Category: zerohedge

Jeremy Grantham's Investment Lessons Learned From "Mistakes Made Over 47 Years" – Chapter 1

From GMO's Jeremy Grantham

Investment Lessons Learned: Mistakes Made Over 47 Years

Chapter 1 (the first of several future chapters)

When I was a teenager, my parents had their friends over on most Sundays for a drink. (Actually, it was a 1950’s version of “a few drinks.”) During these sessions I was impressed by the confident expressions of current and future success laid out by my stepfather’s closest friend. His firm was a manufacturer of scaffolding, a  patented easily-assembled variety, for which he was the main international salesman. After two or three years I could stand it no longer and at 16, because my parents did not invest in the market and for lack of a better idea, I arrived at a bank branch in a south London suburb with the bank book from my “home safe account,” which was designed for children’s savings and which I had had for as long as I could remember. Asking to see the branch manager, I surprised and amused him by asking for his help in investing everything in my account – £16. I remember the investment well: Acrow A shares. It was his first experience with investing for a home safe account but he could see no problem and without parental confirmation or any fuss at all did the trade. And so my first commission was paid out. And, by the way, £16 was a lot. I had been extremely frugal. (The exchange rate was 4:1 and $64 of buying power in 1954 translates to about $560 today.)

So far, so good. Years came and went as they do and presently I was 26 and unexpectedly heading to business school in America. Equally unexpectedly and very generously I had been kept on the payroll of my employer, Royal Dutch Shell, but at £1,200 a year this was only going to cover one-quarter of my two-year expenses. As a result, everything I owned – as in every last thing – was cashed in. By this time my shares had blossomed to about £100 of value and my mother was by now also an investor. Encouraged by the unabated enthusiasm from our neighbor (who, after all, we had argued must surely know the innermost secrets of his firm, particularly because we knew for a fact that he had most of his wealth tied up in the company’s shares), and no doubt reinforced by past stock performance, my mother made me a proposition: to avoid paying the notorious commissions, we would transfer my shares to her account and she would pay me that Wednesday’s closing price. So, off I went to the U.S. with enough to buy my ticket on a VC10, a faster crossing than you can get today by the way, but brutally expensive for a one-way trip. (My parents had bravely allowed me to take out a mortgage on their house to draw down as I needed to balance the books.)

The following year, with little preamble “our” company imploded to zero. My mother took a few hundred pounds’ hit in her only (and last) stock holding, and our friend, right on the cusp of retirement, lost the great majority of his formerly comfortable nest egg. Almost until the last day he had known nothing about his impending doom, about big bets made and reckless debts assumed to make the corporate great leap forward. His own sales efforts in South America had continued promisingly into the last few months.

Lessons Learned:

  1. Inside advice, legal in those days, from friends in the company is a particularly dangerous basis for decisions; you know little how limited their knowledge really is and you are overexposed to sustained enthusiasm;
  2. Always diversify, particularly for your pension fund;
  3. Fraud, near-fraud, or colossal incompetence can always strike;
  4. Don’t buy stocks yourself if you’re an amateur: invest with a relatively rare expert or in a low-cost index;
  5. Investing when young will start your brain turning on things financial;
  6. Painful errors teach you more than success does;
  7. Luck helps; and finally,
  8. Have a convenient mother to be the fall guy.


    



via Zero Hedge http://ift.tt/1bateFq Tyler Durden

5 Things To Ponder: Market Correction Over Or Just Starting

Submitted by Lance Roberts of STA Wealth Management,

Over the last year, investors have been lulled to sleep wrapped in the warmth of complacency as the Federal Reserve stoked the fires of the market with $85 billion a month in liquidity injections.  I have written many times in the past that investors were likely to be rudely awakened by an unexpected event of which was likely not even on the majority of mainstream analysts radars.  That occurred this past week as a revulsion in emerging markets sent the "carry trade" running in reverse.  As I quoted this past week in "Putting The Market Mayhem Into Perspective":

"Hedge funds have been borrowing money in Japan (again) at very low Japanese interest rates, obviously denominated in yen. They then convert those yen to, say, the Brazilian real, Argentine peso, Turkish lira, etc. and buy Brazilian bonds or Turkish bonds using 10:1+ leverage. Accordingly, when such countries jacked up interest rates overnight, their bond markets collapsed. Concurrently, their currencies swooned, causing the 'hot money' investors to not only lose on their leveraged bond positions, but on the currency as well.  If you are leveraged when that happens, the losses add up quickly and those positions need to be sold. So the bonds were sold, and the pesos/lira/real that were freed up from those sales had to be converted back into yen (at currency losses) to pay back the Japanese loans. And as the bonds/currencies crashed, the 'pile on' effect exaggerated the downside dive."

What we will need to ponder this weekend is whether the current correction is simply just a dip within an ongoing uptrend OR have the "bears" finally awakened from their winter hibernation?

1) Is A Bear Market Hanging Over Our Head?  By Robert Lamy via Advisor Perspectives/Dshort.com

"Given the recent performance of the stock market, there is increased uncertainty among individual investors and stock market brokers about the prolongation of the actual bull market into its sixth year. Many of them are asking themselves if the declines over the past thirteen business days is the signal of the near end of the fifth longest bull market since WW II and the beginning of a new long bear market.   A very plausible answer to their interrogations is no. The stock market cycle model predicts that the current bull market will extend through March."

Robert-Lamy-140207-fig-22) Coppock Curve Turns Down by Tom McClellan via PragCap

"A classic technical indicator gave a rare bearish signal for the DJIA with the down move seen in January.  The Coppock Curve has turned down.  More importantly, it has done so after a second big top, which seems to be the important set of dance steps to mark a major market top."

CoppockUnchdFeb2014

3) Retail Panic? via Zero Hedge

I have written many times over the last year that interest rates would rise ONLY as long as complacency ruled investors behavior.  However, with real economic growth remaining extremely weak as deflationary pressures continue to rise, it is only a function of time until investors seek the safety of bonds over risk.   We are now seeing this occur.

"Last week it was the largest equity outflow in over two years. This week, following the Monday drubbing which had the temerity to push the S&P to an "unprecedented" 5% from its all time highs, the timid retail investor said enough, and ran for the hills resulting in the largest equity outflow. Ever.

Zero-hedge-equity-outflows-020714

According to Bank of America, aAfter a 5% loss on the S&P 500 over the last two weeks (through February 5) equity funds reported the largest weekly outflow on record. Outflows from equity funds accelerated to $27.95bn this week from a $12.02bn outflow last week, again led by ETFs." Sure enough, what goes out (here), must come in (somewhere over there), which is why at the same time all fixed income funds reported a record $14.09bn inflow. "Mutual fund investors were clearly seeking the safety of bonds, as three quarters ($11.05bn) of the total net bond fund inflow went into government funds and another $3.48bn into high grade." The great unrotation has officially begun, and unless the downward momentum in stocks is halted (think USD/SPY upward momentum ignition), the party may be coming to an end."

