by ilene - September 21st, 2016 9:54 pm
Courtesy of Joshua Brown, The Reformed Broker
This has been going on since before you were born, fam.
by ilene - September 21st, 2016 6:44 pm
Courtesy of John Mauldin
I’ve been saying for the past couple years that the next recession here in the US will probably be triggered by an external macro event or cascade of events, coming out of Europe or China. Today’s Outside the Box sharpens our focus on China, which had already got quite a lot sharper with Michael Pettis’s piece in Outside the Box on Sept. 2.
Today’s post comes from Ambrose Evans-Pritchard of the London Telegraph. He is commenting on the recently released quarterly report of the Bank for International Settlements (“the central banks’ bank”), in which the BIS repeats Pettis’s warning that China faces escalating risk of a major debt and banking crisis.
The BIS is also rightly concerned about spillover from China to the global economy. After noting that outstanding loans in China have reached $28 trillion – as much as the commercial banking loan books of the US and Japan combined – Ambrose adds, “The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP, and it is this that is keeping global regulators awake at night.”
Total Chinese debt reached 255% of GDP at the end of 2015, a jump of 107% in the past eight years – and still rising fast. Every year, China’s leadership promises to rein in debt growth, and every year the growth just keeps accelerating. That is because China’s GDP growth is fueled by debt, and that debt is becoming increasingly inefficient in producing GDP.
Does China still have the resources to deal with this issue? The answer is a qualified yes – but then there may not be the resources to deal with the other little items on China’s shopping list. The New Silk Road that China seems to be actually in the process of building is estimated to cost $1 trillion, and that’s without cost overruns. Plus, the Chinese leadership has promised massive spending on the interior part of the country to bring up the quality of people’s lives there.
by ilene - September 20th, 2016 2:07 pm
Courtesy of John Mauldin at Mauldin Economics
Yellen’s Jackson Hole speech was widely reported, so I’ll spare you the summary.
What wasn’t widely reported was her Footnote 8. Yellen cited approving a mathematical formula that could put interest rates on autopilot. The Fed hasn’t yet followed the rule, but its presence in Yellen’s paper suggests its use is on the table.
Footnote 8 lays the groundwork for negative rates
For Yellen to adopt any fixed rule would be a major strategy shift. She has declined to use the so-called “Taylor Rule” favored by some economists, claiming the Fed should be flexible but “data-dependent.”
The rule described in Yellen’s Footnote 8 uses variables like core PCE inflation, the Fed’s inflation target, and the unemployment rate to calculate an optimal Federal Funds rate target. If the Fed had been following the rule during the last recession, they would have dropped rates to -9%.
Yes, you read that right, -9%.
As a point of reference, the ECB right now is at -0.4%. Europe is now experiencing all kinds of bizarre consequences.
Yet, here’s our own Fed chair bringing up a method that would send rates far lower.
To be fair, Yellen didn’t say she endorses this idea or wants to adopt it. She concedes it would have been impossible to drop rates that far in 2008.
So why even bring it up?
A generous interpretation: Yellen wanted to demonstrate that the Fed’s control over interest rates has limits as a tool for stimulating economic growth. And in her speech, she does go on from there to talk about other policy tools.
Still, it was no accident that she mentioned the rule for autopilot rates. This was another in a series of small nods to the idea that negative rates might be appropriate in some situations.
The Fed’s muddled assumptions
The Yellen Fed’s mental status gets clearer every day. They think that their crazed ideas—ZIRP, QE, Operation Twist, and the rest—are what brought the economy back from the brink of collapse. Last December’s one-and-done rate hike was the victory lap. They think everything is fine now and
by ilene - September 19th, 2016 7:55 pm
Courtesy of Wade of Investing Caffeine
Financial analysts are constantly seeking the Holy Grail when it comes to financial metrics, and to some financial number crunchers, EBITDA (Earnings Before Interest Taxes Depreciation and Amortization – pronounced “eebit-dah”) fits the bill. On the flip side, Warren Buffett’s right hand man Charlie Munger advises investors to replace EBITDA with the words “bullsh*t earnings” every time you encounter this earnings metric. We’ll explore the good, bad, and ugly attributes of this somewhat controversial financial metric.
The Genesis of EBITDA
The origin of the EBITDA measure can be traced back many years, and rose in popularity during the technology boom of the 1990s. “New Economy” companies were producing very little income, so investment bankers became creative in how they defined profits. Under the guise of comparability, a company with debt (Company X) that was paying high interest expenses could not be compared on an operational profit basis with a closely related company that operated with NO debt (Company Z). In other words, two identical companies could be selling the same number of widgets at the same prices and have the same cost structure and operating income, but the company with debt on their balance sheet would have a different (lower) net income. The investment banker and company X’s answer to this apparent conundrum was to simply compare the operating earnings or EBIT (Earnings Before Interest and Taxes) of each company (X and Z), rather than the disparate net incomes.
