Should it come as any surprise? And yet the details are shocking and outrageous. A whistleblower working for Apple has revealed to The Guardianthat its popular voice activated spying device helpful virtual assistant Siri, now in millions of households, “regularly” records people having sex, and captures other “countless” invasive moments which it promptly sends to Apple contractors for their listening pleasure “quality control”:
Apple contractors regularly hear confidential medical information, drug deals, and recordings of couples having sex, as part of their job providing quality control, or “grading”, the company’s Siri voice assistant, the Guardian has learned.
We’ve long pointed out that according to Amazon’s Alexa terms of use, the company collects and stores most of what you say to Alexa (or perhaps what you groan) – including the geolocation of the product along with your voice instructions.
However, what’s not disclosed or at least not well known up to this point is that a “small proportion” of all Siri recordings of what consumers thought were private settings are actually forwarded to Apple contractors around the world, according to the new report. Supposedly this is to ensure Siri is responding properly and can continue to distinguish dictation. Apple says, according to The Guardian, the data “is used to help Siri and dictation… understand you better and recognise what you say”.
But an anonymous current company insider and whistleblower told The Guardian: “There have been countless instances of recordings featuring private discussions between doctors and patients, business deals, seemingly criminal dealings, sexual encounters and so on. These recordings are accompanied by user data showing location, contact details, and app data.”
Contradicting Apple’s defense that these sultry samples are “pseudonymised recordings,” Apple employees can know precisely who is having sex and where, and what time the deed was done.
Apple’s formal response to the Guardian investigation was as follows:
A small portion of Siri requests are analysed to improve Siri and dictation. User requests are not associated with the user’s Apple ID. Siri responses are analysed in secure facilities and all reviewers are under the obligation to adhere to Apple’s strict confidentiality requirements.
Just trust us, Apple appears to be saying. Most of what can be deemed sensitive data is captured through so-called accidental activations by “trigger words,” according to the report, with the highest rates of such occurrences via the Apple Watch and HomePod smart speakers.
“The regularity of accidental triggers on the watch is incredibly high,” the company whistleblower explained. “The watch can record some snippets that will be 30 seconds – not that long but you can gather a good idea of what’s going on.”
The insider continued, “you can definitely hear a doctor and patient, talking about the medical history of the patient. Or you’d hear someone, maybe with car engine background noise – you can’t say definitely, but it’s a drug deal… you can definitely hear it happening. And you’d hear, like, people engaging in sexual acts that are accidentally recorded on the pod or the watch.”
Apple Watch Series 4. Image source: Bloomberg
Further less than comforting is just how many across the globe have access to these private moments: “There’s not much vetting of who works there, and the amount of data that we’re free to look through seems quite broad,” the contractor continued. “It wouldn’t be difficult to identify the person that you’re listening to, especially with accidental triggers – addresses, names and so on.”
“Apple is subcontracting out, there’s a high turnover. It’s not like people are being encouraged to have consideration for people’s privacy, or even consider it. If there were someone with nefarious intentions, it wouldn’t be hard to identify [people on the recordings].”
The evidence continues to mount: Siri is a blackmailer’s dream come true… or spy agency, or voyeur, or political adversary, or just plain pervert.
via ZeroHedge News https://ift.tt/2YplrNb Tyler Durden
Over the period from 1915 to 2014 the return on U.S. equities was an annualized 11.5 percent, while the return on government bonds averaged 4.3 percent. The longer-run average S&P 500 return is nearer 9 percent, but during the past decade it has exceeded 14 percent. U.S. bonds have also rallied, returning around 2 percent. Yields across most developed countries have fallen to record lows, with the 10-year obligations of Germany, Japan, and Switzerland (among others) offering a negative nominal yield to maturity.
Despite their lower long-run return, the great advantage of bonds and other fixed-income securities, relative to equities, is that they pay, assuming there is no default, regular interest in the form of coupons. For pension funds and other institutions, which need to maintain a steady stream of payments to their plan beneficiaries, these coupons allow the cash flows from assets to match liabilities. Equities, by contrast, may or may not pay dividends (which, in any case, are often variable), and that uncertainty is compounded by the tendency of equity markets to rise and fall, at times dramatically.
Setting aside their inherent volatility, equities have proved an outstanding inflation hedge. Fixed-income securities pay a stream of fixed coupons, and then, at maturity, the principal is repaid to the investor. Equities, unlike most bonds, are, hopefully, perpetual investments. They do not mature at a fixed date in the future; instead, they give the investor a stake in the performance of a business over time. If the price of the goods that a firm sells should rise, all other things equal, equity investors benefit as higher prices are reflected in the profitability of their investment. Retained profit increases the capital value, while higher dividends increase income.