4) 4 Numbers About The Correction by Michael Santoli

"Having entered the year riding an excess of certainty about the steadiness of global economic growth, strength of the corporate sector, attractiveness of stocks over bonds, and scripted predictability of central-bank policies, investors have been greeted with upended expectations on most of these fronts.

 

None of these notions have been decisively refuted. But capital spilling from emerging markets, staticky messages on the pace of global growth and concerns about the duration of developed-world central bank generosity have been just enough to thwart risk-seeking. Recently yields on safe, under-owned U.S. Treasury notes were sent to a multi-week low of 2.6%.

 

Now, as the crowd tries to come to terms with a 5.8% drop in the Standard & Poor’s 500 index over the first 22 trading days of 2014, many seek the “key number” to handicap whether this is a mere frightful pullback that resets investor expectations — or something worse.

 

This is always tricky, because the onset of a “correction” of any depth is hard to distinguish from the opening phases of a more damaging bear market."

5) US Stocks May Unravel Quickly via Bloomberg

Tom DeMark, the chief executive officer of DeMark Analytics LLC, said in an interview on CNBC that U.S. stocks have reached an “inflection point” that resembles the period prior to the 1929 stock-market crash.

 

Chart Of The Day – Putting Stock Market Correction Into Perspective

S&P500-Corrections

With our intermediate term sell signal now issued, it could likely mean that next week will prove to be interesting.


    



via Zero Hedge http://ift.tt/1aEPCGu Tyler Durden

4th Financial Services Executive Found Dead; “From Self-Inflicted Nail-Gun Wounds”

The ugly rash of financial services executive suicides appears to have spread once again. Following the jumping deaths of 2 London bankers and a former-Fed economist in the US, The Denver Post reports Richard Talley, founder and CEO of American Title, was found dead in his home from self-inflicted wounds – from a nail-gun. Talley’s company was under investigation from insurance regulators.

 

Via The Denver Post,

Richard Talley, 57, and the company he founded in 2001 were under investigation by state insurance regulators at the time of his death late Tuesday, an agency spokesman confirmed Thursday.

 

It was unclear how long the investigation had been ongoing or its primary focus.

 

A coroner’s spokeswoman Thursday said Talley was found in his garage by a family member who called authorities. They said Talley died from seven or eight self-inflicted wounds from a nail gun fired into his torso and head.

 

Also unclear is whether Talley’s suicide was related to the investigation by the Colorado Division of Insurance, which regulates title companies.

 

…

 

 

A checkered past?

Before coming to Colorado, Talley was a former regional financial officer at Drexel Burnham Lambert in Chicago, where he met his wife, Cheryl, a vice president at the company. The two married in 1989.

 

Talley had formed a number of companies, some now defunct, according to the Colorado secretary of state’s office. Among them: American Escrow, Clear Title, Clear Creek Financial Holdings, Swift Basin, Sumar, American Real Estate Services, and the American Alliance of Real Estate Professionals.

 

It would appear, unfortunately, that Mr. Talley was not an entirely honest man…

Talley’s 1989 wedding announcement in the Chicago Tribune noted he was “a member of the 1980 U.S. Olympic swimming team.”

 

A spokeswoman for USA Swimming on Thursday said Talley was not on the team.


    



via Zero Hedge http://ift.tt/1fFW79n Tyler Durden

4th Financial Services Executive Found Dead; "From Self-Inflicted Nail-Gun Wounds"

The ugly rash of financial services executive suicides appears to have spread once again. Following the jumping deaths of 2 London bankers and a former-Fed economist in the US, The Denver Post reports Richard Talley, founder and CEO of American Title, was found dead in his home from self-inflicted wounds – from a nail-gun. Talley’s company was under investigation from insurance regulators.

 

Via The Denver Post,

Richard Talley, 57, and the company he founded in 2001 were under investigation by state insurance regulators at the time of his death late Tuesday, an agency spokesman confirmed Thursday.

 

It was unclear how long the investigation had been ongoing or its primary focus.

 

A coroner’s spokeswoman Thursday said Talley was found in his garage by a family member who called authorities. They said Talley died from seven or eight self-inflicted wounds from a nail gun fired into his torso and head.

 

Also unclear is whether Talley’s suicide was related to the investigation by the Colorado Division of Insurance, which regulates title companies.

 

…

 

 

A checkered past?

Before coming to Colorado, Talley was a former regional financial officer at Drexel Burnham Lambert in Chicago, where he met his wife, Cheryl, a vice president at the company. The two married in 1989.

 

Talley had formed a number of companies, some now defunct, according to the Colorado secretary of state’s office. Among them: American Escrow, Clear Title, Clear Creek Financial Holdings, Swift Basin, Sumar, American Real Estate Services, and the American Alliance of Real Estate Professionals.

 

It would appear, unfortunately, that Mr. Talley was not an entirely honest man…

Talley’s 1989 wedding announcement in the Chicago Tribune noted he was “a member of the 1980 U.S. Olympic swimming team.”

 

A spokeswoman for USA Swimming on Thursday said Talley was not on the team.


    



via Zero Hedge http://ift.tt/1fFW79n Tyler Durden

Apple’s Accelerated Repurchase Lowers Its Domestic Cash Holdings To September 2010 Levels

Today, one of the more prominent news releases was that as the WSJ reported overnight, AAPL had repurchased on an accelerated basis some $14 billion of its shares in the past two weeks, following the constant Tweeted proddings of Carl Icahn, and the market responded by rewarding the stock and pushing it 1.4% higher. There is, however, a flip side to this artificial boost in the company’s EPS calculation: a plunge in the company’s domestic cash.

As everyone knows, AAPL is still a cash cow, and in the last quarter following the release of its latest iPhone and iPad, it generated a bumper $12 billion in cash. The only problem is that this is global cash, and as the company’s 10-Q indicates, $13.1 billion of this cash was generated and held offshore, which means that AAPL’s domestic cash declined by $1.1 billion. In fact, as the chart below shows, this was the 4th consecutive quarter in which AAPL’s domestic cash has declined offset by a massive cash build offshore. And a reminder, “Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.” This also means that unless AAPL repatriates some of its offshore cash, and unless it issues even more debt, its stock buybacks and dividends are limited to the declining cash amounts held in the US.

So if one were to extrapolate AAPL’s Q1 domestic cash simply by subtracting the reported $14 billion used in the stock buyback from its December 31 US cash holdings, as of today, all else equal, AAPL now has “only” $20.4 billion in cash held domestically – an amount that matches its domestic cash holdings last seen in September 2010.

Which suggests that after having yielded to Icahn and successfully defended the $500 level by aggressively buying back its own stock in the last two weeks, AAPL’s dry powder for future buybacks is now running dangerously low.

