PG&E Would Be Bought And Converted To Public-Owned Utility Under California Mayor’s Plan
San Jose, California is proposing that PG&E should be bought and converted into the country’s largest customer-owned utility amid mass-blackouts and heightened tempers over their role in the state’s wildfires, according to the Wall Street Journal.
San Jose is the third largest city in California and PG&E’s largest customer.
According to the Journal, Mayor Sam Liccardo hopes in the coming weeks to convince other cities to join the buyout proposal, which would change the utility’s investor-owned status to a nonprofit electric-and-gas cooperative.
The buyout proposal amounts to a revolt by some of PG&E’s roughly 16 million customers as the company struggles to keep the lights on and provide basic services while preventing its aging electric equipment from sparking wildfires.
San Jose Mayor Sam Liccardo said in an interview that the time has come for the people dependent on PG&E for essential services to propose a new direction. A cooperative, he said, would create a utility better able to meet customers’ needs because it would be owned by customers—and answerable to them. –Wall Street Journal
In other words, Liccardo thinks a coalition of California officials can do it better.
“This is a crisis begging for a better solution than what PG&E customers see being considered today,” Liccardo told the Journal, saying of the recent Venezuela-tier power shut-offs, “I’ve seen better organized riots.”
Faced with more than $30 billion in wildfire-related liabilities, PG&E sought chapter 11 bankruptcy protection in January. The will likely oppose the proposal as they explore how to emerge from bankruptcy, compensate fire victims, and modernize their infrastructure (for which they passed along a giant $2 billion rate hike to their customers last December).
California officials are running out of patience with PG&E after the company shut off power to roughly two million Californians in 34 counties earlier this month to ensure that its power lines, transformers and fuses didn’t ignite fires that could spread quickly amid warnings of high winds. PG&E warned Monday that winds could trigger another round of shut-offs for parts of 17 counties later this week.
PG&E may have accidentally galvanized support for the public buyout proposal last week when Chief Executive Bill Johnson told state regulators that the utility may need to rely on power shut-offs for up to 10 years. That is a horrifying prospect for public officials, who note that the blackouts affect public safety and the delivery of other basic services such as clean water. –Wall Street Journal
“We need to align the financial interest with the public interest,” said Liccardo, adding “We hope there will be recognition that this structure better addresses the public need and we’re looking to start the drumbeat to enable all of us to march together.”
When an economy turns from expansion to contraction there is an order of events. The first signs are an unexpected increase in inventories of unsold goods, both accompanied with and followed by business surveys indicating a general softening in demand. For monetarists, this is often confirmed by an inverting yield curve, which tells them that at the margin the short-term rates set by the central bank are becoming too high for business conditions.
That was the position for the US 10-year bond less the 2-year bond very briefly at the end of August, since when this measure, which is often taken to predict recessions, has turned mildly positive again. A generally negative sentiment, fueled mainly by the escalating tariff war between America and China, had earlier alerted investors to an international trade slowdown, expected to undermine the American economy in due course along with all the others. It stands to reason that backward-looking statistics have yet to reflect the global slowdown on the US economy, which is still buoyed up by consumer credit. The German economy, which is driven by production rather than consumption is perhaps a better guide and is already in recession.
After an initial hit, a small recovery in investor sentiment is understandable, with the negative outlook perhaps having got ahead of itself. But we must look beyond that. History shows the combination of a peak in the credit cycle and tariffs can be economically lethal. A brief return to a positive yield curve achieves little more than a sucker rally. It may be enough to put further monetary expansion on pause. But when that is over, and jobs begin to be threatened, there can be no doubt that central banks will ramp up the printing presses.
So reliant have markets become on monetary expansion that the default assumption is that an economy will always be rescued from recession by an easing of monetary policy, and furthermore that monetary inflation will prevent it from being any more than mild and short. We see this in the performance of stock market indices, which reflect perpetual optimism.
There is a further problem. Other than a rise in bankruptcies, unemployment and negative indications from business surveys, there may be no statistical evidence of a slump. The reason this is almost certainly the case is we are dealing with a combination of funny money and statistics which are simply not fit for measuring anything. The money and credit are backed by nothing, and when expanded by the banking system simply dilutes the quantity of existing money, which if continued is bound to end up impoverishing everyone with cash balances and whose wages and profits do not increase at least as fast as the surge in the quantity of money.
Indeed, the official purpose of the expansion of money and credit is to somehow persuade economic actors that things are better than they really are, and to stimulate those animal spirits. You’d think that with this policy now being continually in operation that people would have become aware of the dilution fraud. But as Keynes, the architect of it all said, not one man in a million understands money, and in this he has been proved right.
For five years, the ECB has applied negative interest rates on commercial bank reserves, and commercial banks have paid €21.4bn to it in deposit interest. Since it introduced negative interest rates, it has injected some €2.7 trillion of base money into the Eurozone economy, increasing M1, the narrower measure of the money quantity, by 61%. Almost all of it has supported the finances of Eurozone governments.
The effect on broader money, which includes bank credit, has been to increase M3 by 30%. Far from stimulation, this is daylight robbery perpetrated on everyone’s liquidity and cash deposits. It is a tax on the purchasing power of their wages.
