Awaken! Goldman Sachs calls for the end of the Bull Market

To quote David Kostin chief U.S. equity strategist at Goldman Sachs, he writes that the historic fall in interest rates is unlikely to prevent a “collapse” in second- and third-quarter profits. “After 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end.” The stock strategist slashed his midyear S&P 500 forecast to 2,450, meaning the investment bank now sees the market falling another 15% beyond Tuesday’s close to levels not seen since December 2018. That is, the bank now sees the market down another 15% on top of its 14% loss incurred over the last month. Of course , just to keep you patriotic hubris investors in the market,  Kostin did add that he expects, ”a rebound in the back half of 2020 to boost the S&P 500 to 3,200 by year’s end, 11% higher from current levels.” Yea Sure! And Warren Buffett says, “The market collapse in 2008 was much more scary.” So far! Of course in 2008, we had the collapse of the banks. However, some bank stocks have already collapsed!

 Collapse of the banks stocks.

What worries me most is the collapse of many bank stocks, such as Deutsche Bank (DB), HSBC Holdings, (HBC1.BE), Credit Swiss (CS) and Barclays PLC (BCS). Credit Swiss is down from 78 in 2007 to 9.25. My 25 year charts doesn’t show the stock ever being so low! Barclays was as high as 55 in 2007, now 6.04. That’s a 35 year low! What are these falling bank charts telling me? Trouble!

HBC was at 16 in 2000, now 5.49 a 11 year low. The worst chart is that of Deutsche Bank. Reaching a high of 189 in 2007, it is now at 6.75! This is of course, is the bank that loaned Trump $175 million dollars before the election, when no one else would. This loan saved Trump from his 5^th bankruptcy and allowed him to run for President. Do you know why DB gave him the loan? In a New York Time’s article dated September 29, 2018, “Retired Supreme Court Justice Anthony Kennedy’s son loaned President Donald Trump over a billion dollars for his real estate projects, The New York Times reported. Justin Kennedy was the head of Deutsche Bank’s real estate capital markets division and loaned to Trump when other banks wouldn’t.”  Could this be why Justice Kennedy’s retired and gave Trump an opportunity to shift the balance of the Supreme Court to the right. Did Russia have anything to do with the Trump loans? DB has big Russian connections and loans with Russian oil and gas companies. The Russian Oil and Gas companies cannot services their deb with oil below $50 per barrel. VanEck Russia ETF (RSX) was at 59 in 2007, now at 19.97. Watch out below for a lot of US and worldwide corporate debt.

The Corporate Debt Bubble

In October 2019, I quoted form an article titled Seeking Alpha, a Reprint August 14, 2019 by Ariel Santos-Alborna. What he said, is now truer than ever. Corporate US debt to GDP is at its highest level in all of recorded history. 50% of that debt is BBB, or one level above junk. Decreased cash flows and less corporate debt demand in a US recession, will probably stop buybacks and lead to insolvency in the junk bond market. This may lead to another wave of possible bank bail outs and increases in sovereign debt. A big recession now, could lead to a  Russian, Chinese, Japanese and European  economic recession.  The same is true in the US. In my opinion, unless the U.S. creates inflation, (which it is doubtful that we will or can) or can legislate a massive bank bailout (which is also doubtful), the upcoming  economic recession maybe worse than the 2008 ‘Great Recession.’

As wages have remained relatively stagnant for decades, credit has become the engine of economic growth in the U.S. and the default of excessive credit is the primary driver of past recessions. With the transportation sector rolling over, reduced consumer spending, reduced semiconductor sales, global  Mortgage Rates are at its lowest level in seven years,  the yield curve inverting and the yet to be felt economic effect of the corona virus,  there appears to be a certainly of a growth rate cycle slowdown. I believe the bull market’s excess is undoubtedly in the US corporate debt sector. Corporate buybacks through issuing debt and cash flows has been propping up equity markets. So when cash flows decrease in the next recession, less net buyers of BBB debt in a flight to safety and many BBB corporations become downgraded to junk (the % depends on the severity of the recession), the share buybacks currently propping up the equity market will come to a screeching halt and nothing will be left to support current equity prices. Worldwide debt is even a bigger problem, (See comments on Russia above), as China has flooded the debt market with worthless loans to unsuccessful national corporations and Europe and Japan appear to be facing an economic slowdown because of the corona virus. Merkel says, as many as two thirds of the German population may eventually be affected!

The Fed Acts

Now with the corona virus, our economic weakness worldwide will be exposed. What is worse, is that in the US, we have used all our ‘bullets’ to prop up an already robust economy. The Federal Reserve and the federal government cannot use the normal monetary and fiscal stimulus to offset a recession, because interest rates are already low, taxes have already been cut, the annual budget is already at a 1.5 trillion dollar deficit and unemployment is at record lows.

In September 2019, the interest rate for the overnight money market — a short-term lending market where banks borrow cash from each other to meet reserve requirements at the end of a business day — surged to 10 percent. Banks weren’t willing to lend out capital for the Federal Reserve’s target interest rate of 2 percent. The Fed responded to the cash crunch by financing these so-called repurchasing agreements (repos, for short) directly. It offered the 2 percent interest on these short-term loans (they’re usually paid back in days or weeks) to bring the interest rate down and pump cash into a strapped lending market. It has been offering these overnight loans on a daily basis ever since.