The implication is two-fold: going forward, AAPL’s discretionary stock buybacks will be far, far less active as the company will seek to preserve a cash buffer, especially if it wishes to engage in domestic M&A and to preserve liquidity for future dividends. Alternatively, it is becoming increasingly likely that just like in 2013, AAPL will once again be forced to access the debt markets in order to raise its domestic cash level to a point where it will once again have a comfortable cash balance with which to repurchase its stock.

So if indeed Icahn has gotten deep under the skin of Tim Cook, look for AAPL announcing a bond issue in the not to distant future, as it continues to lever itself up merely to placate some of its more vocal activist shareholders (or, improbably enough, repatriating some of its offshore cash at a huge tax hit to the company – something it did not do last time it issued debt, and something it almost certainly won’t do this time around).

Alternatively, if there is no debt issue, expect that any aggressive future stock buybacks by Cook’s management team will trickle to next to nothing, at which point it will be just the market’s buyers negotiating with the market’s sellers, without the benefit of tens of billions in additional stock purchases by the company itself.

Whether this means that the stock, which got its euphoric boost today on the buyback news, will now drift lower as the price is set purely by the market will likely be seen in the coming week, although should the Fed also fold and once again taper the taper, thus lifting all boats in confirmation that even the most modest pullback in the S&P is enough to get it back into activist mode, then all bets are off.


    



via Zero Hedge http://ift.tt/1aEEU2H Tyler Durden

Apple's Accelerated Repurchase Lowers Its Domestic Cash Holdings To September 2010 Levels

Today, one of the more prominent news releases was that as the WSJ reported overnight, AAPL had repurchased on an accelerated basis some $14 billion of its shares in the past two weeks, following the constant Tweeted proddings of Carl Icahn, and the market responded by rewarding the stock and pushing it 1.4% higher. There is, however, a flip side to this artificial boost in the company’s EPS calculation: a plunge in the company’s domestic cash.

As everyone knows, AAPL is still a cash cow, and in the last quarter following the release of its latest iPhone and iPad, it generated a bumper $12 billion in cash. The only problem is that this is global cash, and as the company’s 10-Q indicates, $13.1 billion of this cash was generated and held offshore, which means that AAPL’s domestic cash declined by $1.1 billion. In fact, as the chart below shows, this was the 4th consecutive quarter in which AAPL’s domestic cash has declined offset by a massive cash build offshore. And a reminder, “Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.” This also means that unless AAPL repatriates some of its offshore cash, and unless it issues even more debt, its stock buybacks and dividends are limited to the declining cash amounts held in the US.

So if one were to extrapolate AAPL’s Q1 domestic cash simply by subtracting the reported $14 billion used in the stock buyback from its December 31 US cash holdings, as of today, all else equal, AAPL now has “only” $20.4 billion in cash held domestically – an amount that matches its domestic cash holdings last seen in September 2010.

Which suggests that after having yielded to Icahn and successfully defended the $500 level by aggressively buying back its own stock in the last two weeks, AAPL’s dry powder for future buybacks is now running dangerously low.

The implication is two-fold: going forward, AAPL’s discretionary stock buybacks will be far, far less active as the company will seek to preserve a cash buffer, especially if it wishes to engage in domestic M&A and to preserve liquidity for future dividends. Alternatively, it is becoming increasingly likely that just like in 2013, AAPL will once again be forced to access the debt markets in order to raise its domestic cash level to a point where it will once again have a comfortable cash balance with which to repurchase its stock.

So if indeed Icahn has gotten deep under the skin of Tim Cook, look for AAPL announcing a bond issue in the not to distant future, as it continues to lever itself up merely to placate some of its more vocal activist shareholders (or, improbably enough, repatriating some of its offshore cash at a huge tax hit to the company – something it did not do last time it issued debt, and something it almost certainly won’t do this time around).

Alternatively, if there is no debt issue, expect that any aggressive future stock buybacks by Cook’s management team will trickle to next to nothing, at which point it will be just the market’s buyers negotiating with the market’s sellers, without the benefit of tens of billions in additional stock purchases by the company itself.

Whether this means that the stock, which got its euphoric boost today on the buyback news, will now drift lower as the price is set purely by the market will likely be seen in the coming week, although should the Fed also fold and once again taper the taper, thus lifting all boats in confirmation that even the most modest pullback in the S&P is enough to get it back into activist mode, then all bets are off.


    



via Zero Hedge http://ift.tt/1aEEU2H Tyler Durden

Bad News Is Great News Again; Stocks Have Best 2 Days In 4 Months

Following the 2nd dismal jobs print in a row, it would appear the market's new "common knowledge" is that the Fed will be forced to un-taper – despite Hilsenrath's "Fed stays the course" perspective. Everything is up today (apart from the USD). The disconnects from recent correlations were extreme as stocks lost the plot against FX carry, commodities, and bonds. The best 2 days in a row for stocks in 4 months sent most indices to critical technical levels and dragged all but Trannies and the Russell back into the green on the week. Oil prices surged back above $100. Bonds rallied (and bull steepened). Gold, silver, and copper all gained notably (with silver's best week in 6 months). Buy, buy it all… apart from VIX which was monkey-hammered back to 15% (down over 2 vols). So with FX carry left in the dust, what was the ammunition for the move? a 6.3% rip squeeze in the "most shorted" stocks.

 

Major US equity indices remain negative year-to-date with the NASDAQ outperforming and Dow underperforming…

 

  • The Dow has seen its best 2-day run in 4 months and regained the 100DMA.
  • The S&P has its best 2-day run in 4 months desparately trying to recover 1,800 and its 50DMA.
  • Trannies surged by their most in 4 months in the last 2 days and touched their 50DMA.

 

Stocks on the week…

 

The initial momentum ignition was our old friend USDJPY but soon enough, stocks disconnected from FX carry and Emerging Market FX…

 

Furthermore, bonds didn't buy it…

 

Though, of course, this disconnect of Gold and Bond strength suggests the QE is back on, un-taper is here trade was on.

Treasuries were mixed on the week – 5Y -2.5bps, 30Y +7.3bps – so a notable steepening…

 

Silver's best week in 6 months.. and WTI back over $100

 

VIX did disconnect into the close modestly…

 

Wondering what fueled all this exuberance? (aside from USDJPY of course)… "most shorted" stocks are up over 6% from Wednesday's lows – more than double the market's performance…

 

 

Charts: Bloomberg

Bonus Bonus Chart: Equity markets decoupled from all other risk assets today. Perhaps the following chart of the intra-asset correlation between a basket of risk assets and US stocks sums up the loss of reality – correlation went negative…

 


    



via Zero Hedge http://ift.tt/1klJwOn Tyler Durden

You've Got No Job!

