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So many bubbles were overinflated, and so many pointless bad behaviors and mal-investments underwritten, that the fallout will be incredibly widespread. Victims will show up everywhere, and the down-cycle will be all-encompassing.
The latest confirmation of my thesis comes from the Wall Street Journal today. The newspaper reports that the tech “unicorn” bubble I warned about last September is clearly popping, with funding of pie-in-the-sky companies plunging.
Specifically, U.S. startups attracted 25% less funding in the first quarter of the year as compared with the fourth quarter of 2015 – only $13.9 billion. That was the worst quarterly plunge since the dot-com bust. The number of deals concluded also tanked to a four-year low of 884.
What’s more, the median startup valuation collapsed to $18.5 million. That’s a stunning 70% collapse from the record high seen in the third quarter of 2015. Lastly, we didn’t see one single venture capital-backed technology company go public in the first quarter. That hasn’t happened in seven years.
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| Are we on the verge of increased layoffs and a flood of empty office space in key markets? |
What does this mean for investors like you? The economy as a whole? Well, think of all the layoffs we’re going to see (and are seeing already) around the San Francisco Bay area. The empty office space that is going to flood the market there. The slump in housing values, restaurant receipts, retail sales and more that will accompany plunging regional wealth.
Don’t live in Silicon Valley, or invest there? Well, it’s not like the bursting unicorn bubble is the only threat to the economy. The energy sector remains in disarray despite the recent bounce in prices. We’ve seen tens of thousands of layoffs there, and just this week, both oil driller Energy XXI (EXXI) and coal producer Peabody Energy (BTU) filed for bankruptcy.
[Read More – The Consequences of Reckless Lending – Mike Larson]
What about autos? Do you really think the major car and truck manufacturers will continue to churn out cars at the recent record pace with sales growth slumping and inventories ballooning? Nope. The credit-cycle turn will bite in that sector, too.
| “Do you really think the major car and truck manufacturers will continue to churn out cars at the recent record pace?” |
One example: Fiat Chrysler (FCAU) said earlier this month that it would lay off 1,300 workers at a plant that produces its Chrysler 200 midsize sedan. Another 120 jobs will vanish at a nearby stamping plant in Sterling Heights, Michigan.
See what I’m getting at? This credit-cycle turn isn’t going to affect just one or two sectors, or a handful of stocks. It’s going to drive activity throughout the capital markets and the economy. That’s why I urge you to watch “The Unseen Hand” as soon as possible, and act on the recommendations I share in it.
As always, I welcome your feedback and comments here at the website. So let me know what you think about the credit cycle, the death of technology unicorns, and the problems in autos and energy when you get a minute.
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Are top-rated stocks better than bottom-of-the-barrel ones? Is NIRP policy helping or hurting? What investing strategies work in today’s environment? Those were some of the questions you tackled online in the past couple of days.
Reader Jim said my colleague Mike Burnick’s data on outperformance by solid stocks is convincing to him. His take: “It makes me wonder why I have ever owned anything but ‘A’-rated stocks that pay dividends and grow their dividends.”
Reader Steve Z. added: “Interesting points – thanks! I’d be interested to see how the equity performance by S&P rating does over longer periods of time and in rising and falling markets, including the last two busts. Does lower risk lead to lower returns over the long term, as the outperformance occur during flights to safety?”
As for overall market direction, Reader Solly R. offered this perspective: “It appears to me, that investors have to adopt a ‘go with the flow’ attitude. Fundamentals, debt, politics, central bank policy, are all considerations of a logical person. But the market is NOT logical. Current investors are buying on dips and selling in rallies, and it’s working for now.”
Several of you also weighed in on negative interest rates. Reader Craig B. talked about one investment that should prosper in a time of cheaper-than-free money — gold. His take:
“Negative interest rates are possibly one reason why gold, silver, and precious mining stocks have done so well in 2016 thus far. There is no systemic risk, currency risk, or other concerns with gold or silver. Depending on where you store them, holding costs are negligible, as well. No negative interest rates with physical gold or silver, either.”
Reader Kent offered this cautionary take on NIRP: “I just re-read Jack London’s short story ‘To Build a Fire.’ I’ll use it for my university ESL class. As the man in the story tries to re-start a fire that got smothered because the first fire he built was in a dangerous place, his increasing panic only leads him to ever riskier actions. He finally runs wild, trying to stimulate his failing circulation. He stumbles and falls several times and then falls asleep. The man dies in a reverie about an ‘old-timer’s’ shrewd warnings.
