Morgan Stanley Sees Tesla Stock Sliding To Musk “Margin Call” Strike Price

It’s the elephant in the room that nobody, especially Elon Musk, wants to talk about but analysts and investors may soon have to face the idea of “teflon” Elon’s Tesla stock approaching extremely uncomfortable territory. Not only does a falling stock price put pressure on the company when it eventually goes to sell equity (assuming it can), but it also calls into question the fate of hundreds of millions in stock that Elon Musk has personally borrowed against.

Here things are getting uglier by the day: the steady decline in analyst price targets for Tesla keeps inching closer to Musk’s inevitable margin call territory, which we believe is around $232. And this morning’s downgrade by Morgan Stanley slapped a price target on the company that is just several dollars away from a price that we, and others, believe will trigger Musk’s margin call. 

Morgan Stanley’s Monday note addressed delivery volume, paltry Model S and X sales and falling revenue while slashing EPS and automotive gross margins targets while calling into question the company’s liquidity (or lack thereof) profile. 

“We expect the 45% YoY decline in 1Q Model S+X volume will largely continue throughout 2019, impacting mix, margin and cash flow. We mark to market our forecasts following disappointing 1Q deliveries and lower our target to $240. Reiterate Equal-weight,” Morgan Stanley analyst Adam Jonas said in a note out this morning.

On delivery volume, the one-time Tesla fanboy said:

We have cut our total company full year 2019 delivery forecast to 344k units vs.362k units previously. We are now below the low end of Tesla’s 360k to 400k range. Over 100% of our delivery reduction is from Model S and X, which we now expect to average 14,800/quarter through the remainder of the year.

Jonas then lowered his revenue forecast by 7.5%:

Our 2019 total company revenue forecast falls 7.5% on the delivery revision, exacerbated by mix degradation from Model S and X declines. Our revised auto revenue forecast calls for a 3% YoY decline in both 3Q19 and 4Q19 revenue.

He also slashed automotive gross margin to 18.4% from 22.3%:

We have revised our 1Q19 US GAAP auto gross margin forecast to 18.4% from 22.3% previously. Going forward, we forecast US GAAP auto gross margin to improve to 20.9% in 2Q,21.9% in 3Q and 22.2% in 4Q.For the full year, our 2019 GAAP auto gross margin has been revised down 150bps to 21.1%. Our FY forecast includes slightly more than $400mm of ZEV (zero emission vehicle) credit revenue, which is worth 140bps of margin.

Finally, Jonas took an absolute hatchet to GAAP EPS estimates for the year, revising to a negative $6.55 from a negative $3.59:

FY19 US GAAP EPS revised to negative $6.55 from negative $3.59 previously. Our 2020 EPS forecast falls to $0.21 from $2.64 previously. Our 2025 EPS forecast falls to $14.78 from $15.88 previously.

In addition, the note addressed what Jonas believes could be “key changes to the narrative” that could send the stock lower, including concerns over the company’s financial strength and whether or not the company has access to capital. 

So just another downgrade? Why is any of this notable or material? Because back in April of 2018, we asked whether or not Musk would be the next high profile CEO to potentially face a margin call. We noted then that Musk’s loans were limited to 25% of the value of the pledged stock, a policy that seemingly did not exist when the 2017 proxy was issued. The figure we used for the value of Musk’s margin loans came from the registration statement for Tesla’s March 2017 stock sale, in which on p. S-9 it notes that he (at that time) owed a total of $624.3 million to various financial institutions, with the largest amount ($344.4 million) owed to Morgan Stanley.

We concluded that $232.30 could be a reasonable target for a Musk margin call:

“…if Musk owed $624.3 million over a year ago and subsequently paid interest on that loan while drawing a minimal salary ($49,920) and continuing his aforementioned luxurious lifestyle while pouring $100 million into his latest distraction, the Boring Companyit seems reasonable to guess that his current loans total approximately $800 million, which means—according to the new proxy—they’d need to be collateralized by $3.2 billion in Tesla shares. As the proxy notes Musk has currently pledged 13,774,897 of his 37,853,041 shares to support those loans, it implies that at a share price below $232.30 (assuming a current balance of $800 million), he’d face either a margin call or the need to post additional shares as collateral. (For some perspective, earlier this month the stock dipped as low as the $244s.)”

But for now, Tesla stock has still defied most analysts’ pessimistic expectations of it, despite finally breaking below the $300 level.

