Month: July 2019

A couple of years back, we reported on a study by Arizona State University professor Hendrik Bessembinder which delivered a conclusion that might be surprising to retail investors, if less so for those who have been paying close attention to markets during the prior years: In a study of 26,000 stocks traded in the US between 1926 and 2015, just 4% accounted for all of the $31.8 trillion in market-cap gains during that period.

This means that, over time, the vast majority of US-traded stocks couldn’t even outperform “riskless” T-bills. So, in theory, millions of investors took on all of that extra risk for no added benefit.

Now, Bessembinder is back with an expanded version of his previous study. This time, his team studied about 62,000 stocks traded in more than 40 countries between 1990 and 2018.

What did they find? About 60% of the stocks studied performed so poorly, they did worse than a one-month Treasury note. That’s an even greater percentage than the initial study that focused solely on the US (in that study, 58% of stocks studied underperformed T-bills), Bloomberg reports.

Suddenly, the 2 and 20 crowd’s inability to outperform their benchmarks makes a lot more sense.

So, what does this mean for individual retail investors? Well, it certainly has some implications for the passive vs. active debate. Though low fees and steady returns have attracted millions of investors to passive index-tracking ETFs, in reality, investors are getting what they pay for.

It also offers some insight into why it’s so hard for active investors to outperform their benchmarks.

“It is historically the norm in the US and around the world that a few top-performing companies have great influence over how the market does overall,” Bessembinder, a professor at the W.P. Carey School of Business at Arizona State, said by phone. “It’s the norm and I expect it to be the case in the future.”

And finally, it calls into question conventional investing wisdom that has long been taken as gospel: Stocks are riskier, but generate higher returns, while bonds are relatively “safe” investments that offer lower, if steadier, returns.

As a whole, the equity market created $44 trillion in shareholder wealth between 1990 and 2018, beating Treasury notes. But that figure is largely due to compounding returns from the usual suspects, like Apple, Microsoft, Alphabet, Amazon and Exxon.

Those four stocks accounted for more than 8% of global net wealth creation during that period.

So, what’s the takeaway here? Maybe the 2-and-20 long/short equity crowd would be better off rolling over T-bills.

via ZeroHedge News https://ift.tt/2LrDws0 Tyler Durden

After two days of grilling by US politicians (including demands for a moratorium and fearmongering of the end of banking and the ease of funding terrorism) and endless byelines supporting and denigrating Facebook’s new digital currency concept, Libra, one would suspect that it is Americans that should be most interested in Zuckerberg’s latest idea for world domination.

That would be wrong.

Perhaps not entirely surprising, it is in fact the Chinese, based on global search volumes, that are the most interested in Libra.

This is ironic since, as we noted in 2015, it was soft capital controls by Chinese authorities that sparked the big run-up in cryptocurrencies as an alternate store of wealth (to avoid government interference).

Are the Chinese once again worried that as economic growth slumps and debt-driven gains evaporate that Chinese authorities will crackdown harder on capital’s exodus from the trade-war-turmoiling nation?

Judging by the questions from US politicians, Libra is the most dangerous ‘thing’ in the world (and perhaps its apparent appeal to the Chinese confirms that). Of course, China will never ‘allow’ this to move forward but as CoinTelegraph’s Aaron Wood details below, Facebook’s David Marcus, the CEO of the Calibra wallet service for the social media giant’s forthcoming Libra stablecoin, at least attempted to assuage US regulators’ concerns regarding the project and educate lawmakers on its purpose and potential.

image courtesy of CoinTelegraph

Cointelegraph has compiled some key quotes from the hearing, which you can view here.

[2:50] Rep. Maxine Waters, chair of the Financial Services Committee: “Demonstrated pattern of failing to keep consumer data private on a scale similar to Equifax… Facebook also allowed malicious Russian state actors to purchase and target ads”.

[5:40] Rep. Patrick McHenry: ”We’re here to go beyond the headlines… Washington must go beyond the hype to ensure that we are not the place where innovation goes to die.”

[13:49] David Marcus: “That’s what Libra is about: developing a safe, secure and low-cost way for people to send money around the world.”

[27:] McHenry: “Why are you doing this in Switzerland and why are you using a basket of currencies? Why not the good old American dollar”

Marcus: “…The choice of Switzerland has nothing to do about evading responsibilities or oversight. The goal of Switzerland is to home this Libra in an international place…” 

[0:40:10] Rep. Nydia Velasquez: “Will you commit yourself to not launch before all the concerns from the Federal Reserve and all the regulators are addressed?”

