This Is Not a Retest—It’s a Live Bear!

That is the title of an essay written by David Stockman this morning on his fantastic site. Here is part of what he had to say:

“By the lights of bubblevision, Tuesday’s plunge was just a bull market “retest” of last week’s lows, which posted at 1867 on the S&P 500. As is evident below, the test was passed with 80 points to spare at today’s close.

“So according to the talking bull heads—–CNBC had three of them on the screen at once about 2pm—–its time to start nibbling on all the bargains. Soon you may even want to just back up the truck.

“You can supposedly see it right here in the charts. The market hit the October 15 Bullard Rip low last week, and has gone careening upwards where it is now allegedly forming a new bottom around 1950. Remember, it’s a process. Be patient.”

To those mainstream assertions, that this is simply a normal stock market decline and a simple market test not to be alarmed about, David responds as follows:

“Not on your life! The world is heading into an unprecedented monetary deflation——with output and trade falling nearly everywhere. That implosion is already rumbling through Canada, Mexico, Brazil, Australia, South Korea, Malaysia, Indonesia, Russia, Japan, the Persian Gulf oil states, and countless lesser economies in between. And at the center, of course, is the unraveling of the Great Red Ponzi of China.
“In the face of this on-coming economic storm, honest financial markets would have been selling off long ago, and, in fact, would never have approached today’s absurd levels of over-valuation. But financial markets have been hopelessly corrupted by two decades of massive central bank intrusion and falsification of asset prices. Consequently, Wall Street punters and their retainers and cheerleaders cannot see the forest for the trees.”

I can recall a few years ago when some of my competing friends in the newsletter-writing business were urging me to visit China because it was this most fantastic explosion of capitalism that would save the world and make us all wealthy as investors in the mining industry. I did visit Asia several times and there certainly was a sense of growth and vitality that was absent from the U.S., especially after the 2008-09 market crisis. But to call China a capitalist economy was certainly not a truthful assessment of what it really was. To the extent statist policies were impoverishing the country, some loosening up of markets was permitted. But by and large, China remained a top down economy where decisions were made by government officials rather than by millions of independent free-market decision makers.

Now that the wheels are coming off the Chinese economy, it should not come as a shock that it is the epicenter of a global depression and what David Stockman rightfully calls “an unprecedented monetary deflation.” While Chinese governments were engaging in all manner of infrastructure programs (which is what Democrats want to do in the U.S. now), the demand for iron and copper and all manner of materials plus heavy equipment exported from the U.S. and elsewhere exploded, causing a global boom for countries producing those materials. But the trouble was that those infrastructures that were built were illegitimate! There was no spontaneous demand that is at the heart of true capitalism. And so it is not surprising that the Chinese economy is now heading toward not just a slowdown but also into a horrific depression. And if China is heading into a depression, where do you think the rest of the world is heading?

David Stockman is right. At the heart of this unprecedented monetary deflation is debt that cannot be repaid. The chart on your left is a picture of an unprecedented debt load for the U.S. But the debt load for countries like Japan and China is much, much worse. If the U.S. is supposed to have the strongest economy in the world (though you can make the case that the U.S. never truly returned to positive growth post 2008-09), with Europe still in the tank and now in decline as well, and with China and Japan in disastrous financial straits, why should we think that equities will not eventually reflect the underlying economic reality?

Stockman’s article goes on to show the devastating negative impact the Chinese decline is having on Brazil, which was growing very rapidly as it supplied all that steel and other materials that were being used to build China’s empty buildings, empty cities, and empty airports. But because those projects were illegitimate children of a highly bastardized “capitalism,” there is no cash flow from which to continue to fund Chinese growth; hence the need no longer to import commodities from Brazil but all the other commodity producing countries, such as Australia, New Zealand, and Canada are now also either in a recession or rapidly heading in that direction.

So I think Stockman is right. What we are starting to witness is more akin to what Dr. Robert McHugh has been describing as a decline to not only correct the bull market from 2008-09 but one in fact to correct the bull from 1987 and quite possibly the bull market that dates back to the 1700s. I pray it’s not true. God help us if it is.