What Morgan Stanley refers to as negative sentiment we just refer to as reality, and the cold hard facts are that if reality ever hits this company, analysts won’t even matter at this point: it’s stock price may become a self fulfilling prophecy – in the wrong direction for Elon Musk.

via ZeroHedge News http://bit.ly/2U6bEJE Tyler Durden

“Trying To Stay Afloat:” Tesla Employee Resorts To GoFundMe After Workers’ Comp Denied

Launched on Saturday, a GoFundMe campaign titled “Trying to stay afloat,” was created by a Tesla Motors employee who alleges the company has not paid him workers’ compensation in over four months.

Carlos Aranda, 43, a lead production worker at Tesla’s Fremont factory, was injured on the job in December “because of their [Tesla] gross negligence,” said the GoFundMe summary.

“I am not one to even want to ask for help but ive come the lowest point in my life. My company has been refusing to pay me what is owed. I was injured at work in December and have been off work since then because of their gross negligence. My quality of life is massively reduced because of my injuries. In the last over 4months they have only paid me for 10 days. My wife who also is injured and works for the same company has had to return to work but that is not enough to keep us going. We are about to lose our living situation and our car because we cant pay for either one. We are almost to the point of no food or gas money. We have 2 children in foster care and without the car or gas money we cant even go see them or do anything towards our reunification. I havent been asking anything from workers comp other than what has been owed to me. Ive worked for the last 28yrs and would love to be able to return to work but they have not accomodated me and are refusing to pay me. Any help now would be appreciated even if its just to spread the word. Thank you so much for taking your time to look at this.”

About 120 days since the accident, Aranda alleges that Tesla has only compensated him for ten days. By law, Tesla is required to carry workers’ compensation insurance, which should cover a majority of Aranda’s wages while recovering from the work-related injury. However, that is not the case here.

Aranda said his “quality of life” has collapsed since the accident, and he cannot pay his bills because he has exhausted all of his savings. “We are almost to the point of no food or gas money. We have 2 children in foster care and without the car or gas money we can’t even go see them or do anything towards our reunification,” part of the summary read.

The employee posted his Work Status Summary on Sunday, which provides some legitimacy to the GoFundMe campaign.

“I wanted to share with everyone what injuries i am dealing with. I have bilateral carpal tunnel syndrome, ganglion cyst left wrist, left arm cubital tunnel syndrome and though not listed in the picture i have plantar faciatis in both feet,” the summary read.

A Truthdig report in November revealed how Tesla employees on the production line aren’t allowed to dial 911 in the event of a severe or life-threatening injury; they must first ask for permission from supervisors.

The report said one worker last year severed his finger and wasn’t allowed to ride in an ambulance, but instead, Tesla doctors called a Lyft to have him transported to the emergency room.

Former Tesla clinic employees said line workers had been systematically sent back to work without proper medical attention.

The GoFundMe campaign has raised roughly $2,800 in less than 24 hours by 48 people. Scrolling through recent donations, you will find a handful of the Tesla short crowd [#TSLAQ] donating funds to Aranda.

via ZeroHedge News http://bit.ly/2KhBSt0 Tyler Durden

“Ghastly” Vancouver Home Sales Crash By 46%, Lowest Since 1985

The Saretsky Report contributed to this article.

Just like last month, when Grant’s Interest Rate Observer dubbed the Vancouver housing market as “ghastly”, in April Vancouver once again reported the fewest monthly sales in 33 years.

According to the Real Estate Board of Greater Vancouver, total housing sales were 46.3% below the 10-year March sales average and was the lowest total for the month since 1986. Condo sales took a steep drop, falling 35% year-over-year as they play catch up with the detached housing market.

City of Vancouver Condo sales in March

“Housing demand today isn’t aligning with our growing economy and low unemployment rates. The market trends we’re seeing are largely policy induced,” Ashley Smith, REBGV president said. “For three years, governments at all levels have imposed new taxes and borrowing requirements on to the housing market.”

“What policymakers are failing to recognize is that demand-side measures don’t eliminate demand, they sideline potential home buyers in the short term. That demand is ultimately satisfied down the line because shelter needs don’t go away. Using public policy to delay local demand in the housing market just feeds disruptive cycles that have been so well-documented in our region.

Given the lack of sales this allowed condo inventory to nearly double, growing 94% from last year. While the rapid pace of inventory growth is concerning the months of inventory remains balanced at just under 6 months. However, given new listings continue to grow and there are still over 40,000 units under construction in Greater Vancouver so inventory will continue trending higher which will surely place added price pressure on the condo segment.

