A brand new report from FX Research determined that for the first time, more scripted television shows were released by online streaming platforms like Amazon, Hulu, and Netflix in 2018 than aired on basic cable, pay cable and broadcast television.
In total, there were 495 scripted shows produced in 2018, and 160 of those or 33% debuted on streaming services, a monumental shift that has big cable worried, reported Variety.
For comparison, 146 shows or 29.5% aired on broadcast networks like ABC, CBS, and NBC, 144 shows or 29% aired on basic cable channels like Disney and MTV, and about 45 shows or 9% aired on pay cable like HBO and Showtime in 2018.
While many streaming platforms experienced a jump in output compared to last year, scripted shows on basic cable and broadcast television saw a rapid decline. Last year, basic cable controlled the largest percentage of scripted show market share, but those times have ended, as originals on streaming platforms are now dominant.
Streaming services last year produced 117 shows compared to 160 this year, a 37% jump in output that has outpaced all traditional broadcasting platforms. Streaming service has come a long way in the last seven years when there were only six streaming shows.
The total number of shows across all of television was up 1.6%, rising from 487 in 2017 to 495 this year. Year-to-year growth has plateaued in the last several years, as the television industry has now reached “peak TV.”
Networks like WGN America, MTV, and A&E are dropping scripted television, focusing instead on unscripted reality shows. Fox has also “geared down on its number of scripted originals, with the network having launched just three new shows this fall with two on deck for midseason,” said Variety.
FX CEO John Landgraf famously coined the term “peak TV” several years ago, referring to an overwhelming rise in the number of scripted shows being produced.
FX Research’s study shows that “peak TV” has been reached as the year-to-year growth rate in shows plateaued, but there is a silver lining when the global and US economy rolls over and thousands are laid off. The unemployed will be able to Netflix and chill with hundreds of shows.
The median retirement account balance among all working US adults is $0. This is true even for the cohort closest to retirement age, those 55-64 years old.
The average (i.e., mean) near-retirement individual has less than 8% of one year’s income saved in a retirement account
77% of all American households aren’t on track to have enough net worth to retire, even under the most conservative estimates.
There a number of causal factors that have contributed to this lack of retirement preparedness (decades of stagnant real wages, fast-rising cost of living, the Great Recession, etc), but as we explained in our report The Great Retirement Con, perhaps none has had more impact than the shift from dedicated-contribution pension plans to voluntary private savings:
The Origins Of The Retirement Plan
Back during the Revolutionary War, the Continental Congress promised a monthly lifetime income to soldiers who fought and survived the conflict. This guaranteed income stream, called a “pension”, was again offered to soldiers in the Civil War and every American war since.
Since then, similar pension promises funded from public coffers expanded to cover retirees from other branches of government. States and cities followed suit — extending pensions to all sorts of municipal workers ranging from policemen to politicians, teachers to trash collectors.
A pension is what’s referred to as a defined benefit plan. The payout promised a worker upon retirement is guaranteed up front according to a formula, typically dependent on salary size and years of employment.
Understandably, workers appreciated the security and dependability offered by pensions. So, as a means to attract skilled talent, the private sector started offering them, too.
The first corporate pension was offered by the American Express Company in 1875. By the 1960s, half of all employees in the private sector were covered by a pension plan.
Off-loading Of Retirement Risk By Corporations
Once pensions had become commonplace, they were much less effective as an incentive to lure top talent. They started to feel like burdensome cost centers to companies.
As America’s corporations grew and their veteran employees started hitting retirement age, the amount of funding required to meet current and future pension funding obligations became huge. And it kept growing. Remember, the Baby Boomer generation, the largest ever by far in US history, was just entering the workforce by the 1960s.
Companies were eager to get this expanding liability off of their backs. And the more poorly-capitalized firms started defaulting on their pensions, stiffing those who had loyally worked for them.
So, it’s little surprise that the 1970s and ’80s saw the introduction of personal retirement savings plans. The Individual Retirement Arrangement (IRA) was formed by the Employee Retirement Income Security Act (ERISA) in 1974. And the first 401k plan was created in 1980.
These savings vehicles are defined contribution plans. The future payout of the plan is variable (i.e., unknown today), and will be largely a function of how much of their income the worker directs into the fund over their career, as well as the market return on the fund’s investments.
Touted as a revolutionary improvement for the worker, these plans promised to give the individual power over his/her own financial destiny. No longer would it be dictated by their employer.
Your company doesn’t offer a pension? No worries: open an IRA and create your own personal pension fund.
Afraid your employer might mismanage your pension fund? A 401k removes that risk. You decide how your retirement money is invested.
Want to retire sooner? Just increase the percent of your annual income contributions.
All this sounded pretty good to workers. But it sounded GREAT to their employers.
Why? Because it transferred the burden of retirement funding away from the company and onto its employees. It allowed for the removal of a massive and fast-growing liability off of the corporate balance sheet, and materially improved the outlook for future earnings and cash flow.
As you would expect given this, corporate America moved swiftly over the next several decades to cap pension participation and transition to defined contribution plans.
The table below shows how vigorously pensions (green) have disappeared since the introduction of IRAs and 401ks (red):
So, to recap: 40 years ago, a grand experiment was embarked upon. One that promised US workers: Using these new defined contribution vehicles, you’ll be better off when you reach retirement age.
Which raises a simple but very important question: How have things worked out?
The Ugly Aftermath
America The Broke
Well, things haven’t worked out too well.
Four decades later, what we’re realizing is that this shift from dedicated-contribution pension plans to voluntary private savings was a grand experiment with no assurances. Corporations definitely benefited, as they could redeploy capital to expansion or bottom line profits. But employees? The data certainly seems to show that the experiment did not take human nature into account enough – specifically, the fact that just because people have the option to save money for later use doesn’t mean that they actually will.
