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Tesla Soars Despite Record Quarterly Loss, $8 Million Daily Cash Burn

Amid reports of a liquidity shortage following reports of cash back demands from suppliers, questions about Model 3 production problems and the “tent” as well as growing concerns about slumping demand, not to mention CEO Elon Musk’s bizarre behavior, and – of course – a gargantuan cash burn, it is safe to say that Tesla’s earnings were the most hotly expected numbers of the week, if not the quarter.

So, here is what Tesla reported moments ago:

  • Q2 Revenue $4.00 billion, Exp. $3.97BN
  • Q2 Adjusted loss per share: $3.06, Exp. $2.90
  • Q2 Adjusted automotive gross margin 21%, Exp. 16%
  • Q2 Cash Burn: $739.5 Million

Incidentally, the company’s GAAP Net Loss was $717.5MM, an all time quarterly high.

This is what revenue looks like:

And earnings, both adjusted and GAAP:

On the income statement side, the company said that GAAP operating expenses increased to $1.24BN, an increase driven by a $103MM restructuring cost.

As regards to auto deliveries, we already knew what Q2 looked like: Tesla reported that it produced 53,339 vehicles in Q2 and delivered 22,319 Model S and Model X vehicles and 18,449 Model 3 vehicles,  totaling 40,768 deliveries.

… So it was all about the forecast and in its release, the company said that during the month of July, it have “repeated weekly” production of approximately 5,000 Model 3 cars multiple times while also producing 2,000 Model S and X per week. Having achieved its 5,000 per week milestone, Tesla says it will now continue to increase that further, with an aim being to produce 6,000 Model 3 vehicles per week by late August.

The company then expect to increase production over the next few quarters beyond 6,000 per week, “while keeping additional capex limited.”

Why are these numbers notable? Because as Musk notes, “a total vehicle output of 7,000 vehicles per week, or 350,000 per year, should enable Tesla to become sustainably profitable for the first time in our history – and we expect to grow our production rate further in Q3.“

Eventually, Tesla aims to increase production to 10,000 Model 3s per week “as fast as we can”. Tesla added that the majority of Tesla’s production lines “will be ready to produce at this rate by end of this year,” but “will still have to increase capacity in certain places” and “will need our suppliers to meet this as well. As a result, we expect to hit this rate sometime next year.”

Looking at just Q3, Tesla said it expects to produce 50,000 to 55,000 Model 3 vehicles “which will represent an increase of 75% to 92% from the prior quarter.”

Which is somewhat strange, because Bloomberg’s Model 3 Tracker suggests the company hasn’t been able to sustain its end-of-quarter burst rate of 5,000 a week. According to the model, which estimates production using two datasets of vehicle identification numbers (VINs), the average weekly rate since July 1 has fallen just short of 4,000 of the sedans.

What about demand? According to the release, demand for Model S and Model X vehicles remains high, with Q2 2018 being our highest ever Q2 for Model S and Model X orders. 

In July 2018, we delivered our 200,000th vehicle in the US, which means that our US customers will have access to the full $7,500 federal tax credit until the end of 2018, at which point it will phase out over the course of 2019.

Tesla also touched on the Shanghai Gigafactory, saying that “construction is expected to start within the next few quarters, though our initial investment will not start in any significant way until 2019, with much of it expected to be funded through local debt.“

One key aspect that investors were looking at as noted above, was Tesla’s cash burn, which in Q2 came in at $739.5 million, better than the estimated $900 loss, however this was largely the result of another decline in CapEx, which shrank to $610MM in Q2 from $655MM last quarter and $959MM a year ago.

Commenting on its cash burn, the company said cash outflow from operating activities in Q2 2018 was $130 million, “which was significantly better than outflows of $398 million in Q1.”

This improvement occurred despite a substantial increase in finished goods vehicle inventory of $579 million as a result of the timing of deliveries.

And a key fact that may explain why the stock is higher in the after hours right now, Tesla reported that “Model 3 gross profit excluding non-cash items shifted from negative in Q1 to positive in Q2, driving significant improvement in cash profitability.”