As we can see, with lower sales and rising inventory price pressures are already building: looking at the overall market, the MLS Home Price Index composite benchmark price for all residential properties in Metro Vancouver was $1,011,200 in March 2019, a 7.7% decrease from March 2018. The benchmark price for a detached home is $1,437,100, a 10.5% decrease from March 2018, and a 0.4% decrease compared to February 2019.

Finally, condo prices fell 7.5% year-over-year. The average price per square foot now shows an 11.5% decline from last year…

… all of which is a vivid reminder of what happens to various global assets when Chinese oligarch bidders of last resort, desperate to park their assets offshore, step away.

via ZeroHedge News http://bit.ly/2FWn1im Tyler Durden

24 California Cities Sue to Stop Home Weed Deliveries

A coalition of California local governments is suing the state’s top marijuana regulator for legalizing the home delivery of recreational cannabis.

On Thursday, 24 cities and Santa Cruz County filed a lawsuit against the Bureau of Cannabis Control (BCC), alleging that the BCC’s decision in July 2018 to allow for door-to-door pot delivery statewide violated Prop. 64, California’s legalization ballot initiative.

That measure, passed in November 2016, ended marijuana prohibition but left local governments with wide discretion over how to regulate the newly legal industry. That includes the power to ban recreational cannabis businesses outright, something 80 percent of California’s 482 municipalities have done, according to the Los Angeles Times.

The dispute over home delivery pits the power of these local governments against those citizens who, having been deprived of nearby brick-and-motor stores, depend on delivery services for ready access to marijuana.

“The negative impact delivery bans would have on the industry and the state cannot be understated,” Josh Drayton of the California Cannabis Industry Association tells the Los Angeles Times, warning that a ban on deliveries would force users “into the illicit market.”

Opponents of home marijuana delivery argue that when Prop. 64 let local governments ban marijuana-related businesses, that naturally included marijuana delivery businesses. Their lawsuit also points to a failed bill last year that would have kept local governments from prohibiting home marijuana deliveries, saying this is evidence that existing law gives local governments that power.

Supporters of home delivery point out that Prop. 64 did not let local governments ban the transportation of marijuana through their jurisdictions. A law passed by the California legislature further establishes that “a local jurisdiction shall not prevent delivery of cannabis or cannabis products on public roads.”

The lawsuit argues that even if cities can’t regulate deliveries on public roads, they still have the power to pass rules on what happens at private addresses.

As a matter of what the law says, the cities suing the BCC may have a point about the state overreaching. As a matter of what would be good policy, the justification for limiting home deliveries is remarkably weak.

For all the problems with banning a physical weed store, it at least targets something that anti-cannabis people can see and be offended by. A ban on home delivery, by contrast, targets behavior that is almost entirely undetectable. It basically limits what cannabis consumers can do in their own home, which undermines the whole purpose of repealing the state’s marijuana prohibition in the first place.

At best, these bans will only force consumers to drive to the next town over to purchase marijuana. More likely, it will just mean more consumers continue to rely on an untaxed, unregulated black market. That might not trouble libertarians, but it cuts against the stated goals of home delivery opponents, who justify their bans by saying they want to prevent the criminal activity that will come along with any commercial cannabis activity.

The lawsuit will take a while to wind through the courts. In the meantime, California potheads might want to order as much home-delivery weed as they can.

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Parents at UC-Berkeley Easter Egg Hunt Must Sign Waivers Due to Risk of ‘Catastrophic Injuries and Death’

EggsHere comes Peter Cottontail, hopping down the paper trail: Hard-boiled lawyers made sure no kids could participate in the University of California-Berkeley’s campus Easter egg hunt on Sunday without their parents first signing a waiver.

Before the tykes were ushered toward the roped-off grass, parents stood in line for up to half an hour to hand in the official form for 25th Annual Easter Egg Hunt and Learning Festival. (God forbid the kids just have fun.) According to the waiver, which was obtained by Reason, the undersigned agreed that “Participation in The Activity carries with it certain risks that cannot be eliminated regardless of the care taken to avoid injuries.” These risks ranged from “1) minor injuries, such as scratches, bruises and sprains 2) major injuries such as eye injury or loss of sight, joint or back injuries, heart attacks, and concussions to 3) catastrophic injuries including paralysis and death.”

Are they hunting Easter eggs or landmines?