Back in the 1960s, as inflation crept into developed economies, the price of goods and services rose. Central banks responded by raising short-term interest rates. Confronted by this headwind, fixed-income investments performed poorly, and capital values declined. This led some investment managers into temptation. In order to keep pace with inflation over the long run, they invested an increasing share of their assets in equity markets.
While this was a good long-term solution to the problem of inflation, it left pension fund managers exposed to a cash flow shortfall. The variable income from dividends (especially during an inflationary recession) did not always cover the costs of meeting their obligations to pensioners; the unpalatable solution was to meet these cash flow requirements by liquidating assets.
Deflation and debt
So what does all this have to do with the negative interest rates seen in many bond markets today? Well, the problem of the mismatch between the cash flow from assets and that from liabilities prompted a deluge of prudential regulation to ensure that pension funds were able to fulfill their obligations to their customers. The politically popular solution was to mandate that pension funds invest a substantial percentage of their assets in cash or liquid securities, such as fixed-income government bonds.
Today most developed countries are grappling with the demographic challenges of an aging population and low fertility rates. Pensioners are living longer, and the working-age population is shrinking. For governments that provide public pensions, this is a near and present danger, since they pay their pension obligations from current tax receipts. The shortfall between tax receipts and public pension obligations will continue to rise.
The funding problem for private sector pension funds should be more manageable. Employees (and their employers) pay regular contributions. Pension funds should, by this method, accumulate sufficient assets to meet future obligations.
Sadly, there is a catch: these pension funds are obligated to invest a significant percentage of their assets in fixed-income government securities. While these bond investments produce a positive inflation-adjusted return, all is relatively well; as soon as their yields dip below the level of inflation, trouble begins to brew.
There may be trouble ahead
Today, if you are a “lucky” employee, you may be enrolled in a “defined-benefit scheme.” On maturity this scheme will pay you a fixed percentage of your final salary (or some variation on that measure) in the form of a pension. If you are a less “lucky” worker, your company scheme will be a “defined-contribution scheme.” This will invest your contributions (and contributions made by your employer) into assets that will, hopefully, generate sufficient returns to ensure you can receive a steady stream of income in retirement.
“And there’s the rub”: most central banks target inflation of around 2 percent, as a direct result of quantitative easing; however, many of their own governments’ bonds yield less than that inflation rate. This is not so true in the U.S., but it is absolutely the case in Switzerland, Japan, and much of the Eurozone. In this environment, pension fund managers should, for prudential reasons, forsake bonds in favor of higher-yielding assets; and yet, their fiduciary duty is at odds with their domestic regulatory requirements to keep a high percentage of assets in liquid cash, near-cash, and fixed-income securities.
How much government paper fund managers are obliged to hold varies from country to country; the rules are complex. A more useful guide is to be found in the table below. Taken from the 2018 OECD Pension Fund Survey, it shows the breakdown of investments by country and asset class.
Source: OECD
According to other OECD data, 12 out of 34 reporting countries saw pension fund assets decline between 2017 and 2018, with total assets declining by 3.9 percent. Back in February 2018, Citibank estimated that the funding shortfall for the 20 largest economies in the OECD was $78 trillion, around 1.8 times the GDP of those countries. In January 2019, Swiss Re estimated that the funding shortfall across the OECD was increasing by around 5 percent per annum, meaning that the underfunding liability could swell to $400 trillion by 2050.
In real terms, stocks have returned more than seven times as much as bonds over the 1915–2014 period. We know that inflation averaged 3.2 percent; nonetheless, bonds managed to produce a positive real return of 1.1 percent versus a real return from equities of 8.3 percent.
An analysis of current government bond yields and inflation shows a very different picture. The table below, which focuses on the assets under management (AUM) of the pension funds (PFs) of the top 12 OECD countries (amounting to 95 percent of the OECD total) shows the weighted-average yield using 10-year bond yields from July 12, 2019.
The table is overly simplistic; please forgive ridiculous assumptions, such as the idea that the pension assets of each country are invested only in bonds of 10 years’ maturity, or that those bonds are of their own country alone. I further assume that current yields and inflation rates prevail for the next 12 months, arriving at a weighted-average nominal bond yield of 1.37 percent, and a real yield of −0.28 percent. Remove U.S. pension assets from the table, and the weighted nominal yield falls to 0.48 percent while real yields dip to −1.30 percent.