And so we end up with the dismal retirement stats bulleted above.
The Income Haves & Have-Nots
In our recent report The Primacy Of Income, we summarized our years-long predictions of a coming painful market correction followed by a prolonged era of no capital gains across equities, bond and real estate.
Simply put: the ‘easy’ gains made over the past 8 years as the central banks did their utmost to inflate asset prices is over. Asset appreciation is going to be a lot harder to come by in the future.
Which makes income now the prime source of building — or simply just maintaining — wealth going forward.
That being the case, it’s obvious that those receiving a pension will be in far better shape than those who aren’t. They’ll have a guaranteed income stream to partially or fully fund their retirement.
Resentment Brewing
While the total number of people expecting a pension isn’t tiny, it’s certainly a minority of today’s workers.
31 million private-sector, state and local government workers in the US participate in a pension plan. 3.3 million currently-employed civilian Federal workers will receive a pension; as will some percentage of the 2 million people serving in the active military and reserves.
Combined, that’s about 25% of current US workers; roughly 13% of total US adults.
The danger here is of festering social discord. The majority, whom we already know will not be able to retire, will highly likely start regarding pensioners with envy and resentment.
“Hey, I worked as hard as Joe during my career. How come he gets to retire and I don’t?” will be a common narrative running in the minds of those jealous of their neighbors.
This bitterness will only increase as taxes continue to rise to fund government pension payouts, already a huge drain on public budgets. “Why am I paying more so Joe can relax on the beach??”
Humans are wired to react angrily to perceived injustice and unfairness. This short clip shows how it’s hard-coded into our primate brains:
So it’s not a stretch at all to predict the divisive tension and prejudice that will result from the growing gap between the pension haves and have-nots.
The negative stereotypes of union workers will be tightly re-embraced. This SNL sketch captures a good number of them:
The steady news reports of pension fraud and abuse will anger the majority further. Any projected decreases in Social Security (benefit payouts will only be 79 cents on the dollar by 2035 at our current trajectory) will only exacerbate the ire, as the small governmental income the have-nots receive becomes even more meager.
The growing potential here is for an emerging social schism, possibly accompanied with intimidation and violence, not dissimilar to that which has occurred along racial or religious lines during darker eras of our history.
As people become stressed, they react emotionally, and look for a culprit to blame. And as they become more desperate, as many elderly workers with no savings often do, they’ll resort to more desperate measures.
Broken Promises
And it’s not all sunshine and roses for the pensioners, either. Being promised a pension and actually receiving one are two very different things.
Underfunded pension liabilities are a massive ticking time bomb, certain to explode over the next few decades.
For example, many pensions offered through multi-employer plans are bad shape. The multiemployer branch of the Pension Benefit Guaranty Corporation, the federally-instated insurer behind private pensions, will be out of business by 2025 if no changes in law are made to help. If that happens, retirees in those plans will get only 10% of what they were promised.
Moreover, research conducted by the Pew Charitable Trusts shows a $1.4 trillion shortfall between state pension assets and guarantees to employees. There are only two ways a gap that big gets addressed: massive tax hikes or massive benefit cuts. The likeliest outcome will be a combination of both.
So, many of those today counting on a pension tomorrow may find themselves in a similar boat to their pension-less neighbors.
No Easy Systemic Solutions, So Act For Yourself
There’s no “fix” to the retirement predicament of the American workforce. There’s no policy change that can be made at this late date to reverse the decades of over-spending, over-indebtedness, and lack of saving.
All we can do at this time is influence how we take our licks. Do we simply leave the masses of unprepared workers to their sad fate? Or do we share the pain across the entire populace by funding new social support programs via more taxes?
Time will tell. But what we can bet on is tougher times ahead, especially for those with poor income prospects.
So the smart strategy for the prudent investor is to prioritize building a portfolio of income streams in order to have sufficient dependable income for a sustainable retirement. Or for simply remaining afloat financially.
Sadly, accustomed to the speculative approach marketed to us for so long by the financial industry, most investors are woefully under-educated in how to build a diversified portfolio of passive income streams (inflation-adjusting and tax-deferred whenever possible) over time.
Those looking to get up to speed can read our recent report A Primer On Investing For Inflation-Adjusting Income, where we detail out the wide range of prevalent (and not-so-prevalent) solutions for today’s investors to consider when designing an income-generating portfolio. From bonds, to dividends (common and preferred), to real estate, to royalties — we explain each vehicle, how it can be used, and what the major benefits and risks are.
And in the interim, make sure the wealth you have accumulated doesn’t disappear along with the bursting of the Everything Bubble. If you haven’t already read it yet, read our premium report from last week What To Do Now That ‘The Big One’ Is Here.
Grupo Aeromexico, an airline holding company, headquartered in Mexico City that owns and operates Aeromexico, is investigating a possible drone strike that severely damaged one of its Boeing 737 jetliners as the aircraft approached its final destination in Tijuana, Mexico, reported Bloomberg.
Several social media reports and local Mexican news media confirmed by Grupo Aeromexico that Flight 773 from Guadalajara was in final approach (also called the final leg and final approach leg) to the airport when the crew heard a “very strong blow” to the aircraft. The pilots were able to land without further incident, as no passengers were injured.
Desde Tijuana nos hacen llegar estas imágenes del Radomo de un B737 de Aeromexico en Tijuana.