“Goodness gracious,” said Robert Strand, executive director and lecturer at the Center for Responsible Business at the UC-Berkeley Haas School of Business, in an interview with Reason. Strand was at the event with his wife and kids, age 5 and 2, and was quite underwhelmed by it. “One you signed, you got the tickets and then you walk over to these three different roped-off areas for kids of different ages and literally it was a flat grass surface where they would just place the eggs.”

Each kid was allowed to pick up five, said Strand, “which was completed within a minute, because they were just placed there.”

On the one hand, he said, “I’m glad they put this event on.” It brought a lot of families to the campus, which made for a lovely afternoon. But the emphasis on the potential risks of Easter egg-hunting scrambled his brains. “We’re in Scandinavia for a chunk of the summer, and our kids just run around at parks,” he said. “They’re jumping off things, and some of our friends there say we should be grateful for the small accidents, because then we learn from them, and that prevents the big accidents.”

Yeah, say the lawyers. Tell that to Humpty Dumpty.

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Morgan Stanley: “The Moment Of Truth For Stocks Is Here”

It’s Monday, which means another dose of cold water is being poured over market euphoria, courtesy of the market’s latest, and according to many most accurate, bear Morgan Stanley’s chief equity strategist Michael Wilson.

One day after Wilson blasted FOMO-mania, warning that “it’s misguided to assume that the profits recession has magically ended, and I see an increasing chance that it turns into an economic one if companies decide they want to protect profits by cutting labor, capex and inventory”, the equity strategist has published a new note in which he warns that “with more than 100% of the rally in stocks this year coming from multiple expansion,” the “moment of truth” is coming with 1Q earnings results. And since we already know that Q1 earnings will be the worst in three years, it will be “more about guidance since S&P 500 1Q estimates are now very achievable, having fallen close to 10% over the past 9 months” with corporate margins the big wildcard according to Morgan Stanley.

First, when looking at the known unknowns, Wilson echoes what we reported a month ago, namely that this is expected to be the first quarter of negative year-over-year earnings growth since the 2015/16 earnings recession…

… as earnings are expected to shrink -4% y/y.

However, unlike the rest of Wall Street which sees a prompt rebound in profits, Wilson believes “this quarter will mark the start of another earnings recession, which we define as two or more quarters of flat or negative growth.”

It’s not all gloom and doom yet, and as MS caveats, US companies typically beat estimates by 4-6% as shown in the next chart. The 4Q18 results showed a lower than normal beat rate at just 3 percent and this was against earnings forecasts that had already come down significantly before they were reported. Even so, a lowered bar into the quarter does not mean the likelihood of a beat is greater: “The forecasts for 1Q19 have been lowered substantially and we do not think we are going to see a beat big enough to lift index growth into positive territory.”

Another potential wildcard: whereas earnings are sliding – largely due to a decline in profit margins – sales growth remains relatively solid, and is expected to be 4.8% for the S&P 500. Only two sectors, Energy and notably growth darling Tech, are expected to have negative sales growth. Health Care is expected to be the biggest contributor to index level sales growth boosting the overall number 2.1%. The sector is expected to grow 11.8% with the strongest growth coming from the Health Care Providers & Services industry group, which is predicted to grow 14.9%. Communication Services is expected to have the next highest sales growth at 11.8%. The rest of the sectors are expected to have tepid sales growth ranging from 2.6% – 4.9%.

Keep in mind that all of the above is already largely priced in as even most market bulls and analysts are resigned to an earnings drop in Q1. The question is what happens next, and whether Morgan Stanley’s dismal thesis for a continued earnings (and potentially economic) recession, plays out.

Which is why of key importance will be company guidance for the rest of the year, and here MS notes that “the ratio of companies offering negative guidance to those offering positive guidance is the highest it has been since the first quarter of 2016 at 3.3x.

This is also above the average ratio since 2005 and supports Wilson’s call for lackluster beats this season, or as he puts it “this is where the rubber will meet the road for stocks” and adds that “we’re comfortable saying that the stock market is well aware of the weaker earnings growth expected this quarter. However, the real question at this point is what the second half of the year really looks like.” And this is where Wall Street diverges: what happens in H2?

Predictably, companies have kept an optimistic outlook with a large majority of those who have recently disappointed telling investors to expect a rebound from the first quarter or in the second half of the year.

So what determine “the moment of truth for stocks” and what will happen in the second half?

To answer that question, Morgan Stanley said that it “will be watching margin results very closely this quarter. Last year, earnings numbers received a one-time boost from tax reform. A good deal of earnings growth during 2018 could be attributed to these benefits. The yellow bars in Exhibit 7 show the spread between year-over-year net income growth and revenue growth adjusted for the tax bump. The tax adjusted spread fell dramatically between the third and fourth quarter, dropping from 9.4% to 3.1%. Margin expansion was difficult to come by late last year and consensus estimates are embedding margin contraction for the first three quarters of 2019.”

