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A Tidal Swell of Delusion Lifts Stocks

By Rick Ackerman Posted on August 17, 2012, 7:46 am EDT Last Updated August 17, 2012, 7:46 am EDT

With U.S. stocks blithely on the rise against a darkening global economic picture, we keep telling ourselves it’s only a movie, it’s only a movie, it’s only a movie.  Except that it isn’t a movie. It’s an epochal tide of delusion; it is quite real; and if it hasn’t yet reached flood levels, it will soon, inundating stock markets around the world. For now, though, even as those once-tireless engines of growth, China, India and Brazil, grind their way toward economic limbo and the growing likelihood of synchronous global recession, it is still evidently possible for the Wall Street Journal to fairly rejoice over July’s modest 0.8% rise in retail sales. Hallelujah!  At long last, Americans have opened their wallets.  After a three-month string of declines, the Journal need hardly have reminded us that three-quarters of U.S. GDP is consumption-based and that a sustained uptrend in retail sales is therefore crucial to reviving consumer confidence and, in turn, economic growth.

Would that a one-month credit-card spree were sufficient to lift us from the Great Recession!  The term “Great Recession” itself is used by everyone outside of politics and the news media to scandalize  economists’ declaration in 2009 that the recession had ended.  Yeah, sure.  Tell that to twenty million homeowners who are still underwater in a housing market that has barely upticked on 3% mortgages. Or to millions who are either unemployed or earning far less than they did before the financial crash. Or to legions of former shopkeepers who have abandoned storefronts and malls, turning the retail landscape into a visual reminder that the recession never really ended.  The Journal is hardly alone in cheerleading every statistical uptick that could serve to distract us from the previous day’s grim economic tidings.  The public may have a short memory, but not that short.  Nor does anyone believe, even on Wall Street, that a rising stock market is evidence of America’s return to economic health.  To the contrary, they see the bull market as a terminal effusion of hubris, corruption and greed.

If you truly believe that the U.S. is an oasis in an economically troubled world, then go ahead and buy the Dow up to 14000 (where it seems to be headed anyway, according to our technical runes).  Meanwhile, although it is folly to think America will somehow avoid the grim economic fate of Europe, this is the story that the Wall Street Journal et al. would have us believe each time a stray piece of “good” news hits the tape.

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  • ProfitsOn August 19, 2012, 2:40 pm

    Stock rally could continue until year’s end. U.S. dollar might instead decline, while gold could rise.

    There is a great risk in trading

  • mava August 18, 2012, 7:29 pm

    BigTom,

    I know, it feels like you were deleted. I had been deleted numerous times before. But, looking at those posts over time, and seeing that they are of all kinds, it becomes clear that RA is not deleting them, or he would have to have no rhyme or reason.

    This has to be some website software bug. This site sucks, technologically speaking. Just try to type up a huge comment and forget to enter email – it is all gone!

    However, it doesn’t look like RA is deleting posts, otherwise there would be a pattern to it. What would be the point of deleting posts randomly?

    • Rick Ackerman August 19, 2012, 11:44 pm

      I rarely delete anything other than Vlad when he goes out-of-bounds. As I have made clear here before, posting comments with more than one or two links is a good way to get the spam filter’s attention. In general, though, from my perspective, the filters do a pretty good job, blocking many thousands of annoying and/or offensive posts before they reach you.

  • BigTom August 18, 2012, 6:34 pm

    Rick – I apparently got deleted from this discourse having not slandered anyone. I used real life experiences in my part of the world as examples to support your “Tidal Swell of Delusion….” theory I concurred with….could you please tell me where I went wrong?

