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China, Bitcoin and Rational Markets Losing Reason.

rational markets

China, Bitcoin and Rational Markets Losing Reason.

Below we look at: market euphoria (and loss of reason), how we got there, and what China and Bitcoin have to say about rational markets gone irrational…

An Update on Some Key Indicators

I’ve written elsewhere about certain key market indicators which the MSFM likes to float past. At Signals Matter, our Trend Watch, Recession Watch and of course our Signals Watch look at hundreds of specific indicators to track money flows, valuation multiples, balance sheets, sectors etc.

Some of the more obvious themes and indicators we’ve publically touched upon include the Russell 2000, the yield on the 10 Year Treasury, earnings realities, and of course tech stocks in general and FANG+ in particular, from TESLA to Amazon.

AS for Bitcoin…I’ll touch on that a bit below, but this puppy deserves its own blog, coming soon…

For now, it’s just important to keep all of these key indicators, and the implications behind them, fresh in our thoughts. In sum certain themes are worthy of repeating/updating as we steer through these record breaking, and indeed, crazy markets.

For example, it’s worth updating that the Russell 2000 is trading at over 110X reported LTM earnings. It’s also worth repeating that “reported earnings” are now factually confirmed to be primarily, well, fake earnings

With all the Q3 earnings now in, it’s also worth updating that LTM earnings for the S&P came in at $107 bucks per share. Is this a sign of earnings growth, as is often lauded in the all-too-cheerleader-like financial media?

Well, the short answer is: nope.

In fact, if you go back exactly 3 years from this Q3, guess what the S&P was earning in 2014? Drumroll…. $106 bucks a share.

That’s right, in the last 3 years earnings have gone up by 1 dollar, and yet you don’t need me to tell you how much the market has gone up despite this so-called “earnings surge.”

In plain English, we are witnessing a massive disconnect between stock earnings and stock price. Today the S&P is trading at 24X earnings, whereas 3 years ago, the multiple was at a “respectable” 18X…


How Did We Get Such Market Mania?

There’s a number of answers. First, of course, is the ever-so “accommodative” market cocaine pusher known as the Federal Reserve, of which I’ve written ad nausea…

Then we had a Trump “Bump” based on hopes of record-breaking tax reform, the Obamacare repeal, infrastructure spending booms and more Fed support. The market priced that in already, basically from the moment Trump took office.

Now that “bump” continues to bump beyond what has already been priced in. All the euphoria, in other words, just got more euphoric.

But why? Obamacare didn’t die, no infrastructure miracle can meet our budget realities and the much heralded “tax reform” has more optics than substance.

This isn’t a rant, it’s just non-partisan candor and math—which both sides of the aisle have been woefully ignoring for years with their hands deep in the sand.

And as for that “accommodative” Fed? Actually, Powell, taking his talking points from Yellen, is about to tighten rather than ease policies, buy selling rather than buying our bond market. This is happening at a rate of $10B per month now, increasing to $50B/month by September.

When the ECB follows inevitable suit, we’re gonna be looking at central bank bond sales hitting an annual rate of $1T by 2019. This will force a dive in bond prices and thus a hike in bond yields –and thus interest rates.

In short, hardly a “euphoric” scenario looking into the future.

A third reason this euphoria continues its ribald march into crazy is a topic I’ve wanted to touch upon for months but kept waiting to address, and that’s the big fat Ponzi scheme called China.



You don’t need to be a Kyle Bass follower to know that China is a case par excellence in form over substance. I’ve touched briefly upon China’s debt numbers in other blogs.

Recall that China is sitting on top of $60+ Trillion in debt, with a 7:1 debt to productivity ratio that is a ticking time bomb not only for Beijing, but for global markets who continue to rely upon China’s “growth engine” to keep their export markets above water-level.

Even JP Morgan’s analysts recently dropped their pom-poms and admitted than nearly 60% of the new loans being issued in China are being used to re-pay old debts. As any of us who have traded market cycles bloated by promiscuous credit can attest, never make the assumption that debt roll-overs can be perpetually rolled-over.

Furthermore, if you think the MSFM has trouble reporting facts over fiction here in the US, it’s beyond common knowledge that the numbers out of China have everything to do with manufacturing perception rather than calculating math.

Based on what we do know, however, is that today’s “meme” of “synchronized global growth” relies primarily on the fantasy that China is the engine of that growth.

If you believe that, then I’ve got a Ford Pinto to sell you…

Needless to say, China’s central planning committee, with even more flare than a game show host, has a real problem with reality. Its recent and gargantuan XI Coronation and 19th Party Congress was all about optics not honesty, and China’s market-making politicos pulled out all the stops to avoid any embarrassing market snafus during this global PR stunt.

The new emperor sweetened the celebratory pot by adding a new $6T in easy credit to make sure its already teetering markets didn’t take a nosedive just as the party music began.

Such easy credit naturally fattened an already obese Chinese credit bubble. We’ve seen this before—i.e. remember the US mortgage crisis in 08? Well, history is repeating itself in China right now, as new mortgage issuance is finally entering its clear, and yet sudden decent into crash territory…

In China, new mortgage rates are declining rapidly, and with them, China’s apartment construction and building materials bubble in tow.

Of course, the MSFM has confused this artificial and $6T debt binge for a “global rebound.” That’s like calling a loan from Guido the alley loan shark a “boost in cash flow.” The fun is temporary, the broken legs are not.

But what happens in China doesn’t stay in China. And as this artificially stimulated, credit-soaked “engine of global growth” heads south rather than north, global commodity and CapEx cycles will go with it.


Putting it All Together

Now that we’ve looked at what caused much of this mania and the risks embedded in it, what can we expect?

For now, all of the foregoing broken fantasies are still in full throttle mode, and the MSFM as well as the global and national markets keep spreading and drinking the collective Kool-Aid.

So, if you want to know what a market mania looks like—you’re in one now…

And if you need more indicators of mania, euphoria, or just plain crazy, simply consider bitcoin and the current crypto currency wave of wow… Just consider the speed, rate and rise of bitcoin. It went from $7k to $8K in 2 weeks, from $8K to $9K in nine days, from $9K to $10K in 2 days and $10K to $11K in 1 day.

Does that look like a rational market to you?

But more on bitcoin later…

For now, we hope you are trading wisely, which is to say, trading with Signals Matter.

1 thought on “China, Bitcoin and Rational Markets Losing Reason.”

  1. Thanks again for another biting survey of reality. Yes, please do a specific piece on bitcoin, and maybe a broader look into the Fed’s bond selling shift. Thanks!

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