Another very troubling observation: if downward earnings revisions, traditionally a reliable leading indicator for forward earnings, is to be trusted, the coming earnings recession will not only be acute, it would be the worst plunge in EPS growth since the financial crisis.

Which is not to say that Wall Street is completely oblivious to the risk of earnings dropping in the second half: to be sure, estimates for 2019 S&P EBIT margins have already fallen -0.8% since 3Q18. Energy, Communication Services, Materials, and Tech have seen bigger declines in margin estimates than the broader market, and zero sectors have seen margin estimates rise. And, as Wilson has repeatedly opined in recent months, labor costs will be one of the key pressures sending margins lower in 2019, especially since “Last quarter, the number of mentions of labor costs during earnings calls was the highest it has been since 2005 (Exhibit 9). We will be watching this earnings season.”

Finally, before Morgan Stanley is accused of being indiscriminately bearish no matter the context, Wilson is quick to caution clients that “Don’t fight the Fed remains the right strategy. In 2018, it was about the Fed tightening in response to a fiscal policy that we believe was poorly timed and an overheating US economy. The result: a rolling bear market for global assets. In 2019, it’s been about the Fed pivoting on that policy and asset prices rallying in unison and faster than they declined last year.”

Apparently, fighting the Fed in either direction is a bad idea. While we correctly forecasted the negative impact of a tightening Fed last year, we underestimated how positive the impact would be from the Fed’s dovish pivot. As a result, we now find the S&P 500 inching closer to our Bull Case of 3000 well before we thought it would get there.

And so with this caveat in the public doman, Wilson once again reminds readers that “with more than 100 percent of the rally this year coming from multiple expansion, we do wonder when, or if, investors will demand more evidence that growth is not only bottoming but accelerating. At 16.8x forward 12 month EPS, the S&P now trades at the very high end of our valuation range, offering little upside in the absence of a growth resurgence.”

At 16.8x we are confident that if we don’t get the reacceleration now baked into the consensus expectations, it will be treated as a disappointment by investors, unlike in January when disappointing earnings results were greeted with positive stock price reactions.

In summary, with first quarter earnings season about to begin, “the moment of truth has arrived—will companies continue to guide for a second-half recovery or lower the bar further?” Wilson suspects the powerful equity rally has left many management teams in a better mood that could encourage them to remain steadfast in the second-half recovery mantra, even if the evidence of one remains uncertain.

Still, while Wilson has no way of knowing how companies will guide, the bank’s leading earnings indictor continues to suggest strongly that CY19 estimates are still too high. “Therefore, we believe strong guidance should be viewed cautiously, and we would prefer to see the bar lowered further.”

In short, where everyone else sees just a one quarter earnings blip, Morgan Stanley remains one of the few (bearish) outliers that sees the start of a protracted, and potentially painful earnings recession that if left unchecked, could mutate into the first full blown economic recession since 2009.

via ZeroHedge News http://bit.ly/2uSzoqq Tyler Durden

Saudi Arabia Denies That It Threatened To Abandon Petrodollar

In what appears to be the latest example of Saudi Arabia saying one thing in public and another in private, Saudi Arabia’s energy ministry on. Monday denied reports published last week claiming that the kingdom might abandon the petrodollar if Congress passes the “NOPEC” bill, which would expose members of the oil cartel to American antitrust laws.

The Financial Times reported that the kingdom has “no plans” to sell its oil in currencies other than the dollar, a decision that, if the kingdom did follow through, would seriously undermine the dollar’s role as the dominant global reserve currency.

These reports “are inaccurate and do not reflect Saudi Arabia’s position on this matter,” the energy ministry said in a statement, adding that the kingdom’s decades-long policy of selling oil in dollars “has served well the objectives of its financial and monetary policies.”

This notably comes as Saudi state oil firm Aramco’s first dollar-denominated bond offering was 4x oversubscribed with $40 billion in orders on $10 billion of bonds.

Saudi

Of course, Saudi Arabia has a long history of subtly threatening the US in response to unfavorable legislation. Three years ago, the kingdom implied it might dump US Treasury holdings following the passage of a law that would hold Saudis accountable for 9/11. That bill was signed into law by Obama after passing both houses of Congress, and since then, the kingdom has been pressuring President Trump to rescind it – though the kingdom remains one of the largest holders of US debt.