  • bc August 18, 2012, 6:31 pm

    I sure hope this doesn’t cause a huge gap down first thing Monday morning setting off a fear based contagion wiping out trillions in capitalization in minutes. That would be unexpected, and too sudden to imagine. Meh, practically impossible anyway. I’ll sell if it does because I’m no fool.
    http://www.google.com/hostednews/ap/article/ALeqM5ghHvvBuivJI4Fqyw9JCtCGUJAGUA?docId=367c6838ffa64de7a2f5810ef6a54730

  • bc August 18, 2012, 6:01 pm

    It’s probably nothing but…
    http://www.zerohedge.com/news/chart-day-garbage-shall-set-you-free-gdp-manipulation

  • gary leibowitz August 18, 2012, 5:22 pm

    http://www.safehaven.com/article/26565/big-changes-ahead-gold-just-became-money-again

    You will not like to read this article. I am surprised no one mentioned this since it was proposed in June. The Fed and FDIC actually proposing GOLD be used as primary assets in banks and that they must increase their assets from 4 to 6 percent?

    Did I miss this discussion?

    • gary leibowitz August 18, 2012, 7:30 pm

      Sorry I now recall there was a discussion on this.

  • Rusty August 18, 2012, 5:57 am

    http://www.internationalforestindustries.com/2012/08/16/us-lumber-production-rises-in-may-western-production-jumps-significantly/ Ok lumber production is up 8% so far this year, but this includes bio-mass. I don’t see home construction “soaring” per Gary, without lumber.

    • Rusty August 18, 2012, 6:04 am

      http://www.shadowstats.com/article/no-465-july-housing-starts-economic-review Housing starts are better, but hardly soaring. Supply will meet demand, if the new home construction rally is real lumber will reflect that, oh yeah copper and aggregates and maybe Toll Bros.

    • gary leibowitz August 18, 2012, 4:48 pm

      I don’t make up the surge in permits. They are real and include many months of up moves. this is an indication for committment to purchase and build new homes. No one would fake these numbers. it makes no sense to do so sinse the result would be catastrophic when reality hits and there is no new construction. no conspiracy here. They hit a 4 year high. You can ignore this number as a fluke. Thats up to you.

      As for seeing signs of a crash, they are always there. In fact individuals always have the advantage of getting in or out faster. I am not talking about the day of the crash. Look at all crashes and tell me there wasn’t first a breakdown mov on a technical level before the day of the crash. It never happens in one day. A loss of 5 percent is nothing if you held on for years making 10 times that amount.

    • Rusty August 18, 2012, 6:55 pm

      I don’t deny what you saw. Let’s look and get facts. Trade journals are likely to be more honest than politicians. So far lumber production doesn’t equal permits, but the latest data is May. Copper, cement, and aggregates will also be a tell.
      Crash? You have been very accurate so far. I find 14K DOW from Ricks chart troubling for short.

    • Rusty August 19, 2012, 6:32 am

      http://seattletimes.nwsource.com/html/localnews/2017319708_apwasnohomishmillclosing.html

      Don’t take my word for it; Google “Lumber Mill Closing 2012” at least ten mill closings. I don’t know what the permits mean; I just know a residential housing boom can’t happen without lumber. You got me interested because on fringe of lumber and the permits got me baffled.

    • Rusty August 19, 2012, 6:36 am

      http://www.bendbulletin.com/article/20120818/NEWS0107/208180335/ including this obscure story from Bend Oregon dated 2 days ago.

  • bc August 18, 2012, 1:19 am

    Let’s talk about the dynamics and psychology that result in the trapping and death of theater and night club patrons repeatedly through history. Each individual patron believes he is safe because he believes there will be ample warning that it is time to run if and when trouble occurs. When trouble comes, the tragedy ensues because this assumption proves horribly and tragically wrong. There is anything but ample warning or time to run. The first 1% who were standing near the doors get out. The second 1% cram together at the door thus blocking it. The remaining 98% die horrible deaths.
    You who think you are standing near the door of the markets, ready to leave at the first sign of trouble, have no clue how sophisticated, how fast, and how “inside” you must be to see that first sign of trouble and react in time. Many who think themselves sophisticated (because they are big banks or hedge funds), and fast (because they have co-located supercomputers across the street from the market centers), and “inside” because they hang with the Fed staff, are going to be carried out on a stretcher. If these guys are gonna get burned what chance do you or I have, Gary?

