American Healthcare – A Racket Of Rackets

Authored by James Howard Kunstler via Kunstler.com,

If you thought banking in our time was a miserable racket – which it is, of course, and by 'racket' I mean a criminal enterprisethen so-called health care has it beat by a country mile, with an added layer of sadism and cruelty built into its operations.

Lots of people willingly sign onto mortgages and car loans they wouldn’t qualify for in an ethically sound society, but the interest rates and payments are generally spelled out on paper. They know what they’re signing on for, even if the contract is reckless and stupid on the parts of both borrower and lender. Pension funds and insurance companies foolishly bought bundled mortgage bonds of this crap concocted in the housing bubble. They did it out of greed and desperation, but a little due diligence would have clued them into the fraud being served up by the likes of Goldman Sachs.

Medicine is utterly opaque cost-wise, and that is the heart of the issue. Nobody in the system will say what anything costs and nobody wants to because it would break the spell that they work in an honest, legit business. There is no rational scheme for the cost of any service from one “provider” to the next or even one patient to the next. Anyway, the costs are obscenely inflated and concealed in so many deliberately deceptive coding schemes that even actuaries and professors of economics are confounded by their bills. The services are provided when the customer is under the utmost duress, often life-threatening, and the outcome even in a successful recovery from illness is financial ruin that leaves a lot of people better off dead.

It is a hostage racket, in plain English, a disgrace to the profession that has adopted it, and an insult to the nation. All the idiotic negotiations in congress around the role of insurance companies are a grand dodge to avoid acknowledging the essential racketeering of the “providers” — doctors and hospitals. We are never going to reform it in its current incarnation. For all his personality deformities, President Trump is right in saying that ObamaCare is going to implode. It is only a carbuncle on the gangrenous body of the US medical establishment. The whole system will go down with it.

The New York Times departed from its usual obsessions with Russian turpitude and transgender life last week to publish a valuable briefing on this aspect of the health care racket: Those Indecipherable Medical Bills? They’re One Reason Health Care Costs So Much by Elisabeth Rosenthal. Much of this covers ground exposed in the now famous March 4, 2013 Time Magazine cover story (it took up the whole issue): Bitter Pill: Why Medical Bills Are Killing Us, by Steven Brill. The American public and its government have been adequately informed about the gross and lawless chiseling rampant in every quarter of medicine. The system is one of engineered criminality. It is inflicting ruin on millions. It is really a wonder that the public has not stormed the hospitals with pitchforks and flaming brands to string up that gang in the parking lots high above their Beemers and Lexuses.

There are only two plausible arcs to this story.

  • One is that the nation might face the facts and resort to the Single Payer system found in virtually every other nation that affects to be civilized. There is no other way to eliminate the deliberate racketeering.
  • The other outcome would be the inevitable collapse of the system and its eventual re-set to a much less complex, cash-on-the-barrelhead, local clinic-based model with far less heroic high-tech interventions available for the broad public, but much more affordable basic care.

Both outcomes would require jettisoning the immense overburden of administrative dross that clutters up the current model, with its absurd tug-of-war between the price-gouging hospital “Chargemaster” clerks and the sadistic insurance company monitors bent on denying treatment to their sick and hapless “customers” (hostages). Be warned: these represent tens of thousands of supposedly “good” jobs. Of course, they are “good” because they pay middle class wages, of which there are fewer and fewer elsewhere in the economy. But, they are well-paid because of the grotesquely profitable racket they serve. They’ve turned an entire generation of office workers into servants of criminal enterprise. Imagine the damage this does to the soul of our culture.

My suggestion for real reform of the medical racket looks to historical precedent:

In 1932 (before the election of FDR, by the way), the US Senate formed a commission to look into the causes of the 1929 Wall Street Crash and recommend corrections in banking regulation to obviate future episodes like it. It is known to history as the Pecora Commission, after its chief counsel Ferdinand Pecora, an assistant Manhattan DA, who performed gallantly in his role. The commission ran for two years. Its hearings led to prison terms for many bankers and ultimately to the Glass-Steagall Act of 1932, which kept banking relatively honest and stable until its nefarious repeal in 1999 under President Bill Clinton — which led rapidly to a new age of Wall Street malfeasance, still underway.

The US Senate needs to set up an equivalent of the Pecora Commission to thoroughly expose the cost racketeering in medicine, enable the prosecution of the people driving it, and propose a Single Payer remedy for flushing it away. The Department of Justice can certainly apply the RICO anti-racketeering statutes against the big health care conglomerates and their executives personally. I don’t know why it has not done so already — except for the obvious conclusion that our elected officials have been fully complicit in the medical rackets, which is surely the case of new Secretary of Health and Human Services, Tom Price, a former surgeon and congressman who trafficked in medical stocks during his years representing his suburban Atlanta district. A new commission could bypass this unprincipled clown altogether.

