Soon Comes The Deluge

This is a syndicated repost published with the permission of Stockman’s Corner – David Stockman's Contra Corner. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

The robo-machines are now having a grand old time hazing the August lows at 1870 on the S&P, and may succeed in ginning up another dead-cat bounce or two. But this market is going down for the count owing to a perfect storm.

To wit, the global and US economies are heading into an extended deflationary recession; S&P earnings peaked at $106 per share more than a year ago and are already at $90, heading much lower; and the central banks of the world are out of dry powder after a 20-year binge of balance sheet expansion.

The latter is surely the most important of the three. It means there will be no printing press driven reflation of the financial markets this time around. And without more monetary juice it’s just a matter of time before a whole generation of punters and front-runners abandon the casino and head for the hills.

Even with today’s ragged bounce, the broad market has now gone sideways for nearly 700 days. The BTFD meme is loosing its mojo because it only worked so long as the Fed-following herd could point to more printing press cash flowing into the market or promises of “accommodation” that were credible.  But that will soon be ancient history.

^SPX data by YCharts

Indeed, it is already evident that “escape velocity” has again escaped. Q4 GDP growth is now running at barely 0.5%, and the current quarter could actually be negative for reasons we will analyze in the days ahead.

But the real economic situation is actually worse than the apparent flatling trend of recent months. As we have long insisted, the GDP does not measure true gains in national wealth or main street living standards.

That’s because even though you can borrow your way to a higher GDP print, as the US did through an explosion of household borrowing in the 20-years prior to the 2008 crisis, or as China and its EM supply convoy did during the last seven years, that only pulls activity forward in time.

At the towering levels of debt which exist in the world today, however, borrowing does not create new wealth; it only mortgages future income.

Indeed, with $220 trillion credit outstanding on a worldwide basis, we have reached “peak debt” for all practical purposes. That means, in turn, that much of the recent accretion of the world’s $78 trillion of GDP represented household consumption growth that cannot be sustained and business sector malinvestments that will lead to losses and write-offs.

In this context, the great commodities crash now underway does not represent some isolated commodity super-cycle that will soon run its course and be gone; it is just the opening wave of a long-term deflationary epoch that is already generating a CapEx depression and shrinking profits and wages in the sectors that led the boom over the last two decades.

That’s why the Wall Street narrative being thrown up against the worst start to a year in market history is so superficial and unpersuasive. It reassures that the only thing going on is a temporary pause due to the commodity plunge and the EM slowdown, and that this is all just a matter of “transition”.

To wit, China is purportedly just working through a soft patch as it goes from an export and fixed asset investment driven economy to one based on consumption and services. But in a few years they will be shopping until they drop in China just like they do here.

No they won’t. China does not even remotely resemble the simulacrum of capitalism that still exists in the US. Instead, it is the most fantastical state driven house of economic cards in recorded history, and it is heading not for a “transition” but a thundering crash landing.

Why does every small miss to the expected macroeconomic results cause endless Wall Street chatter about more “stimulus” from Beijing, as occurred owing to the dismal reports issued last night?

The short answer is that Wall Street’s Keynesian chorus cannot grasp the fact that there is such a thing as a collective balance sheet and that it can get used up. Moreover, when that happens there is no more effective “stimulus” to be had—-it just results in central banks pushing on a string.

It should be patently obvious by now that China is trapped in exactly that dead-end, and that the Red Suzerains of Beijing are swamped in paralysis and confusion. After all, ramping China’s debt from $500 billion or so in 1995 to $30 trillion today wasn’t so hard or even worrisome if you do not understand that a Ponzi scheme will eventually blow-up.

After all, what’s a 60X increase in debt if most of its is held by state banks, which are instructed to sweep bad loans under the rug and to facilitate the achievement of top-down GDP targets at all hazards?

Certainly Mr. Deng had no clue about the limits to debt when he discovered the printing press in the basement of the PBOC in the early 1990s and implicitly declared that to become rich borrowing is glorious. Nor did his successors who cling to the communist party’s tenuous monopoly on power by means of wave after wave of new debt infusions to keep the scheme going whenever activity begins to falter.