume!”) So, the Zero Hedge headline I used to lead off this section caught the true news accurately. It was the third-worst week for retail in history! Cryptocrisis continues to expand Cryptocurrencies saw a global loss of over $3-trillion last year, and in the past week’s Daily Doom one of the largest crypto banks, Silvergate, was reported to have seen day-after-day massive losses (well over 40% down in share values) due to an equally massive (40%) stack of withdrawals from scared customers trying to run from the bank with as much of their money as they can still get their hands on. That is all money that simply evaporated. People took their Fed bucks and exchanged them for crypto bucks, and the crypto bucks just disappeared. They just got written off. Yet, the diehards die hard:
You bet there will be. Lots of conversation about the dizzying losses, but “fear of missing out?” Missing out at this point on what? Until the dust settles, I think the only thing one misses out on is more losses. Crypto is going through something like the huge compression that took place in the auto industry in the last century as many manufacturers went out of business and the rest got conglomerated into the “big three.” Eventually, there will be a few top-dog survivors in crypto, too. Maybe this year will see some fear of missing out on great fire-sale value. Well, just be careful you’re not snarfing up a lot of Studebakercoin. And guess what was banked in all that crypto that vanished when the Fed started tightening the dollar? A goodly amount of those stimulus checks that made consumers so flush during our first Covid year.
The cryptocrash is a lesson in contagion — how one company like Terra can start a landslide among other big and small companies. Eventually, all that downflow causes a major slab of the mountain, like Ponzi FTX, to slide. FTX then slides into Silvergate, and now Silvergate is falling off a cliff and laying off 40% of its workforce. That’s a lot of forties for Silvergate: 40% withdrawals becoming a 40% loss in stock value this past week, resulting in a 40% cut in employees. Yet, those are just the recent big plunge. Overall, Silvergate’s stock is down 95% due to the entire crypto crash bringing down values of all crypto companies because you see, on an individual company basis, economic reality does impact stocks a lot. Silvergate has gone from a high of $222 per share to a present value of about $17 all due to real economics:
Is that low now a bargain-basement buy? Well, not if you sink a wad into it and it drops to becoming a penny stock, as could easily happen. (A penny stock, by my definition, is a stock selling at under a buck a share, but the common definition (adjusting for inflation, I guess ; ) is under $5 per share.) Even at this low price, a drop from $17 to a penny stock means you’ll lose almost all of your money. So, beware the Studebaker stocks out there because you may be sinking your money into a dirt-cheap company that no longer exists in a year. Better be great at picking the winners if you’re going to try to capitalize on those basement bargains. Wolf Richter gives a detailed rundown on the collapse of Studegate (excuse me, Silvergate) if you want to read a lot more in-depth detail on that one. The Covid comeback Covid returned globally with a vengeance over the holidays, particularly due to China ditching its Zero-Covid policy and, once again, exporting Covid all over the world on airliners:
China, in its desire to make sure it is not hurt economically any more by Covid than the rest of the world, has even stated it will retaliate (didn’t say how) against any nation that bars it citizens from flying into those nations — never mind they are intentionally not even being tested before being allowed on aircraft and, even as The Daily Doom reported, Chinese hospitals are now overflowing once again with Covid patients (and China doesn’t use the mRNA vaccines, so it is not due to that kind of vaccine), and the WHO says the new variant that is spreading is the most contagious form of Covid so far. China’s Zero-Covid quarantines all over the nation made the situation worse. By literally screwing people into their homes (to the point they couldn’t even escape out the doors or windows in a fire), China assured its populace developed no naturally enhanced immunity to Covid. They have also stayed with traditional vaccines that are about 60% effective (probably as good as the mRNA vaxxes at this point). Opening the doors widely and immediately after a year or more of total isolation assures widespread infection in a populace with little naturally developed immunity. So, thank you once again, China, for doing your best to reinfect the entire world with yet-again new strains of the disease you largely created! We know from experience what the economic impacts of Covid can be if it makes another global resurgence, though much of the impact depends on human responses. Big banks are warning of a big bust Not just a few banks, but many major banks, are now warning of a recession dead ahead for the US with millions of additional Americans falling into unemployment. (Never mind that we are already technically in a recession; we’re dealing with the news of the past week as it was.) Shadowstats, which measures inflation the way the US did back in the 80s, still reports inflation comparable to the 80s at 15.2%. That, along with today’s job numbers that showed the Fed is losing its battle to bring down jobs as a curb to inflation, means the Fed has a lot more fighting to do! That, in turn means the stock market has a fantasy focus. (But I’ll save the deep dive into the job numbers for my Patron Post. Suffice it to say here, the labor market isn’t getting tight in the way the Fed wants to see.)
The Fed’s goal is to crush down on inflation by pushing unemployment up to about 4.5%, but in today’s report, unemployment , after months of Fed Fu fighting, remains solidly anchored at an extremely low 3.5%, completely defying the Fed’s wishes. So, the stock market, today was a lunatic. No surprise there.
Now consider the following, if Covid rises, it will shut down more production and shipping, particularly in China, as it has in the past, creating more shortages and more inflation. Meanwhile, if the Fed succeeds in eliminating jobs in an economy where the total number of jobs is already well below the pre-Covid trend line and where the labor market already cannot supply enough laborers to fill those remaining jobs, that will mean further reduced production with more shortages and, so, more inflation. The latter is almost a no-brainer to the thinking man or woman who sees an economy that cannot produce enough labor to avoid shortages, resulting in GDP that has already languished for, at least, half of the past year (longer by my accounting). When the Covid lockdowns ended,
The Fed doesn’t realize it, but tightening up an already underproducing labor market is likely to have the backlash effect of worsening shortages and, therefore, ultimately increasing inflation due to the scarcity premium those shortages place on goods and services down the road. Corporate insiders agree with the big banks One good indicator of where the economy is headed is where corporate leaders are placing their own money. Are they betting on their own businesses with stock buybacks and personal purchases of their own companies shares? In a word, “No.”
Two years isn’t very far back, but you have to consider that only two years ago most of the world participated in the largest global economic closure experiment in history. It was a major disaster that is still plaguing us, and it abruptly cut off share buybacks, in part due to buyback regulation on companies getting massive government bailouts. The scale of buyback reduction today shows corporate leaders are reacting to present circumstances in much the same way they did back in the last economic crash, which included a stock crash.
The S&P ended 2022 resting on its 20%-down, bear-market threshold. The ratio of insiders who are buying their stocks to those who are selling their stocks has been falling for months now. Since stock buybacks were the main driver in the long bull market of the last decade, the scaling back of buybacks to such a degree does not bode well for the market.
So major banks are expecting a bigger downshift to come. So are the top dogs among corporate insiders. And buybacks are dwindling significantly, as I said earlier this year, we could expect them to in this kind of climate. Yet, while sentiment is sinking, we haven’t gotten to that point of all-out terror where insiders and big banksters believe we are near a bottom. They are, instead, expecting worse to come. So, there is plenty of room to fall. My own predictions for my Patrons later this month will lay out what I believe that will entail. In the meantime, The Daily Doom will continue to track this ongoing economic catastrophe because that is what this truly is as will become more apparent over time, just as it did in 2022. The forces of gravity are still hard at work, taking us into a deeper dive. (Nearly all articles used in this report were carried in this week’s Daily Doom.)Liked it? Take a second to support David Haggith on Patreon!
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