Author: admin

Another month auction, another record big 3Y Treasury auction.

Moments ago the US sold a record $50 billion in 3Y paper, up from $48bn a month ago and more than double the nominal 3Y auction size observed in 2017 (whcn it was below $25BN).

And as auction sizes hit record highs, so do yields do the opposite and for the 3rd auction in a row, the yield on the 3Y auction hit a new all time low, sliding to 0.17% from 0.179% one month ago, which however was a modest 0.4bps tail.

Yet despite the latest record low yield, the auction was anything but strong, with the Bid to Cover dropping from 2.44 to 2.28, the lowest since April, and below the 6-auction average of 2.41.

The Internals were also disappointing, with just 50.7% Indirects, down sharply from 57.0% last month and well below the 54.4% recent average. In fact, this was the lowest Indirect hit rate since February. And with Directs taking down 13.0%, in line with recent auctions, Dealers were left holding 36.3%, the most since April.

No surprise then that with such disappointing metrics, the 10Y sold of modestly on the results although in light of today’s equity carnage, we doubt any selling pressure in rates will persist into the close. 

The U.S. economy is losing a whopping $3 billion per week in lost tourism dollars, with estimates of total losses for the 2020 year around $155 billion, according to a new report via the World Travel and Tourism Council (WTTC). 

“The lack of international visitors to the U.S. due to the pandemic could wipe out more than $155 billion from the U.S. economy alone – a loss of $425 million a day – from which it may take years to recover. It could also threaten New York’s position as one of the world’s premier hubs for business and leisure travel,” warned Gloria Guevara, WTTC President & CEO. 

This catastrophic loss to the American economy could eliminate upwards of 12 million jobs.

One of the first casualties of the virus-induced downturn crushing the U.S. hotel industry is Hilton Times Square, announcing Aug. 31, it will shutter operations on Oct. 1, laying off more than 200 workers.

WTTC’s Economic Impact Report said 16.8 million jobs in 2019 were supported by the travel and tourism industry, or about 10.7% of the entire US workforce. 

Guevara said the downturn impacts millions of households as their livelihoods depend on tourism jobs, but with no “V-shaped” recovery for several years, this is an ominous sign that deep economic scarring and widespread permanent job loss is developing. 

“The economic pain and suffering caused to millions of households across the U.S., who are dependent upon Travel & Tourism for their livelihoods, is evident from our latest shocking figures.”

“International coordination to re-establish transatlantic travel would provide a boost for the Travel & Tourism sector. It would benefit airlines and hotels, travel agents, and tour operators and revitalize the millions of jobs in the supply chain, which are dependent upon international travel across the Atlantic.”

“We urgently need to replace blanket quarantine measures with rapid, comprehensive and cost-effective test and trace programs at departure points across the country. This investment will be significantly less than the impact of blunt quarantines which have devastating and far-reaching socio-economic consequences.”

As a recovery in tourism could be years away, hedge funds are starting to build up wagers against CMBX 9, due to the tranche’s significant hotel exposure. The crash in tourism has triggered a hotel bust. 

With US stocks suddenly in freefall, they are only now catching up to a recent bout of weakness in China where the Shanghai Composite – which has gone nowhere since early July – just dropped below its 50DMA.

The lack of a market meltup in China, however, has clearly not dented local appetite for stocks and as a result the founder of China’s biggest bottled water company – whose red-capped plastic bottles can be seen at most official gatherings in China because apparently in China there are huge barriers to entry to putting clean water in a plastic bottle – just became the country’s third-richest person after shares in his company surged 54% on their IPO in Hong Kong. Nongfu, raising more than $1 billion in its Hong Kong initial public offering this week.

Zhong Shanshan, founder and Nongfu Spring’s biggest shareholder, is now worth more than $50 billion, after more than 700,000 retail investors in Hong Kong submitted orders totalling HK$670.8bn (US$86.5bn) for the retail portion of Nongfu’s share offering, making it 1,148 times oversubscribed according to the FT.

The unprecedented demand for Nongfu shares meant that at one point on Tuesday, Zhong’s fortune surpassed the $51.3 billion net worth of Pony Ma, the founder of Tencent and China’s second-richest man, according to Bloomberg estimates. Jack Ma, the founder of ecommerce business Alibaba, remains China’s wealthiest individual with an estimated $57.8 billion fortune.