The ECB is not alone. Since Lehman went under, the major central banks have collectively increased their balance sheets from $7 trillion to $19.4 trillion, an increase of 177%. Most of this monetary expansion has been to buy government bonds, providing a money-fountain for profligate governments. The purpose of money-printing is always to finance government spending, not to stimulate or ease conditions for the private sector: while some trusting souls in the system believe it is for the latter, that amounts to just a myth.
Due to the flood of new money the yields on government debt have been depressed, giving holders of this debt, principally the banks, a nice fat capital profit. But that is not the purpose of all this monetary largess: it is to make it ultra-cheap for governments to borrow yet more and to encourage banks to expand credit in their governments’ favour. Just listen to the central bankers now encouraging governments to take the opportunity to ease fiscal policy, extend their debts and borrow even more.
Central banks pretend all these benefits come at no cost to anyone. Unfortunately, there is no such thing as a perpetual motion of money creation, and someone ultimately pays the price. But who pays for it all? Why, it is the wage-earner and saver and anyone else with deposits at the bank. They are also robbed of the compounding interest their pension funds would otherwise receive. These are the very people who, in a bizarre twist of macroeconomic logic, we are told benefit from having the prices of their everyday purchases continually increased.
Attempts to measure the supposed benefits of inflation on the general public are in turn dishonest, with the true rise in prices concealed in official calculations of price inflation. Suppressed evidence of rising prices is then applied to estimates of GDP to make them “real”. For the purpose of measuring the true condition of an economy these official statistics are taken as gospel by both the commentariat and investors.
We cannot know the accumulating economic cost of cycles of progressively greater monetary inflation, because all government statistics are based on the lie that money is a constant, when in fact it has become the greatest variable in everyone’s life. The transfer of wealth from all consumers through monetary debasement is an act of impoverishment, and to the extent it is not offset in other ways the economy as a whole suffers.
China Millionaires Outnumber Rich Americans For First Time: Credit Suisse
As wealth inequalities soar across the world and a trade war rages on between the US and China, a stunning report by Credit Suisse says the number of millionaires in China has, for the first time, surpassed the number of wealthy Americans.
Credit Suisse published the new report in its annual Global Wealth Report on Monday, which is the most “comprehensive and up-to-date source of information on global household wealth. “
The Swiss bank’s report found 100 million Chinese were members of the global top 10% club versus 99 million Americans.
“Despite the trade tension between the US and China over the past 12 months, both countries have fared strongly in wealth creation, contributing USD 3.8tn and USD 1.9tn, respectively.
The number of millionaires has also risen globally by 1.1million to 46.8 million in 2019, collectively owning USD 158.3 trillion or 44% of the global total.
China and other emerging markets have contributed significantly to this growing contingent and show signs of progress and opportunity for investors,” stated Nannette Hechler-Fayd’herbe, global head of economics and research at Credit Suisse.
A seismic shift is underway, one where the number of wealthy American consumers, who powered the global economy for decades, is starting to fade.
The report offered some insight into the slump of wealthy Americans, as we tend to believe it could be due to demographics issues.
While US population growth hits an 80-year low, unleashing demographic stagnation, leading to a dismal economic recovery, China’s population isn’t expected to stop growing until 2030, indicating that the Asian economy will continue to be somewhat more robust for the next decade.
It’s likely that China’s upper-middle-class and wealthy families, currently has more millionaires than the US, will be a crucial driver for global consumption in the 2020s and beyond.
Anthony Shorrocks, a British development economist and author of the report, suggested that after the 2008 financial crisis, China replaced the US as the world’s global growth engine of wealth creation, which maybe explains why more millionaires are being produced in the country.
Shorrocks adds that the US has endured more than a decade, since the post-financial crisis, of creating wealth for its adult population.
However, there was little explanation behind the wealth creation in the US and why not enough millionaires were being produced. Perhaps, it could be due to some of the widest wealth inequality in history, where all the wealth gains are flowing to a very limited number of people — maybe not the case in China, where the wealth is being shared by more, hence, why more millionaires are being produced.
China and the world are entering a new era. The real driver of global growth will likely be upper-middle-class and affluent consumers from China. This new report adds credibility to the trend at play.
Trump announced the withdrawal of US troops who had been protecting the SDF(Syrian democratic forces) in the northeast of Syria, prompting Kurdish leadership and the Damascus governed to strike a deal allowing Syrian Arab Army to retake control of the border with Turkey after nearly six years.
With the US troops withdrawn numbering around 150 to 200 (out of the 2,000 to 3,000 illegally squatting in Syria), it is understood that Trump’s decision is for reasons other than those stated.
The primary impression Trump wishes to convey to his voters is that of keeping his electoral promises, including that of defeating ISIS in Syria, meaning that US troops can now come back home.
Although it is clear (at least to those not under the sway of the mainstream media) that ISIS has not been completely defeated and that the US never really fought against the Caliphate, the impression is nevertheless conveyed that the “Winner-in-Chief” has triumphed and is bringing home the boys.