It is getting to the point where we have to ask ourselves if we are even capable of being a serious people anymore. Medicine is now a catastrophe every bit as pernicious as the illnesses it is supposed to treat, and a grave threat to a nation that we’re supposed to care about. What party, extant or waiting to be born, will get behind this cleanup operation?

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The First Quarter is in the Books: Here Are the Winners and Losers

Year to date, the Dow is higher by 4.8%, S&P 500 +6% and the fag-heavy Nasdaq +10%. The top 5 performing sectors were Home Improvement stores ($BLDR, $LL, $LOW, $HD), Nuclear ($URRE, $UUUU, $UEC, $URG), Aluminum ($AA, $CENX), Semi Equipment ($AEHR, $LPTH, $COHU, $BRKS) and Hospitals ($CYH, $JYNT, $SSY, $THC)

The losers were Department Stores ($BONT, $JCP, $KSS, $SHOS), Oil and Gas Drillers ($NADL, $PACD, $PES, $BBG), Apparel Stores ($SMRT, $SSI, $CBK, $ASNA), Home Furnishing ($TPX, $FLXS, $HOFT, $ETH), Pollution and Treatment Controls ($CECE, $ERII, $HCCI, $FTEK).

The great thing about Presidential elections is the predictability of the policies and how they might affect share prices.

Take, for example, $PRSC. This is literally a play on American welfare and entitlements.

The Providence Service Corporation, through its subsidiaries, provides critical healthcare and workforce development services in the United States and internationally. It operates through three segments: Non-Emergency Transportation Services (NET Services), Workforce Development Services (WD Services), and Health Assessment Services (HA Services). The NET Services segment offers covered healthcare related transportation services for individuals with limited mobility and/or people with financial resources that hinder them from accessing necessary healthcare and social services. The WD Services segment offers workforce development and offender rehabilitation services, including employment preparation and placement, apprenticeship and training, and other health related services comprising employee assistance programs for unemployed, disabled, and unskilled individuals, as well as individuals coping with medical illnesses. The HA Services segment provides care optimization and delivery solutions, including comprehensive health assessments, as well as in-home and community-based care management offerings. The company was founded in 1996 and is headquartered in Tucson, Arizona.

When Obama took office, the share price was under $2. By the end of his term, it was north of $50. I found the stock during Obama’s second term, when it was $15. Regrettably, I never held my position long enough to benefit from their growth.

On the currency side, Bitcoins rose by 10% and the Mexican peso by 10% — recovering some the losses it endured during the American elections.

Lumber is up 20%, Palladium +16% and Lead +16%, while Orange juice dropped by 20%, Natural Gas by 14% and Sugar by 14%.

Going forward, providing Trump isn’t impeached and removed from office, expect more of the same — bullish on infrastructure, commodities and nuclear, while bearish on retail, big pharma, and anything environmental.

Content originally generated at iBankCoin.com

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Goldman’s ‘Analyst Index’ Tumbles In March As ‘Soft’ Survey Data Rolls Over

Since the election, talking heads have crowed about improving economic data (macro- and micro-). However, what they have failed to mention is all of the improvements have been in 'soft' survey and sentiment data, not 'hard' economic figures; and now, judging from the plunge in Goldman Sachs Analyst Index, soft data is starting to lose faith rapidly.

The Goldman Sachs Analyst Index (GSAI) declined by 5.2pt to 51.5 in March, but remains above 50, a level we have found represents trend growth. Underlying components also edged lower, though the month-over-month decline in the headline index was primarily driven by declines in materials prices and sales and shipments indexes. Consistent with the February survey, analyst commentary remains optimistic about the pace of growth in business activity this year, but some sector analysts suggested a few potential headwinds remain.

We construct the headline GSAI using the following weights: 30% for new orders, 25% for sales/shipments, 20% for employment, 15% for materials prices, and 10% for inventories. These weights parallel the Institute for Supply Management’s pre-2008 practice, substituting our materials prices index for their supplier deliveries index. The GSAI includes service as well as manufacturing industries.

On balance, regional manufacturing and non-manufacturing surveys were softer in March.

The Philly Fed, Dallas Fed, and Empire State manufacturing surveys all declined after improvements in February.

Overall, survey or “soft” data have retraced a bit in March after increasing sharply over the prior few months, converging toward the trend in hard data that would suggest a more moderate pace of expansion.

The GSAI’s underlying components generally moved lower in March as well. The sales and shipments index declined by 7.6pt to 53.8, but still continues to indicate expansion. The exports component declined by 3.2pt to 58.3, following a 19.5pt gain in January. While the new orders index edged down by 2pt to 50.6, the inventories index weakened by a larger 7.1pt to 40.0.