Additionally, the company said that significant improvement in our other working capital needs helped to mitigate the impact of inventory growth.

Telsa slo reported that customer deposits decreased compared to Q1 to $942 million, however it notes that this does not reflect the  incremental deposits we received once we opened the Model 3 configurator for orders in early Q3 2018. Deposits impact the P&L only once the vehicle gets delivered to a customer.

 

The market reaction was chaotic, and while the stock initially slumped, it is now well over 5% higher in the after market, surging as a result of what appears to be better than expected cash burn, a strong Model 3 production pipeline, no concerns about liquidity and a generally upbeat perspective on the stock.

And as we now turn our attention to Tesla’s conference call, which if last quarter was any indication should be anything but “boring”, here is a Bingo suggestion for the call.

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Andrea Rich, RIP

Andrea Rich, for decades the skilled and indefatigible operator of the vitally important libertarian bookselling service Laissez Faire Books, has died.

Her career in the libertarian movement was long and varied. Among other things, she was national vice chair for the Libertarian Party in the mid-1970s, worked with the Center for Libertarian Studies in its early years, helped craft a successful national TV ad campaign for Ed Clark’s 1980 Libertarian presidential run, and served on the boards of directors of the Foundation for Economic Education (the first modern libertarian promotional organization), the Atlas Network (which helps free-market institutes around the world), and the Institute for Humane Studies (which trains and supports academics in libertarian thought). She also founded the libertarian book publishing imprint Fox & Wilkes and managed the Thomas Szasz Award for Outstanding Contributions to the Cause of Civil Liberties (which, disclosure, I won in 2011). And her Center for Independent Thought distributed John Stossel’s highly influential market-themed videos to classrooms across America.

In the pre-Amazon age, Laissez Faire Books was often the only way for a far-flung national audience of libertarians to learn of books of interest to them. Its existence, and Andrea’s tough negotiating, made the publication of many libertarian books possible and access to them affordable.

Reason‘s Nick Gillespie eulogized Andrea on Facebook, summing up well the importance of Laissez Faire Books in the pre-Web days:

Every issue of the catalogue was crammed with squibs about books by and about Milton and Rose Friedman, Hayek, Rand, Mises, Rothbard, Rose Wilder Lane (the daughter of Little House author Laura Ingalls Wilder), Lysander Spooner, Voltairine de Cleyre, Tom Szasz, you name it, all held together by mind-blowing essays by Roy Childs and other contributors.

Even more than magazines, catalogues captivated me as a kid growing up in suburban New Jersey….Catalogues offered up endless possibilities, each entry a window into a different world I could imagine living in for a few minutes or hours.

More than any other, the [Laissez Faire Books] catalogue gave me a sense of the world that I would eventually live in for my professional life. At a time when the nearest real bookstore (a tiny Waldenbooks in a mall) was miles away, it gave me tons to look at and think about, broadening my world and options.

David Nott, president of the Reason Foundation (which publishes this magazine) hit on two of Andrea’s prominent qualities in a letter he wrote to her on her retirement. One was her honest but winning ability to have “busted my chops when it has been necessary, speaking truth in a polite way.” The other was her enduring and tolerant “love of the quirky and eccentric characters that make up this movement.” The “networks you have forged,” he wrote, “continue to change the world.”

On a personal note, Andrea and I were on the first-name basis I adopt in this note ever since she agreed back in the mid-1990s to take a chance on this tyro libertarian journalist who’d never written anything longer than a few thousand words. She provided funding via the Roy Childs Memorial Scholars Fund (after an introduction from Chris Whitten, who first convinced me I could write such a thing) for some of the research expenses associated with my book Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement.

Her hard-earned and universally good relationships with nearly everyone else in the libertarian world is what likely inclined the vast majority of my over 100 interview subjects to agree to speak to me on the record. Andrea put up with a process that took a lot longer than she anticipated (12 years from her decision to back the book until its publication in 2007) with grace and continued help and encouragement.