Nuestra fuente indica que se trató de un impacto a un dron en la aproximación final. pic.twitter.com/YJhKVGKY4W
2018-12-12 Aeromexico B737-800 (XA-ADV) sustained damage to its radome on approach to runway 09 at Tijuana-Intl AP (MMTJ), Mexico. Flight #AM770 from Guadalajara landed safely. Unconfirmed reports indicate the aircraft may have hit a drone. https://t.co/L7aG5OlLDppic.twitter.com/g0Mfpw1po3
Local reports suggested that it was a drone that caused the terrifying impact and have provided numerous pictures of the badly damaged nosecone and radome of the aircraft.
“The exact cause is still being investigated,” Aeromexico said in a statement. “The aircraft landed normally and the passengers’ safety was never compromised.”
More photos have emerged on social media showing a large dent punched into the front of the plane.
Incidents involving planes and drones have become more common in the last several years as the number of consumer drones around the world has exploded.
Take, for example, the US, the Federal Aviation Administration (FAA) said drone registrations stood at the 670,000 in January 2017. Fast forward to 2018, and the latest figures show more than a million consumer drones have been registered.
With more consumer drones in the sky, there have been 6,000 drone sightings by pilots, some of them by airline crews, through June, according to FAA data.
So far, the US National Transportation Safety Board has investigated one confirmed midair collision involving a drone. An Army Sikorsky UH-60 Black Hawk helicopter collided with a consumer drone near Staten Island, New York, in September 2017, causing minor damage.
It is only a matter of time before a consumer drone strikes another passenger jet, not on the nosecone and radome, but rather a direct engine hit, which would be catastrophic.
As tech executives continue to be grilled in front of Congress, the growing Bernie Sanders-wing of the Democratic Party is preparing to push its misnamed “Medicare for All” into the political mainstream after its political gains in the midterms. While these two stories seem to have very little in common, it’s not difficult to imagine a not-so-distant future where the two are dangerously connected. After all, so long as the scope of government grows, the continued politicization of all aspects of life will follow – the inevitable consequences of which could be quite horrific.
The State’s Shadow over Silicon Valley
First let’s consider some of the overlooked causes behind the increased censorship from Silicon Valley.
While Republican politicians relish in collecting cheap soundbites railing against the censorship practices of widely despised tech executives, few are willing to point out the obvious influence of government in Big Tech’s growing hostility to free speech.
For example, just recently Facebook announced it was following the lead of Tumblr by cracking down on “sexualized content” on its platform. While both decisions were widely ridiculed by users and pundits alike, largely ignored was the role that recent Congressional laws aimed at cracking down on sex trafficking played in sparking the new policy. Similarly, “anti-hate speech” laws from Europe had very real consequences for American social media users as mechanisms designed to police speech oversees are inevitably used to manage content throughout their global communities.
While tech censorship began with isolated bans on individual social media platforms, it has evolved over time into a far more sinister crackdown of modern-day thought criminals. Alex Jones, for example, saw multiple social media accounts closed in a coordinated campaign earlier this year in what’s been likened to a modern version of Orwell’s “unpersoning.” Increasingly we are seeing financial services platforms, such as PayPal and Patreon, become another particularly effective form of censorship for those found guilty of violating the norms of political correctness.
The traditional libertarian response to these issues is to simply build another platform, but that seems increasingly impotent in the face of the union between Big Tech and state.
Of course the answer to this new era of Big Brother (Sister?) isn’t government regulation, as many on the populist right advocate. The history of government involvement in communication platforms has been one of increased censorship. Instead, the best way to confront the Silicon Valley’s censorship is to recognize the inherently perverse influence of government and pursue a separation of tech and state. For example, attack all forms of state privileges enjoyed by companies that don’t recognize freedom of speech: such as government contracts, and liability waivers. Additionally, allow private citizens to sue when companies violate their terms of service or mislabel themselves as “open platforms.”
Socialism and Political Correctness are a Dangerous Mix
Unfortunately instead of working to depoliticize tech, it’s far more likely that we will see increased politicization of other vital parts of American life – and perhaps none is more dangerous than that applied to healthcare.
While it is easy to mock the economic illiteracy of politicians like Alexandra Ocasio-Cortez, there is no question that her brand of democratic socialism is growing in popularity – and not just on the left. It’s worth remembering that only a few years ago candidate Donald Trump gave his own endorsement to a healthcare vision similar to that held by AOC and Bernie Sanders.
Consider the troubling potential of a progressive government that drops all pretense of valuing free speech, and then giving that government complete control of the healthcare system.
While this perhaps sounds like the makings of an outlandish dystopian novel, imagine the sort of policies we’ve already seen come from the executive branch. Under the Obama Administration, we saw the use of the IRS, Department of Homeland Security, and even intelligence agencies to target and punish political opponents. Meanwhile, the progressive left has increasingly identified those who believe the “wrong ideas” – such as skeptics of anthropogenic climate change – as dangerous threats guilty of the crimes equivalent to murder.
Now does this mean I think it’s likely that a President Ocasio-Cortez would instruct a “political death panel” to not provide Alex Jones with life saving treatment? Not necessarily. The issue, however, is that the greater control the state has on medicine, the more decisions are influenced by the concerns of government, rather than the needs of patients. In such a dark timeline, if socialized healthcare forced America to face the sort of medical rationing that Britain’s prized National Health Service has been reduced to, it would be fair to wonder if Gavin McInnes would receive the same sort of treatment as an Ezra Klein.
At the end of the day the more socialist a country is, the greater the danger in opposing the narrative of the state.
As Mises warned in Omnipotent Government:
Within a socialist community there is no room left for freedom…There can be neither freedom of conscience nor of speech where the government has the power to remove any opponent to a climate which is detrimental to his health.