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LIBOR Pains

Authored by Pater Tenebrarum via Acting-Man.com,

Wrong Focus

If one searches for news on LIBOR (=London Interbank Offered Rate, i.e., the rate at which banks lend dollars to each other in the euro-dollar market), they are currently dominated by Deutsche Bank getting slapped with a total fine of $775 million for the part it played in manipulating the benchmark rate in collusion with other banks (fine for one count of wire fraud: US$150 m.; additional shakedown by US Justice Department: US$625 m., the price tag for a deferred prosecution agreement).

 

Bad, but not deadly for the wobbling banking giant. There is a far more important fact to focus on though – namely what LIBOR has actually done lately. Let us take a look:

 

Since mid 2015, 3 month LIBOR has soared from a low of approx 22.5 basis points to its current level of 115 basis points – i.e., it is now more than 5 times higher than two years ago. The “ouch” is explained further below – click to enlarge.

 

The initial surge in LIBOR was due to a combination of the Fed finally hiking rates and new rules for US money market funds taking shape, which were rightly expected to starve European banks of a major source of dollar funding. The latter continued to affect the market throughout 2016, as US MM funds indeed shifted funds from CP issued by European banks to t-bills (this has incidentally also played a major role in boosting domestic US money supply last year).

Along with the surge in LIBOR we have seen a widening in the TED spread (the spread between 3M LIBOR and the t-bill discount rate). Normally this is a sign of increasing stress in the banking system, but we are not sure if that interpretation is currently applicable. The absolute size of the spread is still a far cry from what was seen during past crisis situations. The spread is also well off its 2016 spike high, which we take as an indication that the disruption caused by the retreat of US MM funds from funding European banks is abating.

 

TED spread: still high, but not as high as it was last year – click to enlarge.

 

So what is the problem? It is actually not the banking system that gives cause for immediate concern. One must keep in mind that risks in the financial system have shifted since the 2008 crisis. Eventually, these risks are still going to redound on the banking system, but it is so to speak one step removed from the currently ticking time bomb, rather than being right at its center.

 

The Nature of the Problem

As mentioned above, LIBOR is a benchmark reference rate (which explains why some banks were so eager to manipulate it). The pricing of all kinds of floating-rate debt is tied to it (corporate loans, mortgages, student loans, credit card debt, and assorted derivatives, such as currency and interest rate swaps, etc.). That has now become a problem. Before we get to that, here is some background information:

One of the components of the global debtberg that has grown at a particularly breath-taking pace in recent years is corporate debt. As we have often mentioned in these pages, we regard it as a major Achilles heel of the Bernanke echo bubble. It already looked dubious before the recent rise in rates (see “A Dangerous Boom in Unsound Corporate Debt”) and has kept growing since then.

We often post a chart that adds up outstanding corporate bonds and bank debt, but the chart actually shows less than half of total US corporate liabilities, which currently amount to more than $18 trillion. There are also the “forgotten” $3 trillion in off-balance sheet operating leases, which are currently only known to avid readers of footnotes found in earnings reports, as Bloomberg recently reported.

 

Debt of US non-financial corporations: total liabilities (blue line), outstanding bonds + bank debt (red line) and the Wilshire Total Market Index (black line) – the  Wilshire Index reflects the bubble in asset prices; these are prone to suffering a “reversal to the mean”. Debt levels will remain where they are when that happens, but the collateral backing a lot of debt will be perceived to be less valuable. There is a multi-layered feedback loop between asset prices and debt that has become quite important for the economy – click to enlarge.

 

There are several points worth noting in this context: 1. corporate debt relative to assets is back at a record high (last seen at the peak of the late 1990s mania); 2.  US corporations are spending far more than they are taking in, i.e., the sum of capex, investment, dividends and stock buybacks vastly exceeds their gross cash flows – the gap is in fact at a record high, above the previous record set in 2007. 3. the return on equity of US corporations is at a record low (yes, you read that right!).

Obviously, the gap between spending and cash flows is funded with debt, which in this context probably deserves to be called Ponzi debt. Not to forget, debt is an absolute figure. The same cannot be said of income or the value of assets, both of which are moving targets. Everything is fine as long as the latter are moving up – alas, it is in their nature to occasionally misbehave.

 

The gap between non-financial corporate spending on capex/ investment/ dividends and stock buybacks vs. gross cash flows is at a new record high. Such expressions of unbridled overconfidence are usually soon punished – click to enlarge.

 

The profitability of US companies is rather underwhelming at the current juncture. It is probably not really the best moment to load up on debt:

 

US corporate profitability produces a record as well, but the wrong kind – click to enlarge.

 

Coming LIBOR Pains

This brings us back to LIBOR. As mentioned above, the rate is used in pricing a lot of variable rate debt – and as it turns out, the 1% level represents a threshold that is actually rather important for corporate debt. As a recent Barron’s article informs us:

“The rate hasn’t climbed above 1% since prior to the financial crisis. Most corporate loans have so-called Libor floors, so the loans wouldn’t reset higher until the 1% mark had been breached. Now that it has, with each rate hike, companies will owe more on their loans. […] And there are a lot more very leveraged companies now than there were even a few years ago.