Her tireless work, dedication to libertarian thought, and buoyant personality were key to that book working at all, and I am forever in her debt. Any libertarian who bought from Laissez Faire or had his or her education buoyed by the authors she sold and promoted, or any of the work of the many libertarian institutions she supported and guided, are as well.

Andrea is survived by her husband Howard Rich, her longtime partner in supporting libertarian causes.

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NIMBYs to Developer: Your Proposed Building Blocks Too Much Sun, Reminds Us of Native American Genocide

Plans to build an apartment complex on a vacant lot in Berkeley have attracted heated opposition from neighbors and from city zoning officials. They suggest that the proposed building is too large, that it will block out needed sunlight, and that it resembles the genocide of the Native Americans.

For nearly two decades, a series of developers has tried to put up multi-family housing on a site boarding Shattuck Avenue in this California town. All of those efforts have come to naught. Building permits were granted in 2001 and 2007 for smaller 16-unit and 21-unit projects, respectively, but those withered on the vine and were never built. In 2013, zoning officials shot down a proposal for a 67-unit micro-apartment complex on the grounds that it was much too large and out of character for the neighborhood.

Now a fourth developer—identified as 2701 Shattuck Berkeley, LLC—is taking a crack at the cursed lot. Last Thursday, Shattuck representative Stuart Gruendl presented plans to the zoning board for a 57-unit apartment building comprised mostly of small, 350-square-foot studio apartments, with space reserved for retail business on the ground floor.

The latest design is an “intelligent smart-growth project on a major transit line,” said Gruendl, who described the proposed building as “affordable-by-design,” with five units reserved for very-low-income renters (defined as individuals making $40,700 or less) and the rest rented out for $5 a square foot.

Now, $1,500 a month for a 300-square-foot studio apartment is hardly a bargain in most of the country. But in Berkeley, where the average rent is roughly $3,100 and the average studio rental is $2,200, this is practically a steal.

Far from jumping at the opportunity to approve new housing in their high-priced community, members of the zoning board reacted to Gruendl’s presentation as though he had proposed a zombie apocalypse.

“One of the very first comments I made on the first project on this site I’ll repeat again tonight because it’s still the same problem,” said Board Member Carrie Olson. “You all seen the movie Rear Window? This is an insane invasion of privacy for the folks who live next door. This is not how we do things in Berkeley.”

Other members seconded this view, complaining that building’s size had still not been reduced enough from the 2013 project they rejected.

“The points of denial [for the 2013 project] in substance apply to this project as well,” said Board Member Patrick Sheahan. “It’s simply too big, too large.”

For Substitute Board Member Toni Mester, the building was not just too large; it was in the wrong place. “It’s on the wrong side of the street. If it were on the other side of the street, we wouldn’t have the same issues.” The problem, apparently, was the sunlight the building would block. “Berkleyeans depend on the afternoon sun. It’s what we live for.”

Some of the neighbors seemed perturbed too.

“Berkeley needs to prioritize a livable, sustainable environment for people who already live here,” said Todd Darling, who owns a property next to the proposed development. “Yes, 40 percent of midwestern college graduates want to move to California. But we are not obligated to sacrifice what is best about Berkeley to build dorm rooms for them.”

Darling preemptively dismissed arguments that building more housing would make housing more affordable, saying that the “Pilgrims used the same arguments against the natives in Massachusetts.” And we all know how that story ended!

The 2701 Shattuck development is hardly the only multi-family housing project to attract the ire of Berkeley townspeople. It’s not even the only project on Shattuck Avenue to do so.

Earlier in July, Berkeley’s zoning board shot down a proposal to construct a 23-unit apartment building at 3000 Shattuck. As Berkeleyside reports, similar concerns about that building’s size, dormitory-like interior design, and lack of below-market units persuaded the zoning board to vote against the project, 7–2.

Despite the persistent opposition to the 2701 Shattuck development, the project might yet succeed where others have failed. The state’s Density Bonus law overrides some local zoning restrictions in exchange for renting out some units at below-market rates. And a 2017 amendment to California’s Housing Accountability Act similarly bars local governments from rejecting density bonus projects on the size of the project alone. This limits what Berkeley’s zoning board mostly to demanding aesthetic changes to the project, a fact that clearly frustrated board members at last Thursday’s meeting.