Pension Fund Target Returns
While pension fund managers have adjusted their target returns downward over the past two decades, the average expected return remains above 6 percent per annum. A classic 60 percent/40 percent portfolio of stocks and bonds has delivered 8.3 percent over the 1915–2014 period, so a 6 percent target might be considered conservative. Nonetheless, with bond yields delivering less than half their long-run average, pension fund managers are confronted with a dilemma. They can increase their equity allocation in order to meet their long-term return objective, but this creates solvency-risk issues since they may have to liquidate equity-capital investment at low valuations in order to meet their income obligations.
There are alternatives: They can invest in higher-yielding, but more volatile, long-dated bonds, or in higher-yielding, higher-risk bonds of less creditworthy issuers; or they can allocate to alternative investment strategies such as private equity or hedge funds. All of these options (with the exception of certain hedge fund strategies) increase investment and liquidity risk.
The inertial alternative, which has been the choice of the majority of funds, is to continue underperforming, hoping for a reversion to long-run average rates of return. Minimum-funding rules differ from country to country but generally permit a cyclical period of underfunding to last for around seven years. This allows pension funds to meet their near-term obligations by borrowing from future returns.
A cyclical dip in fixed-income returns can be tolerated on the grounds that interest rates will normalize. In the post–financial crisis environment, however, low interest rates are now the norm, and quantitative easing has caused long-dated yields to become artificially depressed. Unless interest rates are permitted to normalize, the underfunding gap will widen far more quickly. Swiss Re assumes a 5 percent annual shortfall, taking the developed-country pension fund deficit to $133 trillion within a decade. If we assume the shortfall is a more severe 7 percent, the underfunding deficit balloons to $164 trillion, roughly twice the size of world GDP today.
Negative-yielding bonds are a relatively new phenomenon, and a normalization of interest rates may be in the offing. If so, bond and stock prices will fall substantially and the world economy will head into a debt-laden recession. If, as I expect, central banks avert the near-term crisis by keeping interest rates artificially low and continue to expand their balance sheets by the purchase of their governments’ obligations, they are, in the long run, impoverishing their own people.
All they have contrived is to defer the day of reckoning. Solutions are available, but none are politically palatable; meanwhile the misallocation of capital could drive the trend rate of economic growth inexorably lower.
via ZeroHedge News https://ift.tt/2Ok6wEf Tyler Durden
With a decade-long bull market and an ultra low interest rate environment globally, it’s not surprising to see capital flock to housing assets.
For many investors, real estate is considered as good of a place as any to park money – but what happens when things get a little too frothy, and the fundamentals begin to slip away?
In recent years, experts have been closely watching several indicators that point to rising bubble risks in some housing markets. Further, they are also warning that countries like Canada and New Zealand may be overdue for a correction in housing prices.
Key Housing Market Indicators
Earlier this week, Bloomberg published results from a new study by economist Niraj Shah as he aimed to build a housing bubble dashboard.
It tracks four key metrics:
House Price-Rent Ratio
The ratio of house prices to the annualized cost of rent
House Price-Income Ratio
The ratio of house prices to household income
Real House Prices
Housing prices adjusted for inflation
Credit to Households (% of GDP)
Amount of debt held by households, compared to total economic output
Ranking high on just one of these metrics is a warning sign for a country’s housing market, while ranking high on multiple measures signals even greater fragility.
Housing Bubble Risks, by Indicator
Let’s look at each bubble risk indicator, and see how they apply to the 22 countries covered by the housing dashboard.
It should be noted that most of the measures here are shown in an index form, using the year 2015 as a base year. In other words, the data is not representative of the ratio itself—but instead, how much the ratio has risen or fallen since 2015.
1. House Price-Rent Ratio
When looking at housing prices in comparison to rents, there are four countries that stand out.
New Zealand (196.8) and Canada (195.9) have seen ratios of housing prices to rents nearly double since 2015. Meanwhile, Sweden (172.8) and Norway (168.2) are not far behind.
Elsewhere in the world, this ratio is much more in line with expectations. For example, in Portugal—where house prices have skyrocketed over recent years—rents have increased at nearly the same rate, giving the country a 99.2 score.
2. House Price-Income Ratio
There are three familiar names at the top of this bubble indicator: New Zealand (156.8), Canada (155.3), and Sweden (145.7).
In places where rents are lagging housing prices, so are the levels of household income. For how long will people afford to buy increasingly expensive houses, if their incomes continue to lag?
3. Real House Prices
Real house prices have increased in all of the 22 markets, with the exception of Italy (95.5).