(emphasis added)

This is inter alia going to impact the leveraged loan market. In mid March Fitch weighed in on that particular problem:

“Subsequent rate hikes would expose leveraged loan issuers to reset risk that could pressure credit profiles and cash flow generation. This risk is most acute for deeply speculative-grade credits with large amounts of floating rate debt, already large interest burdens, and limited to negative free cash flow.

 

Near-term interest rate risk is most evident for leveraged issuers who took advantage of longstanding favorable market conditions to issue large amounts of floating-rate debt, but whose credit profiles deteriorated due to secular challenges or idiosyncratic issues that resulted in higher leverage, depressed cash flows and limited liquidity.”

(emphasis added)

We admire the agency’s ability to somehow still sound a hopeful note by stressing that only really bad companies facing “secular challenges” or “idiosyncratic issues” are going to be affected. Everybody else will be immune! Barron’s echoes this sentiment by pointing out that investors in these loans are actually going to enjoy an income bump – with a small, but not unimportant qualifier:

“Of course, investors who own corporate loans (whether in a fund, a business development company (BDC) or a collateralized loan obligation (CLO) can benefit from the higher interest payments — as long as the issuer can afford the rising cost.

(emphasis added)

Investors are actually quite likely to get burned down the road. In order to comply with new regulations, banks have shed a lot of risk-weighted assets, including their proprietary corporate bond trading portfolios. This has shifted a lot of risk to investors, who have loaded up on all sorts of risky debt in the incessant and frankly utterly absurd “hunt for yield” central banks have provoked with their ultra-loose monetary policy.

Of course, banks are lending a bunch of money to investors, which enables them to boost returns via leverage. Banks create CLOs, but are increasingly forced to shed them from their own books on regulatory grounds. Hedge funds have been offered generous incentives to invest in these instruments in order to keep CLO production going at rates the banks have become accustomed to. We mentioned this some time ago in “Embracing Leverage Again” – an excerpt from a WSJ article that appeared at the time provides interesting details:

Banks have offered to lend some investors as much as $9 for every dollar that the buyers invest in CLOs, say traders and strategists. Others are being offered $8 for every $2. An investor in a triple-A-rated CLO earning 1.50 percentage point over the London interbank offered rate—using 10% of his or her own money and paying 0.80 percentage point over Libor for the financing—could earn about 8% in a year.

 

That compares with annual interest rates near 2% on a standard triple-A CLO. Citigroup researchers in a mid-April note to clients predicted that the new source of financing could help drive up prices of triple-A-rated CLOs.”

(emphasis added)

The opportunity to make a paltry 8% per year on an investment that is leveraged 10:1 was apparently considered such a great deal that it was expected to trigger sufficient demand for these securities to drive up their prices – in spite of the fact that banks no doubt were and are producing them by the wagon-load. That is certainly testament to the insanity of the echo bubble. However, banks are lately becoming reluctant to boost their own lending to corporations further:

 

Corporate & Industrial loans, y/y growth rate. Growth in bank lending to companies has slowed from an interim peak of 13.30% in 2015 to 3.16% currently (“cold feet syndrome”). In the absence of QE, this slowdown in credit growth affects money supply growth, which in turn increases the probability that asset prices will fall – click to enlarge.

 

As an aside, since the next crisis is far more likely to be focused on corporate debt rather than mortgage debt, it is irrelevant that CLOs have held up better than CDOs during the GFC. Similarly, triple-A ratings of structured credit products can quickly become meaningless in a credit crisis. CLOs repackage junk and make it fit for top ratings by means of overcollateralization rather than the creation of tranches of different seniority, but ultimately this is exactly the same trap in different clothing.

 

Conclusion – A Bug Waiting for a Windshield

We don’t expect this first round of debt repricing to necessarily trigger a crisis – we don’t know what the threshold will be. We note though that demand for corporate debt and in particular junk debt has been enormous, and corporations have obviously sated it by producing more debt than ever before (with covenants becoming progressively less stringent). The liquidity of many of these debt instruments is a lot worse than it once was, as banks have vacated their previous role of market makers.

Both the companies most at risk (i.e., those mentioned by Fitch) and the most highly leveraged investors operate at the fringes of the system and occasional defaults are normally easily absorbed. Even an entire (and fairly sizable) sector getting into trouble is not necessarily a big deal as long as system-wide free liquidity remains plentiful, as was demonstrated by the energy sector’s woes in 2015. All of the above describes a latent risk, but one that keeps growing – a happy bug in search of a windshield, so to speak.

Is is also worth noting that the echo bubble doesn’t have a particular focus – it is diffuse in the sense that it has become a “bubble in everything”. This is inter alia illustrated by the median price-revenue ratio of the stocks in the S&P 500 Index shown by John Hussman not too long ago:

 

The “bubble in everything” – on a cap-weighted basis, the market was more overvalued at the peak in 2000, but from a more holistic perspective it has never been more overvalued than today – click to enlarge.