When the Federal Reserve began offering these daily agreements in late September 2019 it was the first time it has intervened in repo markets since the Great Recession. The United States’ central bank has funneled roughly $500 billion into the repo market since then in what was originally pitched as temporary operations that would end on October 10, 2019 — but the daily repo bids are still coming. Currently, there is $229 billion in outstanding repos on the Fed’s balance sheet.

Update March 14, 2020

On Wednesday March 11,2020, the central bank said it would increase the amount of overnight repo operations from at least $150 billion to at least $175 billion. In addition, it extended the date for a $45 billion two-week repo operation that was supposed to end  April 13. Finally, there will be three $50 billion one-month term operations, the first of which happened Thursday.

On Thursday March 12, 2020 The Fed announced a bold new initiative in an effort to calm market tumult amid the coronavirus meltdown.In all, the new moves pump in up to $1.5 trillion into the financial system in an effort to combat potential freezes brought on by the coronavirus.This was the second day in a row and the third time this week the Fed has stepped in. Stocks staged a sharp turnaround from earlier losses, though some of those gains were pared.

One part of the announcement saw the Fed widen the scale for its $60 billion worth of money the Treasury purchases, which to now had been confined to short-term T-bills. Under the new regime, the Fed will extend its purchases “across a range of maturities” to include bills, notes, Treasury Inflation-Protected Securities and other instruments. The central bank will begin purchasing coupon-bearing securities, something market participants have been clamoring for since late 2019.The purchases start Thursday and will continue through April 13.The second part of the new operations will see the New York Fed desk offer $500 billion in a three-month repo operation and a one-month operation. The offerings will happen on a weekly basis through the remainder of the program.In addition, the Fed will continue to offer at least $175 billion in overnight repos and $45 billion in two-week operations. Repos are short-term operations in which financial institutions provide high-quality collateral in exchange for cash reserves they use to operate.

The extraordinary moves came amid extreme market turmoil created by uncertainty over the coronavirus pandemic. Government bond yields earlier this week cascaded to record lows amid reports of liquidity issues in the market and fears of a global recession.However, questions remain whether the Fed can arrest the market’s issues on its own. Wall Street has been looking for an aggressive fiscal response and has yet to get it from Washington lawmakers.

On Friday March 13,2020 President Trump announced ‘A National Emergency’ and the Dow shot up 1985!

The question now is, when is enough enough?

Or as Gang Hu, managing partner at WinShore Capital hedge fund, told Bitcoin Magazine. , “If they overdo it, then we’re going the other way” — economic downturn. “If you listen to the Fed, the Fed is aware of this,” Hu said, referring to the gravity of adding several hundred billion dollars into these markets. “If this $500 billion becomes $1 trillion or $2 trillion, then the average American should worry. But now, the Fed’s argument is that we’ve gone too far with shrinking the balance, that since September [2019] we’ve had too little in reserves and that this has hurt the system.”

Dennis Lockhart, former head of the Atlanta branch of the Federal Reserve, likened the Fed’s open market operations to a “trial and error” exercise in a CNBC interview. Lockhart also noted that he doesn’t equate these liquidity injections with quantitative easing — the Fed’s practice of purchasing long-term Treasury bonds to print new cash.

Quantitative easing, Hu assented, tries to control long-term interest rates with reliable, long-term liquidity; repo market intervention, conversely, controls interest rates for immediate short-term liquidity.

Still, the final effect is the same — the Fed purchases assets to flush banks with cash. And like the Fed’s quantitative easing during the Great Recession (which led to the inflated balance sheet of over $4 trillion we have today), the uncharted territory for these repos is that ultimate question: Where do they end?

Hu believes that they will begin winding down and the market will stabilize around April 15, 2020 — federal tax day. But he said that it will be a “challenge to unwind this thing” and that it will be a painstaking process.“I trust that they will do it slowly, gradually, because you can’t ask the bank to pay you $100 billion in one day,” Hu said.

With no clear end in sight and billions in liquidity entering a little-known yet crucial market for the U.S. financial system, some Americans might be wondering if and when the dam is going to break. Or how much capital needs to enter the system to keep the leverage from flooding the levee.

The banks were being stressed before the corona virus. Now what?

Dow projections

Rather than repeating myself about the problems, look at my previous ‘Posts’ about the corporate ‘debt bubble,’ problems in China, lower GDP forecasts at below 2% etc. and all the ‘Pages’ Lone Bear Letters 1-14, Downside Projections, etc.  All can still be applied, only worse.  Because the markets went so high for 11 years without a correction, the current correction, I believe, will be devastating.

STAY FULLY INVESTED? The financial industry approves of the Efficient Market Hypothesis Theory (EMHT), which proposes that it is impossible to beat the market by trading in and out and that investors should at all times be fully invested in the market in the aggregate, by owning an allocation of mutual funds, because in the long run the market will go up. The dangerous beauty of this theory is that accordingly, your goals will always be achieved sometime in the future. If you just ‘hang in there’ long enough you will make your money back. This gives investors a false sense of contentment. Everyone I talk to, is not worried. That makes me worry! They are all saying they are going to ride this decline out and ‘the market always bounce back.’ Trained like Pavlov’s dog by the Big Financial Industry,to just hold while professional short the market, some investors may not outlive this Bear Market or a long economic recovery period! The Dow in 1998 was 9,000 and was still at 9,000 in 2009, eleven years later. Not everyone is positioned to ‘buy and hold’.

Won’t it be ironic, that if a Democratic wins the Presidency, it will be the second time in a row (2008), that the Republicans leave him an economic disaster?

Carl M Birkelbach

Dow 25,018

3/10/2020

Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com