Given that the deep state retains ultimate control of US foreign policy, Trump is allowed to do and say what he wants – provided it is only within the confines of his media playpen, safe in the knowledge that his motivations are purely electoral and not really aimed and upending the foreign-policy consensus of the US establishment.
If we look beyond Trump’s histrionics, we can see that the US deep state continues its illegal stay in Syria, with Trump in reality having no intention of opposing the military-industrial complex (indeed often appointing its members to serve in his administration), with these two parties finding a common point of agreement in the alleged threat posed by Iran.
US troops will only shift near Iraq, looking at disrupting any form of cooperation between Baghdad, Damascus and Tehran.
Trump’s Saudi and Israeli allies in the region have long been conspiring with the Pentagon to bring down the Islamic Republic of Iran.
That said, the possibility of war with Iran does not align well with Trump’s focus on securing a second term. In any such war, Israel and Saudi Arabia would bear the brunt of hostilities, making pointless their support for Trump. The price of oil would rise sharply, throwing the financial markets into chaos; and all this would conspire to ensure that Trump lost the 2020 election. Trump, therefore, has nothing to gain from war and will prefer dialogue and negotiation with the likes of North Korea, even if it does not bear much fruit.
Trump’s main problem lies in the long-term damage his actions and statements may do to the credibility of the US empire. The photo-op with Kim was criticized by many in mainstream media for giving credibility to a “dictator”. But the anger of the military and intelligence community really lay in leaving Washington with nowhere to go after Trump’s threats of annihilation only led to negotiations that did not go anywhere.
I have previously written about the effectiveness of Pyongyang’s nuclear and conventional deterrence, something well known to US policy makers, making them careful to avoid exposing themselves too much such that Pyongyang calls their bluff, thereby revealing to the world that Washington’s bark is worse than its bite. To avoid such an embarrassing situation, Obama and his predecessors were always careful to refuse to meet with the North Korean leader.
The United States bases much of its military strength on the display of power, advertising its theoretical ability to annihilate anyone anywhere. By North Korea calling its bluff and revealing that the most powerful country in the world cannot in actual fact attack it, the projected image of American invincibility is thus punctured.
Similarly, when Trump announced the withdrawal of US troops from the northeast of Syria (quickly downsized by the Pentagon), and above all gave the green light to Turkey to occupy the area vacated, the political establishment and mainstream media swung into action to dissuade Trump from communicating to the world that America does not stick with its allies. Even Fox News, now siding with the Democrats, started giving wide coverage to Trump’s impeachment story, inviting in the process an angry Twitter response from Trump.
Trump is of course more than aware that a complete US withdrawal from Syria would go against the interests of Riyadh and Tel Aviv, those who actually have an influence on him.
Turkey’s aspirations to occupy the northeast Syria are part of Erdogan’s strategy to improve negotiating positions with Damascus and Moscow with regard to the jihadists in Idlib. Erdogan hopes to be able to annex Syrian territory and fill them with the jihadists and their families who lost the war in Syria and who otherwise pose the security risk of invading Turkey from Idlib. Erdogan seems to have come to some kind of understanding with the US, which has hitherto been the protector of the SDF.
Erdogan and Trump didn’t seem to consider the possibility of the SDF and Damascus finding common ground, but this is exactly what happened.
The Syrian Arab Army is now in the North East of the country, protecting its borders against an invading army. Russia and Iran will try and convince Erdogan to downplay the operation in exchange for some sort of arrangement regarding Idlib. The Syrian government in the near future should be able to take back the rich oil fields, boosting its economy.
Turkey and the US have have for years armed and financed terrorism in the region, as have Qatar and Saudi Arabia (in spite of their ideological differences). Even the Syrian Democratic Forces (SDF) were involved in the destabilization of Syria.
All this chaos is ultimately supervised and directed by the United States, which has for years been coordinating in the region color revolutions, the Arab Spring, and proxy wars. Any other interpretation of events would be disingenuous and untruthful.
The withdrawal of US troops from Syria simply reinforces Damascus’s position as the only legitimate authority in Syria, undermines confidence of European allies in the US, and emphasizes the consistency of Moscow’s actions, which has always been opposed to Washington’s chaotic actions in the region.
Amidst this generalized chaos and confusion, Russia, Iran and Syria are trying to put the house back in order again, which includes the international system where sovereign states are respected.
The unipolarists have been suffering pronounced setbacks of late. The expensive air-defense systems of the United States were shown by the Houthis in the last month to be rather ineffectual; Saudi troops soon after this suffered a humiliating defeat in the south of their own country; Washington saw its high-tech drone shot down by Iran; and numerous European and Middle Eastern allies have lost faith in the US, as they watch factions fighting with each other over control for US foreign policy
The US is the victim of a unipolar world order onto which it desperately hangs without any thought of letting go, even as the rest of the world inexorably moves towards a multipolar world order, one that becomes ever more difficult to subdue with every waking day.
Shiller: Recession’s “Not Right Around The Corner” Thanks To Trump-Inspired Consumption
“Consumers are hanging in there,” says Nobel-prize winning economist Robert Shiller, who believes a recession may be years away due to a bullish Trump effect in the market.