 

On the one hand this makes it difficult to pinpoint a likely trigger – in contrast to the situation prior to the GFC. At the time it was crystal clear that a crisis would most likely be centered on the housing sector and the financial engineering associated with it (OK, it wasn’t clear to Fed officials, politicians, regulators, most mainstream economist and most of Wall Street, but it was definitely clear to people in possession of a modicum of common sense).

On the other hand, an ominous implication of the diffuse nature of the bubble is that there will be “no place to hide” when the above-mentioned latent risks materialize. If the oil sector’s problems had emerged amid a lack of system-wide liquidity, they would likely have proved contagious. Rising interest rates and a slowdown in credit growth imply that this precondition is very likely to prevail when the next batch of problems shows up.

 

Bonus Chart: Rate Comparison

The chart below shows LIBOR, interest paid on bank reserves held at the Fed and the effective FF rate:

 

LIBOR (3M) – blue line, IOR – black line, FF rate – purple line. Payment of IOR is what makes it possible for the Fed to hike rates without selling the assets it has accumulated via QE. Allegedly there is a plan to “normalize” the balance sheet, but that would shrink the money supply unless commercial banks were to vastly expand credit at the same time (read: it’s not going to happen) – click to enlarge.

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Building a Wall on the Mexican Border Is a Bad Idea. Here’s Why. (New at Reason)

A wall Building a wall on the southern border is a bad idea legally, practically, morally, and economically.

In 2006, Congress enacted a law mandating that fencing be erected along much of the United States’ southern border. There are now over 600 miles of physical barriers, but only 36 of those miles have two layers, and the majority of the fence is made up of mere concrete posts that provide obstacles for vehicles but not pedestrians.

Despite the lackluster results, construction and maintenance far overshot the budget. Some $1.2 billion was allocated in ’06. By 2015, according to the government’s own statistics, we had managed to spend $7 billion on the project. That’s “more than $11.3 million per mile per decade,” writes David Bier in the cover story of the latest issue of Reason.

Bier will appear on C-SPAN Saturday morning at 8:30 a.m. to talk about his cover story and the reasons why the wall won’t work. Tune in!

Read on for a rundown of the many, many more reasons a barrier on the southern border is a bad idea.

View this article.

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Georgia Legislature Weakens Eminent Domain Protections

Lawmakers in Georgia voted Thursday to weaken the state’s protections against eminent domain, partially undoing reforms passed in the wake of the Kelo ruling and once again allowing governments in the state to seize private property for economic development purposes.

The bill cleared both the state House and state Senate on Thursday, the final day of the legislative session in Georgia. Gov. Nathan Deal has not indicated whether he will sign it.

The Atlanta Journal-Constitution reports that the bill had “powerful backers” who helped speed it through the state legislature, including local governments who want to use eminent domain to tackle supposedly “blighted” properties and the private developers who stand to gain from making it easier for those governments to do so.

“It’s good for government, but it’s bad for citizens in my judgment. End of story,” Charles Ruffin, an Atlanta-based attorney with experience in property law, told the Journal-Constitution.

In the 2005 Kelo v. New London case, the Supreme Court said the seizure of private property counted as a legitimate “public purpose” under the Fifth Amendment if the seizure was part of a redevelopment scheme intended to benefit the community and increase the tax base. In the wake of that ruling, many states approved limitations on how eminent domain could be used. Georgia’s reforms were some of the best in the country. Passed in 2006, the law tightened the definition of “blight”—importantly, it said property could not be deemed “blighted” for purely aesthetic reasons—and prevented the state from taking property for economic development reasons. Georgia voters later approved an amendment to the state constitution requiring a public vote by elected officials before eminent domain could be used.

The bill passed Thursday would reverse the prohibition on seizing property for economic development purposes and would shorten the amount of time a government must hold the property before selling it to private developers. If the bill gets a signature from Deal, governments in Georgia would have to hold seized property for only five years instead of 20 years, as is currently required.

That length of time serves as a deterrent to keep governments from trying to “flip” property to private developers using eminent domain, said Benita Dodd, vice president of the Georgia Public Policy Foundation, a free market think tank. It’s meant to stop governments from seizing private land for a supposedly “public use” like a road or pipeline project, only to turn around a few years later and sell the land to private developers.

“We can only hope that he would side with property owners and not with the governments,” Dodd told Reason.

Eminent domain remains a hot-button issue in Georgia, more than a decade after the post-Kelo reforms were enacted. A proposed pipeline through the eastern part of the state has been held up because eminent domain requests have been blocked by a state judge. Meanwhile, the Institute for Justice is involved in a case in Elberton, Georgia, where local officials are trying to use eminent domain to bulldoze an office building so a hotel can expand.