    • gary leibowitz August 18, 2012, 4:53 pm

      If you set up strict rules and follow them it is hard to miss the events leading up to th crash. in my caser I had a 2 percent drop rule on any given day to get out.

      You can set up a conservative stop loss or aggressive one. The only problem is sticking to it. Have there ever been a crash where days before it didn’t drop 2 percent?

      In my case I told you when I got out. It was the start of this last correction. I would rather be early and exit than get caught in a crash. I am also late to get back in. I wait for the all is clear sign. I am afterall a bear that does expect a crash one day. I don’t like missing the end moves since they are usually prolonged and sharp to the upside.

  • BigTom August 18, 2012, 12:40 am

    This a.m. I was reading a story on how in the last 3 or 6 months(story now deleted and can’t refind it)2 commerical property sales were done in Italy, and 3 were processed in Spain! Sheesh. I have commercial property in a summer resort town in Idaho, U.S.A. that has been on the market for 3 years. This year got an offer to lease it for one year. Last year got an offer to lease it for a summer and then pay me out of the profits at the end of the year. I did check in the mirror to see if I had ‘stupid’ tatooed on my forehead. Nope, none there. I guess I just looked that way to them.
    A local realtor in another part of Idaho was telling me this past spring that her other business participation was selling manufactured homes and setting them up on the property. This past January they had sold 26 units and not one cleared thru financing. Money is being digitized in volums, entered upon bank ledger books and, while looking good on paper and MSM news reports, apparently not getting down to the populace to stimulate the velocity of money index…..
    – another story I was reading describes how Portuguese citizens are running out of their family jewels of gold and silver to sell to pay living expenses. Buying shops are closing down from lack of PM’s in any form to buy….all I guess being shipped off to Mario’s part of the world. Perhaps a warning of things to come here locally when credit totally freezes up. It just seems like a slow choke down of western capitalism/money while a charade of ‘false store fronts’ is being paraded across TV screens for public viewing.
    This ‘good times are returning’ theme being promoted by gov’t/MSM is I believed as Rick describes it; ‘A Tidal Swell of Delusion….’ There seems to be some good traders that frequent this site that I am sure are making some hay out of this market. But this market is beyond my limited abilities at trading so I just give it a wave occasionally as I zoom by on my summer motorcycle rides!

  • gary leibowitz August 18, 2012, 12:29 am

    bc,
    “40% of corporate profits are financial sector profits based on fees for trading by others plus trading profits on their own account.”

    Really?

    So Walmart, AAPL, CICSO, MMM must have an unbelievable P/E ratio since they have all participated in this sham. They derive their profits how? The shareholders would love to find out that their companies profits are derived from other means

    I understand how banks are being allowed to show a profit. I also understand your point on defunct homeowners and the hidden loss the bank incurred. No argument there except the assumption of how it will end. These past 4 years gave banks time to recoup some of their losses. It also is starting to show a huge backlog of new homes about to be built.

    Given enough time all problems get resolved. I am talking about the banks balance sheet, not the government debt load that helped orchesrate this recovery.

    You seem to confuse my statement on corporate profits with the governments wizardry in propping up banks.

    I don’t deny the debt will have to be dealt with. I just don’t see this as an immediate problem, and neither does the street. So far the street has been proven right to double the stock prices.

    So once more show me real tangible evidence that McDonalds is geting its fake profits from government handouts.

    Just because the rules were changed to allow banks to show profits doesn’t negate the government data on GDP, backlog of orders, productivity gains, retail and wholesale earnings, borrowing, lending, etc..

    The street looks at my economic data points and doesn’t care less how the banks are propped up. They will care once it spills in the rest of the economy. For now it looks like the opposite is true.