The Advantages of EBITDA
Although there is no silver bullet metric in financial statement analysis, nevertheless there are numerous benefits to using EBITDA. Here are a few:
- Operational Comparability: As implied above, EBITDA allows comparability across a wide swath of companies. Accounting standards provide leniency in the application of financial statements, therefore using EBITDA allows apples-to-apples comparisons and relieves accounting discrepancies on items such as depreciation, tax rates, and financing choice.
- Cash Flow Proxy:Since the income statement traditionally is the financial statement of choice, EBITDA can be easily derived from this statement and provides a simple proxy for cash generation in the absence of other data.
by ilene - September 18th, 2016 8:28 pm
Courtesy of Lee Adler of the Wall Street Examiner
This report is a condensed version of the Macroliqudity Pro Trader European Banking Report, a service of the Wall Street Examiner Pro Trader.
ECB data on bank deposits for the Eurozone shows total bank deposits down sharply in July, breaking the uptrend in force since the low in 2014. That’s shocking considering that the ECB just boosted its money printing QE programs. Deposits should be rising steadily in concert with the amount of QE, not falling. But cash extinguishment and capital flight are increasing faster than the ECB can print.
We continue to see evidence that funds are fleeing the European banks for the relative “safety” of the US. My long running thesis that the US is and will be The Last Ponzi Game Standing is still well supported by the data. The looming problem is that all Ponzi schemes eventually collapse. The only question is the timing, which we deal with in other reports.
The charts below show that the European banking system is in a slow moving disaster. Only smoke, mirrors, and the unwarranted confidence of most Europeans in their banks and the ECB are keeping the system afloat.
The source of all European bank data in the charts that follow is the ECB Statistical Warehouse.
7/1/16 Money printing in the form of the ECB’s asset purchases should cause a euro for euro increase in deposits, but that has not occurred. Sorry to be repeating this, but it’s because a substantial portion of the ECB’s newly printed money flees the Eurozone to avoid the NIRP tax.
The problem grew worse in July when bank deposits in Europe actually contracted in spite of €70 billion per month in QE. Deposits contracted by €95 billion in July and are down by €112 billion since April. Over that span the ECB printed €284 billion. The net effect was that all of that, plus another €95 billion was either extinguished or fled the European banking system. Imagine that! €379 billion gone! Poof! You have to hand it to Super Mario. That is some disappearing act.
Bank deposits should increase euro for euro with the amount of ECB purchases. When the
by ilene - September 17th, 2016 1:30 pm
Courtesy of George Friedman of Mauldin Economics
Italy has been in a crisis for at least eight months, though mainstream media did not recognize it until July. This crisis has nothing to do with Brexit, although opponents of Brexit will claim it does. Even if Britain had voted to stay in the EU, the Italian crisis would still have been gathering speed.
The high level of non-performing loans (NPLs) has been a problem since before Brexit. It is clear that there is nothing in the Italian economy that can reduce them. Only a dramatic improvement in the economy would make it possible to repay these loans. And Europe’s economy cannot improve drastically enough to help. We have been in crisis for quite a while.
Banks were simply carrying loans as non-performing that were actually in default and discounting the NPLs rather than writing them off. But that only hid the obvious. As much as 17 percent of Italy’s loans will not be repaid. This will crush Italian banks' balance sheets. And this will not only be in Italy.
Italian loans are packaged and resold, and Italian banks take loans from other European banks. These banks in turn have borrowed against Italian debt. Since Italy is the fourth largest economy in Europe, this is the mother of all systemic threats.
Bail-Ins, Not Bail Outs
The only way to help is a government bailout. The problem is that Italy is not only part of the EU, but part of the eurozone. As such, its ability to print its way out of the crisis is limited. In addition, EU regulations make it difficult for governments to bail out banks.
The EU has a concept called a bail-in, which means the depositors and creditors to the bank will lose their money. This is what the EU imposed on Cyprus. In Cyprus, deposits greater than 100,000 euros ($111,000) were seized to cover Cypriot bank debts. While some was returned, most was not.
The bail-in is a formula for bank runs. The money seized in Cyprus came from retirement funds and payrolls. Rome wants to make sure depositors don’t lose their deposits. A run on the banks would guarantee a meltdown. A meltdown would topple the government and
by ilene - September 16th, 2016 9:50 pm
A new demographics study, posted on newgeography.com, found that more tax filers are fleeing the state of New York than any other state in the country. Frankly, we're shocked people wouldn't want to live in a state with the highest cost of living, highest home prices, highest state income tax rate and highest property tax rate…what about the cultural benefits? We guess the bankers and hedgies have finally figured out that they can conduct their business from pretty much any location with an internet connection and then visit New York when/if necessary. Per the same study, Illinois lost the second highest number of taxpayers and California was not far behind in third.