Speaking on CNBC’s “Trading Nation” on Friday, the Yale professor said Trump is creating an environment that’s conducive to strong consumer spending, and it’s a major force that should hold off a recession.
“Consumers are hanging in there. You might wonder why that would be at this time so late into the cycle. This is the longest expansion ever.”
“Now, you can say the expansion was partly [President Barack] Obama… But lingering on this long needs an explanation.”
Specifically, Shiller told CNBC that he believes that Americans are still opening their wallets wide based on what President Trump exemplifies: Consumption.
“I think that [strong spending] has to do with the inspiration for many people provided by our motivational speaker president who models luxurious living.”
Finally, Shiller concludes that the next recession may not hit for another three years, and it could be mild.
“Let’s not make the mistake of assuming it’s right around the corner,” Shiller said.
“If the economy is strong, which is what he built is case on, ‘make America great again,’ he has a good chance of getting re-elected.”
But, before the markets can take-off, Shiller stresses President Trump needs to get past the impeachment inquiry.
“If he survives that, he might contribute for some time in boosting the market,” said Shiller.
“We’re maybe in the Trump era, and I think that Donald Trump by inspiration had an effect on the market – not just tax cutting.”
He sees this as the biggest threat to his optimistic forecast.
There’s a video clip circulating on Twitter right now that simply has to be seen to be believed, in which a gaggle of MSNBC pundits are seen furiously agreeing with each other that Tulsi Gabbard has incriminated herself by pushing back against Hillary Clinton’s obnoxious claim that she is a Russian asset.
I refuse to spend any portion of my life researching the name of whatever MSNBC show this was or the panelists it features, but here’s a quick breakdown for posterity:
“One thing that was interesting about Tulsi Gabbard’s response, I mean she went after Hillary Clinton, she was strong, she said she wasn’t gonna run as a third party candidate — she never denied being a Russian asset,” said a panelist MSNBC identifies as Kimberly Atkins. “That was the one aspect that was missing from her response, which, you know, you would think that would be within the first line or two. It was not there.”
“When Hillary Clinton says there’s a Russian asset and doesn’t say anybody’s name and Tulsi Gabbard goes ‘How dare you call me a Russian asset?’,” added some talking beanbag chair identified by MSNBC as Jonathan Allen.
“Wait, so Kimberly’s right, she didn’t say she was a Russian asset,” interjected another super excited panelist, possibly the show’s host but who cares.
“To your point, Hillary Clinton didn’t name names, but there’s Congresswoman Gabbard going ‘Me! Me, me! Me!’”
Now, to be clear, all of these panelists are knowingly lying when they suggest that Clinton may not have been talking about Gabbard. Literally everyone knew that Hillary Clinton was talking about Gabbard from the moment news broke about her libelous comments, which, as Gabbard pointed out in a recent interview, was evidenced by the fact that all the news headlines about those comments featured Gabbard’s name. Clinton referred, using female pronouns, to a Democratic primary candidate who is a “favorite of the Russians”; nobody in the world thought she was talking about Elizabeth Warren, Kamala Harris or Amy Klobuchar, because those candidates have never been smeared as Russian assets, only Gabbard has. The self-evident fact that Clinton was referring to Gabbard was then quickly confirmed by a Clinton aide.
“Hillary Clinton did not mention Tulsi Gabbard by name, but an aide confirms that’s that who she was talking about when she made this stunning claim that the Russians had already hit on a way to meddle in the 2020 election…,” @nancycordes reports https://t.co/debniGhJPQpic.twitter.com/2HHsJwhZsT
The panelists are also lying when they claim that Gabbard has not denied being a Russian asset; obviously if you call something a “smear” as Gabbard has consistently been doing you are saying that it is false. But that should not matter. Claiming that an evidence-free conspiratorial McCarthyite smear is true because the target of that smear did not prostrate themselves sufficiently to deny it is disgusting and shameful in and of itself.
The burden of proof is always on the party making the claim, and extraordinary claims require extraordinary evidence. If an extraordinary claim is made with no evidence at all, the party making that claim should be promptly shamed and dismissed.
One of the most infuriating things about the Russia hysteria which has polluted western political discourse is the way people keep getting away with side-mouthed insinuations and innuendo, saying things without directly saying them so that when someone responds to what they’re saying they can go “What! Why I never said that, but my my, it’s very interesting that you think I did?” Hillary Clinton knew very well that everyone would understand who she was talking about, but the fact that the target of her smear responded directly is being spun by her flying monkeys as something weird and suspicious instead of something perfectly normal and appropriate.
As much as I speak out against violence and aggression, on a personal level I find passive aggressiveness to be far more obnoxious than just confronting someone head-on. The appropriate response to someone making cowardly indirect accusations is to directly confront them and call out what they’re really saying and describe what they’re really doing, as Tulsi Gabbard did.
So let’s say directly what the MSNBC panelists above tried to get away with saying indirectly: MSNBC aired a segment in which panelists falsely claimed that Tulsi Gabbard incriminated herself as a Russian asset by responding to Hillary Clinton’s smear job. They lied, and they will get away with lying, because billionaire-controlled media like MSNBC is designed to manufacture consent for the status quo upon which the empires of billionaires like Brian L Roberts (whose parent company Comcast controls NBC) are built. Call the propagandists what they are, and shame these passive aggressive Red Scare tactics for the brain poison that it is.
