“Can We Talk?”

That line was made iconic by one of my favorite comedians, the late, Joan Rivers. I’ve used it in prior missives when I felt it deserving. And, today, seems to be another one of “those times.”

I used to have what was known as “casual conversations” with friends and colleagues about markets, business and more. As of late, I seem to be getting into more and more arguments discussions that use me as some sort of a punching-bag, for trying to solidify why their bullish stance on everything is far more correct than anything I may have to say. Repeat: everything.

In other words: They really don’t want to discuss anything, rather, what they’re really trying to do is help themselves to keep believing everything is as it’s being told-and-sold across the mainstream business media. Please excuse me if you’ve heard me say this before, for in many ways, I to realize the monotony. But it’s now gone far past the pace of irritating to now something more akin to where I now am starting to believe the only one who has not “taken the drugs” is me.

Another trait that’s becoming more pronounced to these “discussions” is some convoluted game of “gotcha!” Here’s an example…

If I say something that hasn’t turned out to be 100% correct, yet, has turned out to be correct in its underlying premise that’s usually more due to timing, which is always the unpredictable variant? Their response: “Same as wrong!”

Really?

That may be a usable truism if one is gambling, however, there’s a far greater knowledge needed in relativism to apply that “rule of thumb” accurately. (in trading it’s applicable, but there are so many variables and nuances it requires it’s own article)

Let me express it this way using the obvious, gargantuan elephant in the room, known as the “S&P 500™.”

Since May of 2020 it has been on a rocket-ship ride to ever and increasingly new heights.

Why? (long time readers are well aware, I know. But someone new may not.)

Hint: $4Trillion+ with another $120Billion per month of continuous QE with no end in sight. But, (and it’s a very big, but!) what would have happened if the Federal Reserve had not done this doubling of its balance sheet in 16 months?

However, below is a side note I’ll garner most have yet to understand, never-mind, hear of.

Not to mention ~$1Trillion and counting in the reverse-repo operations, which no one seems to both understand or report accurately it’s dire implications.
The reason (my conjecture) there’s such a massive reverse-repo operation is, because: the Money Markets (MM) are not only broken, but they’ve basically already “Broke the buck.” This has resulted from the phenom that they (MM), for all intents and purposes, went into negative interest territory – which is the true reason why – the Fed raised interest rates on its holdings. Which by extension means – a $dollar in these accounts is now worth less because of inherent business costs just to account for them.
Remember last time the Money Markets “broke the buck?” and the resulting aftermath? It’s called “The Great Financial Crisis.”
The only difference this time is, rather than the underlying instrument it was tied to going down, with interest rates going so low and banks unwilling to put these $dollars to work in the economy through loans, the inherent cost of just keeping track of them now costs more than any interest that can be made in holding them. Therefore, they’ve “broken the buck.”
You heard it here first is all I’ll say, for now. However, if this thing gets further out of hand? I expect it to suddenly become very “front page news” as that saying goes.

Back to our prior discussion..

Their reply to most anything I now say falls along the following premise: “What does it matter Mark, they did it, therefore, they’ll just continue to do it or whatever else they need to do. And that makes your assumptions wrong.”

Really?

To me, that’s more like cupping one’s ears while singing, “La la la la la…🎶” with child like behavior and reasoning for dealing with real issues (and there are more that do this than not, but that’s for another article).

Not only that, it can be down right disastrous in so many separate and/or repercussive ways that it boggles the mind. Yet, far too many just turn their volume up to 11. To them, issue now solved.

I have said numerous times: “It’s not about me being wrong for the right reasons that should worry people. It’s when they assume they’re correct for all the wrong ones that should really trouble them. Because, when it reverses as it usually does? Let’s just say: ‘It ain’t pretty.'”

So, with the above said, here’s a question (Its actually a series, but in reality, its just one) I’ve been asking lately when I seem to be getting no where, for their rebuttals make me want to cup my own ears and begin singing.

It goes like something like this…

Q: If you earned $1000 per week, 52 weeks per year. Your yearly salary would be $52,000, correct?

A: Yes

Q: If you were not able to work for any reason, let’s say, for one month and were not paid. You would be down $4000 from your yearly gross. Correct?

A: Yes.

Q: If a $52,000 annual salary is maxed out per its budget, where it needs all of that to cover all expenses. If it was suddenly short $4,000 leaving it with only $48,000. Is it fair to say, that budget is in trouble when it comes to meeting its current obligation, let alone, adding any more?

A: Of course.

Q: The please explain to me, or yourself for that matter, how it would sound if someone were to tell you, based on “next years earnings,” this already indebted budget will be seeing a sizable increase in pay next year of 7.5%? And, could easily take on even more debt because, the increase in cash flow would more than cover the new termed payment?

A: Well that’s obvious! $52,000 x 7.5% means they now would have an extra $3,900 a year to either spend on new or pay down existing debt.

Q: Sounds great, only, you’re absolutely wrong. That’s not how it works today, which is why you don’t really understand what you regurgitate at me as some sort of “qualified rebuttal.” Let’s dissect it a bit, shall we?

In the real world, that’s what you (and most) would assume based on this conversation. But, in “Wall Street lingo” aka “speak in specious terms only?” Here’s where you’re wrong.

That increase in earnings is just the difference in what’s called the “base effect.” i.e., $48K is now the base for year-over-year comparisons and projections. So, just getting back to even is now portrayed as a 7.5% increase! Even though – all it is in actually – is nothing more than getting back to even. There is no “increase.”

What is also forgotten within all this, is the fact, to truly just get back to even there would need to be additional earnings of almost 8% over and above the original $52,000. Meaning, a net gain to total $56,000. Again, that’s just to get back to even to cover the loss of $4K the year prior, and pay that years already maxed obligations.
(math: $52K x 7.75%= $4,030)
(math: $52K + $52K = $104K vs $48K + $56K = $104K)
There’s no “increase” there, just specious Wall Street linguistics that you and far too many others are buying horns-over-hooves.

Yet, that doesn’t even begin to describe the real difficulties coming forward from this YoY earnings increase reported using words much like “Spectacular!” (Hint: See Twitter™ latest earnings report and reporting via the press, it’s absolute comedic gold.)

However, what we actually have in this example – is a currently maxed out earnings situation, with a $4000 deficit, that has taken on additional debt to make it appear as if they never did lose any money prior (aka “buying back stock to pump up earning per share reporting). Yet, it’s now told/sold their earnings are worth even more!

Would you run your household budget based on this?

A: Of course not.

Me: Well, that’s precisely what’s happening via a little thing called “Buy Backs” funded via the Federal Reserve with QE and cheap money in interest rates.

Think about it: Same example only let’s use a business with Wall Street type valuations. All we need to do is add zeros. Ready?

A company that reported its consistent YoY revenue of $52,000,000, is now down YoY $4,000,000, with no increase in earnings or sales YoY.

Then: It takes on even more debt (additional $4MM to buy back it’s shares) closing the gap of lost earnings through intentional smokescreen accounting gimmicks, and is now said it’s worth even more, because, getting back to $52MM represents a 7% EPS YoY increase!

This is how EPS (earnings per share) gets manipulated. But, all you hear, is how that EPS number is the reason why something is worth more.

So, with all that laid out, I ask…

Understanding what we just went over: Just how much additional economic output over 2019 (when it was, supposedly, the greatest economy ever!) do you think it’s going to take to just get back to even here in 2021? All while not forgetting, you’re already some 25%plus higher in the markets than you were then. (3250 S&P in ’19 vs 4400 today in 2021)

Have you seen anything we’ve done to justify that?

Anything?

It’s as simple as that.

© 2021 Mark St.Cyr