The pop in Nongfu’s stock pushed the value of Mr Zhong’s 84 per cent stake in the company to $40.3bn, according to Bloomberg estimates. Combined with his $9.4bn stake in Beijing Wantai Biological Pharmacy Enterprise, a maker of Covid-19 test kits, and cash and other assets of $1bn, Mr Zhong is now worth $51bn on paper.

While for many 2020 has been a dismal year, 2020 has meant nothing but windfalls for Zhong whose wealth has surged more than 670% since the start of this year. Part of that windfall was derived from his holding in Wantai Biological, whose shares are up more than 2,000% since it listed in Shanghai in April.

As the FT notes, the IPO nearly trebled the net worth of Zhong, a former mushroom grower and journalist who founded Nongfu in 1996; before the Hong Kong offering his fortune stood at $18.9 billion. In response Zhong, who is known in Chinese business circles as the “Lone Wolf” due to his distinctive personality, said “I am a man on my own,” adding “I don’t care about what my peers are doing and thinking.”

Zhong now ranks 22nd on Bloomberg’s global rich list, just above the Mexican telecoms mogul Carlos Slim.

Zhong is a true “rag to riches” story with Chinese characteristics: he dropped out of school at age 12 after his parents were targeted during the Cultural Revolution. After a brief stint as a reporter, he went into business in the early 1990s selling pills used in China to treat erectile dysfunction. After the efficacy of Zhong’s treatments — which were derived from turtle parts — came under regulatory scrutiny, he shifted to bottled water.

Little did he know that just two decades later he would be the dominant player in a massive industry: according to Nongfu’s IPO prospectus, retail sales in China’s bottled water market rose to Rmb201.7bn ($29.5bn) in 2019, with Nongfu enjoying a 20% share,  the largest of any company. The market is expected to grow at an average annual rate of more than 10% between now and 2024, according to research firm Frost & Sullivan.

Also, unlike many unicorns, Nongfu is already very profitable reporting a net profit of Rmb5bn in 2019 on revenue of Rmb24bn, according to the prospectus. Its market capitalisation of about $47bn is higher than US drinks group Constellation Brands but lower than the UK’s Diageo.

The unprecedented retail demand for the offering pointed to huge demand for listings of Chinese companies, according to local brokers and traders. Businesses from the world’s second-biggest economy have raised billions of dollars in Hong Kong this year even as relations between Beijing and Washington have plunged to multi-decade lows.

Ironically, the Trump administration’s push to force Chinese companies to list outside of the US has meant tremendous domestic  success for newly-public companies due to staggering demand by retail investors who have long been fascianting by the massive one-day pops on IPO days. Later this year, Ant Group, the Alibaba-backed Chinese payments business, is expected to sell up to $30bn worth of shares in Hong Kong and Shanghai this year in what could be the world’s largest IPO.

Authored by Ron Paul via The Ron Paul Institute,

Federal Reserve Chairman Jerome Powell recently announced that the Fed is abandoning “inflation targeting” where the Fed aims to maintain a price inflation rate of up to two percent. Instead, the Fed will allow inflation to remain above two percent to balance out periods of lower inflation. Powell’s announcement is not a radical shift in policy. It is an acknowledgment that the Fed is unlikely to reverse course and stop increasing the money supply anytime soon.

Following the 2008 market meltdown, the Fed embarked on an unprecedented money-creation binge. The result was historically low interest rates and an explosion of debt. Today total household debt and business debt are each over 16 trillion dollars. Of course, the biggest debtor is the federal government.

The explosion of debt puts pressure on the Fed to keep increasing the money supply in order to maintain low interest rates. An increase in rates to anything close to what they would be in a free market could make it impossible for consumers, businesses, and (especially) the federal government to manage their debt. This would create a major economic crisis.

The Fed has also dramatically expanded its balance sheet since 2008 via multiple rounds of “quantitative easing.” According to Bloomberg, the Fed is now the world’s largest investor and holds about one-third of all bonds backed by US home mortgages.

Congress has expanded the Fed’s portfolio by giving the central bank authority to make trillions of dollars of payments to business as well as to state and local governments in order to help the economy recover from the unnecessary and destructive lockdowns.

Contrary to what most “mainstream” economists claim, a general increase in prices is an effect — not a cause — of inflation. Inflation occurs whenever the central bank creates money. Increasing the money supply lowers interest rates, which are the price of money, distorting the market and creating a bubble (or bubbles) that provides the illusion of prosperity. The illusion lasts until the inevitable crash. Since the distortions come from money creation, the system cannot be “fixed” by just requiring the Fed to adopt a “rules-based” monetary policy.