But there is a still a lot of wiggle room for bureaucrats to grind the project to a halt, so the 2701 Shattuck project is hardly over the finish line yet. And even if it succeeds, it will be a drop in the bucket compared to the housing California communities need to build to start bring rental prices down.

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Stocks & Bonds Sink Despite Hot Apple, Roasted Turkey, Euphoric Fed

Seemed appropriate…

 

So Apple beat expectations…and a buying panic ensued…

But disappointed everyone by not becoming the first company to be worth ONE TRILLION DOLLARS today… Doubled in size since June 2016

 

Little to no real initial reaction to The Fed statement… and then the machines remember that they are supposed to bid stocks and puke gold…

 

Futures show the reaction shortly after the close to Apple (green) and Trump’s tariff headlines (red) and then the pump and dump through the EU close…

 

Despite AAPL’s help, S&P and Dow ended red with only Nasdaq green on the day… (NOTE the ramp in AAPL to get the S&P green very briefly – that failed)

 

 

While AAPL ripped, FANG stocks could not catch a bid

All eyes on Tesla after hours as bonds lead the carmaker lower…

 

Wells Fargo was funny – dropping ion its big fine and then ramping in a buying panic…

 

Treasury yields were higher across the curve with the long-end notably underperforming…

 

With 10Y Yield topping 3% (the same as at the June Fed hike)…

 

Before falling back to hover around the 3.00% into the close…

 

The yield curve steepened

 

The Dollar Index ended the day practically unchanged

 

The Turkish Lira collapsed to a new record low (above 5.00/USD) after US sanctions…

 

And Offshore Yuan slumped (after another weak Yuan Fix)…

 

Cryptos tumbled overnight on South Korea tax headlines but bounced back a little… (Ripple ripped)

 

Commodities remain lower on the week, with copper leading the drop…

*  *  *

Finally, we offer three charts:

First, Atlanta Fed’s GDPNOW model is forecasting a 4.95% GDP growth in Q3…

Second, despite the hopeful forecasts for US economic growth, the housing segment is collapsing…

As Gluskin Sheff’s David Rosenberg notes, “The Fed could get away with using the term “strong” three times in the opening paragraph and five times throughout because it conveniently missed discussing the housing market!”

Third and finally, Consumer Confidence measures are flashing a very loud “late-cycle” warning…

And, once again, as Gluskin Sheff’s David Rosenberg notes, “The gap that has opened up between consumer confidence for the present and future is so classically late-cycle. As in, no more pent-up demand. Consider this a near-2 SD event. Take out the umbrella!”

* *  *

Happy 20th Anniversary on CNBC Michelle

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The Number Of Americans Living In Their Vehicles “Explodes” As The Middle Class Collapses

Authored by Michael Snyder via The Economic Collapse blog,

If the U.S. economy is really doing so well, then why is homelessness rising so rapidly?

As the gap between the rich and the poor continues to increase, the middle class is steadily eroding.  In fact, I recently gave my readers 15 signs that the middle class in America is being systematically destroyed.  More Americans are falling out of the middle class and into poverty with each passing day, and this is one of the big reasons why the number of homeless is surging.  For example, the number of people living on the street in L.A. has shot up 75 percent over the last 6 years.  But of course L.A. is far from alone.  Other major cities on the west coast are facing similar problems, and that includes Seattle.  It turns out that the Emerald City has seen a 46 percent rise in the number of people sleeping in their vehicles in just the past year…

The number of people who live in their vehicles because they can’t find affordable housing is on the rise, even though the practice is illegal in many U.S. cities.

The number of people residing in campers and other vehicles surged 46 percent over the past year, a recent homeless census in Seattle’s King County, Washington found. The problem is “exploding” in cities with expensive housing markets, including Los Angeles, Portland and San Francisco, according to Governing magazine.

Amazon, Microsoft and other big tech companies are in the Seattle area.  It is a region that is supposedly “prospering”, and yet this is going on.