Are The Rating Agencies Complicit In Another Massive Scandal: A WSJ Investigation Leads To Shocking Questions
Over the past two years, a key development many bears have been citing as a potential catalyst for a sharp market drawdown (i.e. crash), is the systematic downgrade of billions of lowest-rated investment grade bonds to junk as a result of debt leverage creeping ever high, coupled with the inevitable slowdown of the economy, which would lead to an avalanche of “fallen angels” – newly downgraded junk bonds which institutional managers have to sell as a result of limitations on their mandate, in the process sending prices across the corporate sector sharply lower.
As we discussed in July, the scope of this potential problem is massive, with the the lowest-rated, BBB sector now nearly 60% of all investment grade bonds, and more than double the size of the entire junk bond market in the US, and 3.4x bigger than the European junk bond universe.
Yet after waiting patiently for years for the inevitable downgrade avalanche which would unleash a zombie army of fallen angels and potentially spark the next crash, with the occasional exception of a few notable downgrades such as PG&E and Ford, this wholesale event has failed to materialize so far, something which the bulls have frequently paraded as an indication that the economy is far stronger than the bears suggest.
But is it? And instead of the economy being stronger, are we just reliving the past where rating agencies pretended everything was ok until the very end, only to admit they were wrong all along, and then slash their rating retrospectively, too late however as the next financial crisis is already raging.
Well, according to a must-read expose by the WSJ, it appears that we are indeed doomed to repeat the mistakes of the past, because as the Journal’s Gunjan Banerji and Cezary Podkul observe, what was supposed to be a 2015 downgrade has dragged on for over 4 years… while the rating agencies appear to be purposefully looking elsewhere.
To wit:
In August, bond-ratings firms Moody’s and S&P Global predicted that Newell Brands would soon reduce its heavy debt load, allowing it to keep its coveted investment-grade bond rating.
They made the same prediction in 2018. And in 2017. And in 2016. And in 2015, when the company announced a big merger that quadrupled its debt. Yet bond ratings for the maker of Rubbermaid containers and Sharpie markers haven’t budged.
Those asking “why not” are correct, and not just because the rating agencies appear to be delaying a moment of reckoning, clearly aware of the shitstorm they would trigger if they downgraded every soon to be “fallen angel” – just like in 2007 with their ridiculous CDO assessments, the raters have made glaring mistakes, which when correct, have still failed to prompt the agencies into action:
When S&P and Moody’s made their upbeat projections in 2018, they made an error that understated Newell’s indebtedness, according to a Wall Street Journal review of the rating firms’ calculations. They have since fixed their numbers, but still rate Newell investment-grade. Investors have been less forgiving, selling off the bonds and driving up their yield.
The raters’ response: “Moody’s and S&P didn’t dispute revising their calculations, but said the changes didn’t affect their ratings.“
Naturally, it’s not just Newell: amid an epic corporate borrowing spree that sent total non-financial corporate debt to a record $10 trillion…
… sending it to the highest percentage of GDP on record…
… ratings firms have given leeway to other giant borrowers like Kraft Heinz, Campbell, and of course, IBM, which recently almost doubled its debt load to fund the purchase of Red Hat, allowing their balance sheets to swell.
“It’s pretty eye-popping if you’ve been doing this for 20-plus years, to see how much more leverage a number of these companies can incur with the same credit rating,” said Greg Haendel, a portfolio manager at Tortoise in Los Angeles overseeing about $1 billion in corporate bonds. “There’s definitely some ratings inflation.”
To veterans it may be “eye-popping” but to everyone else, it’s a surprise, so here it is visualized: the average Investment Grade company has seen its net leverage rise from roughly 2x to over 3x in the past decade, while leverage for the average BBB name has risen by more than 50% from just over 2x to 3.3x in the same time period.
The relentless increase in leverage should not come as a surprise: years of near-zero interest rates (or negative in the case of Europe) have fueled a record boom in borrowing, driving debt owed by U.S. companies (ex banks) to nearly $10 trillion—up about 60% from pre-crisis levels, with a majority of the proceeds then used by companies to repurchase their own stock and lift the company stock price to likewise nosebleed levels. It is certainly not a surprise then, that leverage hit an all time high in Q2 of this year, according to JPMorgan.
The record debt increase has sparked one of “the most divisive debates on Wall Street” as the WSJ puts it: Will higher debt loads cause big losses when the economy turns? Or have low interest rates made the borrowing more manageable? And, as noted above, will the sudden collapse of “fallen angels” when rating agencies can no longer kick the can, unleash the next financial crisis?
In their own defense, Moody’s and S&P say their ratings are “accurate” because companies like Newell have solid, global brands and generate sufficient cash flow to pay off the bonds. “We take rating actions where appropriate in line with our methodologies,” said Tom Mowat, analytical manager at S&P Global Ratings. The ratings firms also say their grades have accurately predicted defaults, which is their main purpose.