Six months ago, the Saudis once again threatened to weaponize their wealth and invoke another of the “nuclear options” to exert leverage against the US as the biggest importer of arms from America threatened to buy arms somewhere else if the US sanctioned it over the death of Jamal Khashoggi. Sanctions instead were levied against 17 Saudi nationals believed to be involved in the killing, though Crown Prince Mohammad bin Salman and the kingdom’s government were spared.

Infographic: The USA's Biggest Arms Export Partners | Statista You will find more infographics at Statista

Last week, Reuters reported, citing three unidentified people familiar with Saudi energy policy, that the kingdom had threatened to drop the dollar as its main currency in selling its oil if the US passes the lawsuit bill. While the death of the petrodollar has long been predicted (particularly as the petroyuan gathers momentum), this is the most direct threat yet to the dollar’s privileged position in global commodity markets.

NOPEC, or the No Oil Producing and Exporting Cartels Act, was first introduced in 2000 and aims to remove sovereign immunity from US antitrust law, paving the way for OPEC states to be sued for curbing output in a bid to raise oil prices.

The threats to de-dollarize arrived amid reports that Russia and China have been buying more gold reserves as part of a move away from the dollar.

But even if Saudi Arabia keeps the dollar as its currency of choice for trading oil, the Russia and China-led push to create an alternative to the dollar-based financial system will almost certainly continue. And investors who naively expect the dollar’s position will go unchallenged forever would do well to remember the following chart.

Reserves

via ZeroHedge News http://bit.ly/2YXYiTC Tyler Durden

‘Bond Trading’ Exodus Reveals The Global Economy’s Landmine

Authored by Jeffrey Snider via Alhambra Investment Partners,

It isn’t just US or European banks which are shrinking. The nature of this post-August 9, 2007, world is just that – global. Sure, there are regulations which have made investment banking more expensive. But there isn’t a rule or law that Wall Street (really Lombard Street) wouldn’t “discover” a way to circumvent it if they all thought it was worth the trouble.

Bond trading, a euphemism for all this FICC money dealing stuff, didn’t need an LCR to look at the world differently. It only needed Bear Stearns.

There is only risk where there used to be only return. In an environment where everyone largely agrees (outside of a few outliers) with this returnless risk scenario there really is no other course. Being on the wrong end of such asymmetry leaves only the one long run option. You can fight it and disagree now and again, but that sort of reflationary thinking just cannot last.

Goldman Sachs earlier this year announced that it would be cutting back. This week, it was Nomura in Japan (thanks J. Fraser). Once that country’s biggest stalwart in “fixed income”, another way of saying bond trading, they don’t want to do it anymore, either.

The biggest question mark hovers over the cuts in fixed-income trading, often seen as a strength at the bank. Nomura is scaling back emerging markets and G-10 rates, foreign exchange and flow-credit trading businesses, as well as costs in the EMEA flow business by 50 percent. Flow trading occurs on behalf of clients, unlike proprietary trading.

The business just isn’t there for them to keep up with capacity. Why isn’t the business there? An unstable system destroys not just opportunity but also the incentives to try and stabilize the system. At this point, nothing other than outside influence will break the cycle (and that’s about as likely as a central banker recovery prediction paying off).

The Office of the Comptroller of the Currency (OCC) data on Q4 2018 was pretty damning as far as the domestic dealers are concerned. Goldman had an atrocious quarter, no surprise, almost certainly betting on Jay Powell. Money dealers are described in the Economics (and central bank) textbook running neutral books; they don’t, they never have.

You can see the ebbs and flows of particular dealers which follow along each reflation episode. Goldman, out of all of them, really bought into Reflation #3. Beginning with the first quarter of 2017, this bank’s derivative book skyrocketed an astounding 33% over the next five quarters! Apparently, they weren’t in much demand for compression trading during 2017’s globally synchronized growth scare, and boy did the world seem much better for it (CNY UP, too).

That trend, however, abruptly ended around Q1 2018. Not surprisingly, especially since it was the same trend for the other dealers, too, a lot of bad monetary things have been happening ever since.

These are the more visible pieces of that “rest of the money markets that do matter” I write about when they intrude upon federal funds, the trouble out there in the shadows which must be severe if it shows up in EFF and IOER (the joke). Since around Q1 2018, yep, intrude they have.

