Category: zerohedge

Ongoing anti-regime demonstrations in Ukraine are weighing on investor's risk perceptions as CDS spike to near three-year highs today (up over 100bps). At a minimum developments lower president Yanukovich's chances of remaining in power beyond the spring 2015 elections and possibly undermine his hold on power earlier, further decreasing the likelihood of sizeable financial support from Russia. With Moody's earlier comments on the nation's "precarious external liquidity" position; as Goldman warns, with even higher political uncertainty ahead, an acceleration of capital outflows might also follow and while they think the authorities will eventually turn to the IMF to avoid a disorderly sell-off of the currency, recent events arguably raise the risks to that view. However, the capital outflows are already having an impact as Reuters notes, Russian banks are considerably exposed as Ukrainian banks should deposit runs escalate.

 

Some background from Guy Haselmann of Scotiabank:

Ukraine is a strategically important country of 45 million people. A trade pact with the EU was close. However, it appears that a rival bid (or other means of influence) arose during two closed door meetings with Vladimir Putin. The press often reports that President Yanukovich’s corrupt government has shown an instinct for self-preservation often at the expense of the expense of the nation.

 

The Ukraine economy is in recession. The country has only $20 billion of foreign reserves which is 2 ½ months of imports (worse than Egypt). The IMF’s red flag level is 3 months. Ukraine has $10bln of external debt maturing in 2014. Its CDS rose over 100 bps this week to near 1100. Debt-to-GDP is only 43%, but Argentina defaulted with its debt-to-GDP at 50%. Its currency (Hryvnia), which was devalued in 2008, is pegged to the dollar. The current account deficit is 7% and herein lies the biggest problem.

 

The IMF is unlikely to help until after the 2015 election. The EU is unlikely to provide any aid. Russia may be enticed to help via loans. The President is on his way to China – who may help – but he may return no longer in power.

And Goldman notes the situation is fluid but highly likely that anti-regime protests will persist with several possible scenarios developing:

1) President Yanukovich declares a state of emergency and/or uses force to prevent protests from developing further;

 

2) President Yanukovich agrees to talks with the opposition and to a roadmap for signing the EU association agreement at some point in 2014 (our understanding had been that this would not be possible on the EU side, but EU leaders have recently suggested otherwise);

 

3) President Yanukovich does nothing and protests persist.

From the macroeconomic standpoint, these protests come at a time when the National Bank of Ukraine (NBU) has had to defend the currency peg through sizeable interventions, which have depleted the reserve cover to 2.5 months of imports, and when the government is arguably unable to roll its debt in the market. Goldman fears the further risk is that, due to the heightened political uncertainty, capital outflows could intensify, putting further pressure on the peg.

While there had been some press reports suggesting sizeable Russian financial help in exchange for the country not signing the EU association agreement, the recent developments, in our view, call this further into question. We think that Russia is unlikely to extend substantial help without guarantees. Given that it appears that President Yanukovich's chances of holding on to power beyond the 2015 spring election have decreased following the protests and schisms in his administration might even weaken his powers earlier (splits in the Region's Party, for instance, might deprive him of a majority in parliament) he might very well not be in a position any more to give those guarantees.

As indicated by polling and by the participation in street protests, the decision to suspend preparations for signing the EU association agreement was an unpopular one, at least with a significant part of the population. Goldman believes that President Yanukovich may have underestimated the political ramifications of doing so.

At this stage, it is difficult to forecast how the situation will evolve. Apart from the size of the protests it also matters to what extent the president can hold on to his own power bases in the Regions Party and the eastern part of the country. Given that the economy is in recession and the heavy industries in the east in particular are suffering, his support there might very well be more brittle than in the past.

But perhaps there is a silver lining – in an odd twisted way – the concerns about Ukrainian banks and the currency peg have seen deposit outflows increasing the risk to the country's financial system and creating a particularly acute headache for Russian banks. The silver lining, of course, is that Russia may be forced to provide more assistance in a Cyprus-style save for its own banks (lenders) and depositors…

As Reuters notes,

While other foreign lenders have cut their Ukraine exposure in the five years since – to 20 percent of Ukraine banking sector assets in 2012 from 40 percent in 2008, according to a Raiffeisen Research survey – Russian banks have maintained a strong market presence, still accounting for 12 percent.

 

Among foreign banks, the Russians have easily the biggest exposure, more than twice that of Austrian lenders, the next biggest.

 

…

 

"[Moodys] estimate that these banks' exposure to Ukrainian risk is $20-$30 billion, a sizeable amount indeed, considering that their combined Tier 1 capital was $105 billion in June," Moody's said.

 

…

 

Moody's, which estimated that 35 percent of all bank loans in Ukraine were problem loans, said the country's severe economic problems would keep local borrowers under pressure and could result in higher loan losses for the Russian lenders.

 

In the absence of the association agreement with the European Union, Russian-Ukrainian trade is likely to rise, and the four big Russian banks may well increase their exposure to Ukraine, it added.

 

…

 

Dimitry Sologoub, head of research at Raiffeisen in Kiev, said the banks had learned lessons from the 2008 crisis, so were much less exposed to credit risk, liquidity risk and forex risk, and the central bank was calming matters by providing liquidity and foreign exchange.

 

"The question is how long it will go? The rese
rve cushion of the national bank is not so big."

 

In the meantime, Ukraine might secure short-term benefits from its closer ties with Russia, enough perhaps to stave off the kind of currency crisis that nearby Belarus suffered in 2011, said Charles Robertson, chief global economist at Renaissance Capital in London.

 

"In the long run, it will probably keep Ukraine poor. This is bad for Ukrainians and bad for Russia," he added.

 

"Instead of being a strong, successful economy on Russia's borders, able to buy plenty of Russian exports, Ukraine risks becoming another Belarus."