Now obviously the US is far away from such a terrorizing future, and there are far more immediate threats than the specter of political death panels. Can we be so confident about China, with its new social credit system? Or even the UK with the previously mentioned stress placed on its health system, and its own growing political polarization? It’s fair to wonder.
No matter where you are in the world, the danger is the same. Grow the scope of government and expand the weapons of the state that can be deployed against its political enemies.
It’s Big Tech today. Let’s not allow it be healthcare in the future.
Bloomberg has obtained a new report that reveals the truth about money and relationships in the upper echelon of society.
When searching for a significant other, 56% of rich Americans want someone with wealth, versus 44% who want to be “head over heels” in love, according to 1,000 respondents surveyed by Bank of America Corp.’s Merrill Edge.
“There’s a level of realism” for couples who face economic uncertainty and a lack of financial planning, said Aron Levine, head of consumer banking and Merrill Edge, which offers online investing. “How do you keep the love of your life if you can’t pay for a vacation?” he told Bloomberg.
The survey showed respondents heavily scrutinized the finances of potential partners, as many did not actively discuss their financial situation including addressing debt loads, salary, investments and spending habits with significant others.
Additional findings in the report include:
Affluent Americans are willing to put aside an average of $18,000 a year on saving and investing, more than they want to spend on rent or mortgage payments, their children’s education or travel.
The majority of respondents has no monetary goal in mind for milestones such as getting married or having a baby.
Almost three-quarters of respondents expect to get their investment guidance primarily through digital channels within five years.
Bloomberg notes the survey was conducted from Sept. 27 to Oct. 13, were mainly millennials (18 to 40 years old) with investable assets of $50,000 to $250,000, or investable assets of $20,000 to $50,000 and an annual income of at least $50,000. For those older than 40, respondents had investable assets of $50,000 to $250,000.
For the 44 million Americans (mostly millennials) that have student loan debt and face a future of economic uncertainties, it seems that the longstanding institution of marriage could become a thing of the past, all because money talks — especially in relationships.
This is my last note of the year and it deals with house prices into the next cycle.
There are numerous similarities between the Bubble 1.0 era and the past several years. This essay reviews Bubble 1.0 and the present and draws on key parallels that drove house prices that few ever point out (i.e., this time demand wasn’t a feature of surging house prices; this time houses have been a forced savings account, which are key differentiators).
Even if house prices in the CS 20 drop 10% to 20%, I am not sure what that means in the context of record untapped home equity (as opposed to last bubble when everybody could extract every dollar of equity all the way up), a solid employment and wage backdrop, rates that have likely topped and technology that will blow open the buy-box in the next couple of years to include those 10s of millions with irregular income or artificially low credit scores.
I do, however, have a better idea on what this means to pure-play housing, finance, related-retail, appliance, etc, which I will be focusing on in 2019 along with my favorite tech, fintech and advanced credit companies aiming to add liquidity to the housing market and dive into Opportunity Zone ideas.
There are some great trades to be had.
Mark
* * *
The “Mortgage Loan House Price Governor” has been strapped on again.
The common thesis is that “it’s different this time”; house prices are largely protected from a sharp downturn like from 2008 to 2010 because post-crash lending has been conservative, buyers didn’t get over their ski’s, employment is strong, home-equity is at record highs and there have no exotic loans originated than can blow-up borrowers.
While all that may be true and sensical, end-users getting mortgages to buy their shelter homes aren’t the ones who provided most of the energy that pushed house prices past peak-2007 bubble levels in key regions from coast to coast.
I operate on the thesis that house prices will always gravitate to “end-user, mortgage-needing, shelter buyer” cohort affordability – based on ‘local’ employment, income & credit fundamentals and market rates – using a typical 30-yr mortgage & minimal down payment.
At times prices can detach from these fundamentals like from 2002-07 when “unorthodox demand using unorthodox capital & credit” became the main driver. But, they always reattach over time.
Case in point when all the high-leverage loan programs went away at the exact same time in 2007-08 and prices reattached to end-user fundamentals and traditional 30-year fixed-rate loans, which resulted in a 30%+ price drop.
But the 2011 to 2016 era wasn’t dissimilar from the 2002-2007 bubble. That is, “unorthodox demand using unorthodox capital & credit” became the main driver of demand and house prices…all those buy-to-rent, flip and floppers; institutions; foreign lock boxes; money laundering schemes; and EB5’s.
And based on the historical divergence between end-user affordability and house prices in top metros in the nation today house prices could fall at least 30% and only be fairly-valued. I have plenty of local level data & models proving this.
Unless rates fall/incomes rise sharply; the mortgage sector introduces higher leverage programs; unorthodox demand rushes back; or the sector evolves intelligently to include 10s of millions of prime-risk credits left out of the prohibitive FICO/DTI based credit boxes (this IS coming, but it might not be soon enough) my thesis will be tested soon.
The “Mortgage Loan House Price Governor”
1) In a normal housing market — ~ 80% of all purchases to end-users most using “full-doc” mortgage loans — prices are solidly rooted to end-user economic fundamentals. That is, the mortgage loan with its LTV and DTI guidelines is the “house-price governor”; it’s virtually impossible for house prices to detach from local economic employment and income fundamentals unless credit goes haywire. Sure, there have exceptions to this over the decades. But, overall housing has been a pretty simple asset class that for decades leading into the change of the millennium remained mostly in-check to fundamentals and a great inflation hedge.
2) Enter 2003 to 2007, when the “mortgage-loan, house-price governor” – a term I coined — was removed by the introduction and wide acceptance of exotic loans; i.e., stated-income for wage earners, interest only, pay-option arms, etc. Through the power of high-leverage lending the ‘incremental buyer’ always earned $200k a year and had a million dollars in the bank when it came to qualifying for a loan to buy a house…credit went ‘haywire’. This allowed house prices to completely detach from end-user fundamentals.