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“Manias, Panics And Crashes”: A Stunning Warning From Bank Of America

Bank of America’s Michael Hartnett is back with another controversial note overnight, reminding readers that “it ain’t a normal cycle” for one overarching reason: central banks.

As Hartnett explains, the catalyst for bull in equity and credit markets since 2009 was the “revolutionary monetary policy of central banks” who, since Lehman, “have cut rates 679 times and bought $14.2tn of financial assets.” And, once again, he warns that this central bank “liquidity supernova” is coming to an end, as is “the period of excess returns in equities and corporate bonds, as is the period of suppressed volatility.”

With an entire generation of traders having grown up “trading” in centrally-planned markets, few can make sense of the fundamentals that accompany the market. As a result, Harnett writes that “risk markets continue to climb a wall of worry, defying bearish structural trends in the financial industry, taunting skittish skeptics by paraphrasing Margaret Thatcher…”You turn if you want to. The market’s not for turning.”

Demonstrating how insane just the past year has been in markets, Hartnett reminds us that just eight months ago belief in debt deflation & secular stagnation induced lowest interest rates in 5000 years.

  • On July 11th 2016 Swiss government could have issued 50- year debt out to 2076 at a negative yield (of -0.035%)…
  • …and in 1989 the Imperial Palace in Tokyo worth more than all real estate in California…
  • …and in March’2000 the market cap of Yahoo was 25X greater than market cap of Chinese equity market (MSCI)…
  • …and in 2008 the combined assets of Iceland’s three biggest banks were 14 times the size of the nation’s GDP…
  • …all manias, all over now.

While the current mania almost ended in early 2016, it was once again China that was responsible for the latest leg higher:

  • The current rally was kick-started by China, commodities and credit (the “3C’s”) in February 2016: since then stocks are up 31%, commodities 27% and HY bonds 23%.
  • Watch the 3C’s…China, commodities, credit.
  • We believe commodity prices must rise to maintain equity outperformance versus bonds; BofAML forecast oil at $57/b in Q2. Note commodity/claims driver hooked lower last month or two.

And yet, this period of great confusion is slowly coming to an end: what happens next is split into two phases – the famous “Icarus Trade” popularized by Hartnett several months ago, which the BOFA strategist believes will send the S&P above 2,500 and the yield on the 30Y to 3.5%, before the next “Great Fall” trade emerges.

First, a look at the near-term forecast:

We believe we are closer to the highs than lows in risk markets. But tops are a process; lows are a moment. The hubris, monetary tightening and macro peak that normally ends a strong bull trend feels H2 not Q2. So our base case unchanged heading into spring:

  • Long stocks, commodities, US dollar; short bonds; we see double digit returns for Japan, Europe, UK stocks, oil in 2017, single digit returns for US stocks, commodities, US$ and EM, and low/negative returns for bonds
  • Q2 combo of bullish but light Positioning, fiscal Policy expectations, “hard” Profit data keeps our Icarus Trade targets alive…SPX 2500, GT30 3.5%, DXY 110

For those who wish to trade this last, marketwide blow-off top, Hartnett has several “favorite Q2 trades”: the US$, sterling, oil and banks.

We think Q2 driver will be stronger growth expectations; tactical contrarians would play via long US dollar, long sterling-short EM FX, long oil, long EAFE banks-short US tech.

 

The risk to our bullish Q2 call is the price action of 3C’s (China, commodities, credit) deteriorates and signals synchronized global Profit top, on back of PBoC tightening. Commodity prices must rise to maintain equity outperformance versus bonds: BofAML forecast oil @ $57/b in Q2. EPS resilience required for stocks to continue to outperform bonds.

Hartnett also presents “a nice Icarus stat”: “should the S&P500 exceed 2540 in conjunction with a 3% yield on the 10-year Treasury bond then US stocks will reach an all-time high versus US bonds, exceeding the prior tech bubble peak reached in March 2000”

Still, all great – if abnormal and fake – bull markets and manias come to an end eventually, and Hartnett warns that what follows the final, Q2 “Icarus” rally will be far less enjoyable, because that’s when the infamous “great fall” is set to take place.

Great Fall” potentially comes in H2 as hubris, synchronized monetary tightening, EPS peak coincide; buy long-dated puts in anticipation; we believe best time to sell would likely be after a pop induced by a US tax reform bill (March Fund Managers Survey showed only 10% of institutions expect US tax reform passed before summer recess).

And yes, the Fed will likely try to step in again with more rate cuts to prevent a crash, although this time it won’t work at least according to Hartnett, because after the “Great Fall” comes the Long View, which Bank of America describes simply as: Manias, Panics, Crashes

Longer-term, we continue to remind ourselves it’s not a normal cycle. “Normalization” from 5,000-year low in rates, 70-year low in G7 fiscal stimulus, 35-year high in US-German rate differential, all-time high US stocks vs. EAFE, 75-year low in bank stocks is unlikely to be peaceful.