Which – after all – could be just what Putin wants…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/hF5Cn8DpxEg/story01.htm Tyler Durden

Ongoing anti-regime demonstrations in Ukraine are weighing on investor's risk perceptions as CDS spike to near three-year highs today (up over 100bps). At a minimum developments lower president Yanukovich's chances of remaining in power beyond the spring 2015 elections and possibly undermine his hold on power earlier, further decreasing the likelihood of sizeable financial support from Russia. With Moody's earlier comments on the nation's "precarious external liquidity" position; as Goldman warns, with even higher political uncertainty ahead, an acceleration of capital outflows might also follow and while they think the authorities will eventually turn to the IMF to avoid a disorderly sell-off of the currency, recent events arguably raise the risks to that view. However, the capital outflows are already having an impact as Reuters notes, Russian banks are considerably exposed as Ukrainian banks should deposit runs escalate.

 

Some background from Guy Haselmann of Scotiabank:

Ukraine is a strategically important country of 45 million people. A trade pact with the EU was close. However, it appears that a rival bid (or other means of influence) arose during two closed door meetings with Vladimir Putin. The press often reports that President Yanukovich’s corrupt government has shown an instinct for self-preservation often at the expense of the expense of the nation.

 

The Ukraine economy is in recession. The country has only $20 billion of foreign reserves which is 2 ½ months of imports (worse than Egypt). The IMF’s red flag level is 3 months. Ukraine has $10bln of external debt maturing in 2014. Its CDS rose over 100 bps this week to near 1100. Debt-to-GDP is only 43%, but Argentina defaulted with its debt-to-GDP at 50%. Its currency (Hryvnia), which was devalued in 2008, is pegged to the dollar. The current account deficit is 7% and herein lies the biggest problem.

 

The IMF is unlikely to help until after the 2015 election. The EU is unlikely to provide any aid. Russia may be enticed to help via loans. The President is on his way to China – who may help – but he may return no longer in power.

And Goldman notes the situation is fluid but highly likely that anti-regime protests will persist with several possible scenarios developing:

1) President Yanukovich declares a state of emergency and/or uses force to prevent protests from developing further;

 

2) President Yanukovich agrees to talks with the opposition and to a roadmap for signing the EU association agreement at some point in 2014 (our understanding had been that this would not be possible on the EU side, but EU leaders have recently suggested otherwise);

 

3) President Yanukovich does nothing and protests persist.

From the macroeconomic standpoint, these protests come at a time when the National Bank of Ukraine (NBU) has had to defend the currency peg through sizeable interventions, which have depleted the reserve cover to 2.5 months of imports, and when the government is arguably unable to roll its debt in the market. Goldman fears the further risk is that, due to the heightened political uncertainty, capital outflows could intensify, putting further pressure on the peg.

While there had been some press reports suggesting sizeable Russian financial help in exchange for the country not signing the EU association agreement, the recent developments, in our view, call this further into question. We think that Russia is unlikely to extend substantial help without guarantees. Given that it appears that President Yanukovich's chances of holding on to power beyond the 2015 spring election have decreased following the protests and schisms in his administration might even weaken his powers earlier (splits in the Region's Party, for instance, might deprive him of a majority in parliament) he might very well not be in a position any more to give those guarantees.

As indicated by polling and by the participation in street protests, the decision to suspend preparations for signing the EU association agreement was an unpopular one, at least with a significant part of the population. Goldman believes that President Yanukovich may have underestimated the political ramifications of doing so.

At this stage, it is difficult to forecast how the situation will evolve. Apart from the size of the protests it also matters to what extent the president can hold on to his own power bases in the Regions Party and the eastern part of the country. Given that the economy is in recession and the heavy industries in the east in particular are suffering, his support there might very well be more brittle than in the past.

But perhaps there is a silver lining – in an odd twisted way – the concerns about Ukrainian banks and the currency peg have seen deposit outflows increasing the risk to the country's financial system and creating a particularly acute headache for Russian banks. The silver lining, of course, is that Russia may be forced to provide more assistance in a Cyprus-style save for its own banks (lenders) and depositors…

As Reuters notes,

While other foreign lenders have cut their Ukraine exposure in the five years since – to 20 percent of Ukraine banking sector assets in 2012 from 40 percent in 2008, according to a Raiffeisen Research survey – Russian banks have maintained a strong market presence, still accounting for 12 percent.

 

Among foreign banks, the Russians have easily the biggest exposure, more than twice that of Austrian lenders, the next biggest.

 

…

 

"[Moodys] estimate that these banks' exposure to Ukrainian risk is $20-$30 billion, a sizeable amount indeed, considering that their combined Tier 1 capital was $105 billion in June," Moody's said.

 

…

 

Moody's, which estimated that 35 percent of all bank loans in Ukraine were problem loans, said the country's severe economic problems would keep local borrowers under pressure and could result in higher loan losses for the Russian lenders.

 

In the absence of the association agreement with the European Union, Russian-Ukrainian trade is likely to rise, and the four big Russian banks may well increase their exposure to Ukraine, it added.

 

…

 

Dimitry Sologoub, head of research at Raiffeisen in Kiev, said the banks had learned lessons from the 2008 crisis, so were much less exposed to credit risk, liquidity risk and forex risk, and the central bank was calming matters by providing liquidity and foreign exchange.

 

"The question is how long it will go? The reserve cushion of the national bank is not so big."

 

In the meantime, Ukraine might secure short-term benefits from its closer ties with Russia, enough perhaps to stave off the kind of currency crisis that nearby Belarus suffered in 2011, said Charles Robertson, chief global economist at Renaissance Capital in London.

 

"In the long run, it will probably keep Ukraine poor. This is bad for Ukrainians and bad for Russia," he added.

 

"Instead of being a strong, successful economy on Russia's borders, able to buy plenty of Russian exports, Ukraine risks becoming another Belarus."

Which – after all – could be just what Putin wants…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/hF5Cn8DpxEg/story01.htm Tyler Durden

“Interest in PCs has remained limited, leading to little indication of positive growth beyond replacement of existing systems,” is IDC’s under-stated way of saying that personal-computer shipments are projected to fall 10.1% this year, by far the biggest annual decline on record. At IDC’s projected sales rates, shipments worldwide will stay at just more than 300 million through 2017, or barely above 2008 levels.

 

As IDC notes,

“Perhaps the chief concern for future PC demand is a lack of reasons to replace an older system,” said Jay Chou, Senior Research Analyst, Worldwide Quarterly PC Trackers at IDC.