In 2008, when the mortgage loan governor was strapped back on – due to the sudden loss of all the exotic loans over a short period of time — house prices quickly “reset to end-user, employment and income fundamentals”. House prices stopped plunging in 2010, as affordability using new-era 30-year fixed rate, fully-documented loans recoupled with real income and asset levels.
This “bottom” should have set the stage for housing to once again be rooted to fundamentals / governed by contemporary mortgage lending guidelines.
But, that didn’t happen.
3) Enter the mortgage mod craze. Millions of the worst mortgage offenders and house over-spenders were bailed-out through Government and bank sponsored 2% interest-only mortgage mods, so exotic they would have made Lehman and Bear blush.
Instead of these homeowners experiencing foreclosure, renting, replenishing savings and becoming de-levered, credit-worthy boomerang buyers down the road several years, they got to squat in their own home at 2% interest only for five years before their rates started adjusted higher, squeezing them all over again. In fact, mod annual rate increases began in earnest in 2016 and are still occurring every year.
4) Don’t forget in places like the Bay Area how tech companies with double-decker busses have been exporting high Bay Area incomes to adjacent counties an hour or two away where the native population makes half as much. This artificially pushes prices up in the metro periphery, forces out legacy owners and is an implosion waiting to happen in the next employment cycle downturn because the local economies don’t support house prices 50% higher than local employment and income fundamentals.
5) But, overshadowing all this, from 2010 to 2016, the “all-cash”, new-era “spec-vestor” phenomena developed, which in my eyes was a repeat of the 2003 to 2007 exotic loan era in the effect it had on house prices. That’s because the incremental (almost majority) all-cash buyers work without a ‘house price governor’, instead base their purchase and pricing decisions on individual, random, emotional, uneducated, criminal or hopeful models or guesses.
Some bought for rental income, some for appreciation, others to flip, flop, hide money from foreign governments, or to simply beat the yield of a 2% 10-year Treasury. In any case, without a mortgage loan governor the “price” they pay for a house is often subjective vs objective.
Most analysts disregard the all-cash investor demand and supply cohort because they look at companies like Blackstone and Starwood and say, “these institutions only own 500k houses, not enough to make a difference”.
But what they fail to take into consideration is that those 500k houses are highly concentrated within eight to ten major metros. Furthermore, all of the other spec-vestor cohorts – like small two to ten house independent speculators – out purchased institutions by ten-fold from 2011 to 2016. In fact, there have been over six million single family homes taken out of the end-user owner category and turned into rentals, thus the “lack of supply” screed, artificial as it may be, everybody repeated for years.
In the “all-cash”, “spec-vestor” segment, it was very easy to overpay for a house by 20% or 30% in the heat of the deal and when competing against a dozen other all-cash buyers. This is impossible if end-users, mortgage loans and appraisals are required because when end-users overpay, or bid higher than the appraised value, they must come up with the difference in cash, which few have.
As the bubble blew in key markets around the nation and prices become ever further detached from end-user fundamentals there were always greater fools that chased the market keeping it elevated for a period. But, outside of the all-cash cohort the number is finite.
Some will say “all-cash buyers for rentals are rooted to fundamentals…that’s rents”. I say “hogwash”. I have seen many of the single-family rental assumption models from some of the largest investors, and they are beyond rosy. I can easily change two numbers and turn their 6% cap rate into an 6% loss.
Bottom line: It was very easy for demand cohorts – as large as this era’s all-cash insti, private and foreign segments – to push national house prices well above what the average end-user can pay.
And that’s exactly what happened from 2011-16 and why in leading indicating regions from coast to coast in which new-era investors flocked first, demand is plunging and supply surging against a backdrop of rising rates. Just like in 2006/7.
If history rhymes at all, house prices have already gapped down — the lagging indices just haven’t printed it yet — and house prices are more vulnerable than most think.
“We don’t want the Americans. It’s occupation” — a Syrian resident in US-controlled Raqqa told Stars and Stripes military newspaper. This as the Washington Post noted this week that “U.S. troops will now stay in Syria indefinitely, controlling a third of the country and facing peril on many fronts.”
US forces in Syria, via ABC News
Like the “forever war” in Afghanistan, will we be having the same discussion over the indefinite occupation of Syria stretching two decades from now? A new unusually frank assessment in Stars and Stripes bluntly lays out the basic facts concerning the White House decision to “stay the course” until the war’s close:
That decision puts U.S. troops in overall control, perhaps indefinitely, of an area comprising nearly a third of Syria, a vast expanse of mostly desert terrain roughly the size of Louisiana.
The Pentagon does not say how many troops are there. Officially, they number 503, but earlier this year an official let slip that the true number may be closer to 4,000.
A prior New Yorkerpiece described the US-occupied area east of the Euphrates as “an area about the size of Croatia.” With no Congressional vote, no public debate, and not even so much as an official presidential address to the nation, the United States is settling in for another endless occupation of sovereign foreign soil while relying on the now very familiar post-911 AUMF fig leaf of “legality”.
Like the American public and even some Pentagon officials of late have been pointing out for years regarding Afghanistan, do US forces on the ground even know what the mission is? The mission may be undefined and remain ambiguously to “counter Iran”, yet the dangers and potential for major loss in blood and treasure loom larger than ever.
According to Stars and Stripes the dangerous cross-section of powder keg conflicts and geopolitical players means “a new war” is on the horizon:
The new mission raises new questions, about the role they will play and whether their presence will risk becoming a magnet for regional conflict and insurgency.