“As quantitative easing has failed to stimulate the doomed central banks’ ill-advised journey, we now see the negative interest rates freezing what little capital life is left. Doubtless there will be an eventual fire. But it will burn the worthless paper that has been issued along with the many financial dreams of people who ignored old-timers.”
Reader Frebon also said central bank policy is hurting more than helping: “All these central bankers have great economic credentials but no common sense. The only thing that will boost the economy is demand, not stock buybacks or overseas investments.
“And the only class willing to create demand is the dwindling middle class who are reluctant to take risk and who can’t spend because they can’t get a return on a safe investment. Put money in their hands and demand will follow.”
[Read More – Yet ANOTHER Billionaire Warns About Coming Chaos – Mike Larson]
Those are some fantastic observations, and I happen to agree with them. There is no free lunch, and the policies put into place over the last several years created huge imbalances and mal-investment bubbles – bubbles that are starting to burst. If you haven’t seen my new documentary video, “The Unseen Hand,” I urge you to view it now for my description of what’s going on – and how you can profit in this environment.
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The great Chinese growth engine has ground to a halt, with GDP growth coming in at just 6.7% in the first quarter. That was down from 6.8% in the fourth quarter and the worst since the great global meltdown in 2009.
The problems? First, China’s economic data is cooked like a Christmas goose. So I’m sure that actual growth is far lower.
Second, an orgy of credit growth and government policy actions helped improve Chinese data for the month of March. But that kind of unsustainable, short-term borrowing and spending isn’t sustainable because it relies on old tricks like trying to re-inflate a bursting property bubble. So that calls into question all the “China growth proxy” rallies we’ve seen in various ETFs, stocks, and commodities.
The big Doha meeting of oil producers is right around the corner. Oil ministers and other functionaries are set to gather in the Qatari city on Sunday and discuss a production freeze.
But any freeze will just lock in near-record levels of production, ensuring a well-supplied market. Early reports suggest some ministers (like Iran’s) won’t even attend, and any deal will be so loosely worded that non-compliance and cheating will be huge ongoing problems. We will see.
The European Central Bank’s announcement that it would buy corporate debt, and the rally in oil in March, helped attract money to riskier bond funds and emerging market debt over the past few weeks. But global investors pulled money out of Japanese stock funds for the fifth straight week (the longest such streak since September 2012) and out of European funds for the tenth straight week (the longest losing streak since May 2013).
In other words, we’re seeing more evidence of “QF” – Quantitative Failure – around the world. All we can get are temporary, central bank “chasing” rallies in select assets, rather than coordinated, persistent, all-asset-market strength (not to mention actual growth in underlying economies, which is supposed to be the point of all this “foie gras” policy the first place).
Anything you want to add – on Chinese GDP, the weekend’s oil meeting, or central bank policy? Then make sure you weigh in over the weekend at the comment section.
Until next time,
Mike Larson
Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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The returns you cited in the “Invisible Hand” are enormous. Based on these results,one would assume that you followed your own advice and that your Net Worth is somewhere north of $50 Million. Would that assumption be accurate?
When the “invisible hand” stops playing with the government’s tinkering hand, and allows market interest rates to rise to assume their proper levels, according to risk…. we will all breathe easier.
Yes, surely some weak hands will be forced into bankruptcy, and either reorganize, or be liquidated. Such is the price for a “freer market.” As we all know, they are never “free” as tax policies vary, tariff policies vary, and currency values float daily.
Mr Larsen,what do you think ofPresident Obama’s new executive order to increase business competition.Sounds like a real yoke to must people;that really makes competition.Why don’t he start with the ACA Gary
Anecdotal evidence that a stock market downturn is definitely on the horizon:
I have an “on-line” trading account. I recently stopped by my e-broker’s local office. Usually, they are like a ghost town!! ….But this time, there were several other people/customers in the office. Everyone was adding money to their accounts. The lady in front of me, when it came her turn, told the representative that she was there “to fund her future!”
I thought “Yep…they’re buying into the ‘smooth sailing ahead’ line that’s being touted by all the talking heads on tv….must be time to sell!!”
Well you know the old saying buy low sell high!
There is a Chrysler 200? I’ve never seen one where I live in LA. No wonder they must fire people.
GM cranked out millions of overpriced monster SUVs prior to the 2008 crash. The Government bailed out GM and others in Detroit instead of letting them fail. If Obama hadn’t continued the Bush bailout, no labor votes for a second term for him. Has the auto industry or the Government learned anything? Nope.
