This morning is one of the funniest editions of CNBS (all the BS that’s worthy of a cable channel) that I’ve seen in months. They have on guests talking about how people are selling because they need to raise cash. Oh nonsense; this is not what is going on. The utterly-bogus crap that passes for “journalism” these days is a disgrace. This is especially true when the same cable channel runs ads telling you that with a $200,000 cash deposit you can borrow $1 million at under 2% to buy stocks. If you do that (and a lot of people have!) then you are not investing capital. You are trading with credit – money that is in fact vaporous and does not really exist. If you make a “profit” and cash out then you get to take somoene else’s capital (maybe!) and turn it into cash in your account. But if you’re geared up 5:1 and the market takes a 20% crap your $200,000 is vaporized in a margin call and the supposed $1 million you “had”disappears. The truth then becomes evident — while the $200k in capital you put up was real (and is now the property of the broker) the $1 million you were playing with never existed. China’s Shanghai market was off more than 6% last night. I remind you that in 2007 the first dislocation came out of the Chinese market, apparently without warning. The problem was that it was “without warning” only because nobody was reporting it. There were plenty of warnings if you paid attention to them — but few people did. Hell, prior to the first “surprise” I wasn’t paying attention! I sure started though when I saw that sell-off, because unlike so many I understand that this sort of move does not come without cause. Now we’re seeing it again and the usual apologists are showing up on the tube just like they did the last time to tell us all that people are “buying the dip.” Uh huh. With what are they buying, in aggregate? This is the problem, you see. The FVX, 5 year Treasury, has gone up 50% in yield in a few days’ time! And the leverage used in that market is ridiculous – because we allow banks to “print credit” with wild abandon. Cramer is talking about “I’m going to buy some utilities (or telecoms) that yield 5 (percent)” Uh huh. How has this worked out for people thus far? AT&T (as just one example) yields about 5% now, but you have lost two years of yield in the last two months. How much more can you lose? Plenty; what have these companies been doing? AT&T is selling at 26 times earnings even after this decline. If the “forward earnings expectations” decline to the current EPS run-rate then you wind up with a stock that is arguably 50% overvalued! Care to lose half your money? Oh, that was all margin? Darn; you just lost 250% of what you put up. Still think you were so smart to borrow $1 million and buy dividend yield because you can borrow at 2% and earn 5% — right? See ‘ya in the poor house! Reality: Leverage was not taken out after the 2007/08 crash. The rot was instead papered over and the “recovery” was simply more leverage piled upon leverage rather than actual economic growth. Oh, and the margin clerk is on line 1.
Posted on: Mon, 24 Jun 2013 23:53:11 +0000
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