The area is surrounded by powers hostile both to the U.S. presence and the aspirations of the Kurds, who are governing the majority-Arab area in pursuit of a leftist ideology formulated by an imprisoned Turkish Kurdish leader. Signs that the Islamic State is starting to regroup and rumblings of discontent within the Arab community point to the threat of an insurgency.
Without the presence of U.S. troops, these dangers would almost certainly ignite a new war right away, said Ilham Ahmed, a senior official with the Self-Administration of North and East Syria, as the self-styled government of the area is called.
“They have to stay. If they leave and there isn’t a solution for Syria, it will be catastrophic,” she said.
But staying also heralds risk, and already the challenges are starting to mount.
So a US-backed local politician says the US can’t leave or there will be war, while American defense officials simultaneously recognize they are occupying the very center of an impending insurgency from hell— all of which fits the textbook definition of quagmire perfectly.
The New Yorker: “The United States has built a dozen or more bases from Manbij to Al-Hasakah, including four airfields, and American-backed forces now control all of Syria east of the Euphrates, an area about the size of Croatia.”
But in September the White House announced a realignment of its official priorities in Syria, namely to act “as a bulwark against Iran’s expanding influence.” This means the continued potential and likelihood of war with Syria, Iran, and Russia in the region is ever present, per Stripes:
Syrian government troops and Iranian proxy fighters are to the south and west. They have threatened to take the area back by force, in pursuit of President Bashar Assad’s pledge to bring all of Syria under government control.
Already signs of an Iraq-style insurgency targeting US forces in eastern Syria are beginning to emerge.
In Raqqa, the largest Syrian city at the heart of US occupation and reconstruction efforts, the Stripes report finds the following:
The anger on the streets is palpable. Some residents are openly hostile to foreign visitors, which is rare in other towns and cities freed from Islamic State control in Syria and Iraq. Even those who support the presence of the U.S. military and the SDF say they are resentful that the United States and its partners in the anti-ISIS coalition that bombed the city aren’t helping to rebuild.
And many appear not to support their new rulers.
“We don’t want the Americans. It’s occupation,” said one man, a tailor, who didn’t want to give his name because he feared the consequences of speaking his mind. “I don’t know why they had to use such a huge number of weapons and destroy the city. Yes, ISIS was here, but we paid the price. They have a responsibility.”
Recent reports out of the Pentagon suggests defense officials simply want to throw more money into US efforts in Syria, which are further focused on training and supplying the so-called Syrian Democratic Forces (or Kurdish/YPG-dominated SDF), which threatens confrontation with Turkey as its forces continue making preparations for a planned attack on Kurdish enclaves in Syria this week.
Everyone says the streets are not safe now. Recent months have seen an uptick in assassinations and kidnappings, mostly targeting members of the security forces or people who work with the local council. But some critics of the authorities have been gunned down, too, and at night there are abductions and robberies.
As America settles in for yet another endless and “indefinite” occupation of a Middle East country, perhaps all that remains is for the president to land on an aircraft carrier with “Mission Accomplished” banners flying overhead?
A curious divergence has emerged within the analyst ranks at JPMorgan, where on one hand there are the bulls such as cross-asset and quant heads, John Normand and Marko Kolanovic, and equity strategists like Mislav Matejka, all of whom are urging clients to remain bullish on stocks and ignore the recent turbulence in the market, and on the other hand there are the lone quasi-bears like Nikolaos Panigirtzoglou who writes one of the bank’s most popular weekly reports, Flows and Liquidity, and who has a habit of going against JPM’s optimistic so-called “house view.”
In an ironic twist, Panigirtzoglou’s less than “rose-colored” takes on the market come at a time when Marko Kolanovic recently branded anything that is less that ragingly bullish as “fake news”, and not just fake but having a greater impact on the market than JPMorgan’s own official research, to wit:
There are specialized websites that mass produce a mix of real and fake news. Often these outlets will present somewhat credible but distorted coverage of sell-side financial research, mixed with geopolitical news, while tolerating hate speech in their website commentary section. If we add to this an increased number of algorithms that trade based on posts and headlines, the impact on price action and investor psychology can be significant.
Amusingly, and perhaps to frontrun attacks on his own research, just hours after Kolanovic published the above “hot take” (which came as he was again calling for JPM clients to “buy the dip”, and ahead of the market’s latest rout), Panigirtzoglou wrote the following disclaimer in his latest weekly report:
As a note to our readers, the above analysis does not represent JPM’s official views/forecasts about US share buybacks. These JPM official forecasts are more positive and are outlined in the reports by our US equity strategists (Dubravko Lakos-Bujas and team). Instead, the objective of our analysis is to highlight risks around the house view.
In other words, JPM’s bearish takes are note “fake news”, they are just meant to provide cover when the house’s “more positive” forecasts for popular consumption, end up being wildly wrong.
Not surprisingly, we find Panigirtzoglou’s “less positive” if more accurate and thought out research reports more informative than the “more positive” JPMorgan “official view”, which in turn brings us to his latest weekly note which this time takes on the topic of rising downgrade risk within the high grade sector, a topic near and dear to us as just yesterday we pointed out that in the fourth quarter alone, some $176 billion in A-rated debt was downgraded into BBB territory according to Goldman calculations, “the highest amount since 4Q2015, which was a period characterized by a heavy wave of commodity-related “fallen angels.”