Submitted by Adam Taggart via Peak Prosperity,

Today, the pundits are a-buzz making sense of the latest jobs report. Expect much hand-wringing over the impact of the 'polar vortex' and that Punxsutawney Phil saw his shadow.

But most of us care more about the state of one particular job: our own. How relevant is this latest bit of data to that? Not very.

So, to better understand the trends in the work environment most likely impact our own paychecks, it will help to look at another bellwether similar to our fuzzy groundhog friend: AOL.

AOL, a once-important pioneer in the transition to the 'digital economy', is once again showing us where the future of work is headed.

Unfortunately, like the health of AOL's business over the past decade, it's not a pretty picture.

The Expendable Employee

As we've transitioned to an economy in which corporate profitability — and thereby, stock prices — is THE metric for success, the employer-employee relationship has become much more superficial than in past generations.

No longer do workers expect (or in many cases, aspire) to work for a single company for their entire careers. And with the cost efficiencies offered by automation, outsourcing, temporary workers, and related trends — companies are much more inclined to view their workers as expendable and/or easily replaceable, especially when facing a business downturn.

We've seen this dynamic play out in spades since the arrival of the 2008 credit crisis. Companies immediately shed workers in droves as the economy slowed down. But as things stabilized by 2010 and then the "recovery" of 2012-2013 sent corporate profits soaring, the pace of hiring those displaced workers back has been nothing short of anemic:

(source)

And of the jobs that have been added over the past five years, the majority have been temporary jobs. Read that as "Low Pay/No Benefits" jobs:

(source)

It turns out that companies used the 2008-2009 layoff wave as an opportunity to reduce their dependence on human capital (at least, US-based). A vigorous debate can (and should) be waged on whether that happened for good reasons or not, but the fact remains that the employment market remains frail over 5 years later.

More cynical critics will note that lower hiring budgets are NOT a result of companies investing more heavily in productivity-boosting capital expenditures. In fact, since 2008, CAPEX has remained depressed by over 20% compared to historic averages. Rather, it seems companies have been fattening profits by focusing on cutting costs, with the main intent of boosting stock prices. Profits of companies within the S&P 500 are at all-time highs right now. It's clear they're being artificially inflated, and most likely by means that can't be long sustained. 

Many companies have doubled-down on this approach, spending corporate profits on stock buyback programs. This has only served to send shares higher (as I type this, a headline just announced that Apple bought back $14 billion of its stock over the past two weeks). Is it any surprise this is going on when company executives have fantastically-sized compensation packages that are based on increases in…..oh, that's right… the price of their company's stock?

"You've Got No Job!"

Enter AOL, which incidentally bought back $600 million worth of its shares last August, along with a $1.1 billion special dividend to line its investors' pockets.

Since its ill-fated merger with Time Warner 14 years ago, AOL has been a train wreck by most business metrics. It received a dose of much-needed hope when former Google executive Tim Armstrong signed on as CEO in 2009, who was hired to turn things around.

I'll leave it other writers to opine on Armstrong's degree of success since then, but not surprisingly during his tenure, he's made a lot of cuts. AOL has had a steady parade of layoffs over the years (including six months after Armstrong's hiring, announcing it would cut 1/3 of its workforce).

And its the relentless drumbeat of its mass firings, and more notably, the anti-septic manner in which they've been handled, that I think is emblematic of the new era of the disposable worker.

Here's a powerful example. One of Tim Armstrong's first strategic deals after taking the reigns at AOL was to buy a company he had earlier founded called Patch. There was a boatload of drama around the Patch saga at AOL, but in order to avoid getting too diverted, let it suffice to say that Patch proved a massive distraction for the company. Armstrong was very personally invested in its performance and made many promises to both its employees and Wall Street that ultimately didn't materialize.

Last summer, Armstrong rallied the Patch team, calling on them to "fully commit" to the company's plans for the future, which he promised he was hell-bent on supporting. Then, jarringly, in mid-sentence during this pep talk, he was momentarily distracted by an employee whom he then fired on the spot, in front of an audience of 1,000 (you can listen to this drive-by canning here). This incident was reported at wildfire speed among the tech blogs, sparking a debate about the treatment of employees in the modern workplace – and questioning the wisdom of randomly firing people during an event intended to boost morale.

But even more soulless is the latest sad development at Patch. Despite proclaiming his "full" commitment as recently as August, Armstrong sold the controlling stake in Patch last month to investment firm Hale Global. Not surprisingly, soon after this deal was announced, the hatchet soon swung. 

I want you to listen here, as hundreds of Patch employees, many of whom stuck with the struggling company for years at Armstrong's urging, learn that they are losing their jobs, effective immediately:

 

"Thank you again. And best of luck". Oh, and you need to be out of the building by 5pm.

Don't Remain Vulnerable

Was AOL too cruel here? Or is this simply the healthy Darwinian nature of capitalism in action?

I'm going to leave that for others to debate; because that's not the point of this article.

The point is: If you're an employee (which most folks reading this are), recognize that the trend here is not your friend. For a variety of reasons, some defensible, some not, corporations are increasingly less motivated to train, compensate, develop and retain workers than in the past.

The question I want you to ask yourself is this: How impacted would my life be if I unexpectedly received a pink slip tomorrow?

For most people, th
e answer is: Substantially. For too many: Devastating.

Bills, debts, family obligations, etc keep most people soldiering on in their current jobs. Fears of lost income or the weak hiring market prevent folks from taking career risks. Most just keep their heads down and hope the axe doesn't fall on them. Of course, many of those who just celebrated 99 months collecting unemployment once felt that way, too…

The unhappy truth here is that it's an increasingly vulnerable time to be in the rank-and-file. And by 'rank-and-file', I mean pretty much anyone not senior enough in their company to have a voice in headcount decisions.

If that definition applies to you, don't give in to denial or despair. Neither will help you. And even if it may not feel like it at the moment, you have much more agency in your career destiny than you likely realize.

