by David Stockman, David Stockman’s Contra Corner:
The posse of fools in the Eccles Building is so petrified of a stock market hissy fit that it has more or less created a Wall Street doomsday machine.
After trolling on the zero bound for 89 straight months now, the FOMC falsely believes that it has levitated the U.S. economy to the cusp of full-employment via massive liquidity and wealth effects pumping.
As a consequence, it refuses to let the market have breathing room for even a modest correction, insisting that just a few more months of this monetary lunacy will permit a return to some semblance of normalcy.
But it never gets there. The truth is, this so-called recovery cycle is now visibly dying of old age and being crushed by the headwinds of global deflation.
Rather than acknowledge that the jig is up, our feckless monetary politburo just equivocates, procrastinates and prevaricates about the monumental policy failure it has superintended.
So the casino punters just won’t go home. They hang around against all odds, failing to liquidate and thereby enabling the robo machines to engage in endless and pointless cycling between chart points. As shown in the graph below, this has been going on for nearly 600 days now.
But of late the churning has been occurring in an increasingly narrow channel. Accordingly, the spring is being coiled ever more tightly.
When this 83-month long simulacrum of a economic recovery finally rolls over into recession someday soon, therefore, the implosion will be thunderous. The robo-machines will chase the punters out the casino exits in an epic stampede of selling.
Indeed, given the headwinds emanating from all corners of the global economy and financial system it is hard to believe that any sentient carbon units actually participated in today’s 19th nervous short squeeze in as many weeks. Among other things, first quarter results have been fully posted and it turns out that the S&P 500 companies earned $87 per share during the last 12 months (LTM).
That’s down from the $99 per share LTM figure posted in Q1 last year and the peak of $106 per share recorded in the year ended in September 2014.
In short, reported GAAP earnings—–the honest kind companies report to the SEC on penalty of jail—— are now down 18% from their recent bubble cycle peak. But since the S&P 500 has remained within 3% of its May 2015 all-time high (2130), it means that the PE ratio has been rapidly inflating right into the teeth of falling profits and a rapidly cooling domestic and global economy.
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