In Q4 when everything was going wrong, GS’s derivative book collapsed 22% during just those three months. Weeks later, the “bank” then announced how it didn’t want to do this stuff anymore. Having bet on Yellen, the bank’s withdrawal helped force her successor to his epic flip flop.

The other big banks reduced their exposures during Q4, too. Citigroup, which as late as 2014 right before Euro$ #3 was jockeying to overtake JPM as the money dealer king, ran for the hills in Q4 2018. Its book was whacked 13%. We know the global economy hit a landmine in this same October to December window.

Again, it’s not just US banks or those conflicted throughout Europe. This is a systemic problem all across the board, a point driven home by Japan’s Nomura. This derivative stuff, or bond trading and FICC, is the guts of the global money system – a credit-based currency regime. This eurodollar is the world’s reserve currency, its corrosive fingerprints once more all over the global economy.

And so, our problems at least are very well defined. You just can’t get anyone to believe it, the high intellectual hurdle which I described a few months ago:

This is one key factor as to why our economic problems are so hard to overcome; how in the world the global economy can lose an entire decade and be one-tenth of the way into another. You start by saying the central bank isn’t central and already people are at best skeptical if not completely turned off. And then you tell them, the few who are left, if you really want any chance at legitimate economic recovery Goldman Sachs [or Nomura] needs to make more money, a lot more, in its bond trading business. And if you don’t want Goldman [or Nomura] to thrive in FICC, then the whole global monetary system must be completely revamped from the ground up.

Oh, and by the way, we’ve been operating under a clandestine global monetary system predicated on the world’s biggest banks who aren’t really banks working in the shadows for half a century already.

It’s way, way too much to grasp, especially all at once.

Real economy participants don’t care one way or the other about formal definitions.

They’re stuck with what’s actually available, or not available. The consequences are real, too.

via ZeroHedge News http://bit.ly/2KhMfgt Tyler Durden

Four ways that Uncle Sam will respond to its $75 trillion insolvency

Last week I told you that the US government recently reported a negative net worth of MINUS $75 TRILLION.

That’s not a type-o. According to the Treasury Department’s annual financial report for Fiscal Year 2018 (which they just published last week), the US government is hopelessly bankrupt.

Now, I’m not talking about this trying to stoke fear and panic.

Quite the opposite– I’m hoping that this conversation results in calm optimism. But the point is that it’s an important conversation to have… because a number as large as $75 trillion absolutely has consequences.

To believe that any nation can be so desperately insolvent without suffering any negative impact is just plain foolish.

Debts have to be paid. Obligations have to be met. So at some point, with numbers these gruesome, something has to break down.

This is not a dire prediction or wild conspiracy theory. It’s an arithmetic certainty.

Remember, this isn’t even my analysis. The government itself acknowledges its $75 trillion insolvency. The Social Security Administration acknowledges that its trust funds will run out of money in 15 years.

This is happening. So let’s take a look at the government’s very narrow playbook:

1) Ignore the problem

Politicians are already acting as if nothing is wrong.

Sure, occasionally you’ll hear someone complain about the debt, or there will be a debt ceiling showdown. But no serious alarm bells are ringing.

And because they don’t make a big deal over the debt, no one else does either. Everyone just goes along as if there’s not a problem.

2) Raise taxes

This is HIGHLY likely because it’s the most politically palatable option. The Bolsheviks are already coming to power under a mandate to soak the rich. They want wealth taxes, dramatically higher income taxes, corporate taxes, surtaxes, etc.

Problem is– it won’t help.

Since the end of World War II, tax rates in the United States have been all over the board. Back in the 1960s, the wealthiest paid a highest marginal rate of 90%! Now the highest is 37%.

During that period, corporate, individual, and capital gain rates have bounced around like a drunken pinball.

Yet throughout it all, despite how high or low tax rates have been set, overall tax REVENUE (measured as a percentage of GDP) has been more or less the same.

US tax revenue averages out to be about 17.7% of GDP, year in, year out, regardless of what actual tax rates are.

In other words, the US government’s ‘slice’ of the economic pie is about 17.7%, plus/minus a very narrow range.

In Fiscal Year 2018, for example, the federal government’s tax revenue was 18.0% of GDP.

Point is, they could jack up tax rates to the moon… but actual tax REVENUE won’t budge at all.

You’d think that they would recognize this– that eight decades of tax data would make them think– “Gee, if we can’t increase our slice of the pie, why don’t we just try to make the pie bigger…”

But no. They fall back on the same old ‘soak the rich’ mentality, because it gets them elected.

3) Default

Since raising taxes won’t actually fix anything, their next move is to default.