Marcus: “Absolutely Congresswoman and I want to reiterate this commitment that this was the spirit in which we announced early…”

[1:01:51] Rep. David Scott: “Neither your white paper nor your subsequent Facebook post offered any concrete details as to how you plan to implement or enforce strong Anti-Money Laundering, how you plan to enforce Know Your Customer protections, and most importantly, to ensure — and that’s what all of us are concerned about — the safety of our financial system.[…] what do you see as the responsibilities of Libra to combat money laundering, to protect our financial system?”

Marcus: “[Libra] will have an AML program and will have guidelines for all the members to enforce the AML, KYC, CFT standards. […] Blockchain gives additional information to law enforcement and regulators compared to our current system.”

Scott: “What are you anticipating as some of the new ways that criminals may attempt to export and exploit Libra for illicit use and how are you combating [this]?” 

Marcus: “I couldn’t agree more with you Congressman, and I believe that we can improve on the current system because we have a chance this time around to think through how the network is designed, the way that the on and off ramps are properly regulated with proper KYC controls, the proper way to monitor new activity and report it with new technologies and I think this system might be potentially better on these fronts.”

[1:17:44] Rep. Sean Duffy: “Who gets to use Calibra and Libra? 

Marcus: “Anyone that can open an account, goes through KYC, in countries where we can operate.”

Duffy: “Who can use a $20 bill? […] This $20 bill doesn’t discriminate on anything you can be a murderer say horrible things, you can say great things. This $20 bill can be used by every single person that possesses it. With regard to your network, can Milos Yianopolous and Louis Farrakhan use Libra?” [both have been banned from FB]

Marcus: “I don’t know yet, congressman.”

[1:33:00] Rep. Brad Sherman: “We need to get Mr. Zuckerberg here. This is the biggest thing or this tries to biggest thing this committee will deal with this decade […] Now we’re told by some that innovation is always good, the most innovative thing that happened this century is when Osama bin Laden came up with the idea of flying two airplanes into the twin towers. That’s the most consequential innovation, although this will do more to endanger America than even that […] If cryptocurrency is used to finance the next horrific terrorist attack, 100 lawyers standing in a row, charging $200,000 an hour, are not going to protect his [Zuckerber’s] rear end from the wrath of the American people.”

[2:37:00] Rep. Ayanna Pressley: “It is long past time that we stop compromising consumers’ privacy in pursuit of profit. […] Would you trust your money with a company who essential admits it’s just winging it?”

[2:50:00] Rep. Alexandria Ocasio-Cortez: “I believe we’re here today because Facebook, which is a publishing platform, an advertising network, a surveillance corporation, a content distributor now always wants to establish a currency and act through its wallet as at minimum a payment processor. Why should these activities be consolidated under one corporation?”

Marcus: “The one thing we are focused on is solving problems for the very people who are left behind right now and we believe it’s important because we have the ability to invest and the products to deliver those services that will solve problems.”

[3:11:30] Madeleine: “No, we do need to trust you. We absolutely need to trust you […] Could you be specific as to the wrong-doing that generated a $5 billion fine? It’s tough to trust when the collection, storage and misuse of the information of your customers generated a $5 billion fine.”

*  *  *

For now we will have to wait to see if the Chinese people’s initial interest turns into actual capital exodus, and/or how quickly Chinese authorities will ban/block/censor any such action.

via ZeroHedge News https://ift.tt/32BWtgY Tyler Durden

Three weeks after a meeting between the countries who singed the Iran nuclear deal, also known as the Joint Comprehensive Plan of Action (JCPOA), which was ditched by US, French, British and German officials said the trade mechanism which was proposed last summer – designed to circumvent both SWIFT as well as US sanctions banning trade with Iran – called Instex, is now operational.

And while we await for the White House to threaten Europe with even greater tariffs unless it ends this special purpose vehicle – it already did once back in May when it warned that anyone associated with the SPV could be barred from the U.S. financial system if it goes into effect – a response from the US is now assured, because in the biggest attack on the dollar as a reserve currency to date, on Thursday, Russia signaled its willingness to join the controversial payments channel, and has called on Brussels to expand the new mechanism to cover oil exports, the FT reported.

Moscow’s involvement in the Instex channel would mark a significant step forward in attempts by the EU and Russia to rescue a 2015 Iran nuclear deal that has been unravelling since the Trump administration abandoned it last year.

