Posts Tagged ‘liabilities’

DID THE CONSUMER EVER RECOVER FROM THE NASDAQ BUST?

Pragcap explains why the reflation fix cannot work in the long run and is nothing more than a kick-the-can solution to our economic woes (high unemployment, losses of houses, lack of money for retirement, too much debt, record numbers of people on food stamps, etc). – Ilene 

DID THE CONSUMER EVER RECOVER FROM THE NASDAQ BUST?

Courtesy of The Pragmatic Capitalist 

There are more than a handful of notable economists and investors who believe that the current credit crisis is really just an extension of a much larger bust that was set in motion more than a decade ago.  In essence, the 90′s created a mentality that everything was different.  American net worth exploded and the world appeared to be permanently altered for the better.  Specifically, assets to liabilities soared:

Then the Nasdaq bubble burst and the paper wealth went up in flames.  Alan Greenspan’s approach was simple.  If we could simply reflate the consumer balance sheet through asset reflation everything would be resolved.  So, the consumer was encouraged to continue taking on excess debt without the underlying income to sustain this debt.  In essence, Americans were trying to sustain the lifestyle that they had become accustomed to in the 90′s and the Federal Reserve and Treasury did everything in their power to maintain that lifestyle.

As the housing bubble grew Americans once again felt the invincibility of paper wealth.  Of course, just like the Nasdaq bubble none of this was actually supported by the underlying fundamentals.  And as the housing bubble wealth effect dissipated in 2005 so did the ability of the consumer to sustain its 25 year spending spree:

The surge in household wealth due to the double bubbles proved to be nothing more than paper gains that were not supported by the underlying fundamentals.  Assets were higher than they otherwise should have been.  It’s clear, in retrospect, that Americans never really recovered from the excesses of the 90′s.  The government’s response to this bubble era has done little to help create the foundation for a sustained recovery.

This past weekend, Brian Sack admitted that the Fed’s recovery plan is largely dependent on propping up asset prices that would “otherwise be lower.”  The U.S. government hopes they can reflate assets and sustain a supposedly capitalist market without having any losers. They just can’t come to grips with the fact that there are decades of…
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See, I told You So (Again): Corporate Balance Sheets

Essentially, the giant piles of cash on corporate balance sheets are offset by similarly large liabilities (but few are writing about that). – Ilene

See, I told You So (Again): Corporate Balance Sheets

Courtesy of Karl Denninger at The Market Ticker 

No, really?

BOSTON — You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they’ve paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.

It all sounds wonderful for investors and the U.S. economy. There’s just one problem: It’s a crock.

Yep.

Again, back to the charts:

See the blue section?  Yep.

$10.9 trillion, to be precise.

To be fair, it is down some from the peak, which was $11.16 trillion in Q4/2008.  But the recent low, that is $10.9 trillion recorded in Q4/2009, is now up by close to $300 billion.

So when you hear "record cash", you have to subtract back out the liabilities.  At least you do if you’re being honest, which none of the mainstream media clowns are.

Let’s look at this with a bit different perspective via charts:

There’s your "growth" in non-financial business credit. 

Now let’s compare against stock prices to see whether leverage is "reasonably reflected" in them….

 

Uhhhhh… that’s not so good…..

Specifically, notice that during the "climb out" from the 2002 dump leverage continually increased.  That is, while prices roughly doubled so did total outstanding business credit. The problem with this progression is that you only get benefit from that if you can profitably employ the credit you have out.

When equities dove then and only then did businesses cut back – and not much! And now, with the nice little rampjob from the lows, businesses have stopped de-leveraging.

Into excess capacity this is suicidal and is one of the (many) reasons that I say that equity valuations are dramatically unattractive at the present time. De-leveraging grossly compresses multiples, which serves to amplify the damage that comes from debt service that is required on non-productive borrowed funds.

"The street" talks about how "debt markets have pretty much returned to health" (other than securitized mortgages and similar things.) Sure they have – for the snakes on Wall Street, who are back to their asset-stripping and…
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Do sovereign debt ratios matter?