    SO as the game is still on, play along and stop worrying until you notice the game will be lost. Right now the score is very one sided. Even in 87, as people have said here, the market telegraphed trouble ahead. Do you really see that trouble? Not with the current technical data. in fct if you were to compare all big run-ups you will notice a consolidation pattern very similar to this one.

    I continue to argue, 8 months running, while the market keeps looking stronger and stronger. EU, housing, inflation, costs, employment. Yes employment. It is pathetic how slow the trend is and you know my take on the reasons.

    All I can say is we will have this debate in 3 or 6 months from now with much higher stock prices.

    • Pat August 18, 2012, 3:06 am

      Gary, while I don’t totally agree with you the health of world economies, I agree that there is very little risk in stocks for at least the next 6-12 months. Does the market look the slight bit worried about the fast approaching debt ceiling, the “fiscal cliff”, slowing corporate earnings projections/lowered company guidance, or even europe’s debt problems? … Not in the slightest. Sentiment still stinks, WAY too many shorts in the market and after October we have the next 5-6 months that are traditionally very bullish for stocks. And once we get to 1500 on the SPX, there is now way Da Boyz won’t take it to new highs. Oh, and I almost for the “Bernanke put” is always there to cushion any turbulence, should it arise. So buy every 1-2% pullback in the market, and relax. Stocks are headed to new all-time highs, possibly by year end.

    • Bay of Pigs August 18, 2012, 9:20 am

      Gary, do you any serious study on the markets historically? Seriously, your comments would be demolished on almsot any board I visit. It’s almost laughable. Yes, stocks may well go up, but the currecncy is doomed. You won’t win. Real vs nominal.

    • gary leibowitz August 18, 2012, 4:55 pm

      Bay,
      I will let YOU know when I see the possibility of a crash and the day I get out.

  • Rick Ackerman August 17, 2012, 11:23 pm

    Great post, bc. Thanks for an enlightening response to Gary’s question.

  • gary leibowitz August 17, 2012, 9:20 pm

    AAPL – new high. Where techs go, everyone else follows. I do not see any QE announcements anytime soon. The street might react initially but if the data points show continued improvemnt any correction will be short lived. As for AAPL it too should show some sort of correction, but don’t count on anything big.

    I still can’t understand the adamant stand on a crash scenario if you can’t explain away how earnings will disappear soon. Perhaps my notion of following the fundamental T square profits and losses is wrong.

    • bc August 17, 2012, 10:16 pm

      40% of corporate profits are financial sector profits based on fees for trading by others plus trading profits on their own account. Trading by others is dropping like a stone (look at volumes), while hedge fund and bank profits (trading for their own account) are sliding too. Banks are substituting fees to make up for trading and loan losses, but the big money is flowing from the Fed to the banks in the form of bad asset purchases by the Fed plus FHFA guarantees allowing banks to roll non performing homeowners into new govt. guaranteed loans. Soon realized losses of horrific magnitude will hit the Fed and agency ( FHFA, Fannie, Freddie, even FDIC) balance sheets. The losses are already there. The only missing trigger is the realization of those losses-a political decision. Eventually, the political decision to hide these losses will be moot, because Joe six pack will reach his own conclusion that he is being lied to when his SNAP card stops working. Gary, a whole bunch of very respected, responsible, high level people are going to be revealing their own naivete about how the real world works as we hear them say, “I can’t be out of money…I still have some blank checks!”. And then we will all be informed that it is illegal on pain of death (by hollow point bullets apparently) to refuse to honor those same checks.
      You want an explanation of how “earnings” will disappear? That’s my explanation.

  • bc August 17, 2012, 8:59 pm

    Those earnings are sustained by CB monetary and legislative fiscal policy both without precedend. This will end. I believe it is ending now at the Fed and will end after the election fiscally. Planning to be first out the door when the theater shows actual flames because it’s just a wiff of smoke now is a bad plan.