“Russia is interested in close co-ordination with the European Union on Instex,” the Russian foreign ministry told the Financial Times. “The more countries and continents involved, the more effective will the mechanism be as a whole.”

… and the more isolated the US will be as a currency union meant to evade SWIFT and bypass the dollar’s reserve currency status will soon include virtually all relevant and important countries. Only China would be left outstanding; after the rest of the world’s would promptly join.

On Thursday, the Kremlin confirmed the foreign ministry’s take:

“We are tracking the information regarding this. If I’m not mistaken, there have already been statements from our side that, taking into account the first experience of using this system, when it is activated, we cannot rule out interaction in this regard,” Dmitry Peskov, Vladimir Putin’s spokesman, told reporters.

“This is an important project. It is aimed at protecting the interests of European economic operators against the background of illegal attempts to restrict their activities by third countries,” he added.

Earlier, the Russian foreign ministry hinted at precisely what will take place next, when it said that “The full potential of Instex will only be able to be deployed if it will be open to the participation of countries which are not members of the European Union.” Such as Russia and China. 

Ironically, Mohammad Javad Zarif, Iran’s foreign minister, has previously described Instex as “not sufficient” even though Russia was far more promise, and said Instex was “a good tool in the implementation of projects . . . that the United States has strongly torpedoed” but called for it to be expanded to include crude oil.

“If the encouraging statements by the EU . . . will be backed up by concrete steps and practical advances, including in relation to the use of Instex for servicing trading in Iranian oil, it will help stabilise the difficult situation created around the JCPOA,” it said.

Russia has strengthened its ties with Iran in recent years as part of Moscow’s increased geopolitical importance in the Middle East, including its role of propping up the Assad regime in the war in Syria.

At a meeting with Iran’s president Hassan Rouhani last month, Russian president Vladimir Putin vowed to continue developing trade ties with Tehran and said Moscow was committed to a project to expand the Bushehr nuclear plant in Iran. As the FT correctly notes, efforts to rescue the nuclear deal have been a rare area of co-operation between Brussels and Moscow, whose relations have soured in recent years.

* * *

Since US president Donald Trump pulled out of the deal last May, its other signatories — Germany, France, UK, China and Russia — have scrambled to find ways to maintain trade with Iran. But they have been stymied by companies’ reluctance to risk Washington’s wrath.

As a reminder, Instex was launched in January but subsequently delayed by bureaucratic hurdles and the complications caused by the US sanctions. It only became operational last month and has been criticised by both Tehran – for having big limitations – and the US – for existing.

Iran has a more valid point: just 10 EU states are members and the mechanism’s initial credit line of several million euros is a fraction of EU-Iran trade, which stood at more than €20bn annually before the US sanctions.

Meanwhile, it appears that Moscow will get an invite because as the FT adds, Brussels is interested in bringing Russia into Instex, but it would first seek to get the channel up and running with humanitarian aid trades before potentially expanding its scope or membership.

Federica Mogherini, the EU’s foreign policy head, said this week that the trade mechanism “has always been conceived to be open to third countries . . . and we are already seeing interest by some of them to participate in that”, although she did not identify them. “The issue of whether or not Instex will deal with oil is a discussion that is ongoing among the shareholders,” she added.

And while Iran wants Europe to buy its oil so that it can use the hard currency earnings to import basic commodities and medicines through Instex, Russia is seeking to find ever more creative ways to chip away at US global dominance, with a focus on the dollar’s reserve currency status.

Additionally,  Moscow previously said that it would look into ways to facilitate or finance Iranian oil exports if Instex was not launched or proved to be ineffective.

As we discussed extensively last summer, the idea behind Instex was to set up a mirror image transaction system that replaces potentially sanctionable international payments between Europe and Iran with payments that do not cross Iran’s borders, nor are they denominated in dollars to avoid giving the US veto rights.

As a final point, the FT quotes analyst who said that China, which has repeatedly defied US sanctions on Iran, has greater potential to hand Tehran an economic lifeline by continuing to purchase Iranian crude exports; it has yet to be seen if China will also join Instex.

via ZeroHedge News https://ift.tt/2XMa2vv Tyler Durden

Authored by Lance Roberts via RealInvestmentAdvice.com,

A fascinating graphic was recently produced by Oxford Economics showing compounded economic growth rates over time.

What should immediately jump out at you is that the compounded rate of growth of the U.S. economy was fairly stable between 1950 and the mid-1980s. However, since then, there has been a rather marked decline in economic growth.

The question is, why?

