Buckle Up!

This morning at breakfast our local CBS news radio station informed us that the drop in the market was far from over. When as mainstream an outlet as CBS radio shares bad news during a Dem regime, I tend to take it at face value. Later, when I sat down in front of the computer I came across this at Karl Denninger’s blog:

The Simple Facts On Equities And Debt

KD has been bearish for a long time, so there was no surprise in what he had to say—which isn’t much different than what you can get at a number of sites:

No, the market is nowhere near a "buying point" or "bottom."

In fact its probably overpriced at 50% of today's prices -- even with the dump so far.

Here's why.

Have a look at that chart.

Corporations basically never pay off debt; they always roll it over.  Since 1980, roughly, the cost of money has always been cheaper, so every time that bond comes due and has to be rolled over the amount of money you must pay in interest on the new one is less.

This in turn means the amount the corporation pays in interest goes down and that means "E", or earnings, go up.

But -- this cycle presumes that rates will never rise.

KD then goes on to provide some examples of what this could mean for our debt heavy economy “going forward”:

Take a firm that is regard as very well-managed -- Berkshire.  They have $119 billion in debt outstanding, and are certainly a AAA credit.  Let's assume that $119 billion currently carries a 2% coupon, so $2.38 billion in interest expense a year.  The firm's net income is $11.7 billion so what happens if the cost of carrying that debt doubles (say much less triples.)

That's a 20% whack off the earnings; if the cost triples its a massive 40%.

How does the "current" 58 P/E sound to you or even the so-called "forward projection" (commonly called a guess) if the earnings crash by nearly half?

That’s a hypothetical, but there are already very concrete examples out there. I’ve been hearing dire sounding things about FedEx for a few weeks, and those who follow such things—I’m not one of those people—will have taken note of news surrounding FedEx this morning:

As another example look at FedEx which reported last night.  Revenues largely met expectations but EPS missed by a third.  Where'd that come from?  Costs, obviously.  And, I might add, roll costs, that is, the spike higher in interest expense on outstanding debt are not yet showing up in any material size -- but they most-certainly will over coming quarters and years; it is unavoidable for anyone with outstanding paper.

PS: Given the quality of Berkshire's management and operational expertise what you're going to find in most other firms is worse -- and not a little worse either.  Buckle up.

There’s more at the link. The real point is expressed at FedEx's Troubles A Stark Symptom Of Tight Global Liquidity:

The delivery company is a bellwether for the economic outlook, and is highly sensitive to global monetary conditions. Such conditions have yet to improve while central banks around the world remain squarely focused on eradicating elevated inflation, pointing to more underperformance ahead for FedEx.

There’s plenty more bad economic news, and my intent is not to provide a digest, which is readily available elsewhere. Nevertheless, these stories caught my eye today—among many more:

"No Bailout Coming" - US Energy Producers Send Ominous Warning To Europe

The threat of power rationing across Europe persists even after EU officials held an emergency meeting last week to starve off the impending winter energy crisis. EU countries have increasingly relied on US energy imports, though shale bosses warned the ability to boost oil and gas supplies would be challenging. 

"It's not like the US can pump a bunch more. Our production is what it is," Wil VanLoh, head of private equity group Quantum Energy Partners, one of the shale's most prominent investors, told Financial Times. 

"There's no bailout coming," VanLoh added. 

"Not on the oil side, not on the gas side.

Europe can thank the Democrats and the Biden administration for their war against the US energy industry that led to massive divestments across the sector, which crippled oil production growth and refining capacity, and pressured/shamed the world into withdrawing any capital allocations to fossil fuels.

It was left to the CEO of Chevron to warn Americans that they won’t be getting a bailout, either—but maybe the thought that it’s worse in Europe will somehow make us feel … warmer?

Chevron CEO Warns Americans To Brace For Higher Natural Gas Prices This Winter

While Worth noted that the situation in the United States would not be as bad as it is in Europe, the CEO stated that natural gas prices could still be “significantly higher” this winter in the [US].

No word on energy prices in Russia, but Belarus’ Lukashenko is doing his bit for Europe (I’d never heard Byelorussian before, and was surprised at how much it sounded like Polish to me):

Angelo Giuliano 🇮🇹 🇨🇭/ living in 🇨🇳 @Angelo4justice3

huge trolling of Lukashenko cutting wood for Europe : "we won't let Europe freeze this winter"

And then there’s this. If you thought EV prices were high, guess what? They’re going higher:

Lithium Prices Hit New Record As EV Affordability Concerns Mount

While California banned the sale of new gas-powered cars by 2035, and the Biden administration unveiled $900 million in new funding to build electric vehicle charging stations, rising lithium prices could derail the EV revolution.

The progressive view is that EVs will save the planet from catching on fire because green vehicles would eliminate the harmful carbon emissions of fossil fuel vehicles. Though a widespread rollout of EVs depends on affordability, and EVs are way more expensive than gas-powered.

Bloomberg reported lithium carbonate, a key metal in EV batteries, hit a new record high in China this week. Per ton, prices jumped to 500,500 yuan ($71,315), more than triple the price versus last year.

I always like it when there are pictures to help me understand. This was helpful:

I’m sticking with my gas powered vehicles.

And, of course, nobody has yet figured out what to do with the highly toxic and/or non-biodegradable detritus of the “green revolution”: lithium batteries, solar panels, windmill blades, etc.