The reason why Panigirtzoglou is also focused on the sensitive topic of fallen angel downgrades, is because as he explains with the credit cycle turning (and entering a bear market according to Morgan Stanley) and High Grade credit spreads making new highs in both the US and Europe (where spreads are now at the same level they were when Draghi launched QE back in 2016)…
… “one of the issues credit investors are facing is that of rating downgrades and fallen angels, i.e. corporate bonds downgraded
from investment-grade status.” This, as the JPM strategist explains, is not because rating downgrades or fallen angels have forecasting ability in terms of gauging the direction of the credit cycle – on the contrary they tend to rather lag the credit cycle – but they are important in gauging the negative impact on credit returns: This, as we have explained previously, is because rating downgrades or fallen angels “drive a wedge between spread returns and total returns as the managers who are only allowed to hold investment grade bonds are forced to offload their downgraded bonds.”
So how big are the rating downgrade or fallen angel effects? The good news, is that at the moment, the answer is “pretty small.” In fact, these rating downgrade or fallen angel effects have barely started because, as the chart below shows, the number of fallen angels in JPMorgan’s global high yield dollar denominated index still stands at very low levels typically seen at the beginning of a credit cycle (this is a far lower number than the abovementioned surge in downgrades from A to BBB, or credits which can be dubbed pre-fallen angels).
A quick look at rating downgrades reveals a similar picture because like with fallen angels, corporate downgrade reviews have yet to rise materially.
As a result, while many have expressed concern about the threat from future downgrades, the realized negative impact that downgrades and fallen angels typically exert on credit returns has yet to hurt credit investors in a big way.
So are current concerns by traders and market participants about rating downgrades/fallen angels justified?
This is where the abovementioned internal dichotomy in JPM’s views would emerge, because while we would expect Kolanovic to respond firmly in the negative, Panigirtzoglou believes the answer is yes if one simply looks at credit fundamentals such as debt-to-income ratios. In fact, as the JPM strategist writes, “a visual inspection of debt-to-income ratios across the universe of companies behind corporate bond indices reveals a highly problematic picture.”
The four charts below show the net-debt-to-EBITDA ratio for companies behind JPMorgan’s HG and HY indices in both the US and
Europe. Panigirtzoglou warns that the leverage metric has been rising steeply over the past decade to levels that are much higher than those seen at the peaks of the previous two cycles in 2007/2008 and 2001/2002.
In other words “companies are currently much more vulnerable to a decline in incomes and/or rise in interest rates that in the previous two cycles.”
This is especially true in the US where the Fed hikes coupled with its balance sheet shrinkage have pushed corporate bond yields close to the 5% mark, creating vulnerability for credit in a risk scenario where earnings contract next year. In Europe, a similar demand/supply balance problem looms for corporate bonds next year when the ECB ends its corporate bond program on Jan 1.
Narrowing the observations down to just BBB companies, which currently account for more than half of the HG corporate bond universe, look equally vulnerable.
As laid out in the two charts below, the median net debt-to-EBITDA ratio for companies in JPMorgan’s BBB indices in both the US and Europe has also risen for BBB corporates to above the peaks of the previous two cycles especially in Europe. More importantly if one looks at the portion of BBB companies with net-debt-to-EBITDA ratio higher than the BB average of 2.3 in the US and 2.6 in Europe since 2001, JPM finds that this portion stands at 55% currently in both the US and Europe, or at the highest level in at least two decades.
At face value, from a net-debt-to-EBITDA point of view – and much more concerning from a future downgrade standpoint – more than half of BBB companies in the US and Europe look more like high yield than high grade.
And this is why to Panigirtzoglou this suggests that “the downgrade and fallen angel risks look pretty elevated at the moment for both US and European high grade corporates, raising the prospect of disorderly transfer of risk between HG and HY markets over the coming year.“
This is a problem because as Bank of America first pointed out back in June, in Europe alone JPM estimates that roughly €100 – 120bn of bonds could be downgraded from investment grade to high yield during the next recession. This would cause the Euro high yield market to balloon in size by at least a third from the current notional of just over €300bn.
In October, Morgan Stanley applied a similar calculation to corporate bonds in the US, and found that over $1 trillion in IG bonds could be downgraded to High Yield once the cycle turns.
Summarizing the above, Panigirtzoglou concludes the because of these capacity problems, a “disorderly transfer of risk” between HG and HY markets is an increasingly greater threat to the credit market (which already has its hands full with the sudden repricing and turmoil sweeping across the leveraged loan market). Or, as Kolanovic would say “fake news.”
With its nation-leading murder rate, lake-effect weather and endemic corruption and financial mismanagement, who really wants to live in Chicago? Well, the data is in, and as Mayor Rahm Emmanuel prepares to hand power to a new administration next year, his legacy – already marred by the above-mentioned scourges – has accrued another ignominious distinction. According to Census data analyzed by Bloomberg, Chicago experienced the highest daily net migration in the US, losing 156 residents a day (strictly due to migration, not murder) a day in 2017.
After Chicago, Los Angeles came second with 128, followed by New York with 132.
On the other side of that coin were cities across the US sun belt, like Dallas (No. 1, with 246 net incoming), followed by Phoenix (with 174) and Atlanta (No. 3 with 147).
In terms of total net migration for the year, the tallies differed only slightly. While the sun belt was the biggest beneficiary of Americans’ growing preference for sunnier weather, lower rents and plentiful job opportunities…
Dallas was the greatest beneficiary of this domestic migration, adding nearly 59,000 domestic movers in 2017, followed by Phoenix (51,000) and Tampa (41,000), which serve as anchors for the western and southern regions that got the bulk of the gains.
…some of America’s largest cities saw net outflows as rising rents, crumbling (or inadequate) public infrastructure. The city with the biggest outflow was NYC, followed by Los Angeles and – in third place – beautiful Bridgeport, Conn.
On the flip side, more than 208,000 residents left the New York City metropolitan area last year. This was nearly twice as many as the second biggest loser, Los Angeles, which had a decline of nearly 110,000. Chicago fell by 85,000. Honolulu, San Jose, New York and Bridgeport, CT lost the highest shares of their residents to other parts of the country.