 

“While IDC research finds that the PC still remains the primary computing device – for example, PCs are used more hours per day than tablets or phones – PC usage is nonetheless declining each year as more devices become available.

 

And despite industry efforts, PC usage has not moved significantly beyond consumption and productivity tasks to differentiate PCs from other devices. As a result, PC lifespans continue to increase, thereby limiting market growth.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mbbPBhKXCIU/story01.htm Tyler Durden

A world, in which former permabears David Rosenberg, Jeremy Grantham and now Hugh Hendry have thrown in the towel and gone bull retard, and where none other than the Chief Investment Officer of General Re-New England Asset Management – a company wholly-owned by Warren Buffett’s Berkshire Hathaway, has issued one of the direst proclamations about the future to date and blasts the Fed’s role in creating the biggest mess in financial history, is truly upside down.

While the topic of CIO John Gilbert is Twitter, and specifically the investors in the second coming of the irrational exuberance bubble, about which he says that “following such a crowd is an excellent hedge against ever being financially independent. Gravity wins in time“… what Gilbert is really talking about, is the Fed. To wit:

It should be obvious to everybody by now that such stock market largesse is made in Washington. The specific address is the Eccles Building on Constitution Avenue, home of the Federal Reserve. In fact as citizens and U.S. taxpayers, we think it would be an expression of gratitude if Twitter were to take a little pressure off of the Fed and buy some Treasury bonds themselves.

 

…

 

We may be seeing the leading edge of a wave of credit problems among corporate borrowers in emerging market economies. Lest one think it does not affect the U.S. and other developed market countries, recall the Asian crisis chronology. Thailand devalued its currency in the summer of 1997 and few outside of Thailand cared. But contracting Asian demand reduced demand for oil, and Russia (whose exports are 80% oil) defaulted in August of 1998. Risk spreads widened, and five weeks later, Long Term Capital Management was insolvent. That was a systemic event and caused disruption in markets in general, and a stock market decline. So for those who believe that they are protected from loss by central bank behavior, a little history is in order. As usual.

 

…

 

This is a major component of the downside to the Fed’s program. They have created a systemic risk in the world financial system for which they take little or no responsibility, because that which happens outside the U.S. is not their assignment. But as custodians of the reserve currency, it ends up that way.

Since we obviously agree with everything the GenRE CIO says we can only assume with absolute certainly that he does not speak for his ultimate employer: the man who according to many has benefitted the most from the Fed’s largesse: Warren Buffett.

Full letter below (pdf)

History Ignored, Again

It would seem fair if Twitter were to share. The company’s initial public offering was a staggering success, of course. Priced at $26, the stock closed its first day of trading at $45 per share. The company was thus endowed with a market capitalization of $25 billion. The company has no earnings, but who cares. Adding back non-cash charges to produce earnings before interest, taxes, depreciation and amortization, then adding back the financial value of non-cash employee compensation, the company can be regarded as profitable. Such a number for 2013 may approximate $50 million or so. The company is valued at 500 times such results, which exclude expenses that do have economic value. Correctly accounted, the company makes not a dime. But who cares when circumspection is the investment equivalent of tuberculosis.

It should be obvious to everybody by now that such stock market largesse is made in Washington. The specific address is the Eccles Building on Constitution Avenue, home of the Federal Reserve. In fact as citizens and U.S. taxpayers, we think it would be an expression of gratitude if Twitter were to take a little pressure off of the Fed and buy some Treasury bonds themselves. But that is not our remit, the company would reply. We are here to, well, Twitter.

Happily, not all members of the U.S. government are as pleased as the central bank to induce investors to behave foolishly. On the eve of Twitter’s IPO, Mary Jo White, chair of the Securities and Exchange Commission, offered cautionary remarks on investing in complex or inchoate technology businesses. The stock market ignored her, but her comments were well chosen.

 We have seen this all before and it ends badly. Ms. White’s remarks were presumably pollinated by the lessons of history. By coincidence, in the same week that Twitter completed its offering, another tech firm reported disappointing earnings. That firm was Cisco, which was one of the belles of the stock market boom of the late 1990s. By the peak in early 2000, Cisco was valued at about $500 billion, which was 200 times the company’s then earnings. An impressive valuation, also. But back then, Cisco and brethren were going to change the world. Sort of like Twitter today. Chart 1 is Cisco, tracing out the dreaded where-the-Rocky-Mountains-meet-the-Great-Plains stock price pattern.

Cisco’s valuation has been decimated, and it trades today at only about 11 times earnings, a rather modest valuation, and a reminder that following such a crowd is an excellent hedge against ever being financially independent. Gravity wins in time.

Cisco’s discouraging recent earnings disclosure was particularly ironic, coming as it did in the week that Twitter led the Fed-driven market upward. That is because the company made pointed comments about a sudden deceleration in their businesses in many emerging market economies in the last few months. This is not only a cautionary tale about the uncertainty implicit in technology businesses. We fear that it may precede more such news from a number of firms and emerging countries that have benefitted from the same central bank policies of which Twitter is the lottery winner of the moment.

We applauded Fed Governor Jeremy Stein when, in his paper of February of this year, he broached the subject of unintended consequences of the Fed’s  unconventional policies. We have long held that view. Governor Stein explored a number of evident candidates, including mortgage REITs and high yield bond issuance. One asset class that he did not discuss was emerging market debt issuance, which to us seemed then, and since, as even more important because of its systemic nature. Emerging market borrowers can borrow at very low rates in dollars, and have accepted the opportunity with alacrity.

When Chairman Bernanke broached the subject of reducing bond purchases back in February, long-term rates began a sharp rise that took the yield on the 10-year Treasury from 1.6% to 2.5% to 3.0%, where they remain. While such yields are low by historic standards, the change at the margin is significant. It has already retarded activity in the U.S. mortgage market, for example.

The most important emerging market borrowers have historically been sovereign governments, who could reduce their borrowing costs so long as the currency mismatch did not move against them. From time to time, it did, resulting in such borrowing being referred to pejoratively as original sin in international finance. But at least those were sovereign governments.