That’s how second terms are bought and paid for.
The malinvestment economy is now exposed.. The real economy is a complete con game. The global decline is a welcome relief from inflated prices.
2 TSUNAMIS COMING!!
All FIAT CURRENCIES CRASH!–Weimar Republic Replay, WORLD-WIDE! & Stock Market Crash! SOON!
–6 Months or Less. (From, Fri. 4/15/16) The MOST IMPORTANT QUESTION!–Is NOT! “Are we ALONE?” The MOST IMPORTANT QUESTION IS ….. THIS: “What Profit to Gain the Whole-World, (or any smallest part) BUT! LOSE YOUR OWN Life!â€? NOTHING! NO PROFIT! Spinning-Wheels! Like a Chicken fried as an egg or fried as a Chicken–Doesn’t Matter—
NO FUTURE!!
The ANSWER?!
TELOMERASE!!
Predicted by the MOST FAMOUS JEW!–Fictional? or Factual? Nobody KNOWS! But he said: “In the World-to-Come=Future! the GOOD will be resurrected unto GOOD & PHYSICAL IMMORTALITY–EVERLASTING LIFE! There are ONLY 30,000 genes!! EVERYBODY IS/ …. WILL BE Resurrected-Cloned-Copied Sooner or Later! But, NOBODY Remembers a Past-Life! Because THERE IS NO IMMORTAL SOUL & NO Life-AFTER-Death! SO! YOU Gotta FIND TELOMERASE–“Tree-of-Life”–Physical-Immortality that the Most Famous Jew TAUGHT! OR! YOU NOTHING but a Soap-Bubble!—MACHINE! Ha!
http://www.how-to-get-everything.blogspot.com
Ha!, indeed!
We all know that the cost of actually living (food, clothing, fuel, utilities, housing, etc.), continues to rise, much faster than earnings do. That means there is less available for other things like travel, entertainment, luxuries and such (unless we can borrow it). Those are the things by which prosperity is measured, and our economy is NOT growing much, and could be starting to shrink, as people are more conscious of costs, and are trying to save a little here and there for the future. They know that there is no longer any certainty about jobs and income, and government benefits are not as certain as they were. People are more on their own, now.
Hi Chuck
Your talking common sense again your age is showing.
And here I thought the Unseen Hand resides in the Eccles Building. Shows how little I know!
I know conventional wisdom says the Doha meeting will be meaningless, but it may not be as simple as it seems. Producing full out, conventional production depletes at about six per cent a year, shale much more. The depleted oil is not being replaced. This will easily bring the market back into balance within a year. If they cut by a million and a half now, or even freeze, they probably get a twenty five to thirty five per cent increase in revenue quickly. So why wait a year for something that is going to happen anyway? It is also said a price increase would bring shale development back but a great deal of their past success was based on the safety of hedging which won’t be available. I don’t think they can recover at $50-60 and pay down their big debt load without the hedges. I’m could be wrong but it certainly makes sense to be a little more bullish at this point. Jim
Jim
Bullish on oil maybe the rest of the economy not so much. You made a good point on depletion which a lot of so called economists do not factor in. The low lying fruit has been picked as well. I also think and have expressed that the Chinese numbers have been cooked. Darth Vader with his smiling face is not to be trusted. Everything China does is for the motherland and no one else. Lie to me once shame on you lie to me twice shame on me.
And what makes you think anything the American government says is true?
Jim & Gordon:
When it comes to natural resources Australia is a good place to look if holding stocks longer rather than day trading; especially if you expect the USD to weaken as you then get some exchange rate leverage later when selling. There is an Ausie oil producer with zero debt with not long ago having cash amounting to 70% of capital. The price has gone up a bit of late so this may no longer be 70%. They are still drilling as well. If interested you can check out the AXE for information. Just thought you or others might be interested in something for longer term holding. Personally, the slot machine is not for me.
dear Mike ,
when will the Dow Jones crash to 14.000 ?
Whoever can help to make it crash in May or June 2016 ,
I will be his follower and subscriber .
I wish it crash immediately , the sooner the better .
I just can’t wait to see it happen . tq
Dear john,
This is not a “Dear John” letter; but 6,000 may be more like it for the DJI. But, maybe not before the elections; expect Obama to give Yellen strict instructions on that. It may require a counter punch below the waist to meet your June deadline. Just do not know who will be doing the kicking at this time, so stay tuned.