In Chicago, New York and Los Angeles, the three areas with a triple-digit daily exodus, people are fleeing at a greater rate than just a few years earlier. Soaring home prices and high local taxes are pushing local residents out and scaring off potential movers from other parts of the country.
But maybe if Emmanuel’s successor can successfully implement the outgoing mayor’s plans for a city wide UBI (which we imagine would go a long way toward offsetting its hated ‘amusement tax’ and other levies needed to pay off the city’s brutal debt burden), maybe he can bribe residents into staying.
A Texas federal Judge ruled on Friday that the entire Affordable Care Act (ACA), or Obamacare, was rendered unconstitutional after Congress eliminated the individual mandate – a federal requirement to buy insurance or face a penalty.
At issue in the case was the individual mandate, which requires people to have health insurance. The penalty for not having insurance was dropped to $0 in the most recent tax legislation, potentially undercutting the Supreme Court’s decision in 2012 that the Affordable Care Act was constitutional because of Congress’ ability to tax.
With no penalty, there’s no tax, the plaintiffs, a coalition of Republican-led states, argued in the Texas case. The plaintiffs also argued that the individual mandate is so essential to the entire law, so that if it’s unconstitutional, the rest of the law must also be thrown out. U.S. District Court Judge Reed O’Connor agreed on that point, too. –CBS News
The ruling came just one day before the december 15 deadline to sign up for health coverage in 2019 through the ACA’s marketplace.
How will this the ruling affect people covered under the ACA? It won’t, for now – and people can still sign up for coverage through Saturday. “Court’s decision does not affect this season’s open enrollment,” reads a notice on HealthCare.gov.
The Trump White House has said that the existing law will stand for now while the ruling works its way through the appeals process up to the Supreme Court – a process which could take years. Some, such as Vox‘s Ezra Klein, have suggested that since Congress removed the individual mandate with the intention of keeping Obamacare intact, the Texas ruling is judicial overreach and the ruling is unlikely to stand.
“We expect this ruling will be appealed to the Supreme Court. Pending the appeal process, the law remains in place,” said White House Press Secretary Sarah Sanders in a statement, adding that Trump is now calling on Congress to replace the Affordable Care Act.
That didn’t stop Trump from throwing salt in the wound – tweeting on Saturday: “As I predicted all along, Obamacare has been struck down as an UNCONSTITUTIONAL disaster! Now Congress must pass a STRONG law that provides GREAT healthcare and protects pre-existing conditions. Mitch and Nancy, get it done!”
Wow, but not surprisingly, ObamaCare was just ruled UNCONSTITUTIONAL by a highly respected judge in Texas. Great news for America!
That said, if the law is ultimately invalidated, other well-liked sections of the law are likely to be scrapped according to CBS News, such as the provision allowing adult children to remain on their parents insurance coverage until age 26 – whether or not they live in the basement.
Moreover, invalidating the ACA would eliminate the mandate that insurance companies cannot discriminate against pre-existing conditions, as well as the ban on annual lifetime limits for coverage.
Democrats immediately jumped on the Friday night ruling to warn that health care coverage for millions of Americans was at stake due to the Republican-led lawsuit that sought to void popular parts of Obamacare, including protections for pre-existing conditions and a ban on annual lifetime limits. –Bloomberg
House Speaker-in-waiting Nancy Pelosi said that the ruling “exposes the monstrous endgame of Republicans’ all-out assault on people with pre-existing conditions and Americans’ access to affordable health care.”
Trump, of course, celebrated – though not everyone agrees… “When Trump says this is ‘great for America,’ he’s forgetting the health care driven whipping Republicans got in the midterms,” said Andy Slavitt – the man who oversaw the implementation of the ACA for the Obama administration, who added “Rather than let that heal, he’s making health care a 2020 prime fight and also putting Republicans in the Senate at great exposure.”
Republicans struggled with the issue in the campaign. They vowed to support protections for Americans with pre-existing conditions, even if they backed the lawsuit or legislation that would undo those provisions. One prominent Republican ally of Trump said health care could be his “Achilles heel” in 2020, when he’s up for re-election. –Bloomberg
“I’m not sure Republicans even know what they’re fighting for right now when it comes to health care,” said former GOP Congressman from Florida who is now an independent. “Opposing Obamacare has become reflexive GOP orthodoxy, but they just spent six months saying they’d protect pre-existing conditions. Hard to square GOP campaign promises with the court victory by GOP attorneys general,” he added.
The next step for the matter will be the Fifth Circuit Court of Appeals – the most conservative appellate court in the country, according to Bloomberg. If they uphold the decision, it’s likely headed to the Supreme Court. On the other hand if the Fifth Circuit reverses the decision, the Supreme Court likely won’t hear the case, according to legal experts.
“I can’t see who in the Fifth Circuit swallows this, and if they don’t,” the Supreme Court won’t take the the case, predicted Adler, who’s also a member of the conservative Federalist Society.
Nicholas Bagley, a professor at University of Michigan Law School, said he doubts the case will make it to the Supreme Court. By far the likeliest outcome is that it gets rejected on appeal at the Fifth Circuit, he said in an email, adding, “No serious conservative has yet endorsed this litigation. That includes very hard-line conservatives.” -Bloomberg
Republican Kevin Brady – the House Ways and Means Committee Chairman who assisted in the unsuccessful Republican bill to repeal Obamacare in 2017, said that the ruling was “not surprising,” as the law was “embarrassingly designed.
If Friday’s ruling is upheld, Brady says “ultimately both parties should start over.”
