MacroProfit: Is this IT?

MacroProfit October 27, 2014 Issue


money-printingThe Federal Reserve’s leverage on its balance sheet has reached 80 times. Compare this to Lehman Brother’s firm melding 30 times. J. P. Morgan’s deposits have reached an all time peak of 1.34 trillion dollars achieved almost exclusively from The Fed’s Quantitative Easing program.  Bank of America has gained an ignoble distinction of seeing 2 of every 3 dollars, in non-GAAP earnings, accomplished through criminal activities.  What have we become?  What does it all mean?

The Dow Jones has lost over 1500 points in the past 30 days and people are wondering if a simple correction has occurred or is there something more severe that is blowing in the wind?

In this issue of MacroProfit we’ll look at why I believe we have just had a taste of things to come.  We will look at both the technical and fundamental issues that are forming.  We will examine the story being told by the bond market in both investment grade and in the world of junk.  We’ll look at what is being regurgitated in US housing and Japanese politics in order to try to save their respective economies.  The thing is that it didn’t work the first time but perhaps this time is different.

The Federal Reserve is ready to end Quantitative Easing (or so they say).  What does that mean for liquidity, if anything at all and what happens next?  In 1999, 2008 and September of 2014 three tops were made.  It’s been almost 15 years.  Is the party over?


Opinions are always in the minds of the beholder but I don’t think anyone can argue that with the Federal balance sheet levered at 80 times and growing we have been living through one of the greatest financial bubbles of American history. Derivative markets since the credit crash of 2008 have not shrunk as promised but have grown to a mind numbing several hundred trillion dollars. One false step, one miscue could see the house of cards come quickly and gloriously crashing down. Are we seeing the beginning of that? Let’s look!

Many of the patterns that we saw just before the collapse of the bubble and financial crisis of 2008 are occurring again.On October 13th the S&P moved below its 200 day moving average for the first time in about two years. The last time this happened the S&P ended up declining by a total of 22%.

Prior to the Lehman collapse in 2008 the put/call ratio had hit an all time high indicating extreme fear on Wall Street.In the past week that number has been exceeded.

Fear can also be seen as the VXX has risen to its highest level since the powerful European debt crisis going from the low of 15 to the mid 20’s.

Canadian stocks and European stocks have all experienced a rough 30 days and they too have all dropped at least 10% from their peaks.

Oil has plummeted from well over a hundred dollars to below 80 dollars with more downside in sight.This crashing also happened in 2008 just before the financial crisis erupted.

Some are warning of a “DOJI Star Topping pattern” which we last saw in 2007.Others warned of the already occurred “death cross” in the 10 year treasury yield. Elliott Wave, Fourth Turning, mumbo jumbo perhaps to the uninitiated!

But there can be no doubt each day is fraught with danger.

The past 30 days has seen the market rally, sell off, rally, sell off, and rally again all in just one week’s time giving every indication of volatility, after a longer manic hiatus, has returned to the market.

The rest of 2000 was down over 10%. The New York Stock Exchange has enhanced the timeline topped off in late August. The S&P Small Cap 600 index and the S&P Big Cap 400 index have all been in downtrends for several months.

The markets remind me of the plate spinner on the old Ed Sullivan Show. Remember when he started his routine? He would first put a plate on a long thin stick and spin it, then a second and a third. Fairly impressive we thought but when he added several more plates then the show really begins. To keep all spinning he had to move quickly from one plate to another and give each a turn. We would holler with fear and joy as each plate slowed down and appeared ready to crash to the earth. Can you visualize that? But alas, the routine was to make us think that danger was imminent, little did we know that the performer could handle every plate and keep them all spinning with ease.

The Federal Reserve reached their twelve plate limit quite awhile ago and recognized that tapering (reducing bond buying) had to be done. The market has been crying out for more plates, more spinning, more danger, and more excitement. In the past, each time a Fed plate (the markets) appeared to be ready to fall they gave it another spin through Quantitative Easing, twists and jaw-boning. In addition, to satisfy the crowd, they added more plates. Ultimately the number of plates and the continued spinning will be more than the performer can handle and the plates will crash.


We have used this and other forms to highlight Albert Einstein’s thoughts on insanity being:  doing the same thing over and over again expecting a different result.  The peak and Craiglistness in the Keynesian camp-Janet Yellen, Ben Bernanke, Tim Geithner, Larry Summers, Alan Greenspan, George Bush and Barack Obama (just in the U.S.) have continued to believe that the American consumer is not spending because he does not have access to enough credit.  Granted banks are not opening their coffers due to the recognition of the risk in lending to the general public.  However, the credit card machine is ramped up and ready to go.  In addition, the collapse in single family housing purchases can only be accredited to the “po’ folk” not getting the opportunity to achieve the American dream-home ownership.