  • SR August 17, 2012, 4:37 pm

    This market has nothing to do with economic it is about politic. The politicians save the bankers because they know that they need them to lend money to the government to promise people things that we cannot afford to win their next election. People want everything for nothing and they are slave to their desire.
    The game is over and everybody know that. Like in the monopoly game the winners take all and the only winners are the bankers. That is why they run the world.
    Markey is always right and construct to make the elite richer and the slave poorer. At the end even the best trader will not make money if he does not work for the banksters. The people trade with “real” money (money obtain from work) but the banksters are allowed to contrefeit it (money create out of nothing).

    1929=Painting The Tape
    An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.

    Read more: http://www.investopedia.com/terms/p/paintingthetape.asp#ixzz23ntDpOS7

    2012=High-Frequency Trading – HFT
    A program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. As of 2009, it is estimated more than 50% of exchange volume comes from high-frequency trading orders.
    Investopedia Says
    Investopedia explains ‘High-Frequency Trading – HFT’
    High-frequency trading became most popular when exchanges began to offer incentives for companies to add liquidity to the market. For instance, the New York Stock Exchange has a group of liquidity providers called supplemental liquidly providers (SLPs), which attempt to add competition and liquidity for existing quotes on the exchange. As an incentive to the firm, the NYSE pays a fee or rebate for providing said liquidity. As of 2009, the SLP rebate was $0.0015. Multiply that by millions of transactions per day and you can see where part of the profits for high frequency trading comes from.

    The SLP was introduced following the collapse of Lehman Brothers in 2008, when liquidity was a major concern for investors.

    Read more: http://www.investopedia.com/terms/h/high-frequency-trading.asp#ixzz23nujq48G

    The bankers are allowed to do this because the politicians want power and bankers want to continue to control the world. Look at the history of every civilisation, at the end there is no more rules of law.

  • gary leibowitz August 17, 2012, 3:31 pm

    Nice article but it is too one sided. You never mentioned that the FEDs policy of extremely low rates allows for refinancing and money in peoples pockets. It also allows for the housing market to heal. The housing permits have soared. That IS an indication of the health of the market. You also don’t want to mention the huge rewards corporations and the wealthy have reaped during this so called economic shame.

    I find it curious that you discard my statement that corporations are using this turmoil as an excuse to cut workers and benefits, while creating the largest profit margin they ever experienced. I also find it stange that the cry for less government and less corporate taxes is the way to build us up. Surely the imbalance of wealth is the number one reason why the middle class is struggling.

    You call this whole economy some mass delusion when in fact the stock market IS reflecting reality. Cororations are making money. The wealthy are reaping huge gains. These are facts that can’t b disputed.

    You want the stock market to reflect the struggles of the common man? It never will. If the struggles become so great that earnings are affected than the street listens. They are only cruching numbers, and the numbers are good.

    One other point. 4 years into this so called recovery and yet some way, some how the dilusion continues. How individual corporations fake their earnings I will never know. yes the banks are propped up. yes the Fed has artifically kept rates low. yes thy even buy government bonds when no one wants them. Owning a business, you don’t complain when tax laws or political cronyism allows you to make a profit. You adapt to the current environment. Corporate America is a class act when it comes to surviving. Today it is not only surviving but thriving, and at the expense of the worker.

    Please, someone, show me where these earnings are fakes and the fact tht the wealthiest amoung us are seeing huge gains, like never before.

    We might even get a President that represents the new America. The epitome of the new american way.

    When corporations start losing money, that means the game is over. No more ability to squeeze another dime out of us.

    Do you really think the markets will crash when there is still, today, expectations of future earnings in the double digits? Until there are big earnings surprises, or events that cause wall street to dramatically reduce its expectation, I can’t see the end yet.

    It will happen. I just think you have to let the market tell you when things start breaking down.