Will
We all look at China and believe the official growth figures of 6.8% or 6.5% or…. The truth of the matter is that when you have the government that China does, growth figures are a “command performance” number, which is far from the truth.
I have a business that manufactures in China, and therefore I have first hand experience of Chinese factories. And I can tell you that, at least in the electronics/appliance industry, most of the factories that I have visited within the past 6 months are running around 30% to capacity. And that is from over 100% a few years ago. So, you can draw your own conclusions.
Thanks Walter. That seems to confirm what Mearsk has been saying.
Will
Agreed. The world is slowing down. It is just difficult to see.
One more thing. Chinese are a superstitious lot. They believe in numerology, with numbers like 8 being extremely luck (infinity) and 4 being extremely unlucky (death). So, most hotels in China avoid 4th floors. And anyone that gets a new phone, always avoided phone numbers with 4’s, but is willing to pay money for 8’s.
So, I wonder what the China government is going to do when their growth comes down to 4%. Are they going to keep it at 5% or are they going to skip it and jump to 3%. Hmmm
You really seem down on China, but your colleague Larry Edelson (whose judgment I certainly respect) seems to think all is fine. What issue do you have with his perspective?
California raised its minimum wage to $15. The Los Angeles Times says it is already having an effect on the L.A. apparel industry. American Apparel, which employs some 4000 people in southern California says it is dropping some 500 people and moving work to other states with lower wages. Other manufacturers will, or already have moved work to Mexico and South America. One employer held up a dress and said if the cost of manufacture rose from $5 to $6.50, there goes his profit. He will go elsewhere. So much for politically dictated(!!) minimum wages. They kill jobs, and create discontent among workers who lose out. People who don’t work no longer contribute to the tax base, but I suppose the politicians figure they can make it up elsewhere. LOL!!
Just another “unseen hand”.
Never trust the government, NEVER. If their lips are moving, they are lying to you. Do you really think unemployment is 5%? Hardly, try 9 or 10% at best. Why are so many people on food stamps and government handouts? What about EBT cards etc. The government is hiding the truth. Inflation is rising but being lied about. Almost 20 Trillion in debt not to mention entitlements which peg us at over 100 Trillion in debt. We are headed for financial Armageddon. Maybe in the next 12 months or sooner. Depends on how long the government continues lying to themselves. The rest of us already know the facts.
As an elder retired man I have never seen so much debt. I agree with Robert as to how this will be a negative to out economy. It just depends when it will occur!
Yes. There is going to be a crash. But everybody seems to be forgetting that, in each and every case of a crash, things recover within a fairly short time. If your stops fail and you’re caught holding on to a declining asset, keep it. It’ll recover. Most people sell, at any price. And live to bitterly regret that panic. Finally – if you want to sleep soundly at night as you wait for Armageddon, buy precious metals, and do it now, while there’s still time. Nothing will protect you better. When every other asset in the financial world starts to collapse in price, it’ll already be too late. No one will want to sell you their precious metals holdings; and if they DO, it will be at a huge price and only if you can pay them in a currency that is solidly backed by gold.
Fiat/Chrysler layoffs a faulty comparison. If you dig a little deeper, Chrysler is re-tooling the plant to upgrade it to a different product focus. So yes those workers were sidelined but will probably be recalled after the construction revamp of the facility. The stamping plant feeds production to the assembly plant. Those jobs will return as well.
My concern is the product line of all USA manufactured vehicles. The current models are over designed with way too many modules and service manuals that are over 10,000 pages. They are building vehicles that even the dealer is unable to repair. These complex machines have limited durability because the market cannot possibly carry the parts necessary to service them mush out of warranty. Such as 3 or 4 mid year alternators. A parts supplier must carry 4 alternators for a single year and model. Use the wrong one and the ECM will never turn off the check engine light.
The American public is growing weary of having to shell out $300 for a dealer only key FOB. Run flat tires, if you have a flat, it is a $400 replacement cost. On and on.
Stupid and costly options that most working class folks don’t really want.
Slvoplait..monsieur.Mike.larso..j’ai.riene.comprit..tu..explique..en..langue..français..merci…de…trsfirer
Mon..misadisposion ..acete.cin..EB 23559…Casablanca.Maroc
Le..mantant.et..50000€.duré.72mois
Merci
Slvoplait..monsieur.Mike.larso..j’ai.riene.comprit..tu..explique..en..langue..français..merci…de…trsfirer
Mon..misadisposion ..acete.cin..EB 23559…Casablanca.Maroc
Le..mantant.et..50000€.duré.72mois
Merci