Sadly, it isn’t just major urban areas that are seeing more people sleeping in their vehicles.  Over in Sioux Falls, South Dakota, many of the homeless sleep in their vehicles even in the middle of winter…

Stephanie Monroe, managing director of Children Youth & Family Services at Volunteers of America, Dakotas, tells a similar story. At least 25 percent of the non-profit’s Sioux Falls clients have lived in their vehicles at some point, even during winter’s sub-freezing temperatures.

“Many of our communities don’t have formal shelter services,” she said in an interview. “It can lead to individuals resorting to living in their cars or other vehicles.”

It is time to admit that we have a problem.  The number of homeless in this country is surging, and we need to start coming up with some better solutions.

But instead, many communities are simply passing laws that make it illegal for people to sleep in their vehicles…

A recent survey by the National Law Center on Homelessness and Poverty (NLCHP), which tracks policies in 187 cities, found the number of prohibitions against vehicle residency has more than doubled during the last decade.

Those laws aren’t going to solve anything.

At best, they will just encourage some of the homeless to go somewhere else.

And if our homelessness crisis is escalating this dramatically while the economy is supposedly “growing”, how bad are things going to be once the next recession officially begins?

We live at a time when the cost of living is soaring but our paychecks are not.  As a result, middle class families are being squeezed like never before.

A recent Marketwatch article highlighted the plight of California history teacher Matt Barry and his wife Nicole…

Barry’s wife, Nicole, teaches as well — they each earn $69,000, a combined salary that not long ago was enough to afford a comfortable family life. But due to the astronomical costs in his area, including real estate — a 1,500-square-foot “starter home” costs $680,000 — driving for Uber was a necessity.

“Teachers are killing themselves,” Barry says in Alissa Quart’s new book, “Squeezed: Why Our Families Can’t Afford America” (Ecco), out Tuesday. “I shouldn’t be having to drive Uber at eight o’clock at night on a weekday. I just shut down from the mental toll: grading papers between rides, thinking of what I could be doing instead of driving — like creating a curriculum.”

Home prices are completely out of control, but that bubble should soon burst.

However, other elements of our cost of living are only going to become even more painful.  Health care costs rise much faster than the rate of inflation every year, food prices are becoming incredibly ridiculous, and the cost of a college education is off the charts.  According to author Alissa Quart, living a middle class life is “30% more expensive” than it was two decades ago…

“Middle-class life is now 30% more expensive than it was 20 years ago,” Quart writes, citing the costs of housing, education, health care and child care in particular. “In some cases the cost of daily life over the last 20 years has doubled.”

And thanks to the trade war, prices are going to start going up more rapidly than we have seen in a very long time.

On Tuesday, we learned that diaper and toilet paper prices are rising again…

Procter & Gamble said on Tuesday that it was in the process of raising Pampers’ prices in North America by 4%. P&G also began notifying retailers this week that it would increase the average prices of Bounty, Charmin, and Puffs by 5%.

P&G is raising prices because commodity and transportation cost pressures are intensifying. The hikes to Bounty and Charmin will go into effect in late October, and Puffs will become more expensive beginning early next year.

I wish that I had better news for you, but I don’t.  We are all going to have to work harder, smarter and more efficiently.  And we are definitely going to have to tighten our belts.

Many middle class families are relying on debt to get them from month to month, and consumer debt in the United States has surged to an all-time high.  But eventually a day of reckoning comes, and we all understand that.

The U.S. economy is not going to be getting any better than it is right now.  So it is time to be a lean, mean saving machine, because it will be important to have a financial cushion for the hard times that are ahead of us.

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Tesla Shorts Stand To Make – Or Lose – $850 Million After Earnings Today

All eyes will be on Tesla’s earnings after the close today, and considering the fiasco that was last quarter’s earnings call, all ears too.