Do sovereign debt ratios matter?

Courtesy of Michael Pettis at China Financial Markets 

Flags flutter in front of the headquarters of Spain's largest savings bank La Caixa in Barcelona July 23, 2010. European Union bank stress tests due from regulators on Friday aim to bolster confidence in the sector by making clear which lenders are healthy and which need to raise capital. Tests on 91 financial institutions from 20 of the EU's 27 nations simulate worsened economic conditions including declines in the value of sovereign debt they hold. REUTERS/Albert Gea (SPAIN - Tags: BUSINESS IMAGES OF THE DAY)

In the past few weeks I have been getting a lot of questions about serial sovereign defaults and how to predict which countries will or won’t suspend debt payments or otherwise get into trouble.  The most common question is whether or not there is a threshold of debt (measured, say, against total GDP) above which we need to start worrying.

Perhaps because I started my career in 1987 trading defaulted and restructured bank loans during the LDC Crisis, I have spent the last 30 years as a finance history junky, obsessively reading everything I can about the history of financial markets, banking and sovereign debt crises, and international capital flows. My book, The Volatility Machine, published in 2002, examines the past 200 years of international financial crises in order to derive a theory of debt crisis using the work of Hyman Minsky and Charles Kindleberger.

No aspect of history seems to repeat itself quite as regularly as financial history.  The written history of financial crises dates back at least as far back as the reign of Tiberius, when we have very good accounts of Rome’s 33 AD real estate crisis.  No one reading about that particular crisis will find any of it strange or unfamiliar – least of all the 100-million-sesterces interest-free loan the emperor had to provide (without even having read Bagehot) in order to end the panic.

So although I am not smart enough to tell you who will or won’t default (I have my suspicions however), based on my historical reading and experiences, I think there are two statements that I can make with confidence.  First, we have only begun the period of sovereign default.

The major global adjustments haven’t yet taken place and until they do, we won’t have seen the full consequences of the global crisis, although already Monday’s New York Times had an article in which some commentators all but declared the European crisis yesterday’s news.

Just two months ago, Europe’s sovereign debt problems seemed grave enough to imperil the global economic recovery. Now, at least some investors are treating it as the crisis that wasn’t.

The article goes on to quote Jean-Claude Trichet sniffing over the “tendency among some investors and market participants to underestimate Europe’s ability to take bold decisions.”  Of course I’d be more impressed with…
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Tsunami of Red Ink – Global Look at National Debt and Who Owns US Debt

Tsunami of Red Ink – Global Look at National Debt and Who Owns US Debt

Courtesy of Mish 

The Chicago Tribune had an excellent set of charts this weekend in A Tsunami of Red Ink regarding US government debt and who owns it, and also a comparison of US debt to the national debt of other countries.

Debt as a Percentage of GDP

Comparison of US Debt to Other Countries

Click on the link at the top to see foreign holders of US debt country by country. The top three US debt holders are China, Japan, and Canada.

Some will not believe those figures on debt to GDP comparisons. I don’t either. For starters the numbers are from 2009.

The footnote also says, if intragovernmental debt is included the figure is 83%. That number is approximately correct in my opinion (as of 2009).

Some will want to count unfunded Social Security and Medicare liabilities out to 2050 or whatever. This is simply wrong. That would be like counting a car you intend to buy 3 years from now as part of your debt now.

Many things can happen between now and then.

  • You may buy a smaller car.
  • You may not buy the car at all, opting for public transportation.
  • When the time arrives, you may postpone buying a car for a couple more years.
  • You may save enough to pay for the car in cash so that you incur no debt.

Likewise, the plans for Social Security and Medicare might change. Costs may go up, or down. The plans may be scaled back by the next generation of US citizens who think our generation was the most greedy in history.

Things We Know

  • The current path and current plans are not sustainable.
  • The money has not been spent, yet.
  • Costs may go up or down.
  • Political promises can easily change.
  • Taxes may go up dramatically, to pay for the costs.