What Mowat is really saying, is that since central banks have forced bond investors into anything that offers even a modest yield, the fact that yields on the companies in question have fallen is confirmation the rating agency is right.
That, of course, is bullshit: what is really happening is unprecedented herding of the investing community, and even though there is a tsunami of capital chasing even the most modest return, events such as PG&E still happen which reprice bonds from par to a fraction of their value overnight as the folly of “investment grade” fundamentals is laid bare for all to see.
There is another, unspoken reason why S&P and Moody’s have dreaded downgrading names such Newell, Kraft and Campbell Soup, all of which are triple-B rated, the lowest category for bonds considered investment-grade, which is what countless vanilla funds are only allowed to hold: a mass downgrade to high yield, or junk, would result in forced liquidation and an unprecedented repricing of the junk bond market, not to mention raising the newly downgraded companies’ borrowing costs.
Amid the debt issuance spree of the past decade, the triple-B rating has exploded in the last decade, with debt outstanding more than tripling to $3.7 trillion, more than double the size of the entire US junk bond universe. Should a substantial fraction of these companies be downgraded, it would result in an unprecedented shockwave. These days, more than 50% of all investment-grade bonds are rated triple-B, up from 38% in September 2009.
To be sure, some investors still remember what happened when they put their trust in rating agencies, and despite their BBB-rating, over $100 billion worth of bonds already trade with yields like junk despite their triple-B-minus ratings, despite the flood of cash into investment-grade debt.
Which brings us to the real reason why rating agencies are loath to downgrade most of these “pre-fallen angles” to their true, junk status: such a move would validate what is arguably one of the most bearish catalyst of the past few years, potentially triggering the next market crash. Which, of course, makes the raters even more unwilling to rate these credits at fair value, because the longer they delay admitting reality, the greater the price to pay will be in the end. Which leaves them paralyzed, and pretending that a 3.5x leverage now for a BBB-rated company is the same as a 2.0x levereage at the start of the decade.
Meanwhile, investors and analysts have told the SEC that they are concerned about the buildup of triple-B debt. Here are some examples from the WSJ:
Last October, Adam Richmond, Morgan Stanley’s then head of U.S. credit strategy, testified at an SEC hearing that if leverage were the sole criteria for ratings, many triple-B rated companies wouldn’t qualify for such high grades. He warned that “downgrade activity could be heavy” once the economy inevitably weakens. The firm’s analysts wrote in a September report that investment-grade companies “have not de-levered significantly and are still getting credit for assumed earnings growth, integration of acquisitions, and other ‘plans’ to delever.”
JPMorgan raised similar concerns in a report it submitted to a bond-investor advisory committee at the SEC. In February, the committee created a new group to examine credit ratings and potentially recommend new regulations to boost oversight of the industry, according to people familiar with the group
So far, regulators like rating agencies, have decided to simply stick their head in the sand, and hope that this, too, shall pass. It won’t.
Meanwhile, as Moody’s and S&P desperately scramble to defend their reputation before their criminal inactivity is seen as the catalyst for the next crash, arguing that cash flow has actually improved in recent year (spoiler alert: it hasn’t), even the IMF’s new head, Kristalina Georgieva, said last month that $19 trillion of corporate debt would be at risk of default, nearly 40% of total debt in eight major economies. “This is above the levels seen during the financial crisis,” she said.
But wait, it gets better. Instead of downgrading companies on the cusp of being junk-rated, last year S&P actually upgraded Kraft, one of the biggest corporate borrowers, saying cost savings would help push leverage below four times annual earnings by late 2019. Then, in June, following the company’s humiliating earnings restatement which embarrassed even crony capitalism market wizard, Warren Buffett, S&P had no choice but to downgrade Kraft … but it still kept Kraft at the lowest rung of investment-grade, giving it another two years to meet the target. In September, S&P estimated leverage was in the “high-4x area.” Since then, Kraft’s leverage has risen even more.
“How long do you give management the benefit of the doubt?” said Lon Erickson, a portfolio manager at Thornburg Investment Management, who oversees $7 billion in corporate debt, including some Kraft bonds.
Here we’ll paraphrase Lon, and ask: how long will this Kabuki farce, in which everyone knows that the rating agencies are desperate not to be blamed for the next crisis – for not doing their job again – and thus will never downgrade trillions in BBB-rated bonds to junk, continue?
Apparently the answer is “for a long time.” Another example:wWhen Keurig Green Mountain merged with Dr Pepper Snapple Group in 2018, Moody’s said it could downgrade the combined company if leverage didn’t fall to about four times earnings by January 2020. This year, Moody’s said four times annual earnings by the end of 2020 was fine.
“If it’s a strike, it’s a strike. If it’s a ball, it’s a ball,” said Joe Pimbley, a former Moody’s analyst and principal of Maxwell Consulting. “Call it as you see it.”
If only his former co-workers would do that. Instead, they are doing what they did in the run up to the last financial crisis – lying.
The ratings firms say they question companies’ debt reduction plans. “By nature we are a pretty skeptical bunch. We like to poke holes in stories,” said Peter Abdill, who oversees Moody’s ratings for consumer products companies.