Once the lockdowns end, the Fed’s actions may lead to a short-term boom. However, the long-term effect will be even more debt, continued erosion of the average American’s standard of living, and the collapse of the fiat money system and the welfare-warfare state. The crisis will likely be brought on by a rejection of the dollar’s reserve currency status. This will be supported both by concerns about the stability of the US economy and resentment over America’s hyper-interventionist foreign policy.

The question is not if the current system will end. The question is how it will end.

If the end comes via a meltdown, the result will likely be chaos, violence, and increased support for authoritarian movements as desperate people trade their few remaining liberties in hopes of gaining security.

However, if pro-liberty Americans are able to force Congress to begin cutting spending — starting with the money wasted on militarism — and to move toward restoring a sound and sane monetary policy that includes ending the Federal Reserve, we can minimize an economic crisis and begin restoring limited constitutional government, a free-market economy, and respect for liberty.

On Tuesday Beirut residents were alarmed when they saw a plume of smoke on the horizon centered at the destroyed Beirut Port, following the Aug.4 massive explosion of ammonium nitrate stores which leveled much of the city, killing hundreds and wounding over 6,000.

Initial reports say piles of debris and garbage caught fire at the port, which still resembles a war zone of twisted metal and towering heaps of charred pieces of destroyed buildings and vehicles.

Fire in Beirut port. As if we can handle the fear. pic.twitter.com/4AQ9hIh8ir

— Beirut.com (@BeirutCityGuide) September 8, 2020

Circulation of video showing smoke rising above the area triggered a momentary panic among already traumatized locals, according to correspondents on the ground:

حريق جديد في مرفأ بيروت المدمر… pic.twitter.com/gPsv8ruR2W

— Salman Andary (@salmanonline) September 8, 2020

Firefighters and civil defense workers rushed to the scene in what some eyewitnesses feared could be a replay of the original tragedy, also given the recent discovery of yet more ammonium nitrate and other hazardous, potentially explosive chemicals stored there.

Port authorities have since said the small blaze is under control, and it’s as yet unclear how it started.

It may be connected to efforts to reduce the rubble and waste still at the site, raising questions of the continued safety and potential volatility of the area.

اخماد الحريق مستمر في المرفأ.. (حريق مخلفات الردم وبقايا الانفجار)..
pic.twitter.com/jajyYMmPAq

— Salman Andary (@salmanonline) September 8, 2020

There’s continued anger at how years of neglect at the port led to the tragic explosion last month.

There’s also questions about what port authorities are still allowing to be stored in the area, after the Lebanese Army last week discovered four more tons of the highly explosive ammonium nitrate compound nearby.

Apple is set to begin initial 5G iPhone production in mid-September, with mass production expected by the end of the month or early October, according to the Nikkei Asian Review (NAR), citing two sources with knowledge of the matter.

The problem developing, according to the sources, is that Apple is behind “usual schedule over the past few years, when mass production began in August for lineups released in September, but it was a large improvement compared with the situation a few months ago.” 

Factoring in the lost time, Apple could fall short of its iPhone production target this year. It ordered smartphone components for at least 80 million 5G iPhones, but sources said production levels could be around 73 to 74 million, with the rest of the units deferred into early 2021. 

Sources said Apple would focus on the manufacturing of the cheaper 5G iPhone (6.1-inch OLED, two rear cameras), which accounts for 40% of total orders. The most expensive 5G handset is the 6.7-inch, triple-camera 5G iPhone.

NAR’s report offers new insight into how Apple’s growth prospects for the coming “5G supercycle” could underwhelm initial estimates. 

Goldman Sachs analyst Rod Hall wrote the “iPhone is a very tough act to follow, with Services and Wearables not likely to be large enough to return the company to growth,” which doesn’t justify current valuations. 

“In this report, we highlight both Microsoft and Amazon as examples of companies that are delivering the numbers and yet are valued at about the same multiple as Apple. We want to emphasize that we are not permanent bears on Apple. However, we also believe investors should follow the numbers, and, in our opinion, these aren’t consistent with the narrative that had driven the stock to its highest premium vs. the S&P 500 since 2011, when iPhone penetration was accelerating,” Hall wrote. 