There are defined steps you can take and investments you can make that will dramatically reduce your vulnerability to the fickle hand of a company layoff or a bad economy. A lot of the foundational work is described in depth in my 2013 book on career transition Finding Your Way To Your Authentic Career, and much more can (and will) be written on the subject at PeakProsperity.com. The following are *not* quick fixes; they take a lot of inner work, dedication, perseverance and time to complete. But these steps are indeed achievable, and will make your chances for career success and security a heck of a lot higher than if you don't do them. The basics include:

  • Identify the work you're best suited for based on your natural aptitudes, interests and work experience – For many, this is the hardest step. Our educational system is notoriously bad at helping people actually figure out what kind of career path is right for them. The good news is that there is a defined process that, if followed conscientiously, makes your chances of identifying a "best fit" field highly probable — even if you've been in the workforce for decades. It's what the first half of my book focuses on.
  • Make a career transition if you're currently in a 'bad-fit" field – If you're not on a career track that plays to your strengths, you need to move out of it. If you're in a bad-fit position, it's hard to outperform (or even perform at the average), and you'll be in danger of being one of the early casualties during a culling of non-essential employees. Making a transition to a new career track is time-intensive; but again, quite doable once you know what direction to head in (see above bullet). Not surprisingly, this transition process is the focus of the second half of my book.
  • Become a domain expert with organizational ownership – Management values most the talent it needs that is expensive (time and/or cost-wise) to replace. It can always reduce budgets or department staff levels, but it will do its utmost to retain talent that does work others can't (or can't do as well or as cheaply). 
  • Develop a professional support network – Make yourself known in your field, particularly outside of your company. Be a source of useful industry insights, and seek to learn as much as you share. Help other people. Seek out mentors. People change firms often throughout their careers; after a few years you'll find you have contacts across numerous companies. Should you fall victim to a layoff, you'll have insiders at other firms working on your behalf to get you hired in.
  • Develop a personal support network – Talk actively with family and friends about what you are willing to do for each other should one of you lose your job. How can you help  ease the burden (meals, child care, loans, etc) of the uncertain time between gainful employment? Figuring a plan out in advance, and making deposits in the Bank of Karma by supporting struggling folks in your community, will result in payback that will dramatically reduce the shock of sudden job loss.
  • Create multiple streams of income – Ideally, you want to develop enough diversity of income that the loss of any single one won't compromise your lifestyle dramatically. Again, there are no easy short-cuts here. But options include: taking on a second job, moonlighting, starting a side business, enabling an unemployed family member to start a paying job, investing in assets that produce cash flows/coupons/dividends, consulting, monetizing existing assets (e.g., renting out a room on AirBnB), etc. Spend some time deciding which approach seems most appropriate for you and start with that one. Once you've got that second income started, as yourself: How can I make it bigger? What other new sources can I add next? 
  • Save – Start by amassing a rainy-day fund equal to 3 months of your current monthly income. Then expand it to six. Then, if you're able to, a year. This cushion will take the pressure off immensely if you find yourself unexpectedly out of work. Concurrently, strive to not only live within your means, but below them. Learn to appreciate non-material joys in life. You'll reduce your expenses (the difference of which should go straight into savings) in the immediate term, and be able to better maintain your quality of life if your income takes a hit.
  • Develop a plan for business ownership – In the end, it's better to be the one calling the shots than answering to them. Yes, there are other types of risks that apply to business owners, but your employment and income destinies are much more within your control as long as the business remains solvent. As you currently build your domain expertise, develop a plan for converting it into your ticket to independence. How can you use it to create value that others will pay you for, versus depending on the single check from your employer? If you have multiple customers, it's unlikely they'll all stop doing business with you at once. With an employer, it's all or nothing.

This list is just a starting-off point, as entire books have been written on each of the steps above. But if you fall in the 100% vulnerable-to-a-pink-slip category, you should start thinking now about which one makes the most sense to tackle first.

As help for those at the beginning of this process, Peak Prosperity is offering its first-ever Countdown Deal for the Kindle version of Finding Your Way To Your Authentic Career. The promotion starts on Saturday, Feb 7, runs for a week, and depending on the day, will offer the e-book for as low as $0.99 (earlier buyers get the deepest discounts)

And The Hits Keep Coming

Even those who feel 'safe' in their jobs are seeing erosion of their 'purchasing power' as employees. Let's look at AOL again.

Like most other companies in the US, AOL will incur costs in complying with the Affordable Care Act. Its compliance expenses will be in the $millions, annually. So today, Tim Armstrong announced that AOL was cutting 401k benefits for its workers:

AOL Blames Obamacare for Plan to Reduce Retirement Benefits (Bloomberg)

 

AOL Inc. (AOL) blamed President Barack Obama’s health-care law for its plan to reduce spending on contributions to employees’ 401(k) retirement plans.

 

AOL, owner of websites such as the Huffington Post, will still match employee contributions to retirement
plans up to 3 percent of their paychecks, Chief Executive Officer Tim Armstrong said. Under the new policy, it will make the matching payments in a lump sum at the end of the year, forcing employees who leave before then to forfeit the benefit, he said in an interview today on CNBC.

 

“Obamacare is an additional $7.1 million expense for us as a company,” Armstrong said. “We have to decide whether to pass that expense to employees or cut other benefits.”

 

The White House is defending the law from criticism that it causes consumers more economic harm than good. Republicans have seized on a report this week by the Congressional Budget Office, which said Obamacare will reduce the hours Americans work by the equivalent of 2 million full-time jobs in 2017.

 

Armstrong didn’t specify how the health-care law had increased costs for New York-based AOL. The CEO told employees today that the health-care expenses of two employees in 2012 played a role in his decision on which benefits to cut, Capital New York reported. The two workers had “distressed babies that were born,” costing AOL $1 million each, he said, indicating that he’d rather prioritize health care over retirement among the company’s benefits.

So, even the 'safe' salaried professionals are more vulnerable than they realize. Do you think they have any alternative other than "take it or leave it" to this news?

Parting Shot

If this article hasn't already driven home the point that employers are increasingly motivated to find ways to cut employee costs — and employees — out of the picture, perhaps this simple example will do the trick.

In the past, those finding themselves between jobs could often rely on unskilled, but unpleasant, work to provide temporary subsistence income. Well, more and more of those jobs are going away, largely due to performance advancements and cost declines in automation.

Ever see a sign spinner on a street corner and think "I guess if I couldn't find work elsewhere, I could always do that?". Not anymore. The robots are taking over:

 

Not only does the encroachment of automation remove income options for those temporarily out of work, but it's increasingly limiting the options for the large pool of unskilled labor with few other alternatives. Of course, this opens up a whole spectrum of economic, social, technological and policy-related questions, which will have to wait for another day…

But the takeaway is: Don't be 100% vulnerable. If you're employed, but at risk, use the time and income you have now to reduce the upheaval a pink slip could wreak on your life.

Even a 10-20% reduction in your vulnerability will mean a world of difference if you find yourself suddenly out of work. Your future self will be extremely grateful of the steps you take today.

 


    



via Zero Hedge http://ift.tt/1klES2Y Tyler Durden

You’ve Got No Job!

Submitted by Adam Taggart via Peak Prosperity,

Today, the pundits are a-buzz making sense of the latest jobs report. Expect much hand-wringing over the impact of the 'polar vortex' and that Punxsutawney Phil saw his shadow.

But most of us care more about the state of one particular job: our own. How relevant is this latest bit of data to that? Not very.

So, to better understand the trends in the work environment most likely impact our own paychecks, it will help to look at another bellwether similar to our fuzzy groundhog friend: AOL.

AOL, a once-important pioneer in the transition to the 'digital economy', is once again showing us where the future of work is headed.

Unfortunately, like the health of AOL's business over the past decade, it's not a pretty picture.