  • Humiliation remains one of the best assets to buy.
  • In Feb 2009 the 10-year rolling return from US large-cap stocks humiliatingly dropped to -3.4%, lowest since 1930s.
  • Since then S&P 500 up from 676 to 2368; now second longest bull ever (longest ever if runs past August 22nd 2018), and becomes 3rd largest ever at 2467.

His conclusion is two fold.

On one hand, “our Longest Pictures argue for a treacherous period of potential manias, panics or crashes as policy makers try to normalize policy.

On the other, the response will be the same one we have said since day one will ultimately take place: runaway inflation as central banks literally throw everything at the next mega crash, or as Hartnett calls it, “further outperformance of inflation assets versus deflation assets.”

And this is how to trade it:

  • The beneficiaries of rising inflation and rates are many.
    • The long-run price relative of real assets (real estate, commodities, and collectibles) to financial assets (stocks and bonds) is at its lowest level since 1926.
    • Bull markets in real assets have coincided with war and fiscal stimulus programs in 1940s, rise of inflation in 1960s and 1970s, and 9/11 & China accession to WTO in the early years of this century.
    • Higher inflation and interest rates are consistent with real assets outperforming financial assets: since 1970, relative performance of real assets 83% correlated with inflation.

His best trade recommendation?

“Buy gold.”

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NBC Confirms Obama Administration Officials Saved Trump-Russia Probe Docs

Seemingly confirming the incriminating remarks from former Obama Deputy Assistant Secretary of Defense, Evelyn Farkas, on the mad scramble by the Obama administration to collect and preserve intelligence on alleged Russian election hacking before Obama left office, NBC News reports that a former Obama official admits they made a list of Russia probe documents to keep them safe.

While most of the mainstrem media has conveniently dismissed the remarks from Evenlyn Farkas that accidentally implicated the Obama White House in the surveillance of Trump's campaign staff:

The Trump folks, if they found out how we knew what we knew about the Trump staff dealing with Russians, that they would try to compromise those sources and methods, meaning we would not longer have access to that intelligence.

 

It seems now NBC News is confirming parts of her story…

Obama administration officials were so concerned about what would happen to key classified documents related to the Russia probe once President Trump took office that they created a list of document serial numbers to give to senior members of the Senate Intelligence Committee, a former Obama official told NBC News.

 

The official said that after the list of documents related to the probe into Russian interference in the U.S. election was created in early January, he hand-carried it to the committee members. The numbers themselves were not classified, said the official.

 

The purpose, said the official, was to make it "harder to bury" the information, "to share it with those on the Hill who could lawfully see the documents," and to make sure it could reside in an Intelligence committee safe, "not just at Langley [CIA hq]."

Furthermore, as we previously noted, Farkas effectively corroborated a New York Times article from early March which cited "Former American officials" as their anonymous source regarding efforts to leak this surveillance on the Trump team to Democrats across Washington DC.

I became very worried because not enough was coming out into the open and I knew that there was more. We have very good intelligence on Russia. So then I had talked to some of my former colleagues and I knew they were trying to also get information to the hill.

 

That's why you have the leaking.

In other words; the Obama administration was concerned about spoliation of evidence gathered through various "sources and methods" of surveillance, so a plan was hatched to leak this information to congress – also known as "The Hill."

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Disgraced Takes on Baylor’s Sports Corruption: New at Reason

'Disgraced'When a Baylor basketball player murdered another, the crime triggered a deluge of revelations about cars, cash, and other goodies provided to the school’s athletes by their coaches, under the table and massively in violation of NCAA rules. In an attempt to contain the damage, Baylor’s then-basketball coach Dave Bliss tried to frame the murdered player as a drug dealer whose sideline explained his lush lifestyle. When one of the assistant coaches took exception to the frame-up, Bliss threatened to fire him, which turned out to be a catastrophic misstep: The assistant began wearing a wire, and the resulting tapes sank not just Bliss but the entire basketball program.

The basketball scandal may get more attention with Showtime’s airing of Disgraced, a superb documentary that recounts the implosion of Baylor’s basketball program in damning detail.

At heart, the crisp and intense Disgraced is a true-crime documentary set against a backdrop of big-time college basketball. Better known as a bastion of Southern Baptist morality—dancing was banned on campus until 1996, and homosexuality was on its list of sexual misconduct as late as 2015—than as an athletic factory, Baylor decided in the late 1990s to end decades of basketball ineptitude. In 1999, ignoring hints that he’d flouted NCAA rules while coaching at nearby SMU, Baylor hired Bliss, who in a quarter of a century had amassed more than 450 wins in major-college basketball. Television critic Glenn Garvin describes what happened next.

View this article.