This question has been a point of a contentious debate over the last several years as debt and deficit levels in the U.S. have soared higher.

Causation? Or Correlation?

As I will explain, the case can be made the surge in debt is the culprit of slowing rates of economic growth. However, we must start our discussion with the Keynesian theory, which has been the main driver both of fiscal and monetary policies over the last 30-years.

“Keynes contended that ‘a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.’

In such a situation, Keynesian economics states that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment.”

Keynes’ was correct in his theory. In order for deficit spending to be effective, the “payback” from investments being made must yield a higher rate of return than the debt used to fund it.

The problem has been two-fold.

First, “deficit spending” was only supposed to be used during a recessionary period, and reversed to a surplus during the ensuing expansion. However, beginning in the early ’80s, those in power only adhered to “deficit spending part” after all “if a little deficit spending is good, a lot should be better,” right?

Secondly, deficit spending shifted away from productive investments, which create jobs (infrastructure and development,) to primarily social welfare and debt service. Money used in this manner has a negative rate of return.

According to the Center On Budget & Policy Priorities, roughly 75% of every tax dollar goes to non-productive spending. 

Here is the real kicker. In 2018, the Federal Government spent $4.48 Trillion, which was equivalent to 22% of the nation’s entire nominal GDP. Of that total spending, ONLY $3.5 Trillion was financed by Federal revenues and $986 billion was financed through debt.

In other words, if 75% of all expenditures is social welfare and interest on the debt, those payments required $3.36 Trillion of the $3.5 Trillion (or 96%) of revenue coming in. 

Do you see the problem here? (In the financial markets, when you borrow from others to pay obligations you can’t afford it is known as a “Ponzi-scheme.”)

Debt Is The Cause, Not The Cure

This is one of the issues with MMT (Modern Monetary Theory) in which it is assumed that “debts and deficits don’t matter” as long as there is no inflation. However, the premise fails to hold up when one begins to pay attention to the trends in debt and economic growth.

I won’t argue that “debt, and specifically deficit spending, can be productive.” As I discussed in American Gridlock:

“The word “deficit” has no real meaning. Dr. Brock used the following example of two different countries.

Country A spends $4 Trillion with receipts of $3 Trillion. This leaves Country A with a $1 Trillion deficit. In order to make up the difference between the spending and the income, the Treasury must issue $1 Trillion in new debt. That new debt is used to cover the excess expenditures, but generates no income leaving a future hole that must be filled.

Country B spends $4 Trillion and receives $3 Trillion income. However, the $1 Trillion of excess, which was financed by debt, was invested into projects, infrastructure, that produced a positive rate of return. There is no deficit as the rate of return on the investment funds the “deficit” over time.

There is no disagreement about the need for government spending. The disagreement is with the abuse, and waste, of it.”

The U.S. is Country B.

Increases in the national debt have long been squandered on increases in social welfare programs, and ultimately higher debt service, which has an effective negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is by diverting an ever growing amount of dollars away from productive investments to service payments.

The relevance of debt versus economic growth is all too evident, as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

The irony is that debt driven economic growth, consistently requires more debt to fund a diminishing rate of return of future growth. It now requires $3.02 of debt to create $1 of real economic growth.

However, it isn’t just Federal debt that is the problem. It is all debt.

When it comes to households, which are responsible for roughly 2/3rds of economic growth through personal consumption expenditures, debt was used to sustain a standard of living well beyond what income and wage growth could support. This worked out as long as the ability to leverage indebtedness was an option. Eventually, debt reaches levels where the ability to consume at levels great enough to foster stronger economic growth is eroded.

For the 30-year period from 1952 to 1982, debt-free economic growth was running a surplus. However, since the early 80’s, total credit market debt growth has sharply eclipsed economic growth. Without the debt to support economic growth, there is currently an accumulated deficit of more than $50 Trillion.

What was the difference between pre-1980 and post-1980?

From 1950-1980, the economy grew at an annualized rate of 7.70%. This was accomplished with a total credit market debt to GDP ratio of less 150%. The CRITICAL factor to note is that economic growth was trending higher during this span going from roughly 5% to a peak of nearly 15%.

There were a couple of reasons for this.

1. Lower levels of debt allowed for personal savings to remain robust which fueled productive investment in the economy.

2. The economy was focused primarily on production and manufacturing which has a high multiplier effect on the economy.  

The obvious problem is the ongoing decline in economic growth. Over the past 35 years, slower rates of growth has kept the average American struggling to maintain their standard of living. As wage growth stagnates, or declines, consumers are forced to turn to credit to fill the gap in maintaining their current standard of living. (The chart below is the inflation-adjusted standard of living for a family of four as compared to disposable personal incomes and savings rate. The difference comes from debt which now exceeds $3400 per year.)