An alarm
ing feature as the current credit cycle has developed has been the rapid growth in borrowing by emerging market businesses. Many emerging countries have had boom conditions over most of the period since the Asian Financial Crisis. China’s accession to the WTO in 2001 was followed by a massive investment program that provided a massive and rapidly growing market for the exports of many other emerging nations—and the businesses that produced the coal, steel, copper and cement China required. The Lehman bankruptcy was an abrupt interruption of the boom, but China’s response was a redoubling of investment to overcome the financial crisis. So China’s demand for imports surged again, much of which was satisfied by emerging market vendors from Brazil to Indonesia to Africa.

Those boom conditions coincided with the Fed’s everyday low price interest rate policy. The temptation to borrow in dollars at low rates, and take the chance on  exchange rates, was evidently too powerful for many corporate borrowers. In fact, at the time, the currencies were moving in their favor. Booming exports made for  resilience, or even strength, in their currencies against the dollar. Borrowing in dollars seemed to make all the sense in the world.

The result was a boom in borrowing to match the boom in business. Chart 2 shows the increase in dollar—denominated borrowing by corporations since the Asian Financial Crisis in 1997–1998. It has exploded since the Federal Reserve has suppressed borrowing costs in the last five years.

The result of this roaring issuance is that debt ratios have risen to a level not seen since the Asian Financial Crisis of 1997—1998, as shown in Chart 3

This might be disquieting, but not necessarily troublesome, if the currency mismatch were not an issue. But shortly after Bernanke’s suggestion in May that the punchbowl might be removed, capital began flowing out of the hot emerging markets. The result was downward pressure on their currencies, which in some cases is severe. Chart 4 shows the change in exchange values versus the dollar for a number of affected emerging countries.

The systemic nature of the problem—booming debt issuance in dollars, followed by contemporaneous currency shocks in response to Bernanke’s comments in May—coincides with the sudden slowing in demand for Cisco’s equipment and, perhaps, others as well.

This is a major component of the downside to the Fed’s program. They have created a systemic risk in the world financial system for which they take little or no responsibility, because that which happens outside the U.S. is not their assignment. But as custodians of the reserve currency, it ends up that way.

We may be seeing the leading edge of a wave of credit problems among corporate borrowers in emerging market economies. Lest one think it does not affect the U.S. and other developed market countries, recall the Asian crisis chronology. Thailand devalued its currency in the summer of 1997 and few outside of Thailand cared. But contracting Asian demand reduced demand for oil, and Russia (whose exports are 80% oil) defaulted in August of 1998. Risk spreads widened, and five weeks later, Long Term Capital Management was insolvent. That was a systemic event and caused disruption in markets in general, and a stock market decline. So for those who believe that they are protected from loss by central bank behavior, a little history is in order. As usual. Particularly for Twitter aficionados.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/UHf_aA7nYi0/story01.htm Tyler Durden

A world, in which former permabears David Rosenberg, Jeremy Grantham and now Hugh Hendry have thrown in the towel and gone bull retard, and where none other than the Chief Investment Officer of General Re-New England Asset Management – a company wholly-owned by Warren Buffett’s Berkshire Hathaway, has issued one of the direst proclamations about the future to date and blasts the Fed’s role in creating the biggest mess in financial history, is truly upside down.

While the topic of CIO John Gilbert is Twitter, and specifically the investors in the second coming of the irrational exuberance bubble, about which he says that “following such a crowd is an excellent hedge against ever being financially independent. Gravity wins in time“… what Gilbert is really talking about, is the Fed. To wit:

It should be obvious to everybody by now that such stock market largesse is made in Washington. The specific address is the Eccles Building on Constitution Avenue, home of the Federal Reserve. In fact as citizens and U.S. taxpayers, we think it would be an expression of gratitude if Twitter were to take a little pressure off of the Fed and buy some Treasury bonds themselves.

 

…

 

We may be seeing the leading edge of a wave of credit problems among corporate borrowers in emerging market economies. Lest one think it does not affect the U.S. and other developed market countries, recall the Asian crisis chronology. Thailand devalued its currency in the summer of 1997 and few outside of Thailand cared. But contracting Asian demand reduced demand for oil, and Russia (whose exports are 80% oil) defaulted in August of 1998. Risk spreads widened, and five weeks later, Long Term Capital Management was insolvent. That was a systemic event and caused disruption in markets in general, and a stock market decline. So for those who believe that they are protected from loss by central bank behavior, a little history is in order. As usual.

 

…

 

This is a major component of the downside to the Fed’s program. They have created a systemic risk in the world financial system for which they take little or no responsibility, because that which happens outside the U.S. is not their assignment. But as custodians of the reserve currency, it ends up that way.

Since we obviously agree with everything the GenRE CIO says we can only assume with absolute certainly that he does not speak for his ultimate employer: the man who according to many has benefitted the most from the Fed’s largesse: Warren Buffett.

Full letter below (pdf)

History Ignored, Again

It would seem fair if Twitter were to share. The company’s initial public offering was a staggering success, of course. Priced at $26, the stock closed its first day of trading at $45 per share. The company was thus endowed with a market capitalization of $25 billion. The company has no earnings, but who cares. Adding back non-cash charges to produce earnings before interest, taxes, depreciation and amortization, then adding back the financial value of non-cash employee compensation, the company can be regarded as profitable. Such a number for 2013 may approximate $50 million or so. The company is valued at 500 times such results, which exclude expenses that do have economic value. Correctly accounted, the company makes not a dime. But who cares when circumspection is the investment equivalent of tuberculosis.

It should be obvious to everybody by now that such stock market largesse is made in Washington. The specific address is the Eccles Building on Constitution Avenue, home of the Federal Reserve. In fact as citizens and U.S. taxpayers, we think it would be an expression of gratitude if Twitter were to take a little pressure off of the Fed and buy some Treasury bonds themselves. But that is not our remit, the company would reply. We are here to, well, Twitter.

Happily, not all members of the U.S. government are as pleased as the central bank to induce investors to behave foolishly. On the eve of Twitter’s IPO, Mary Jo White, chair of the Securities and Exchange Commission, offered cautionary remarks on investing in complex or inchoate technology businesses. The stock market ignored her, but her comments were well chosen.

