VRA Update: The ACTUAL 2016-2017 Playbook

I've yet to hear a single, not one mind you, Wall Street/FED economist...certainly not many portfolio mangers...speak the truth as to why global financial markets are trading like a brutal recession (at minimum) is just around the corner.  

There are just two reasons why this might be; 1) they truly don't see the downside risks (economists) or 2) they have been instructed to "talk up the market"...so that their firms can sell their own positions (this happens ALL the time...something to keep in mind when you hear a portfolio mgr talking up their books).

Over the decades, I've gotten to know no fewer than 10 of Wall Streets top economists, and there was one thing that always stood out to me. Our best and brightest economists are...as a group...weak-minded, complete pushovers. When I would question them, over a drink or cup of coffee, as to their positions, few ever had the ability to back up their views in anything that you might call "confidently". This observation baffled me. How can these really bright folks be so weak?? It also explains how they get everything so incredibly wrong. 

Each year, the Wall Street Journal publishes their year end views from a collection of more than 100 top US economists. My firm was Oppenheimer, and their top strategist just happened to be my personal mentor. His name was Michael Metz and I've written about him often in these pages. Michael was the first to teach me that "these economists are wrong every single year. If you want your clients to make real money in the markets, take anything they might say with a big grain of salt. You're better off taking the other side"  

As clear proof of the sad state of affairs with our top economic brains, think back to early 2008. We were already seeing a large number of subprime lenders close their doors, and the stock market was obviously telling anyone that would listen that "something is very wrong here". 

Yet, the worlds best economists and market gurus routinely said "yes, we see a slowdown in housing and access to lending, but we do not view these as serious economic risks to the US economy".

The quote above is actually from THE WORLDS TOP ECONOMIST at that time, FED Chair Ben Bernanke...just 6 months before Lehman Brothers failed and the market route was on. Yep, the same guy that sees all of the economic figures long before anyone else, completely missed one of the worst market/economic crashes in all of US history.

But folks, remarkably, it gets worse. Like, much worse. Speaking to a congressional committee, under oath and all, Bernanke said the following, just 3 months before panic had set in and Bernanke and Treasury Secretary Paulson were begging our countries top leaders for a $700 billion bank bailout. Under oath, Bernanke said, "the housing slowdown is worse than we had expected, but we still do not see warning signs that the slowdown will have a serious impact on the overall US economy. We see the risks of a recession as small"

Again, this was just 3 months before the US actually entered "The Great Recession"!  

HERE'S WHY I BRING THIS UP TODAY:

Consider the following; 

1) the bond market, just this week, began signaling the first recession call.

2) we are IN an actual earnings/manufacturing recession, now!

3) global credit spreads have widened to such a degree that the odds of avoiding a recession are now 1 in 3 (in up to 70% of major economies). Yes, the actual odds in the debt markets tell us that a recession is almost certainly imminent.

4) After decreasing for more than 30 years, we are now reaching the end of the most powerful debt super cycle in world history. Rates have fallen dramatically since the early 80's, and played a massive role in the expansion/availability of credit, thus boosting global GDP levels to all time highs. 

5) the signs are clear to anyone that will simply pay attention...listen. The coming debt crisis/contagion, as marked by the end of our planets historic debt super cycle, is just now beginning to make itself known. Already, trillions have been wiped from equity markets, and the signs are everywhere that massive bankruptcies in the energy space are now moving into the rest of the global economy.  

6) just today, I heard Goldman Sachs top economist (Jan Hatsius) say the following: "with the US employment picture as strong as it is today, the odds of entering a recession are slim".

How is it possible that Hatsius is still getting snowed by the methods our government reports on employment?? It's now been proven that last months strong employment data, with 290,000 jobs created, was pulled straight out of the air! The gains were based on "modeling". What we know instead is the LFPR is at his lowest level since the 70's, with more than 93 million Amercians that still cannot find a full time job. 

7) Let me ask you each a question; from what industries do you see major employment gains taking place over the next 1-2 years; Energy? Banking? Retailing? Travel/Tourism? Technology? From the strength in global economies??

In just the last quarter, already announced layoffs from the group above total in the "hundreds of thousands". Yet somehow, our government will likely find a way to spin this into POSITIVE job creation. Don't believe it.

THIS "IS" 2007/2008

Don't believe the economists that can't shoot straight. Their backwards looking data collection is lame and only ensures that they are unable to forecast the future. Folks, this is the beginning of the next great financial crisis...it's on our doorstep. But this time, there will not be enough QE to rescue everyone...debt contagion of this magnitude is going to overwhelm the entire system.

The VRA will continue to do the ACTUAL research...we want to see what's directly ahead of us....not behind us. Once this bear market rally is over, we will be even more aggressively short...once again.

Stay Frosty,

Kip

vraletter.com