One person who will surely be following closely is prominent Tesla short David Einhorn, who told investors that the rally in Tesla shares, which he is short, turned into heavy losses at his Greenlight Capital fund and dedicated a portion of his latest letter to investors yesterday to discuss the Musk’s increasingly bizarre antics:

The most striking feature of the quarter is that Elon Musk appears erratic and desperate. During the quarter Mr. Musk:

  • Attacked an analyst for asking “boring bonehead questions” on the quarterly conference call;
  • Hung up on the head of the National Transportation Safety Board;
  • Assailed the media for the audacity to report that Tesla’s customers crash while using “autopilot”;
  • Accused an internal whistleblower of “sabotage”;
  • Appeared to paint the tape with trivial insider purchases; and
  • Went on a tweetstorm calling for “the short burn of the century.”

The market preferred this bravado much more than say, GM’s actual accomplishments. TSLA soared 29% during the quarter and was our second biggest loser.

Einhorn also famously said that he is “happy that his Model S lease ended (there were growing problems with the touchscreen and the power windows) and is excited to get the Jaguar IPACE, which has gotten excellent reviews” and continued the criticism: “The Model S residual values are falling. Meanwhile, the Model 3 initially received lukewarm reviews, and the raft of bad publicity is probably having a negative impact on the brand.”

Naturally, Musk could not let Einhorn’s jab go without response, responding early this morning on Twitter: “Tragic. Will send Einhorn a box of short shorts to comfort him through this difficult time.”

Then, in another odd comment, just hours before the Tesla earnings call, Musk followed up with another odd tweet, saying that “some of best classic @Atari games coming as Easter eggs in Tesla V9.0 release in about 4 weeks. Thanks @Atari!“

In any case, with TSLA stock having recently fallen into a bear market and having lost key upside momentum, the stakes are high for everyone… but more so than ever for the shorts.

As of this moment, Tesla is the most heavily shorted U.S., and according to a Reuters analysis, short-sellers could see a nearly $850 million loss or gain, depending on the direction of the post-earnings stock move. The electric carmaker, which is burning cash at an unprecedented pace and struggling to turn a profit, is a favorite target for shorts with about 35 million shares, or roughly 28% of Tesla’s free float, currently sold short, pegging the short interest at $10.53 billion, according to S3 Partners.

Furthermore, as we noted moments ago, Q2 earnings season has been extremely volatile for reporting companies, especially for tech names, which has seen the biggest negative reaction despite what have generally been strong earnings.

And Tesla will be no exception: based on the price of weekly Tesla options contracts set to expire on Friday, traders in the options market expect the shares to swing by about 8% after the company reports results.

A move of that magnitude to the upside would mean that short-sellers would rack up about $842.6 million in on-paper losses, while they would make as much in on-paper gains if the share reaction is negative, according to S3 data.

And just like its fanatical fans, Tesla shorts have proven to be extremely tenacious: headed into the results, short-sellers, who suffered a lot of pain in the second-quarter as Tesla shares soared 29% , helped by encouraging production-related news, have shown little inclination to tweak their bets on the carmaker.

“There has been virtually no net change in shares shorted in over a week,” said Ihor Dusaniwsky, head of research at S3 in New York.

“Although short-sellers’ conviction in Tesla’s longer term performance is solid with no significant short covering since the end of June when Tesla hit its year-to-date highs, I haven’t seen a rush to short more shares in anticipation of weak results,” he said.

As Reuters adds, Tesla’s post-earnings reaction will also decide whether short-sellers, who are down $170.9 million in mark-to-market losses for 2018, turn a profit or go $1 billion in the red.

Analysts expect Tesla to report revenue of $3.921 billion, up from $2.79 billion a year ago, and a loss of $2.92 per share, according to Thomson Reuters data. But all eyes will be on the cash burn, the debt and non-GAAP profitability: any upside surprises here, and the shorts will be in for a world of pain.

Finally, while there has been little movement in the number of equity shorts, with the recent launch of trade in Tesla CDS, bond traders are increasingly betting the company will default in the coming years, with the CDS surging to a contract high yesterday, implying a 43% probability of default in the next 5 years.

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Cultural Appropriation Tastes Damn Good: How Immigrants, Commerce, and Fusion Keep Food Delicious – New at Reason

Los Angeles Times columnist Gustavo Arellano sits down with Reason‘s Nick Gillespie to talk about the late food critic Jonathan Gold, political correctness in cuisine, and why food may be the best way to learn about a culture different from your own. Watch above and click here for text and downloadable versions.