 We have seen this all before and it ends badly. Ms. White’s remarks were presumably pollinated by the lessons of history. By coincidence, in the same week that Twitter completed its offering, another tech firm reported disappointing earnings. That firm was Cisco, which was one of the belles of the stock market boom of the late 1990s. By the peak in early 2000, Cisco was valued at about $500 billion, which was 200 times the company’s then earnings. An impressive valuation, also. But back then, Cisco and brethren were going to change the world. Sort of like Twitter today. Chart 1 is Cisco, tracing out the dreaded where-the-Rocky-Mountains-meet-the-Great-Plains stock price pattern.

Cisco’s valuation has been decimated, and it trades today at only about 11 times earnings, a rather modest valuation, and a reminder that following such a crowd is an excellent hedge against ever being financially independent. Gravity wins in time.

Cisco’s discouraging recent earnings disclosure was particularly ironic, coming as it did in the week that Twitter led the Fed-driven market upward. That is because the company made pointed comments about a sudden deceleration in their businesses in many emerging market economies in the last few months. This is not only a cautionary tale about the uncertainty implicit in technology businesses. We fear that it may precede more such news from a number of firms and emerging countries that have benefitted from the same central bank policies of which Twitter is the lottery winner of the moment.

We applauded Fed Governor Jeremy Stein when, in his paper of February of this year, he broached the subject of unintended consequences of the Fed’s  unconventional policies. We have long held that view. Governor Stein explored a number of evident candidates, including mortgage REITs and high yield bond issuance. One asset class that he did not discuss was emerging market debt issuance, which to us seemed then, and since, as even more important because of its systemic nature. Emerging market borrowers can borrow at very low rates in dollars, and have accepted the opportunity with alacrity.

When Chairman Bernanke broached the subject of reducing bond purchases back in February, long-term rates began a sharp rise that took the yield on the 10-year Treasury from 1.6% to 2.5% to 3.0%, where they remain. While such yields are low by historic standards, the change at the margin is significant. It has already retarded activity in the U.S. mortgage market, for example.

The most important emerging market borrowers have historically been sovereign governments, who could reduce their borrowing costs so long as the currency mismatch did not move against them. From time to time, it did, resulting in such borrowing being referred to pejoratively as original sin in international finance. But at least those were sovereign governments.

An alarming feature as the current credit cycle has developed has been the rapid growth in borrowing by emerging market businesses. Many emerging countries have had boom conditions over most of the period since the Asian Financial Crisis. China’s accession to the WTO in 2001 was followed by a massive investment program that provided a massive and rapidly growing market for the exports of many other emerging nations—and the businesses that produced the coal, steel, copper and cement China required. The Lehman bankruptcy was an abrupt interruption of the boom, but China’s response was a redoubling of investment to overcome the financial crisis. So China’s demand for imports surged again, much of which was satisfied by emerging market vendors from Brazil to Indonesia to Africa.

Those boom conditions coincided with the Fed’s everyday low price interest rate policy. The temptation to borrow in dollars at low rates, and take the chance on  exchange rates, was evidently too powerful for many corporate borrowers. In fact, at the time, the currencies were moving in their favor. Booming exports made for  resilience, or even strength, in their currencies against the dollar. Borrowing in dollars seemed to make all the sense in the world.

The result was a boom in borrowing to match the boom in business. Chart 2 shows the increase in dollar—denominated borrowing by corporations since the Asian Financial Crisis in 1997–1998. It has exploded since the Federal Reserve has suppressed borrowing costs in the last five years.

The result of this roaring issuance is that debt ratios have risen to a level not seen since the Asian Financial Crisis of 1997—1998, as shown in Chart 3

This might be disquieting, but not necessarily troublesome, if the currency mismatch were not an issue. But shortly after Bernanke’s suggestion in May that the punchbowl might be removed, capital began flowing out of the hot emerging markets. The result was downward pressure on their currencies, which in some cases is severe. Chart 4 shows the change in exchange values versus the dollar for a number of affected emerging countries.

The systemic nature of the problem—booming debt issuance in dollars, followed by contemporaneous currency shocks in response to Bernanke’s comments in May—coincides with the sudden slowing in demand for Cisco’s equipment and, perhaps, others as well.

This is a major component of the downside to the Fed’s program. They have created a systemic risk in the world financial system for which they take little or no responsibility, because that which happens outside the U.S. is not their assignment. But as custodians of the reserve currency, it ends up that way.

We may be seeing the leading edge of a wave of credit problems among corporate borrowers in emerging market economies. Lest one think it does not affect the U.S. and other developed market countries, recall the Asian crisis chronology. Thailand devalued its currency in the summer of 1997 and few outside of Thailand cared. But contracting Asian demand reduced demand for oil, and Russia (whose exports are 80% oil) defaulted in August of 1998. Risk spreads widened, and five weeks later, Long Term Capital Management was insolvent. That was a systemic event and caused disruption in markets in general, and a stock market decline. So for those who believe that they are protected from loss by central bank behavior, a little history is in order. As usual. Particularly for Twitter aficionados.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/UHf_aA7nYi0/story01.htm Tyler Durden

As an experiment, Bloomberg Businessweek typed the names of the 50 states into Google to see what people most frequently ask about them. The questions range from dumb (well, mostly dumb) to revealing, both about the states and about the people doing the searching. Lots of questions about carrying a gun, buying alcohol, getting divorced, and fighting union organizers. Whether a state is in the Midwest or South seems to be a particular obsession. But the most common question about the states is even more basic: Is it a state? or Is it racist?

 

 

Via Bloomberg Businessweek,

Alabama:
Is Alabama racist?
Is Alabama playing today? [The university is better known than the state.]
Is Alabama a good school?
Is Alabama a community property state?

Alaska:
Is Alaska a state?
Is Alaska an island? [No.]
Is Alaska a good place to live?
Is Alaska connected to Canada? [Yes.]

Arizona:
Is Arizona bad for you?
Is Arizona iced tea gluten free?
Is Arizona a good place to live?
Is Arizona iced tea healthy?

Arkansas:
Is Arkansas a state?
Is Arkansas a southern state?
Is Arkansas an open carry state? [Gun owners want to know.]
Is Arkansas a dry state?