This could mean either defaulting on their creditors, i.e. people who own the debt… or defaulting on their obligations to taxpayers (like Social Security).

And as I said earlier, that’s already happening.

In 2018 annual report, the Social Security Administration stated that its trust funds will run out of money in 2034, just 15 years away.

After that, they’ll have no choice but to dramatically cut benefits for current and future Social Security recipients.

Imagine paying into the system for your entire life under a promise that you’ll receive certain benefits, only to have that promise broken. That constitutes a default. And it’s already in the works.

Defaulting on creditors is a tricky one.

The top owners of US debt are as follows:

  • Social Security Administration: yes it’s true, Social Security is the top US debt holder. So if Uncle Sam defaults on Social Security, that program is even more royally screwed.
  • Federal Reserve: The Fed owns trillions of dollars worth of US debt. So if Uncle Sam defaults, it would wipe out the Fed’s solvency and create an epic currency crisis for the US dollar.
  • Foreign Creditors like China: If the Fed defaults on the Chinese, it would create a global financial crisis, as nearly all foreigners would dump their US bonds. Borrowing costs would skyrocket as a result, bankrupting the government.

None of those is a good option, which leads to…

4) Inflation

For thousands of years, governments in financial distress resorted to debasing their currencies and creating inflation in order to make ends meet.

Governments really like inflation, because it slowly reduces the value of the debt that they’ve borrowed.

And because inflation is so gradual (around 3% annually), no one kicks up much of a fuss, even though it steals prosperity year after year.

So most likely they’ll continue to print money in an attempt to create inflation and inflate the debt away.

These are all things that a reasonable person should plan on: higher taxes, higher inflation, default on Social Security, etc.

And again, this is based on the government’s own data.

But it’s not anything to fear– there are plenty of solutions.

It certainly makes sense, for example, to consider owning some inflation-proof assets: gold and silver, real estate (including foreign property), shares of a well-managed, high cash-flow business, etc.

Those assets will do well against inflation.

It also makes sense to create a robust retirement structure like a solo 401(k) or SEP IRA so that you’re not as dependent on Social Security… because that reckoning day is absolutely coming.

The government is practically giving us a date to circle on our calendars. Failing to plan for it is insane.

Source

from Sovereign Man http://bit.ly/2P0bd2D
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Top House Republican Shreds Nadler For Bullying Barr; Wants Mueller To Testify “Immediately”

Rep. Doug Collins, the top Republican on the Democrat-controlled House Judiciary Committee, wrote a scathing letter to the panel’s chairman, Rep. Jerry Nadler (D-NY) accusing him of putting Attorney General William Barr in an “untenable but politically convenient situation.” 

According to the letter, Barr would be forced to “break the law” if he complies with a subpoena for special counsel Robert Mueller’s unredacted Russia report and its underlying evidence. If Barr doesn’t, Nadler will “label him as part of a cover-up,” according to the letter. 

Barr has vowed to release a version of Mueller’s Russia report by the middle of April, with redactions made to grand jury and classified information, – as required under federal law

House Democrats voted last Wednesday to authorize subpoenas for Mueller’s report and its underlying evidence with no redactions. 

Collins notes that Nadler could compel AG Barr to provide the unredacted report if he launches an impeachment hearing, however the top Republican on the panel noted “Perhaps you are loath to begin an impeachment hearing when the facts do not support one.” 

“Instead, you refuse to head down that path for political reasons, and have chosen the path of greatest resistance, and least legality – attacking the Attorney General for refusing to break the law while misleading the American public about what the law requires or allows.” 

“Your decision to make groundless claims and repeatedly threaten to go to court not only distracts from other Committee business but, based on firm legal precedent, will also end — after months, if not years, of litigation.” 

Collins suggests that if Nadler isn’t going to launch an impeachment hearing, he invite Mueller to testify “immediately.”

“For nearly two years, Special Counsel Mueller oversaw an investigation that issued more than 2.800 subpoenas, executed nearly 500 search warrants, and interviewed approximately 500 witnesses. Attorney General Barr was never part of this investigation, and instead simply reviewed the Special Counsel’s final report and has provided Congress, so far, with the Special Counsel’s principal conclusions.” 

 “I urge you to do the right thing, follow the law, and invite the Special Counsel to testify before the Committee immediately. Doing so ensures we will hear the unfiltered truth from a man who conducted his investigation with integrity and professionalism.” 

via ZeroHedge News http://bit.ly/2uUuycw Tyler Durden