No, you are not a skeptical bunch. You are a bunch of pathological liars and hoping that by the time the system comes crashing down, you will have quit long ago, making your criminal inactivity someone else’s problem. Meanwhile, the rating agencies are engaging in what appears to be borderline criminal behavior, only when pressed, they will simply say “it was a mistake.” Take the example of Newell:
One company that has been given significant leeway by ratings firms is consumer goods giant Newell Brands, which makes everything from Elmer’s glue to Yankee Candles. While food companies like Kraft and Campbell produce steady earnings in good and bad economies, Newell is more cyclical, meaning it is more likely to run into trouble during a downturn. When Newell said it would acquire rival Jarden Corp. for about $20 billion in December 2015, S&P and Moody’s analysts said Newell could keep its low investment-grade rating because debt would fall from more than five times projected earnings to under four times by December 2017.
Newell had tens of millions of dollars riding on that decision. A provision tucked into an $8 billion acquisition bond sale in March 2016 said Newell would owe its investors as much as $160 million more in annual interest costs if it got downgraded into junk territory.
As an aside, the provision highlights the conflict faced by the ratings firms. While investors use rating firms’ research, it is the companies that issue bonds who pay for the ratings. And while Moody’s and S&P say they don’t allow the conflict, or bond provisions like these, to influence their rating decisions, it’s beyond obvious that there is no objectivity left when rating BBB-rated companies:
But we digress, back to the story of Newell:
In 2018, under pressure from activist investors, Newell announced plans to sell about a third of its businesses and buy back more than 40% of its shares, moves that could slow down deleveraging. Moody’s and S&P confirmed the company’s rating and predicted its leverage would fall to less than four times earnings by the end of 2018.
This past February, Newell announced that its debt was 3.5 times earnings at the end of 2018. But Newell failed to account for lost earnings from businesses it sold when it calculated the figure. Investors were skeptical, said James Dunn of CreditSights, an independent credit research firm. He estimated Newell’s actual debt load to be 5.3 times projected earnings.
Of course, Moody’s and S&P’s leverage estimates mirrored Newell’s erroneous approach, the WSJ said after reviewing their calculations. Moody’s estimated Newell’s year-end leverage at 3.8 times in a Nov. 2018 report. S&P put it at 3.9 times in a July 2018 note. Worse, Moody’s also overstated Newell’s earnings by double-counting amortization when calculating EBITDA.
Adjusting for the errors, Moody’s estimate of Newell’s leverage should have been closer to 6x earnings, the Journal found. Instead, Moody’s currently has it below 4.0x! For those confused, leverage around 6x EBITDA would – in a normal world – make the company a Jefferies special: somewhere in the B2/B category.
Having been caught in a flagrant mistake, earlier this month, Moody’s updated its calculation of Newell’s year-end 2018 leverage to six times earnings, versus a revised estimate of 5.5 times it published in August that took various asset sales into account. However, it sees that number drifting as low as 3.8x by 2022. S&P raised its number to 5.4 times earnings, citing “normalized” figures that also took into account Newell’s asset sales.
End result? The company is still investment grade. An S&P spokesman said in an email that “our analysis speaks for itself.”
It does indeed, and when the next crisis hits, everyone will remember precisely what your “analysis” spoke.
How could Chicago Public Schools get a fresh restart, fix its pension crisis, cut its debt, void bad contracts and end the teacher’s strike?
The same way Michigan did for Detroit schools. It’s called “reconstitution” and it’s a regular process in the private sector, often called “oldco/newco.” It would have all the benefits of a bankruptcy reorganization, though a formal bankruptcy might not even be needed.
It would go something like this:
Create a new entity, or perhaps several of them, to run the schools.
Redirect to the new entity taxes and other funding now going to CPS. Transfer needed assets to the new system. Put the old CPS in a Chapter 9 bankruptcy, if necessary.
Freeze the Chicago Teachers’ Pension Fund and, instead, begin funding a new, affordable retirement plan.
Terminate all CPS employees and rehire the good ones on terms affordable for the city.
“The district would avoid declaring bankruptcy by using an ‘oldco/newco’ model similar to GM’s. School operations would be transferred to a new debt-free district.”
The Detroit Free Press reported the opening of that city’s new school district in July 2016. We also wrote here about why the option is actually better suited for Chicago than it was for Detroit.
GM did the same thing in its bankruptcy. The GM you know today is actually a new company formed in 2009 to take over assets of the old, insolvent GM.
Reconstituting CPS would require state legislation as well as the city’s cooperation. That legislation could also include changes to the collective bargaining process to ensure there’s no repeat of the Chicago Teachers Union’s impossible demands. Currently, those laws are stacked in favor of CTU and are out of line with other states, especially our neighboring states, as we described here.
To nobody’s surprise, Illinois politicians have never considered the option for Chicago. And with lawmakers still in denial about the scope of our crisis, it’s right to be cynical about the chance of them reconstituting CPS now.
But maybe, just maybe, they will start to consider how history will record their failure to act. Mayor Lightfoot has no good options for dealing with the city’s financial plight, and may not have any bad options either. CTU seems resolute, impassioned with their role as the vanguard of a radical agenda that goes far beyond schools. “Bargaining for the common good” is what they call it – they anointed themselves to bargain for the working class across the country.