California
Is California a city? [Umm … no.]
Is California a good place to live?
Is California a right to work state?
Is California an at will state?

Colorado
Is Colorado cold?
Is Colorado a community property state?
Is Colorado red or blue?
Is Colorado in the Midwest? [Not when we last checked.]

Connecticut
Is Connecticut a state?
Is Connecticut a good place to live?
Is Connecticut an open carry state?
Is Connecticut a no fault state?

Delaware
Is Delaware a state?
Is Delaware a good place to live?
Is Delaware a commonwealth?
Is Delaware a party school?

Florida
Is Florida a good place to live?
Is Florida sinking? [No. Not all of it, anyway.]
Is Florida a community property state?
Is Florida a country?

Georgia
Is Georgia a country? [Actually, yes.]
Is Georgia a good place to live?
Is Georgia a community property state?
Is Georgia a right to work state?

Hawaii
Is Hawaii a state?
Is Hawaii expensive?
Is Hawaii humid?
Is Hawaiian a language?

Idaho
Is Idaho a community property state?
Is Idaho a racist state?
Is Idaho a state?
Is Idaho racist? [Idaho, you seem to have an image problem.]

Illinois
Is Illinois a community property state?
Is Illinois in the Midwest?
Is Illinois in Chicago? [Only part of Illinois is in Chicago.]
Is Illinois a no fault state?

Indiana
Is Indiana a state?
Is Indiana in the Midwest?
Is Indianapolis Central Time?
Is Indiana on Eastern Time?

Iowa
Is Iowa a right to work state?
Is Iowa a good place to live?
Is Iowa a red state?
Is Iowa a state?

Kansas
Is Kansas a state?
Is Kansas City in Missouri?
Is Kansas City in Kansas?
Is Kansas City in two states? [Bingo.]

Kentucky
Is Kentucky a good place to live?
Is Kentucky a state?
Is Kentucky in the South?
Is Kentucky southern?

Louisiana
Is Louisiana a state?
Is Louisiana a community property state? [Good to find out before you divorce.]
Is Louisiana a right to work state?
Is Louisiana a good state to live in?

Maine
Is Maine a state?
Is Maine a Republican state?
Is Maine a cheap place to live?
Is Maine part of New England?

Maryland
Is Maryland a state?
Is Maryland a southern state?
Is Maryland in the South?
Is Maryland a middle colony? [Sounds like a homework question.]

Massachusetts
Is Massachusetts a state?
Is Massachusetts health care working? [Finally a smart question.]
Is Massachusetts in Boston? [Less smart.]
Is Massachusetts a right to work state?

Michigan
Is Michigan a state?
Is Michigan rolling admission? [The university, presumably, not the border crossings.]
Is Michigan in the Midwest?
Is Michigan a right to work state?

Minnesota
Is Minnesota a state? [YES. Stop asking!]
Is Minnesota a right to work state?
Is Minnesota cold?
Is MinnesotaBurns in Optic? [Screen name of Internet troll. Don’t ask.]

Mississippi
Is Mississippi a state?
Is Mississippi State a good school?
Is Mississippi a community property state?
Is Mississippi an open carry state?

Missouri
Is Missouri a good place to live?
Is Missouri a right to work state? [Non-union employers want to know.]
Is Missouri in the South?
Is Missouri a community property state?

Montana
Is Montana a state?
Is Montana a good place to live?
Is Montana a right to work state?
Is Montana a good state to live in?

Nebraska
Is Nebraska football on TV? [Go, Huskers!]
Is Nebraska cold?
Is Nebraska a red state?
Is Nebraska a state?

Nevada
Is Nevada exempt from Obamacare?
Is Nevada a state?
Is Nevada a community property state?
Is Nevada a good place to live?

New Hampshire
Is New Hampshire a good state to retire to?
Is New Hampshire a dry state?
Is New Hampshire a red state?
Is New Hampshire the Granite State?

New Jersey
Is New Jersey a peninsula? [You must be thinking of Florida.]
Is New Jersey a state?
Is New Jersey a no fault state?
Is New Jersey a right to work state?

New Mexico
Is New Mexico a state?
Is New Mexico in Mexico? [Not anymore.]
Is New Mexico a community property state?
Is New Mexico in the U.S.A.?

New York
Is New York a state? [No. It’s a state of mind.]
Is New York Eastern Time?
Is New York a community property state?
Is New York a right to work state?

North Carolina
Is North Carolina a good place to live?
Is North Carolina a red state?
Is North Carolina a community property state?
Is North Carolina a dry state? [“Dry” as in, “Can I buy a drink there?”]

North Dakota
Is North Dakota cold?
Is North Dakota a ni
ce place to live?
Is North Dakota real? [This turns out to be an actual issue.]
Is North Dakota State Division 1?

Ohio
Is Ohio in the Midwest?
Is Ohio a state?
Is Ohio Central Time?
Is Ohio a good place to live?

Oklahoma
Is Oklahoma in the Midwest?
Is Oklahoma a southern state? [People, not everything is South or Midwest.]
Is Oklahoma a state?
Is Oklahoma a right to work state?

Oregon
Is Oregon a state?
Is Oregon a right to work state?
Is Oregon bowl-eligible?
Is Oregon better than Alabama? [Our first argument starter.]

Pennsylvania
Is Pennsylvania a state?
Is Pennsylvania a good place to live?
Is Pennsylvania a right to work state?
Is Pennsylvania a commonwealth? [What? No one wants to know if it’s in Philadelphia?]

Rhode Island
Is Rhode Island an island?
Is Rhode Island a state?
Is Rhode Island an actual island? [This is what maps are for, folks.]
Is Rhode Island a middle colony?

South Carolina
Is South Carolina a community property state?
Is South Carolina a right to work state?
Is South Carolina racist?
Is South Carolina an open carry state?

South Dakota
Is South Dakota a state?
Is South Dakota a community property state?
Is South Dakota a good place to live?
Is South Dakota Mountain Time?

Tennessee
Is Tennessee a state?
Is Tennessee a right to work state?
Is Tennessee a dry state?
Is Tennessee a red state?