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One Trader Explains Why Everyone’s Wrong On The Dollar

“Everyone is entitled to their own opinion, far be it from me to say otherwise,” notes former fund manager and FX trader Richard Breslow, but as far as the dollar is concerned – it’s going higher, he contends.

Via Bloomberg,

As true as it is that differences of opinion are what “makes markets”, I find the avalanche of analysts arguing for an imminent move lower in the dollar confounding. The most you can say is the jury is out. Both technically and fundamentally. To say otherwise strikes me as arguing without the facts being in evidence. Rhetoric can be an effective form of argument. It may even be borne out by future results, but “Leap of Faith” isn’t something that really belongs in the pluses or minuses side of the ledger when settling on a trading strategy.

The dollar has been doing a lot of nothing for the last couple of months. It will break out at some point. But patience actually is a virtue when the range-trading opportunities continue to present marvelous possibilities.

The charts are difficult to read but if you were forced to say something, they would actually give a passing nod to a higher not a lower dollar. There is a better argument to be made that the DXY, and certainly the EUR/USD, are tracing out potential pennant formations favorable to the currency.

If I were looking for signs of a directional move, devoid of a lot of the cross-currency noise, I’d put a yellow Post-it on the bottom of my screen with the range for the euro versus the dollar set on June 14. We seem trapped within it. That’s when President Mario Draghi surprised a bulled-up market for euros by the extent of his dovishness post the ECB’s rate-setting meeting. I like it as a marker because you will be put on notice somewhat ahead of levels a lot of people are looking at.

One thing we do know for sure is that the Fed is in the process of raising rates and both the ECB and BOJ again made it clear, in the last week, no matter how wishfully you want to spin it, that they are on hold for the next year at least. Global growth is indeed growing, but by any measure the U.S. is outstripping Europe and Japan. People keep telling me that all the good news is already built into the dollar’s value and when, not if, growth differentials narrow markets will realize the error of their current ways. I’ve got news, those forecasts aren’t a secret.

And those expecting for the Fed to start tacking dovish are misreading what Chairman Powell meant by “for now”. He’s a pragmatist, not a zealot.

The phrase “secular decline” gets bandied about a lot. As in the dollar will resume its move lower driven by greater forces…I’m hard-pressed to see any secular decline but should it even exist you would have gone broke many times over waiting for it to bail out your positions. In any case, DXY has spent the majority of the last three years above its 20-year average price.

The weekly CFTC positioning data is also used as a warning sign of an imminent squeeze.

Maybe yes, maybe no, but those are short-term phenomena. Yes, the net dollar longs are the largest since mid-January, but if you look at the disaggregated data versus individual currencies, it would be hard to argue that it is reckless. Was Brexit sorted out and no one told me?

It is getting harder and harder to know what will be potential safe haven currencies or whether or not they will be needed. Yesterday all was happy-on trade. Today not so much. It’s a known unknown is the best you can say.

Where’s the dollar going? We will see. But as recent experience has shown, only time will really tell and living in the moment has its advantages.

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Why Japan may spark the next crisis

In a world full of reckless and extreme monetary policy, Japan no doubt takes the cake.

The country has total debt of more than ONE QUADRILLION YEN (around $10 trillion) pushing its debt-to-GDP ratio to a whopping 224% – that puts it ahead of financial basket case Greece, whose debt-to-GDP is around 180%.

Japan spent 24.1% of its total revenue (appx. 23.5 trillion yen) last year servicing its debt – both paying down principal and interest. And that percentage has no doubt moved even higher this year.

And, keep in mind, this isn’t some banana republic. It’s the world’s third-largest economy.

The country’s economy is so screwed up that the Bank of Japan (BOJ), the central bank, has been conjuring trillions of yen out of thin air to buy government debt.

The BOJ printed yen to buy basically all of the $9.5 trillion of government debt outstanding. When it ran out of bonds to buy, BOJ started buying stocks. Now it’s a top 10 shareholder in 40% of Japanese listed companies.