Mike "Mish" Shedlock

 


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Losing the Red Queen’s Race

Losing the Red Queen’s Race

Courtesy of Charles Hugh Smith, Of Two Minds

The Red Queen’s Race is an apt analogy for the meltdown in assets and debt now swamping the global economy. 

The Red Queen’s race refers to running very fast to stay in the same place. As asset values fall globally (except where massive government stimulus has pushed the day of reckoning forward a bit), debt holders are frantically paying down or writing down debt--running very fast--but finding themselves in the same place--zero equity--despite their prodigious efforts.

I’ve prepared a chart to illustrate The Red Queen’s Race in assets and debt:

Owning an asset as it catapults ever higher in a credit/asset bubble offers a fateful temptation to leverage that rising equity ("free money") or extract it to enjoy.Millions of speculators did so by borrowing against their stocks (margin accounts) and tens of millions did so by borrowing against their home equity via second mortgages or HELOCs (home equity lines of credit).

Alas, when the asset bubbles bursts, values quickly begin a long and painful retrace to pre-bubble valuations. In very short order, those who bought with high leverage or borrowed 90% of their equity find themselves underwater, owing more than the value of their asset/property.

Those with 80% of bubble-top value mortgages who cling to the hope of a rapid recovery in valuations soon find they too are underwater.

Lenders who thought they were "safe" extending 80%-of-value loans at the bubble top find their 1-2% reserves against losses are woefully inadequate as assets continue their ceaseless decline to rational valuations.

In a desperate attempt to stave off losing the Red Queen’s Race, The Federal Reserve essentially hands the banks billions in easy profits, loaning them unlimited funds at near-zero interest rates so they can "re-capitalize" by loaning their unlimited "free money" at higher rates of interest.

But even the incantations and legerdemaine of the Fed are no match for the inexorable punishment of running in place just to avoid falling behind; no matter how fast the Fed-induced profits flow, they cannot gain on the declining assets. Banks pocket billions yet their net equity remains far below zero.

At some point, the lender or owner tires of writing down or paying down debt to no avail, and they lose the Red Queen’s Race. Having lost, some lenders, owners and even governments (see Japan, Inc. for a…
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In The Year 3000: Predicting The Liability Side Of The Fed’s Balance Sheet

In The Year 3000: Predicting The Liability Side Of The Fed’s Balance Sheet

Courtesy of Tyler Durden

When it comes to the asset side of the Federal Reserve’s balance sheet, there are no secrets: with the winddown of the bulk of the Fed’s emergency liquidity programs by February 1, the majority of the Fed’s current $2.2 trillion in assets will continue being outright-held securities. And even as the emergency programs sunset, the quasi-permanent, QE remnants will be here to stay. What we know for certain is that the current $1.8 trillion in Treasuries and MBS will rise to at least $2.2 trillion, as the balance of QE round 1 is exhausted. Will this purchasing of outright securities end there? Hardly. As the Fed is the only market for MBS, and as the MBS market can not allow a dramatic rise in 30 year mortgage rates, which is precisely what will happen if the buyer of first resort disappears, we fully expect some form of QE to show up and grab the baton where QE 1.0 ends. In fact just today, Fed economist Wayne Passmore, under the aegis of Atlanta Fed president Dennis Lockhart, stated during the annual American Economic Association meeting that GSE ABS should have an outright explicit guarantee by the Federal Reserve. Forget about QE then – this would be an onboarding of over $6 trillion in various assets of dubious worth, which currently exist in the limbo of semi-Fed guaranteed securities, yet which have an implicit guarantee. Of course, should the broader Fed listen to young master Passmore, look for John Williams’ expectation of hyperinflation as soon as 2010 to be very promptly met. The danger of the Fed’s next unpredictable step is so great that it is even causing insomnia for none other than BlackRock big man Larry Fink, who asks rhetorically "Are they going to kill the housing market?" Well Larry, unless the Wall Street lobby hustles, and the Fed isn’t forced to print another cool trillion under the guise of Mutual Assured Destruction, they very well might.