Texas
Is Texas a good place to live?
Is Texas a community property state?
Is Texas a state?
Is Texas an open carry state?

Utah
Is Utah a dry state?
Is Utah a red state?
Is Utah a state?
Is Utah Lake salty? [That would be Great Salt Lake. And yes.]

Vermont
Is Vermont a state?
Is Vermont racist?
Is Vermont a good place to retire?
Is Vermont a good state to live in?

Virginia
Is Virginia a good place to live?
Is Virginia a commonwealth?
Is Virginia creeper poisonous?
Is Virginia a good place to live? [Except for the Virginia creeper.]

Washington
Is Washington, D.C., a state?
Is Washington Heights safe?
Is Washington, D.C., a city?
Is Washington, D.C., in Maryland? [Ouch. The only state with no questions about the state.]

West Virginia
Is West Virginia a state?
Is West Virginia racist?
Is West Virginia University racist?
Is West Virginia University a good school?

Wisconsin
Is Wisconsin a state?
Is Wisconsin a right to work state?
Is Wisconsin in the Midwest?
Is Wisconsin a community property state?

Wyoming
Is Wyoming in the Midwest?
Is Wyoming cold?
Is Wyoming an open carry state?
Is Wyoming a state?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lS0tq1MBzEA/story01.htm Tyler Durden

As an experiment, Bloomberg Businessweek typed the names of the 50 states into Google to see what people most frequently ask about them. The questions range from dumb (well, mostly dumb) to revealing, both about the states and about the people doing the searching. Lots of questions about carrying a gun, buying alcohol, getting divorced, and fighting union organizers. Whether a state is in the Midwest or South seems to be a particular obsession. But the most common question about the states is even more basic: Is it a state? or Is it racist?

 

 

Via Bloomberg Businessweek,

Alabama:
Is Alabama racist?
Is Alabama playing today? [The university is better known than the state.]
Is Alabama a good school?
Is Alabama a community property state?

Alaska:
Is Alaska a state?
Is Alaska an island? [No.]
Is Alaska a good place to live?
Is Alaska connected to Canada? [Yes.]

Arizona:
Is Arizona bad for you?
Is Arizona iced tea gluten free?
Is Arizona a good place to live?
Is Arizona iced tea healthy?

Arkansas:
Is Arkansas a state?
Is Arkansas a southern state?
Is Arkansas an open carry state? [Gun owners want to know.]
Is Arkansas a dry state?

California
Is California a city? [Umm … no.]
Is California a good place to live?
Is California a right to work state?
Is California an at will state?

Colorado
Is Colorado cold?
Is Colorado a community property state?
Is Colorado red or blue?
Is Colorado in the Midwest? [Not when we last checked.]

Connecticut
Is Connecticut a state?
Is Connecticut a good place to live?
Is Connecticut an open carry state?
Is Connecticut a no fault state?

Delaware
Is Delaware a state?
Is Delaware a good place to live?
Is Delaware a commonwealth?
Is Delaware a party school?

Florida
Is Florida a good place to live?
Is Florida sinking? [No. Not all of it, anyway.]
Is Florida a community property state?
Is Florida a country?

Georgia
Is Georgia a country? [Actually, yes.]
Is Georgia a good place to live?
Is Georgia a community property state?
Is Georgia a right to work state?

Hawaii
Is Hawaii a state?
Is Hawaii expensive?
Is Hawaii humid?
Is Hawaiian a language?

Idaho
Is Idaho a community property state?
Is Idaho a racist state?
Is Idaho a state?
Is Idaho racist? [Idaho, you seem to have an image problem.]

Illinois
Is Illinois a community property state?
Is Illinois in the Midwest?
Is Illinois in Chicago? [Only part of Illinois is in Chicago.]
Is Illinois a no fault state?

Indiana
Is Indiana a state?
Is Indiana in the Midwest?
Is Indianapolis Central Time?
Is Indiana on Eastern Time?

Iowa
Is Iowa a right to work state?
Is Iowa a good place to live?
Is Iowa a red state?
Is Iowa a state?

Kansas
Is Kansas a state?
Is Kansas City in Missouri?
Is Kansas City in Kansas?
Is Kansas City in two states? [Bingo.]

Kentucky
Is Kentucky a good place to live?
Is Kentucky a state?
Is Kentucky in the South?
Is Kentucky southern?

Louisiana
Is Louisiana a state?
Is Louisiana a community property state? [Good to find out before you divorce.]
Is Louisiana a right to work state?
Is Louisiana a good state to live in?

Maine
Is Maine a state?
Is Maine a Republican state?
Is Maine a cheap place to live?
Is Maine part of New England?

Maryland
Is Maryland a state?
Is Maryland a southern state?
Is Maryland in the South?
Is Maryland a middle colony? [Sounds like a homework question.]

Massachusetts
Is Massachusetts a state?
Is Massachusetts health care working? [Finally a smart question.]
Is Massachusetts in Boston? [Less smart.]
Is Massachusetts a right to work state?

Michigan
Is Michigan a state?
Is Michigan rolling admission? [The university, presumably, not the border crossings.]
Is Michigan in the Midwest?
Is Michigan a right to work state?

Minnesota
Is Minnesota a state? [YES. Stop asking!]
Is Minnesota a right to work state?
Is Minnesota cold?
Is MinnesotaBurns in Optic? [Screen name of Internet troll. Don’t ask.]

Mississippi
Is Mississippi a state?
Is Mississippi State a good school?
Is Mississippi a community property state?
Is Mississippi an open carry state?

Missouri
Is Missouri a good place to live?
Is Missouri a right to work state? [Non-union employers want to know.]
Is Missouri in the South?
Is Missouri a community property state?

Montana
Is Montana a state?
Is Montana a good place to live?
Is Montana a right to work state?
Is Montana a good state to live in?

Nebraska
Is Nebraska football on TV? [Go, Huskers!]
Is Nebraska cold?
Is Nebraska a red state?
Is Nebraska a state?

Nevada
Is Nevada exempt from Obamacare?
Is Nevada a state?
Is Nevada a community property state?
Is Nevada a good place to live?