Hall pointed out Apple is trading at the largest premium to the S&P500 on a next twelve months basis despite known production woes this fall.  

He said the latest rally in Apple shares (pre-selloff) is mainly due to “increased retail participation.” 

Hall noted, “… yet Apple is valued like a growth company:” 

“We show Apple’s P/E compared to the other FAAMG stocks. Here we see that Apple at 31x trades on a forward P/E similar to that of Microsoft (31x), Google (28x) and Facebook (28x) despite having much slower forecast growth. Note that our own sales growth expectations for Apple (+2% CY19-22 CAGR) are even lower than the consensus forecasts (+7%) shown in Exhibit 15.” 

Hall wrote, “another way to look at this discrepancy is to compare PEG ratios for these same stocks. Here we see that Apple is trading on a premium to all other FAAMG stocks. If we were to use our own EPS forecasts, Apple’s PEG would be a much higher 6x while the other companies’ PEGS would remain similar.” 

Hall said the “ongoing confirmation from suppliers that Apple’s build is delayed and that the new iPhone launch is likely to be staggered” doesn’t support current valuations, leading to a revision of the company’s revenue forecast for the fourth quarter of 2020. 

“We decrease our FQ4’20 (Sep’20 QTR) revenue estimate by 7% to $63.7bn but increase our FQ1’21 and FQ2’21 revenues by 2% and 1%, respectively, as we push out ~4m iPhone units from FQ4’20 to FQ1/FQ2’21 given ongoing confirmation from suppliers that Apple’s build is delayed and that the new iPhone launch is likely to be staggered. We also reduce our FQ4’20 iPhone ASP forecast to better reflect lower-priced products in the mix, given the popularity of the SE. Overall, our EPS forecasts decrease by 2% in FY’20 but increase by 2% in FY’21 due to the shift of units into the early part of that year,” Hall wrote. 

And with Softbank’s Masayoshi Son‘s option purchases, sending FAAMG skyhigh – it appears a dose of reality is hitting Apple as it’s 5G supercycle might not be as robust as previously thought.   

Dotcom bubble 2.0? 

Last week we discussed the corruption and abuse inherent in the rollout of the Trump administration’s $659 billion taxpayer-funded PPP program, where according to a report authored by House Democrats, more than $1 billion of the money went to applicants that triggered red flags. These included receiving multiple loans – in violation of the program’s rules – or receiving loans despite having been disciplined for a given transgression. $3 billion went to businesses that had been flagged as potentially problematic by the government.

Yet while it was easy to blame the administration for rushing to handout hundreds of billions (without which the US economy would still be in a depression), a key question is how and why did the private banks that were gatekeepers for all this capital, allow such abuse to take place.

It’s apparently a question Jamie Dimon wants answered too because according to Bloomberg, JPMorgan has identified “instances in which Covid-relief funds were misused by customers and is probing employees’ involvement in the potentially illegal activities.”

In a memo sent to staff from the bank’s senior leaders Tuesday, the largest US commercial bank said it has found that improper conduct includes “instances of customers misusing Paycheck Protection Program Loans, unemployment benefits and other government programs” and that some “employees have fallen short, too.” The firm said the incidents don’t meet its principles “and may even be illegal.”

“We are doing all we can to identify those instances and cooperating with law enforcement where appropriate,” the memo also said according to Bloomberg. The bank asked workers to report any conduct that violates its policies. JPMorgan spokeswoman Trish Wexler declined to comment.

According to SBA data, JPMorgan issued about 280,000 loans totaling more than $29 billion, making it the top PPP lender in the country. JPMorgan has fallen in the government’s cross sights as the DOJ has been pursuing cases of potential fraud in the emergency program. A congressional subcommittee found earlier this month that more than $1 billion in federal coronavirus relief went to U.S. small businesses that received multiple loans, according to a report that also raised red flags for potential fraud with thousands of other companies.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Pretense and PR are not reality, and believing the Old Normal will magically be restored with sacrifice-free Federal Reserve printing is not an actual strategy.

Quick history quiz: who was the second-to-the-last Emperor of the Western Roman Empire? How about the third-to-the-last? Answers: Glycerius, 473-74 A.D. and Julius Nepos, 474-475 A.D. The last emperor was the grandly titled Romulus Augustus, who reigned less than a year until the whole shebang disintegrated in 476 A.D.