Most recently, the central bank has started “yield-curve control,” which basically means they’ll do whatever it takes to make sure the government doesn’t have to pay more than 0.1% interest.

But something interesting has happened over the past few weeks…

Despite the BOJ’s promise to hold rates and bond yields down, the other owners of Japanese government bonds (JGBs) have been getting nervous. And they’ve been selling.

The selling pressure pushed bond prices down (and, inversely, yields and rates up)… In just under two weeks, yields on 10-year JGBs soared from 0.03% to 0.11% – an 18-month high.

If you own an asset and you don’t think it will perform well, you sell it. And clearly that’s how people feel about Japanese debt. The bonds pay close to zero, after all.

Japan has been fighting deflation for a long time. And with deflation, when the purchasing power of your money increases every year, you may consider holding a bond that pays close to zero… because you’re still maintaining your purchasing power.

But for the past decade or more, Japan has been committed to producing inflation. And now it’s getting inflation of around 1% a year (with a target of 2% annual inflation).

Now, anyone holding JGBs is guaranteed to lose money. And who in their right mind is going to hold an asset that guarantees you’ll lose money?

So people are selling those bonds. And yields are going up as a result.

Yields increasing from 0.03% to 0.11% may not sound like a big deal to you. But think about what it means for Japan…

The country already spends a quarter of its tax revenue just to service the debt. They cannot afford even the tiniest increase in interest rates.

And because bondholders are selling, and rates have been rising, the BOJ has intervened three times in a single week… buying up all the bonds people are selling in a desperate attempt to hold interest rates down.

This is a clear-cut case of BLATANT financial desperation.

And, to be honest, it’s a bit scary.

Japan is already in debt up to its eyeballs… but the BOJ is telling the world that they’re just getting started buying more bonds, no matter what the cost.

It’s crazy when you hear the most powerful economic policy makers in the world’s third-largest economy say that they’re going to hold interest rates down with ZERO consideration for the consequences.

It means they don’t care about fiscal responsibility, they don’t care how much they will plunder the power of people’s savings through inflation, or about their underfunded pensions struggling to generate returns. None of that matters.

The government’s only focus is to hold down interest rates… which they have to do to make sure Japan doesn’t go bankrupt.

If interest rates in Japan went to, say, just 1%, the nation’s annual debt service would literally exceed all of government tax revenue.

Here’s why this is a really big deal…

Remember how crazy things got in June, when some Italian finance minister didn’t get the job?

Markets around the world completely freaked out.

The potential downfall from what’s currently happening in Japan would be 1,000x worse. Remember, this is the third-largest economy in the world.

The Japanese government is fighting for its life right now (with absolutely ZERO concern for its other financial obligations). And it’s clear that they will spend whatever it takes to combat a rise in interest rates.

This won’t end well.

And it’s time to start loading up on the safest assets you can find.

Source

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U.S. Tech Giants Are Too Big, Too Powerful and Now Are Running Into Serious Trouble

Today’s post will explain why I think the U.S. tech giants are in the early stages of destroying themselves. It will focus on two of the biggest names in the space, Facebook and Google. Both face serious issues that are only now truly coming to a head and rooted in two primary factors, size and politics.

Facebook is further along in the process of being in serious trouble, so let’s start there. The social media company currently has 2.2 billion active users worldwide, which amounts to well over half of all human beings online at the moment (estimated at 3-4 billion). In other words, the company already has a tremendous share of global potential users. Since everybody already knows what Facebook is, you have to assume those who aren’t using it (like me), aren’t using it for a reason. Such people aren’t about to be convinced. Thus, you have to ask whether or not meaningful growth in active users is remotely realistic for Facebook. I would argue not.

There are many reasons to bet against Facebook significantly growing active users in the years ahead, but the main hurdle seems to be keeping the users it already has actively engaged. Specifically, I think there are two types of users Facebook risks losing going forward. These people might not “delete Facebook” per se, but their engagement with the platform may drop meaningfully.

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