So now that we (don’t) know about the assets, what about that much less discussed topic: the Fed’s liabilities?

As it stands now, and as we have often pointed out, the liabilities of the Federal Reserve are rather straightforward: the major items are currency in circulation (about a $800 billion, and excess…
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Daniel Amerman vs. Mish: Reflections on the Great Inflation/Deflation Debate

This debate – inflation vs. deflation – illustrates how important it is to agree on definitions first, in order to engage in a more productive exchange of ideas, second. – Ilene

Daniel Amerman vs. Mish: Reflections on the Great Inflation/Deflation Debate

Courtesy of Mish

Last week I was in an inflation vs. deflation debate on Financial Sense with Daniel Amerman. The debate was moderated by Jim Puplava. It is a credit to Jim that he is willing to entertain both sides of an argument even though he himself is an inflationist.

Amerman took the inflation side, and of course I took the deflation side.

One of the main rules of any debate is to agree on definitions. In this case, there was no agreement.

I believe inflation is an increase in money supply and credit while Amerman considers inflation to be a purchasing power phenomenon. This lead to different opinions as to whether or not we are in deflation.

Furthermore, as with any audio discussion, there was an inability to point to charts or written material to make a case.

Let’s now explore some of the issues that came up in the debate starting with Amerman’s post Puncturing Deflation Myths

Japan & “Where’s The Beef”?

As discussed in Part One, someone who had attended one of my inflation solutions workshops asked me to debate deflation theory with him. I said “fine” but with one condition: before I would debate theory, he needed to first provide a real word example of this problem actually having happened. Could he answer this simple, real world question:

Name an example of a modern, major nation where the domestic purchasing power (as measured by CPI) of its purely symbolic & independent currency uncontrollably grew in value at a rapid rate over a sustained period, despite the best efforts of the nation to stop this rapid deflation?

The problem with this line of reasoning is agreement on the definition. One could just as easily define inflation as the number of meteors visible to the naked eye at nightime and conclude inflation is a cyclical phenomena that peaks every August in conjunction with the annual Perseids Meteor Shower.

Amerman did not "puncture deflation myths" because there is no agreement that his definition is the correct one.

Interestingly, he does post this chart


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Zero Hedge

Stocks, Yuan Tumble As Trade-Talks Hit Snag

Courtesy of ZeroHedge View original post here.

Having ramped since the cash market open to run the stops over last week's highs, US equity markets are suddenly tumbling on reports that US-China trade talks have hit a snag over farm purchases...

China is also resisting US requests for tech-transfer curbs and any enforcement mechanism.

The market is not happy...

And the timing is perfect having run the stops and run out of squeeze ammo...

...



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The Technical Traders

Great Cycles Article PG 9 in TradersWorld Mag - Free

Courtesy of Technical Traders

  1. How to Use Price Cycles and Profit as a Swing Trader
  2. Geodetics and the Affairs of Men – USA, and China
  3. Cosmological Economics
  4. Time Machine
  5. Trading Means Pr...


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Phil's Favorites

Below-Average Bull Market

 

Below-Average Bull Market

Courtesy of 

My Chart o’ the Day comes from LPL’s Ryan Detrick, who notes that:

Many consider this bull market the greatest ever, given it has incredibly lasted more than 10 years. But in terms of magnitude, many would be surprised to hear that the 357% gain during this bull market is still beneath the record 417% gain seen during the 1990s.

This bull market also isn’t the strongest in history in terms of gains, even though it has lasted longer than any other bull market…On an annualized return basis, this bull market has gained 15.3%, which is actual...



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Digital Currencies

Is Bitcoin a Macro Asset?

 

Is Bitcoin a Macro Asset?

Courtesy of 

As part of Coindesk’s popup podcast series centered around today’s Invest conference, I answered a few questions for Nolan Bauerly about Bitcoin from a wealth management perspective. I decided in December of 2017 that investing directly into crypto currencies was unnecessary and not a good use of a portfolio’s allocation slots. I remain in this posture today but I am openminded about how this may change in the future.