The Expendable Employee

As we've transitioned to an economy in which corporate profitability — and thereby, stock prices — is THE metric for success, the employer-employee relationship has become much more superficial than in past generations.

No longer do workers expect (or in many cases, aspire) to work for a single company for their entire careers. And with the cost efficiencies offered by automation, outsourcing, temporary workers, and related trends — companies are much more inclined to view their workers as expendable and/or easily replaceable, especially when facing a business downturn.

We've seen this dynamic play out in spades since the arrival of the 2008 credit crisis. Companies immediately shed workers in droves as the economy slowed down. But as things stabilized by 2010 and then the "recovery" of 2012-2013 sent corporate profits soaring, the pace of hiring those displaced workers back has been nothing short of anemic:

(source)

And of the jobs that have been added over the past five years, the majority have been temporary jobs. Read that as "Low Pay/No Benefits" jobs:

(source)

It turns out that companies used the 2008-2009 layoff wave as an opportunity to reduce their dependence on human capital (at least, US-based). A vigorous debate can (and should) be waged on whether that happened for good reasons or not, but the fact remains that the employment market remains frail over 5 years later.

More cynical critics will note that lower hiring budgets are NOT a result of companies investing more heavily in productivity-boosting capital expenditures. In fact, since 2008, CAPEX has remained depressed by over 20% compared to historic averages. Rather, it seems companies have been fattening profits by focusing on cutting costs, with the main intent of boosting stock prices. Profits of companies within the S&P 500 are at all-time highs right now. It's clear they're being artificially inflated, and most likely by means that can't be long sustained. 

Many companies have doubled-down on this approach, spending corporate profits on stock buyback programs. This has only served to send shares higher (as I type this, a headline just announced that Apple bought back $14 billion of its stock over the past two weeks). Is it any surprise this is going on when company executives have fantastically-sized compensation packages that are based on increases in…..oh, that's right… the price of their company's stock?

"You've Got No Job!"

Enter AOL, which incidentally bought back $600 million worth of its shares last August, along with a $1.1 billion special dividend to line its investors' pockets.

Since its ill-fated merger with Time Warner 14 years ago, AOL has been a train wreck by most business metrics. It received a dose of much-needed hope when former Google executive Tim Armstrong signed on as CEO in 2009, who was hired to turn things around.

I'll leave it other writers to opine on Armstrong's degree of success since then, but not surprisingly during his tenure, he's made a lot of cuts. AOL has had a steady parade of layoffs over the years (including six months after Armstrong's hiring, announcing it would cut 1/3 of its workforce).

And its the relentless drumbeat of its mass firings, and more notably, the anti-septic manner in which they've been handled, that I think is emblematic of the new era of the disposable worker.

Here's a powerful example. One of Tim Armstrong's first strategic deals after taking the reigns at AOL was to buy a company he had earlier founded called Patch. There was a boatload of drama around the Patch saga at AOL, but in order to avoid getting too diverted, let it suffice to say that Patch proved a massive distraction for the company. Armstrong was very personally invested in its performance and made many promises to both its employees and Wall Street that ultimately didn't materialize.

Last summer, Armstrong rallied the Patch team, calling on them to "fully commit" to the company's plans for the future, which he promised he was hell-bent on supporting. Then, jarringly, in mid-sentence during this pep talk, he was momentarily distracted by an employee whom he then fired on the spot, in front of an audience of 1,000 (you can listen to this drive-by canning here). This incident was reported at wildfire speed among the tech blogs, sparking a debate about the treatment of employees in the modern workplace – and questioning the wisdom of randomly firing people during an event intended to boost morale.

But even more soulless is the latest sad development at Patch. Despite proclaiming his "full" commitment as recently as August, Armstrong sold the controlling stake in Patch last month to investment firm Hale Global. Not surprisingly, soon after this deal was announced, the hatchet soon swung. 

I want you to listen here, as hundreds of Patch employees, many of whom stuck with the struggling company for years at Armstrong's urging, learn that they are losing their jobs, effective immediately:

 

"Thank you again. And best of luck". Oh, and you need to be out of the building by 5pm.

Don't Remain Vulnerable

Was AOL too cruel here? Or is this simply the healthy Darwinian nature of capitalism in action?

I'm going to leave that for others to debate; because that's not the point of this article.

The point is: If you're an employee (which most folks reading this are), recognize that the trend here is not your friend. For a variety of reasons, some defensible, some not, corporations are increasingly less motivated to train, compensate, develop and retain workers than in the past.

The question I want you to ask yourself is this: How impacted would my life be if I unexpectedly received a pink slip tomorrow?

For most people, the answer is: Substantially. For too many: Devastating.

Bills, debts, family obligations, etc keep most people soldiering on in their current jobs. Fears of lost income or the weak hiring market prevent folks from taking career risks. Most just keep their heads down and hope the axe doesn't fall on them. Of course, many of those who just celebrated 99 months collecting unemployment once felt that way, too…

The unhappy truth here is that it's an increasingly vulnerable time to be in the rank-and-file. And by 'rank-and-file', I mean pretty much anyone not senior enough in their company to have a voice in headcount decisions.

If that definition applies to you, don't give in to denial or despair. Neither will help you. And even if it may not feel like it at the moment, you have much more agency in your career destiny than you likely realize.

There are defined steps you can take and investments you can make that will dramatically reduce your vulnerability to the fickle hand of a company layoff or a bad economy. A lot of the foundational work is described in depth in my 2013 book on career transition Finding Your Way To Your Authentic Career, and much more can (and will) be written on the subject at PeakProsperity.com. The following are *not* quick fixes; they take a lot of inner work, dedication, perseverance and time to complete. But these steps are indeed achievable, and will make your chances for career success and security a heck of a lot higher than if you don't do them. The basics include:

  • Identify the work you're best suited for based on your natural aptitudes, interests and work experience – For many, this is the hardest step. Our educational system is notoriously bad at helping people actually figure out what kind of career path is right for them. The good news is that there is a defined process that, if followed conscientiously, makes your chances of identifying a "best fit" field highly probable — even if you've been in the workforce for decades. It's what the first half of my book focuses on.
  • Make a career transition if you're currently in a 'bad-fit" field – If you're not on a career track that plays to your strengths, you need to move out of it. If you're in a bad-fit position, it's hard to outperform (or even perform at the average), and you'll be in danger of being one of the early casualties during a culling of non-essential employees. Making a transition to a new career track is time-intensive; but again, quite doable once you know what direction to head in (see above bullet). Not surprisingly, this transition process is the focus of the second half of my book.
  • Become a domain expert with organizational ownership – Management values most the talent it needs that is expensive (time and/or cost-wise) to replace. It can always reduce budgets or department staff levels, but it will do its utmost to retain talent that does work others can't (or can't do as well or as cheaply). 
  • Develop a professional support network – Make yourself known in your field, particularly outside of your company. Be a source of useful industry insights, and seek to learn as much as you share. Help other people. Seek out mentors. People change firms often throughout their careers; after a few years you'll find you have contacts across numerous companies. Should you fall victim to a layoff, you'll have insiders at other firms working on your behalf to get you hired in.
  • Develop a personal support network – Talk actively with family and friends about what you are willing to do for each other should one of you lose your job. How can you help  ease the burden (meals, child care, loans, etc) of the uncertain time between gainful employment? Figuring a plan out in advance, and making deposits in the Bank of Karma by supporting struggling folks in your community, will result in payback that will dramatically reduce the shock of sudden job loss.
  • Create multiple streams of income – Ideally, you want to develop enough diversity of income that the loss of any single one won't compromise your lifestyle dramatically. Again, there are no easy short-cuts here. But options include: taking on a second job, moonlighting, starting a side business, enabling an unemployed family member to start a paying job, investing in assets that produce cash flows/coupons/dividends, consulting, monetizing existing assets (e.g., renting out a room on AirBnB), etc. Spend some time deciding which approach seems most appropriate for you and start with that one. Once you've got that second income started, as yourself: How can I make it bigger? What other new sources can I add next? 
  • Save – Start by amassing a rainy-day fund equal to 3 months of your current monthly income. Then expand it to six. Then, if you're able to, a year. This cushion will take the pressure off immensely if you find yourself unexpectedly out of work. Concurrently, strive to not only live within your means, but below them. Learn to appreciate non-material joys in life. You'll reduce your expenses (the difference of which should go straight into savings) in the immediate term, and be able to better maintain your quality of life if your income takes a hit.
  • Develop a plan for business ownership – In the end, it's better to be the one calling the shots than answering to them. Yes, there are other types of risks that apply to business owners, but your employment and income destinies are much more within your control as long as the business remains solvent. As you currently build your domain expertise, develop a plan for converting it into your ticket to independence. How can you use it to create value that others will pay you for, versus depending on the single check from your employer? If you have multiple customers, it's unlikely they'll all stop doing business with you at once. With an employer, it's all or nothing.

This list is just a starting-off point, as entire books have been written on each of the steps above. But if you fall in the 100% vulnerable-to-a-pink-slip category, you should start thinking now about which one makes the most sense to tackle first.

As help for those at the beginning of this process, Peak Prosperity is offering its first-ever Countdown Deal for the Kindle version of Finding Your Way To Your Authentic Career. The promotion starts on Saturday, Feb 7, runs for a week, and depending on the day, will offer the e-book for as low as $0.99 (earlier buyers get the deepest discounts)

And The Hits Keep Coming

Even those who feel 'safe' in their jobs are seeing erosion of their 'purchasing power' as employees. Let's look at AOL again.

Like most other companies in the US, AOL will incur costs in complying with the Affordable Care Act. Its compliance expenses will be in the $millions, annually. So today, Tim Armstrong announced that AOL was cutting 401k benefits for its workers:

AOL Blames Obamacare for Plan to Reduce Retirement Benefits (Bloomberg)

 

AOL Inc. (AOL) blamed President Barack Obama’s health-care law for its plan to reduce spending on contributions to employees’ 401(k) retirement plans.

 

AOL, owner of websites such as the Huffington Post, will still match employee contributions to retirement plans up to 3 percent of their paychecks, Chief Executive Officer Tim Armstrong said. Under the new policy, it will make the matching payments in a lump sum at the end of the year, forcing employees who leave before then to forfeit the benefit, he said in an interview today on CNBC.

 

“Obamacare is an additional $7.1 million expense for us as a company,” Armstrong said. “We have to decide whether to pass that expense to employees or cut other benefits.”

 

The White House is defending the law from criticism that it causes consumers more economic harm than good. Republicans have seized on a report this week by the Congressional Budget Office, which said Obamacare will reduce the hours Americans work by the equivalent of 2 million full-time jobs in 2017.

 

Armstrong didn’t specify how the health-care law had increased costs for New York-based AOL. The CEO told employees today that the health-care expenses of two employees in 2012 played a role in his decision on which benefits to cut, Capital New York reported. The two workers had “distressed babies that were born,” costing AOL $1 million each, he said, indicating that he’d rather prioritize health care over retirement among the company’s benefits.

So, even the 'safe' salaried professionals are more vulnerable than they realize. Do you think they have any alternative other than "take it or leave it" to this news?

Parting Shot

If this article hasn't already driven home the point that employers are increasingly motivated to find ways to cut employee costs — and employees — out of the picture, perhaps this simple example will do the trick.

In the past, those finding themselves between jobs could often rely on unskilled, but unpleasant, work to provide temporary subsistence income. Well, more and more of those jobs are going away, largely due to performance advancements and cost declines in automation.

Ever see a sign spinner on a street corner and think "I guess if I couldn't find work elsewhere, I could always do that?". Not anymore. The robots are taking over:

 

Not only does the encroachment of automation remove income options for those temporarily out of work, but it's increasingly limiting the options for the large pool of unskilled labor with few other alternatives. Of course, this opens up a whole spectrum of economic, social, technological and policy-related questions, which will have to wait for another day…

But the takeaway is: Don't be 100% vulnerable. If you're employed, but at risk, use the time and income you have now to reduce the upheaval a pink slip could wreak on your life.

Even a 10-20% reduction in your vulnerability will mean a world of difference if you find yourself suddenly out of work. Your future self will be extremely grateful of the steps you take today.

 


    



via Zero Hedge http://ift.tt/1klES2Y Tyler Durden

A Walk-Thru The First Shadow Bank Run… 250 Year Ago

Plain vanilla bank runs are as old as fractional reserve banking itself, and usually happen just before or during an economic and financial collapse, when all trust (i.e. credit) in counterparties disappears and it is every man, woman and child, and what meager savings they may have, for themselves. However, when it comes to shadow bank runs, which take place when institutions are so mismatched in interest, credit and/or maturity exposure that something just snaps as it did in the hours after the Lehman collapse, that due to the sheer size of their funding exposure that they promptly grind the system to a halt even before conventional banks can open their doors to the general public, the conventional wisdom is that this is a novel development (and one which is largely misunderstood). It isn’t.

As the NY Fed’s blog (whose historical narratives are far more informative and accurate than its attempts to “explain away” the labor force participation collapse) recounts, the first tremor in the shadow banking system took place not in 2008 but some 250 years ago… during the Commercial Credit crisis of 1763, whose analog today is the all too shaky and largely unregulated core shadow banking system component: Tri-Party Repo.