New Hampshire
Is New Hampshire a good state to retire to?
Is New Hampshire a dry state?
Is New Hampshire a red state?
Is New Hampshire the Granite State?

New Jersey
Is New Jersey a peninsula? [You must be thinking of Florida.]
Is New Jersey a state?
Is New Jersey a no fault state?
Is New Jersey a right to work state?

New Mexico
Is New Mexico a state?
Is New Mexico in Mexico? [Not anymore.]
Is New Mexico a community property state?
Is New Mexico in the U.S.A.?

New York
Is New York a state? [No. It’s a state of mind.]
Is New York Eastern Time?
Is New York a community property state?
Is New York a right to work state?

North Carolina
Is North Carolina a good place to live?
Is North Carolina a red state?
Is North Carolina a community property state?
Is North Carolina a dry state? [“Dry” as in, “Can I buy a drink there?”]

North Dakota
Is North Dakota cold?
Is North Dakota a nice place to live?
Is North Dakota real? [This turns out to be an actual issue.]
Is North Dakota State Division 1?

Ohio
Is Ohio in the Midwest?
Is Ohio a state?
Is Ohio Central Time?
Is Ohio a good place to live?

Oklahoma
Is Oklahoma in the Midwest?
Is Oklahoma a southern state? [People, not everything is South or Midwest.]
Is Oklahoma a state?
Is Oklahoma a right to work state?

Oregon
Is Oregon a state?
Is Oregon a right to work state?
Is Oregon bowl-eligible?
Is Oregon better than Alabama? [Our first argument starter.]

Pennsylvania
Is Pennsylvania a state?
Is Pennsylvania a good place to live?
Is Pennsylvania a right to work state?
Is Pennsylvania a commonwealth? [What? No one wants to know if it’s in Philadelphia?]

Rhode Island
Is Rhode Island an island?
Is Rhode Island a state?
Is Rhode Island an actual island? [This is what maps are for, folks.]
Is Rhode Island a middle colony?

South Carolina
Is South Carolina a community property state?
Is South Carolina a right to work state?
Is South Carolina racist?
Is South Carolina an open carry state?

South Dakota
Is South Dakota a state?
Is South Dakota a community property state?
Is South Dakota a good place to live?
Is South Dakota Mountain Time?

Tennessee
Is Tennessee a state?
Is Tennessee a right to work state?
Is Tennessee a dry state?
Is Tennessee a red state?

Texas
Is Texas a good place to live?
Is Texas a community property state?
Is Texas a state?
Is Texas an open carry state?

Utah
Is Utah a dry state?
Is Utah a red state?
Is Utah a state?
Is Utah Lake salty? [That would be Great Salt Lake. And yes.]

Vermont
Is Vermont a state?
Is Vermont racist?
Is Vermont a good place to retire?
Is Vermont a good state to live in?

Virginia
Is Virginia a good place to live?
Is Virginia a commonwealth?
Is Virginia creeper poisonous?
Is Virginia a good place to live? [Except for the Virginia creeper.]

Washington
Is Washington, D.C., a state?
Is Washington Heights safe?
Is Washington, D.C., a city?
Is Washington, D.C., in Maryland? [Ouch. The only state with no questions about the state.]

West Virginia
Is West Virginia a state?
Is West Virginia racist?
Is West Virginia University racist?
Is West Virginia University a good school?

Wisconsin
Is Wisconsin a state?
Is Wisconsin a right to work state?
Is Wisconsin in the Midwest?
Is Wisconsin a community property state?

Wyoming
Is Wyoming in the Midwest?
Is Wyoming cold?
Is Wyoming an open carry state?
Is Wyoming a state?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/lS0tq1MBzEA/story01.htm Tyler Durden

Among Cliff Asness’ top peeves are commonly held and oft-repeated beliefs that are wrong or misleading and can potentially hurt investors. The asset manager politely requests people stop saying – “There is a lot of cash on the sidelines.” Everyone should pay attention…

 

Via Cliff Asness,

Every time someone says, “There is a lot of cash on the sidelines,” a tiny part of my soul dies. There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.

If you want to save those who say this, I can think of two ways.

First, they really just mean that sentiment is negative but people are waiting to buy. If sentiment turns, it won’t move any cash off the sidelines because, again, that just can’t happen, but it can mean prices will rise because more people will be trying to get off the nonexistent sidelines than on.

 

Second, over the long term, there really are sidelines in the sense that new shares can be created or destroyed (net issuance), and that may well be a function of investor sentiment.

 

But even though I’ve thrown people who use this phrase a lifeline, I believe that they really do think there are sidelines.

There aren’t. Like any equilibrium concept (a powerful way of thinking that is amazingly underused), there can be a sideline for any subset of investors, but someone else has to be doing the opposite.

Add us all up and there are no sidelines.

 

Now where’s Maria Bartiromo?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xIYsFJbiHpk/story01.htm Tyler Durden

Among Cliff Asness’ top peeves are commonly held and oft-repeated beliefs that are wrong or misleading and can potentially hurt investors. The asset manager politely requests people stop saying – “There is a lot of cash on the sidelines.” Everyone should pay attention…

 

Via Cliff Asness,

Every time someone says, “There is a lot of cash on the sidelines,” a tiny part of my soul dies. There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.

If you want to save those who say this, I can think of two ways.

First, they really just mean that sentiment is negative but people are waiting to buy. If sentiment turns, it won’t move any cash off the sidelines because, again, that just can’t happen, but it can mean prices will rise because more people will be trying to get off the nonexistent sidelines than on.

 

Second, over the long term, there really are sidelines in the sense that new shares can be created or destroyed (net issuance), and that may well be a function of investor sentiment.

 

But even though I’ve thrown people who use this phrase a lifeline, I believe that they really do think there are sidelines.

There aren’t. Like any equilibrium concept (a powerful way of thinking that is amazingly underused), there can be a sideline for any subset of investors, but someone else has to be doing the opposite.

Add us all up and there are no sidelines.

 

Now where’s Maria Bartiromo?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xIYsFJbiHpk/story01.htm Tyler Durden

One of the following seems very eager to please his new master…

 

 

(h/t @AlbertoNardelli)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/CTF6GvCLqas/story01.htm Tyler Durden