It isn’t just personal and corporate debt either. Corporations have also gorged on cheap debt over the last decade as the Fed’s “Zero Interest Rate Policy” fostered a scramble for cash for diminishing investment opportunities, such as share buybacks. These malinvestments ultimately have a steep payback.

We saw this movie play out “real-time” previously in everything from sub-prime mortgages to derivative instruments. Banks and institutions milked the system for profit without regard for the risk. Today, we see it again in non-financial corporate debt. To wit:

“And while the developed world has some more to go before regaining the prior all time leverage high, with borrowing led by the U.S. federal government and by global non-financial business, total debt in emerging markets hit a new all time high, thanks almost entirely to China.”

“Chinese corporations owed the equivalent of more than 155% of Global GDP in March, or nearly $21 trillion, up from about 100% of GDP, or $5 trillion, two decades ago.”

The Debt End Game

Unsurprisingly, Keynesian policies have failed to stimulate broad based economic growth. Those fiscal and monetary policies, from TARP, to QE, to tax cuts, only delayed the eventual clearing process. Unfortunately, the delay only created a bigger problem for the future. As noted by Zerohedge:

“The IIF pointed out the obvious, namely that lower borrowing costs thanks to central banks’ monetary easing had encouraged countries to take on new debt. Amusingly, by doing so, this makes rising rates even more impossible as the world’s can barely support 100% debt of GDP, let alone 3x that.”

Ultimately, the clearing process will be very substantial. As noted above, with the economy currently requiring roughly $3 of debt to create $1 of economic growth, a reversion to a structurally manageable level of debt would involve a nearly $40 Trillion reduction of total credit market debt from current levels. 

This is the “great reset” that is coming.

The economic drag from such a reduction in debt would be a devastating process. In fact, the last time such a reversion occurred, the period was known as the “Great Depression.”

This is one of the primary reasons why economic growth will continue to run at lower levels going into the future. We will witness an economy plagued by more frequent recessionary spats, lower equity market returns, and a stagflationary environment as wages remain suppressed while cost of living rise.

The problem of debt will continue to be magnified by the changes in structural employment, demographics, and deflationary pressures derived from changes in productivity. As I showed previously,this trend has already been in place for the last decade and will only continue to confound economists in the future.

“The U.S. is currently running at lower levels of GDP, productivity, and wage growth than before the last recession. While this certainly doesn’t confirm Shelton’s analysis, it also doesn’t confirm the conventional wisdom that $33 Trillion in bailouts and liquidity, zero interest rates, and surging stock markets, are conducive to stronger economic growth for all.”

Correlation or causation? You decide.

via ZeroHedge News https://ift.tt/30KPQqV Tyler Durden

Jeffrey Epstein was denied bail on Thursday despite his legal team’s best efforts to convince SDNY Judge Richard M. Berman that he wasn’t a flight risk. 

Judge Berman cites evidence of intimidation and evidence of Epstein missing sex-offender check-ins.

Also cites “sexually explicit photos” and “expired Austrian passport” with Epstein’s photo, not his name, and a Saudi residence.

— Kevin Corke (@kevincorke) July 18, 2019

Berman:

“I find that the government has established danger to others and to the community by clear and convincing evidence,” he says, also finding risk of flight by “preponderance of the evidence.”

“I doubt that any bail package can overcome danger to the community.”

— Adam Klasfeld (@KlasfeldReports) July 18, 2019

The 66-year-old registered sex offender will remain in the Metropolitan Correctional Center (MCC) in lower Manhattan until his trial on charges of sex-trafficking minors, where he has been held since his July 6 arrest.

“When you have someone that’s allegedly a sexual predator like Jeffrey Epstein, he’ll need to be in protective custody,” said lawyer Andrew Laufer, who has represented MCC inmates. And because of Epstein’s high profile, he’s likely in solitary confinement. 

He faces a maximum sentence of 45 years in prison if convicted. 

And as Bloomberg points out, “The bail decision means Mr. Epstein is likely to spend more time in jail awaiting trial in New York than he did in Florida after pleading guilty in 2008 to two state counts following an investigation into similar allegations of sex abuse against minors.” 

Developing…

via ZeroHedge News https://ift.tt/2XRM2XK Tyler Durden