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Snyder Warns Of The Ticking Time Bomb That Could Wipe Out Virtually Every Pension Fund In America

Authored by Michael Snyder via The Economic Collapse blog,

Are millions of Americans about to see the big, juicy pensions that they were counting on to fund their golden years go up in flames in the biggest financial disaster in U.S. history? When Bloomberg published an editorial entitled “Pension Crisis Too Big for Markets to Ignore“, it simply confirmed what a lot of people already knew to be true.  Pension funds all over America are woefully underfunded, and they have been pouring mind boggling amounts of money into very risky investments such as Internet stocks and commercial mortgages.  Just like with subprime mortgages in 2008, this is a crisis that everyone can see coming well in advance, and yet nothing is being done about it.

On a day to day basis, Americans generally don’t think very much about pensions.  Most of those that have been promised pensions simply have faith that they will be there when they need them.

Unfortunately, the truth is that pension plans all over the country are severely underfunded, and this has already resulted in local fiascos such as the one that we just witnessed in Dallas.

But what happened in Dallas is just the very small tip of a very large iceberg.  According to Bloomberg, unfunded pension obligations on a national basis “have risen to $1.9 trillion from $292 billion since 2007″…

As was the case with the subprime crisis, the writing appears to be on the wall. And yet calamity has yet to strike. How so? Call it the triumvirate of conspirators – the actuaries, accountants and their accomplices in office. Throw in the law of big numbers, very big numbers, and you get to a disaster in a seemingly permanent state of making. Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007.

And of course that $1.9 trillion number is not actually the real number.

That same Bloomberg article goes on to admit that if honest math was being used that the real number would actually be closer to 6 trillion dollars…

So why not just flip the switch and require truth and honesty in public pension math? Too many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used. That would translate into much steeper funding requirements at a time when budgets are already severely constrained. Pockets of the country would face essential public service budgets being slashed to dangerous levels.

So where are all of these pensions eventually going to come up with 6 trillion dollars?

That is a very good question.

Ultimately, even if financial conditions stay as stable as they are right now, a whole lot of people are not going to get the money that they were promised.

But things will get really “interesting” if we see a major downturn in the financial markets.  According to Dave Kranzler, if the stock market were to fall by 10 percent or more and stay there for a number of months, that “would cause every single public pension fund to blow up”.  And Kranzler is also deeply concerned about the tremendous amount of exposure that these pension funds have to commercial mortgages…

Circling back to the mall/REIT ticking time-bomb, while the Fed can keep the stock market propped up as means of preventing an immediate nuclear melt-down in U.S. pensions (all of which are substantially “maxed-out” in their mandated equities allocation), the collapse of commercial mortgage-back securities (CMBS) will have the affect of launching a nuclear sub-missile directly into the side of the U.S. financial system.

 

The commercial mortgage market is about $3 trillion, of which about $1 trillion has been packaged into asset-backed securities and stuffed into yield-starved pension funds. Without a doubt, the same degree of fraud of has been used to concoct the various tranches in these CMBS trusts that was employed during the mid-2000’s mortgage/housing bubble, with full cooperation of the ratings agencies then and now. Just like in 2008, with the derivatives that have been layered into the mix, the embedded leverage in the commercial mortgage/CMBS/REIT model is the financial equivalent of the Fukushima nuclear power plant collapse.

I have previously talked about the ongoing retail apocalypse in the United States which threatens to make so many of these commercial mortgage securities go bad.  It is being projected that somewhere around 3,500 stores will close in the months ahead, and this is going to absolutely devastate mall owners.  In turn, it is inevitable that a lot of their debts will start to go bad, and pension funds will be hit extremely hard by this.

But the coming stock market crash is going to hit pension funds even harder.  Stocks are ridiculously overvalued right now, and if they simply return to “normal valuations”, pension funds are going to lose trillions of dollars.

We are talking about a financial tsunami that will be absolutely unprecedented in our history, and yet investors continue to act like the party can last forever.  In fact, we just learned that margin debt on Wall Street has just hit another brand new record high

The latest data from the New York Stock Exchange show margin debt, or cash borrowed to buy shares, hit a record $528.2 billion in February, up from its prior high of $513.3 billion in January.

Of course my regular readers already know that margin debt also shot up to dramatic peaks just before the last two stock market crashes as well

Prior periods when margin debt hit records occurred around stock market peaks, including 2000 when the dot-com stock boom went bust, and 2007 when stocks began to crater amid early signs of trouble in the housing market ahead of the 2008 financial crisis.

 

Margin debt jumped 22% from the end of 1999 before peaking in March 2000 at $278.5 billion, the same month stocks peaked. In 2007, margin debt shot up to $381.4 billion in July, three months before stocks topped.

We are perfectly primed for the greatest financial disaster in American history, and yet very few people are sounding the alarm.

This massive financial bubble is a ticking time bomb, and when it finally goes off it is going to wipe out virtually every pension fund in the United States.

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