  • John Jay August 17, 2012, 3:08 pm

    I happened upon another sign post to watch for up ahead on our way to the Twilight Zone. It seems that the “Cash for Gold” shops in Portugal are empty. The plebs there have run out of gold rings and jewelry to sell. Now what do they do? I’ll have to watch and see when the TV ads for them stop running here in the USA, and all those storefronts that house them go vacant.
    As far as any increase in retail sales, that might just reflect increasing gasoline prices at the pump, a heat wave induced spike in electric bills, and inflating food prices. Another drain on the plebs discretionary income.
    Inflating prices in areas the government ignores when calculating “Inflation” that are a big chunk of the monthly nut for Joe Six Pack.
    And 1.1% interest on the highest paying bank CDs.
    And vastly underfunded pension plans that continue to assume 7 or 8 percent returns.
    And retail money, (what’s left of it), is still moving out of equities and into the crowded trade of bond funds.
    I would say it is all closing in on us now.

  • linda amick August 17, 2012, 1:36 pm

    The stock market rise which is largely caused by central banking inputs, is required to keep the remaining middle class proles that still have jobs thinking their 401k monies are growing. Thinking that 401ks are recovered from 2008 allows the working middle class to retain CONFIDENCE in the ponzi that is the global financial model. Without confidence the house of cards collapses.

    • mava August 18, 2012, 7:44 pm

      Oh wow, Linda!

      I think you had hit it right on the head! If the government didn’t made sure that stocks are ok, then by now, there would be millions trying to move their monies from those traps and into something they can, actually, control. That would be the end that many are still sure is coming nevertheless (such as myself).

      I find it hillarious to watch people beating themselves up about stocks and bonds, devising strategies, angles, trying to find a rhyme in a mechanical record of humanly guided series of events, “investing” every day. All the while everything they see is not real, it is only a fly paper rolled all over the place, yes, for them to stick to. But, the flies can not believe that the entire fly paper “market” is only a conspiracy against them. They say to each other : ” c’mon, not everything is a conspiracy! Let’s invest right there! Fly and land!”

      Isn’t it funny that the people who will lose the most actually deserve to lose? How does the poetic justice always enforces itself? It is amazing to see them being warned repeatedly, shown where and what to read to deprogram themselves, pointed to numerous media created to explain the mechanism of theft, and yet, there they are, mindless as ever, landing on the flypaper of the stock market.

      People as dumb as those must not leave their genes floating around. Sadly, in many cases they have already done so. This reminds me of another reason humanity sucks today, – we have extended our lives way past the point where we procreate, and that is wrong, because this means that dumb people survive more often, then procreate, creating even more dumb people.

      But I digress. Yes, you are right, it is all about fake confidence!

  • mario cavolo August 17, 2012, 9:44 am

    Rick, you’re the best at elucidating all that’s wrong with the system as its tentacles continue reaching across the global economy. While 50% of the S&P 500’s earnings are international, more and more from Asia, Wall Street ain’t very “American” is it? Yet how does it matter to, how does such a state of affairs support the declining lower/middle income sector of America? It doesn’t. NOTHING is helping that sector of people in America! They are the American version of China’s lost generation just one generation ago under Mao. 50,000,000 and counting on SNAP food stamps. I read the other day how the corruption finally reaches a point where the unfairness of it all causes a downward shift in productivity because people start realizing that the way to make money is to game the system as much as possible, without an ethical scruple of guilt. Having recently read Sorkin’s riveting “Too Big Too Fail”, I think merely of the law firms shuffling accounting papers that were a joke and a shambles, who then simply collected their 18 million in fees from the banks who were completely bust; with the taxpayers on the hook for it all. Pathetic.

    However, above does NOT mean there is nothing good happening no where no place across the globe…bad English intentional.

    As the historically observable direction….inflation, printing, expansion, inflation…in general, that’s where we’re going, while certain individual sectors and populations along the way across the globe and over a certain few years in the cycles will suffer more, suffer less, do better, do worse relative to the others. I also consider that as America’s lower/middle income sector of the world seems to be the one being hit most brutally by the economic and societal developments across the globe, that it renders Americans less able to objectively see the forest through the trees. Hard to see things clear when you’re hurting and angry and have had the rug pulled out from under you and your family.

    Cheers Mario


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