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What If The Sun Does Not Come Out Tomorrow?

Submitted by Thad Beversdorf via FirstRebuttal.com,

Growing up I was an avid athlete.  I played every sport known to man and so I understand the concept of positive thinking, encouragement and the never say die attitude that is necessary for champions.  It’s why we have cheerleaders.  But I also know that when the game is clearly lost the prudent coaching move is to pull your star players off the field so they are healthy for next week.  And for years now we’ve been listening to market cheerleaders like Steve Liesman, Tom Lee and Brian Belski give us their rendition of Little Orphan Annie’s “Tomorrow, tomorrow, the sun will come out tomorrow” but at a certain point the financial engineering runs out of time.

You see financial engineering can be a smart maneuver to stave of losses for short periods while the economic landscape corrects.  However, what we saw in ’08 was three years of financial engineering that began in ’05 run out of time because the economy never corrected.  Earnings growth through contraction is simply not sustainable.  Looking to the economic data over the past year we’ve seen a fairly steady deterioration that has become very apparent over the past 3 months. It doesn’t matter if you look at the consumer, the producer, the worker or the borrower, they are all getting sicker.

Now most of you younger fellas may not have heard of the word ‘sales’ but back in the day markets would look to sales to determine how a company was doing operationally.  The reason is because of the difficulty to engineer or fudge sales.  It’s not impossible but it is much more limited and complex than to do so with earnings.  And so the top line was a great litmus test.  Now they no longer say this word on the street because it conflicts with the cheerleading.  That is, revenues are actually lower today than they were in ’08.  Six years of 0% interest and $13T printed and nothing to show but very wealthy having reached the very very wealthy level.

Now one of the things that has always interested me about finance is how well financial algorithms mesh with physics algorithms.  And so the laws of physics seem to transfer well to the world of finance.  One of the laws of physics is the point of no return.  This is a point beyond which one’s course will continue because turning back is physically impossible.  Think about a plane on a runway.  Pilots must be aware of the point of no return during take off.  Meaning the point at which the pilot upon take off can no longer stop the plane and remain on the runway.  Once you’re past that point physical laws determine one’s course.  And just like a plane, when economic policy has been speeding down the runway it does us no good to recognize we have no wings once we are past that point of no return.  At that point a crash is imminent and all we can do is prepare to best withstand the inevitable chaos.

I am suggesting that we are in a wingless plane and we have now passed that point of no return.  I have been very vocal about the idea that our economic fate was set upon implementing the trickle down strategy of inflating stock prices to boost our economy.  It was clear to me such a strategy actually necessitated a contracting economy.  And the past 3 months of collapsing economic data is telling me the end is not only inevitable but near.  I want to play a little game.  I’m going to show you a chart and I want you to predict the forward direction of the line.

Right so you get the point, the continuous onslaught of horrible macro indicators that have been swarming us for the past three months are not just transitional transgressions as the cheerleaders would have us believe.  They are in fact telling us exactly what this chart is also screaming in our face; SIATHTF.  I don’t know if I can make this any more simple or apparent.

Over the past 30 years, anytime we have had a negative inflection in the path of capital goods new orders (ex def/ac) our economy has moved into recession and our equity markets have gotten slaughtered.  Well we’ve had three quarters of declining new capital goods orders since they peaked in March 2014.  And as such, we can be quite certain we are moving into recession and we can expect our equity markets to get slaughtered.  Those who believe the current significant deterioration in essentially every macro indictor since the beginning of the year is just a dip to be bought, are just plain fools.  Like a roller coaster we are over the hump and starting to pick up downhill speed.  Best hang on and get ready for the screams.  We just climbed the world’s tallest coaster and this is going to be one wild ride down.