We’ve heard this story before from former Congressman Barney Frank who pushed and pushed and pushed until the final result culminated in NINJA loans (no income, no job, no assets) highly leveraged securitization and a collapse in housing not seeing modern times.Did we learn from that exercise in futility? Of course not! We may have learned but those in power chose to ignore it.

Edward J. Demarco, was at continual odds with the social Keynesians, so what better than to replace him as head of FHFA with a man who was a member of the Democratic Socialists of America. A man who raised a tremendous amount of money from banking and real estate related corporations and trade associations, as much as 45% of his total in his political climb. A man who is recommending doing more of the same.

Meet Mel Watt.Appointed in May by Barack Obama to head the FHFA, housing’s castle in the sky. The best example of a fox guarding the hen house.

Given the precarious leverage many times greater than in 2008 one would think Watts’ job would be to rain in the obvious and control the devious, but alas, no. On the surface the Liberal Socialist’s will say that he is a champion of the poor and is helping families afford houses. Unfortunately the truth may be miles distant from the proposed new FHFA head’s position.

Watt is encouraging banks to make lax lending standards and reduce down payments to as little as 3%. Here we go again!

The housing market has peaked. Mortgage originations are at an all time low. Private equity and hedge funds are choking on the amount of houses in their portfolios. The next crash is dead ahead so what’s better than to offload Mel Watts’ buddies’ houses on an unsuspecting public.

According to Mike Kreiger “this housing plan isn’t about helping families afford houses. It’s about creating artificial demand for overpriced homes so that stuck private equity and hedge fund managers (who can no longer make it rain in the buy-to-rent trade) have some tenants to sell to ahead of the next crash”. As we return to days of yore how quickly will we see the sector of housing’s plate stop spinning and come crashing down?


On September 19th, the biggest NYSE splash in history was culminated in Alibaba, the Chinese Internet Company, went public. The CNBC chorus girls were agog and made the event a global sensation. Imagine being told that every other line you must utter makes you sound like a sheep, bah bah.

Curiously this event coincided with the Dow, S&P and Nasdaq hitting a peak.

In March of 2008, Visa puts forth a 17.9 billion dollar deal. In November of 1999, ENEL went public at 16.4 billion dollars. Both IPOs were record setting and marked the peak in each of their respective time periods.

Now Alibaba, a company who was dependent on the goodwill of a Communist government, which has demonstrated a willingness to interfere in e-commerce at will, comes forth with an all time record setting, 25 billion dollar offering.

The fact that investors do not own shares in Alibaba, but in offshore trusts which funnels profits and a lack of transparency of BABA’s history of leaving investors in the dark did nothing to stop the stock from spiking to $99.70 on opening day. Since then it has been all downhill.

That is systematic of two other Chinese IPOs. An Industrial Bank and an Agricultural Bank which are both down 60% and 30% from their respective highs in 2007 & 2011.

Some people say that the bell never rings at the top of a market but perhaps on September 19th the New York Stock Exchange opening bell rung by Alibaba executives was actually sounding the death knell.


On June 23rd of 2014 the spread (differences) between yields and investment grade bonds so called high yield bonds (junk bonds) was it’s narrowest in history at 3.23%. Simply put that meant that if a 30 year treasury was at 3% then a junk bond yield was 6.73%. Remember I said JUNK.

Over the past few years companies that were fighting for survival found that at issuing paper at incredibly low yields was almost a once in a lifetime opportunity. Historically, JUNK gave its holders with double digit cash flow, but with ZIRP dominating, people were looking for anything that had even half that yield.

These companies, however, did not use the proceeds for company improvements, but on the contrary, used them for share buyback. This process was instituted to support the equity crisis.

Junk bond companies were leveraging their balance sheets and not improving their company. This was a sure recipe for disaster.

Until next time,


MacroProfit is for education and entertainment purposes only. The information contained within is not a recommendation to buy or sell securities. All individuals possess different risk tolerances and should consult an advisor before making any transaction to ensure it fits their financial goals. Furthermore, individuals should understand the tax consequences of any investment and should speak with their tax advisor before making any transactions.
Written by
With his passion for economics Bill Tatro has been entertaining audiences on the radio and in seminars for decades. Bill is an economist that provides weekly paid content to subscribers, and offers a free daily "lite" version as well.