You can listen to this short exchange below:

...



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Kimble Charting Solutions

Silver Testing This Support For The First Time In 8-Years!

Courtesy of Chris Kimble

Its been a good while since Silver bulls could say that it is testing support. Well, this week that can be said! Will this support test hold? Silver Bulls sure hope so!

This chart looks at Silver Futures over the past 10-years. Silver has spent the majority of the past 8-years inside of the pink shaded falling channel, as it has created lower highs and lower lows.

Silver broke above the top of this falling channel around 90-days ago at (1). It quickly rallied over 15%, before creating a large bearish reversal pattern, around 5-weeks after the bre...



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Insider Scoop

Analysts Upbeat On Skyworks' Fundamentals

Courtesy of Benzinga

Skyworks Solutions Inc (NASDAQ: SWKS) reported better-than-expected fiscal fourth-quarter earnings and revenues, but the stock is slipping in reaction to the year-over-year declines in both metrics.

The Analysts

Bank of America analyst Vivek Arya reiterated an Underperform rating and $92 price target for Skyworks shares. (See his track record ...



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Chart School

Gold Gann and Cycle Review

Courtesy of Read the Ticker

Gold has performed well, golden skies are here again. In fact it has been a straight line move, and this is typically unusual and a pause can be expected.

It seems the markets are happy again, new highs in the SP500, US 10 year interest rates look to re bound, negative interest may soften. The US FED has reversed their QT and now doing $250BN (not QE) repo. The main point is the FED has stopped QT, and will do QE forever. The evidence now is the FED put is under market risk and the possibility of excessive losses do not exist. 

Point: If in future if there is market risk, the FED will print it's way out of it.
Subject To: In this blog view. The above is so until the amount required rocks confidence in the US dollar as a reserve currency.&n...



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Lee's Free Thinking

Today's Fed POMO TOMO FOMC Alphabet Soup Unspin

Courtesy of Lee Adler

But make no mistake, if the Fed wants money rates to stay down by another quarter, it will need to imagineer even more money.

That’s on top of the $281 billion it has already imagineered into existence since addressing its “one-off” repo market emergency on September 17. This came via  “Temporary” Repo Man Operations money, and $70.6 billion in Permanent Open Market Operations (POMO) money.

By my calculations that averages out to $7.4 billion per business day. That works out to a monthly pace of $155 billion or so.

If they keep this up, it will be more than enough to absorb every penny of new Treasury supply. That supply had caused the system to run out of money in mid September.  This flood of paper had been inundati...



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Biotech

The Big Pharma Takeover of Medical Cannabis

Reminder: We are available to chat with Members, comments are found below each post.

 

The Big Pharma Takeover of Medical Cannabis

Courtesy of  , Visual Capitalist

The Big Pharma Takeover of Medical Cannabis

As evidence of cannabis’ many benefits mounts, so does the interest from the global pharmaceutical industry, known as Big Pharma. The entrance of such behemoths will radically transform the cannabis industry—once heavily stigmatized, it is now a potentially game-changing source of growth for countless co...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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Members' Corner

Despacito - How to Make Money the Old-Fashioned Way - SLOWLY!

Are you ready to retire?  

For most people, the purpose of investing is to build up enough wealth to allow you to retire.  In general, that's usually enough money to reliably generate a year's worth of your average income, each year into your retirement so that that, plus you Social Security, should be enough to pay your bills without having to draw down on your principle.

Unfortunately, as the last decade has shown us, we can't count on bonds to pay us more than 3% and the average return from the stock market over the past 20 years has been erratic - to say the least - with 4 negative years (2000, 2001, 2002 and 2008) and 14 positives, though mostly in the 10% range on the positives.  A string of losses like we had from 2000-02 could easily wipe out a decades worth of gains.

Still, the stock market has been better over the last 10 (7%) an...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

·       How 2017 Will Affect Oil, the US Dollar and the European Union

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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