Faced with that, why shouldn’t Lightfoot ask Springfield for legislation to reconstitute CPS? Chances are she would be ignored, but at least she would be remembered as the first Chicago politician to suggest a serious step to head off or at least mitigate the meltdown that’s ahead.
Actual Witches Hunt Trump With Pre-Halloween “Binding Spell”
Witches across the United States are preparing to cast a coordinated “binding spell” on President Trump on October 25 – their third such attempt.
According to the Boston Globe, the so-called #MagicResistance first sought to bind the president in 2017. Since then, they have attempted to do the same to Supreme Court Justice Brett Kavanaugh, as well as “Hex the NRA.”
Here’s what it looks like:
“I’m willing to go on record and say it’s working,” the spell’s inventor, Michael Hughes, told the Washington Examiner. “Knowing thousands of people are gathering together at the same time from all over the world to do this ritual and to put our beliefs and our desires into sharp focus, and to do that ritualistically, I think that has a really powerful effect.”
And as the Daily Callerreports, “The ingredients for the binding include an unflattering photo of Trump, a tarot card, a stub of an orange candle, a pin, and a feather.”
Last year, a group of “real” witches took umbrage with President Trump’s repeated use of the term “Witch Hunt” to describe the Russia investigation.
You’d think Hillary Clinton might come up with a better zinger than “Russian asset” when she flew out of her volcano on leathery wings Friday and tried to jam her blunted beak through Tulsi Gabbard’s heart. Much speculation has been brewing in the Webiverse that the Flying Reptile of Chappaqua might seek an opening to join the Democratic Party 2020 free-for-all. Wasn’t “Russian asset” the big McGuffin in the Mueller Report – the tantalizing and elusive triggering device that added up to nothing — and aren’t most people over twelve years old onto that con by now?
It’s not like Tulsi G was leading the pack, with two cable news networks and the nation’s leading newspapers ignoring her existence. Tulsi must have been wearing her Kevlar flak vest because she easily fended off the aerial attack and fired back at the squawking beast with a blast of napalm:
“Great! Thank you @HillaryClinton. You, the queen of warmongers, embodiment of corruption, and personification of the rot that has sickened the Democratic Party for so long, have finally come out from behind the curtain. From the day I announced my candidacy, there has been a concerted campaign to destroy my reputation. We wondered who was behind it and why. Now we know — it was always you, through your proxies….”
Ouch! The skirmish does raise the question, though: is the Democratic Party so sick and rotted that it would resort to entertaining Hillary Clinton as the 2020 nominee? Fer sure, I’d say.
The party has been on suicide watch since the Mueller Report blew up in its face. At this point, it’s choking to death on its current leaders in the race. Apart from his incessant hapless blundering on the campaign trail, Joe Biden will never survive assisting his son Hunter’s grifting adventures in foreign lands. It’s just too cut-and-dried and in-your-face. The kid scammed millions out of Ukraine and China and it’s all documented. Mr. Biden will soon announce his retirement from the field — to spend more time with his family, or for vague health reasons.
Source: Bloomberg
Mrs. Warren has been on a roll since August — with Joe B foundering — but she has two big problems:
1. She seems incapable of telling the truth about her personal “story.” For decades she pretended to be a Cherokee Indian for the purpose of career advancement on various college faculties (including Harvard), and lately she told a whopper about being fired from a teaching job years ago on account of being pregnant, apparently unaware that a tape recording existed of her telling a totally different story — that she quit the job to do something else, even when they offered her a new contract. How many times would those bytes be replayed in 2020?
And 2. She’s retailing a cargo of economic policy bullshit that would turn the USA into Venezuela with sprinkles on top, and she’s already hard-pressed to explain all the numbers that don’t add up in her Medicare-for-all package. Over the weekend, she demanded that transgender illegal border jumpers “must” be released into the United States. There’s a winning issue in the Rustbelt states!
And of course, there are questions a’plenty about the DNC itself and the peculiar mix of race hustlers, Wall Street catamites and war-hawks currently running the outfit. Sounds like a Hillary quorum to me. The DNC handed off the whole operation to the Hillary campaign in 2016 and fixed the nomination with super-delegate hugger-mugger. Is it possible that Hillary still controls the leadership? My guess is that a big chunk of the loot assembled into the Clinton Foundation over the years has enabled HRC to buy the tattered remnants of the DNC lock, stock, and barrel. All that funny money bought a whole lot more, too, including all the predicating bullshit that kicked off RussiaGate, UkraineGate, and now ImpeachGate.
The next gate to go through will be the wholesale prosecution of a whole lot of government officials, elected, appointed, and retired, for the malicious shenanigans that led to the current administrative civil war between the branches and agencies of the government itself. It may prove to be a gate too far for the existence of constitutional government as we’ve known it. All that rot leads to the heads of the big fish: Barack Obama and Hillary.
When they are officially implicated, that will be the last roundup for the old donkey.
Perhaps something new will organize around the stalwart Tulsi G. She is not alone out there.