From the NY Fed blog, by James Narron and David Skeie:

Crisis Chronicles: The Commercial Credit Crisis of 1763 and Today’s Tri-Party Repo Market

During the economic boom and credit expansion that followed the Seven Years’ War (1756-63), Berlin was the equivalent of an emerging market, Amsterdam’s merchant bankers were the primary sources of credit, and the Hamburg banking houses served as intermediaries between the two. But some Amsterdam merchant bankers were leveraged far beyond their capacity. When a speculative grain deal went bad, the banks discovered that there were limits to how much risk could be effectively hedged. In this issue of Crisis Chronicles, we review how “fire sales” drove systemic risk in funding markets some 250 years ago and explain why this could still happen in today’s tri-party repo market.

Early Credit Wrappers

One of the primary financial credit instruments of the 1760s was the bill of exchange—essentially a written order to pay a fixed sum of money at a future date. Early forms of bills of exchange date back to eighth-century China; the instrument was later adopted by Arab merchants to facilitate trade, and then spread throughout Europe. Bills of exchange were originally designed as short-term contracts but gradually became heavily used for long-term borrowing. They were typically rolled over and became de facto short-term loans to finance longer-term projects, creating a classic balance sheet maturity mismatch. At that time, bills of exchange could be re-sold, with each seller serving as a signatory to the bill and, by implication, insuring the buyer of the bill against default. This practice prevented the circulation of low-credit-quality bills among market participants and created a kind of “credit wrapper”—a guarantee for the specific loan—by making all signatories jointly liable for a particular bill. In addition, low acceptance fees—the fees paid to market participants for taking on the obligation to pay the bill of exchange—implied a perceived negligible risk. But the practice also resulted in binding market participants together through their balance sheets: one bank might have a receivable asset and a payable liability for the same bill of exchange, even when no goods were traded. By the end of the Seven Years’ War in 1763, high leverage and balance sheet interconnectedness left merchant bankers highly vulnerable to any slowdown in credit availability.

Tight Credit Markets Lead to Distressed Sales

Merchant bankers believed that their balance sheet growth and leverage were hedged through offsetting claims and liabilities. And while some of the more conservative Dutch bankers were cautious in growing their wartime business, others expanded quickly. One of the faster growing merchant banks belonged to the de Neufville brothers, who speculated in depreciating currencies and endorsed a large number of bills of exchange. Noting their success (if only in the short term), other merchant bankers followed suit. The crisis was triggered when the brothers entered into a speculative deal to buy grain from the Russian army as it left Poland. But with the war’s end, previously elevated grain prices collapsed by more than 75 percent, and the price decline began to depress other prices. As asset prices fell, it became increasingly difficult to get new loans to roll over existing debt. Tight credit markets led to distressed sales and further price declines. As credit markets dried up, merchant bankers began to suffer direct losses when their counterparties went bankrupt.

The crisis came to a head in Amsterdam in late July 1763 when the banking houses of Aron Joseph & Co and de Neufville failed, despite a collective action to save them. Their failure caused the de Neufville house’s creditors around Amsterdam to default. Two weeks later, Hamburg saw a wave of bank collapses, which in turn led to a new wave of failures in Amsterdam and pressure in Berlin. In all, there were more than 100 bank failures, mostly in Hamburg.

An Early Crisis-Driven Bailout

The commercial crisis in Berlin was severe, with the manufacturer, merchant, and banker Johann Ernst Gotzkowsky at the center. Gotzkowsky’s liabilities were almost all in bills of exchange, while almost all his assets were in fixed capital divided among his silk works and porcelain factory. Berlin was able to mitigate the effects of the crisis when Crown Prince Frederick imposed a payments standstill for several firms. To prevent contagion, the prince also organized some of the first financial-crisis-driven bailouts after he examined the books of Gotzkowsky’s diverse operations. Ultimately, about half of Gotzkowsky’s creditors accepted 50 cents on the dollar for outstanding debts.

Meanwhile, banks in Hamburg and the Exchange Bank of Amsterdam tried to extend securitized loans to deflect the crisis. But existing lending provisions restricted the ratio of bank money to gold and silver such that the banks had no real power to expand credit. These healthy banks were legally limited in their ability to support the credit-constrained banks. To preserve cash on hand, Hamburg and Amsterdam banks were slow to honor bills of exchange, eventually honoring them only after pressure from Berlin. The fact that Amsterdam and Hamburg banks re-opened within the year—and some even within weeks—provides evidence that the crisis was one of liquidity and not fundamental insolvency.

The crisis led to a period of falling industrial production and credit stagnation in northern Europe, with the recession being both deep and long-lasting in Prussia. These developments prompted a second wave of bankruptcies in 1766.

Distressed Fire Sales and the Tri-Party Repo Market

From this crisis we learn that it is difficult for firms to hedge losses when market risk and credit risk are highly correlated and aggregate risk remains. In this case, as asset prices fell during a time of distressed “fire sales,” asset prices became more correlated, further exacerbating downward price movement. When one firm moved to shore up its balance sheet by selling distressed assets, that put downward pressure on other, interconnected balance sheets. The liquidity risk was heightened further because most firms were highly leveraged. Those that had liquidity guarded it, creating a self-fulfilling flight to liquidity.

As we saw during the recent financial crisis, the tri-party repo market was overly reliant on massive extensions of intraday credit, driven by the timing between the daily unwind and renewal of repo transactions. Estimates suggest that by 2007, the repo market had grown to $10 trillion—the same order of magnitude as the total assets in the U.S. commercial banking sector—and intraday credit to any particular broker/dealer might approach $100 billion. And as in the commercial crisis of 1763, risk was underpriced with low repo “haircuts”—a haircut being a demand by a depositor for collateral valued higher than the value of the deposit.

Much of the work to address intraday credit risk in the repo market will be complete by year-end 2014, when intraday credit will have been reduced from 100 percent to about 10 percent. But as New York Fed President William C. Dudley noted in his recent introductory remarks at the conference “Fire Sales” as a Driver of Systemic Risk, “current reforms do not address the risk that a dealer’s loss of access to tri-party repo funding could precipitate destabilizing asset fire sales.” For example, in a time of market stress, when margin calls and mark-to-market losses constrain liquidity, firms are forced to deleverage. As recently pointed out by our New York Fed colleagues, deleveraging could impact other market participants and market sectors in current times, just as it did in 1763.

Crown Prince Frederick provided a short-term solution in 1763, but as we’ll see in upcoming posts, credit crises persisted. As we look toward a tri-party repo market structure that is more resilient to “destabilizing asset fire sales” and that prices risk more accurately, we ask, can industry provide the leadership needed to ensure that credit crises don’t persist? Or will regulators need to step in and play a firmer role to discipline dealers that borrow short-term from money market fund lenders and draw on the intraday credit provided by clearing banks? Tell us what you think.

* * *

Fast forward to today when we find that the total collateral value in the Tri-Party repo system as of December amounts to $1.6 trillion.

… or 10% of US GDP. What can possibly go wrong.


    



via Zero Hedge http://ift.tt/1o1Zv4o Tyler Durden