You get the point: when the momentum of collapse crosses the Event Horizon, it no longer matters who claims the title of Head Snake; the collapse is beyond the control of any individual or agency.

So when I hear the most important election in history, last chance for democracy, etc. I hear blah-blah-blah because we’re following the footsteps of Rome’s collapse to a T. As I explained in How Nations Collapse: Disunity (8/20/20), profound disunity between classes and within power elites is the key driver of collapse, as all the energy required to make the perilous, radical changes needed to save the system are squandered on in-fighting and jockeying for control of the dwindling centralized power.

The final generation of Romans also preferred pretense to reality. The last Roman elites found solace in Rome’s past glories, as if it was inevitable that something or other would magically restore Rome’s power and stability without any sacrifices being made by the elites or the public.

Today we hear the shrill, keening cries for the pretense of unity: since actual unity has been lost, then public-relations pretense is the best the elites can manage.

just as in the waning days of the Western Roman Empire, the elites got overly greedy and complacent–a fatal combination. America’s billionaire class and the New Nobility just below the billionaires have scooped most of the economy’s gains since 2008, and paid either zero or low taxes. (Just ask Mr. Gates how to make your fortune tax-free via philanthro-capitalist foundations that are simply other avenues for achieving the same dominance.)

Once you have a Big Tech monopoly, the political influence to protect your monopoly, and the Federal Reserve juicing stocks, junk bonds, etc., then your greed has no limit. Just as in Rome’s waning days, the super-wealthy evade taxes and indeed, any sacrifice. Whatever wealth remains is sluiced into the coffers of the super-wealthy while the citizenry pay the price via the destruction of social mobility, higher taxes and a fast-decaying real economy.

The power elites are complacent, as they believe manipulating top-heavy bureaucracies and captured central bankers is the only skillset needed. Creating value or real-world goods and services? Why bother when the real money is made in corruption, fraud and legalized looting?

America squandered its last chance to make the necessary sacrifices and radical systemic changes in the 2008 Global Financial Meltdown. The power elites bailed themselves out at the cost of systemic stability, and now the dominoes are finally falling.

Human Wetware 1.0 hasn’t changed since 473 A.D. and so our elites are filled with the same complacent hubris as the last batch of greedy, entitled, overly impressed with their wealth and power elites of Rome.

The Fed will continue to bail out all those whose self-serving greed undermined the republic, and print trillions to distribute bread and circuses to placate the milling mob, thereby destroying the value of the bread and the last pretenses of a “market economy.”

Rather than face the need for a radical from-the-ground-up reformation of the political-economic system, our elites have focused on increasing their already destabilizing wealth and power and taking down their elite rivals.

As a result, there is no way to stop the dominoes from falling. Pretense and PR are not reality, and believing the Old Normal will magically be restored with sacrifice-free Federal Reserve printing is not an actual strategy.

The Fall of the Roman Empire: A Reappraisal (Michael Grant)

*  *  *

My recent books:

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World ($13)

(Kindle $6.95, print $11.95) Read the first section for free (PDF).

Pathfinding our Destiny: Preventing the Final Fall of Our Democratic Republic ($6.95 (Kindle), $12 (print), $13.08 ( audiobook): Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake $1.29 (Kindle), $8.95 (print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Boeing shares are down 4.5% on Tuesday morning following a new report via WSJ, published a day earlier during the Monday Labor Day holiday, detailing new troubles that have emerged for the Boeing 787 Dreamliner. 

Now, Boeing has confirmed the 787 Dreamliner has specific components within its fuselage that do not meet design standards. The company said the 787’s horizontal stabilizers have quality issues that are resulting in more plane inspections, thus slowing down deliveries. 

“We are taking time to thoroughly inspect completed 787s to ensure that they are free of the issues and meet all engineering specifications prior to delivery,” Boeing said in a statement Tuesday.

“We expect these inspections to affect the timing of 787 deliveries in the near-term.”

Compound these developing 787 Dreamliner issues with the two fatal accidents of its narrow-body 737 MAX, and Boeing is experiencing widespread manufacturing quality-control lapses. 

On top of 787 Dreamliner and 737 Max design woes, Boeing has seen six straight months (as of August) of airlines canceling narrow and wide-body plane orders as the virus-induced downturn in air travel has doomed the industry for the next several years. 

It’s just the latest in a series of setbacks for the American aerospace giant.