Does anyone think it's purely a coincidence that the darkest areas of the following maps seem to overlap and represent the states that people are fleeing at the highest rates? If so, we assume you probably also think it's a coincidence that those very same states have been Democratic strongholds for decades.
Source: Economic Policy Institute.
Actually, the Albany Times Union was able to find at least one person who thought that people were fleeing from NY for reasons other than oppressively high costs of living and burdensome tax rates. Ironically, that person was non other than Richard Azzopardi, of Governor Cuomo's office, who said:
"The fact is that under this administration, New York has a record number of private sector jobs, an unemployment number below the national average, and passed reforms that led to the lowest middle class taxes in 70 years, the lowest corporate tax rates since 1968 and the lowest manufacturing tax rate since 1917 and a property tax cap."
While we appreciate the data from Azzopardi, we're not sure that linking New York's excessive tax rates to its own historically higher excessive tax rates is the right comparison. Our guess is that your citizens (or ex-citizens) probably consider New York's current tax rates versus the current tax rates of other states as the more relevant comparison. But that's just a hunch.
by ilene - September 16th, 2016 4:50 pm
Courtesy of Lance Roberts of RealInvestmentAdvice.com
Ironically, last week I titled the reading list “Market Stasis” with respect to the 43-days of sideways market action with relatively minor price fluctuations. That publication marked the respective end of that complacency.
This past week has been anything but complacent as the volume in volatility trades have exploded simultaneously with wild swings in market price from spectacular declines to surging rebounds.
This corrective action, which I have warned about repeatedly over the last month (see here) may be different than the standard “buy the dip” correction. The market has already violated both initial supports (the bull trend line and previous highs) which brings into focus the bull trend support line from the February lows. A violation of the latter will likely see the markets retest the 2020 level on the S&P 500.
One thing the sell off this week showed investors is what happens when correlations across asset classes become extremely high. When the selling begins, there is no “safe place” to hide. As my partner, Michael Lebowitz, noted earlier this week:
“The truth of the matter is that blind diversification does not work simply because it does not take into account the effects of volatility on asset prices. Chris Cole from Artemis Capital, one of the clearest thinkers on the importance of volatility as an asset class, highlights this point in the following graphic.”
“Contrasting the perception of a well-diversified portfolio with the reality of embedded volatility, the graph reflects enormous concentration risk in short volatility. Importantly, this risk matters most at the exact point in time when one expects – hopes – their strategy of diversification will protect them. Unfortunately, the well-diversified portfolio (left side) turns into the short volatility-concentrated portfolio in periods of extreme market disruption. Mr. Cole’s analysis may be best summarized with the popular statement that correlations on many assets go to one during a crisis.”
Let’s put it this way. If you didn’t like what happened to your portfolio this week during a mere 3% decline from recent peaks, just imagine what you will be feeling when a correction of some magnitude eventually occurs.
by ilene - September 15th, 2016 8:18 pm
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by ilene - September 14th, 2016 8:07 pm
Courtesy of John Mauldin, Mauldin Economics
“You shall not crucify mankind upon a cross of gold.”
– William Jennings Bryan, July 9, 1896
“You shall not crucify the retiree and saver on a cross of negative rates.”
– John Mauldin, September 14, 2016
As is now the practice on many college campuses, I should preface this week’s newsletter with a trigger warning. What you are about to read could give you serious heartburn, especially if you are an economist or a central banker. Or a retiree or just someone who has lived life playing by the rules, and now you find yourself getting no return on your savings, forcing you to save even more and work even longer. Let me be careful to point out that I am not including all economists in my rather sweeping indictments. But if the shoe fits…
I also know that this special letter is a little longer than the average. But I think the topic requires a whole-cloth approach rather than yet another two- or three-part series.
Before we jump in, I want to note that economic chaos is not my only concern. We face a whole different kind of chaos on the geopolitical front. To a considerable degree it overlaps with the economic problems I’ll discuss today. George Friedman has been calling the Eurasian landmass a “cradle of disorder.” It’s home to 5 billion people, and it’s floundering in a sea of accelerating crises.
Regular readers know that George doesn’t exaggerate. He may be the most fact-driven person I’ve ever worked with. He looks at good evidence and draws sound conclusions. And right now he sees evidence in Eurasia that looks chillingly similar to what happened in the years leading up to World War II. I know that’s a strong statement. George doesn’t issue it lightly. He is genuinely concerned – and I am, too.