For this indicator, there are five markets that stand out as having fast-rising prices: Portugal (131.8), Ireland (127.6), Netherlands (121.9), Canada (124.1), and New Zealand (121.9). The latter two (Canada/New Zealand) have appeared near the top of all three bubble indicators, so far.
4. Credit to Households (% of GDP)
Exceedingly high debt ratios point to a strain on consumer finances – and when finances are strained, the chance of a default increases.
Switzerland (128.7%), Australia (120.3%), and Denmark (115.4%) top the list here with consumer debt far exceeding country GDP levels. However, Canada still makes an appearance in the top five with a debt-to-GDP ratio of 100.7%.
via ZeroHedge News https://ift.tt/32UdoeO Tyler Durden
Democrats in Washington are trying to push through a bill to raise the federal minimum wage, but around the country dozens of cities and states raised the wage floor at the beginning of the year. And like clockwork, small businesses across the country are already struggling with some of the issues that conservatives warned about. To wit, many businesses, particularly restaurants, which are notoriously low-margin businesses, have been forced to lay off employees, even after raising prices to meet the new wage requirements.
In other words, just like it did in Seattle, a higher minimum wage is hurting the poorest and most vulnerable workers – in other words, its hurting the same people it was supposed to help.
In a piece published this week, WSJ takes us to the Bay Area, where the owner of a restaurant called Patatas Neighborhood Kitchen, situated in the small city north of Oakland. After the city of Emeryville raised its minimum wage from $15 to $16.30 this year, the restaurant’s owner was forced to lay off six of his 10 employees and eliminate the dinner shift.
The economy is booming in the Bay Area, but at Patatas Neighborhood Kitchen, located in this small city just north of Oakland, owner Marcos Quezada recently eliminated the dinner shift and laid off six of his 10 workers.
He struggled with the decision but felt he had no choice after Emeryville increased its hourly minimum wage in July from $15 to $16.30, the highest in the U.S. “I just didn’t see how I was going to survive it,” said Mr. Quezada, who opened the eatery in 2017.
There’s no question that the cost of living in the Bay Area is higher than almost anywhere else in the US. But after several minimum-wage hikes in recent years, business owners are finding themselves stuck between a rock and a hard place.
Proponents say a minimum-wage increase was desperately needed in the hometown of Pixar Animation Studios, where the median rent for a one-bedroom apartment is $2,840, the median home price is more than $560,000, and a salad costs more than $15.
“The Bay Area is more expensive than any other part of the country,” said María Moreno, community organizer with the Restaurant Opportunities Center of the Bay, an advocacy group.
But local businesses say several increases in Emeryville’s minimum wage over the past few years have left them nervous about their financial viability.
To offset the cost of higher wages, restaurants have had to raise prices. But they’re getting to the point where another round of price hikes might jeopardize their business.
But the wage hikes aren’t over yet. Across California, the state minimum wage, currently $12, is set to rise by $1 a year through 2022. The CBO projects that higher wages will lift 1.3 million Americans out of poverty. But it will also destroy 1.3 million jobs.
The city of Emeryville, with its minimum wage higher than the state’s baseline, has become a proving ground for these policies, and already they’re showing signs of strain.
Emeryville first raised its minimum wage above the statewide floor in 2015, to $12.25 an hour, setting it to automatically increase every year since. Mayor Ally Medina, a Democrat, said the ordinance was meant to help workers cope with the Bay Area’s high living costs.
Sheena Luu, a barista at Polaris Cafe, said Emeryville’s minimum wage makes it possible for her to afford $1,500 in rent for her studio apartment. She also works at coffee shops in two nearby cities, earning about $13 an hour. “If I didn’t have it, I would have to cut back,” she said of the higher pay in Emeryville.
Some local business owners lobbied the city council for temporary exemptions from the new minimum wage laws. But ultimately, the council decided not to grant them, because such a measure wouldn’t be politically feasible.
Business owners in Emeryville recently pressured the city council to temporarily exempt about two dozen small restaurants from the wage increase.
But the council on Tuesday night voted 5-0 to keep the $16.30 floor in place. The city council also agreed to convene a working group to help small businesses better cope with the higher costs.
“I just did not feel comfortable telling workers they were not getting a pay increase they expected,” said Ms. Medina.
Meanwhile, citizens of Emeryville must now get used to paying some of the highest prices outside of Hawaii. Retailers and other industries with lots of minimum wage workers have adapted to the wage hikes, but restaurants, with their thin margins, are different.
The flip side can be seen on the menus at Rudy’s. Co-owner Doug Smith said he has raised the price of the cafe’s signature Deuces Wild special – two pancakes or two pieces of french toast, two eggs and two bacon slices or sausages – to $14.50 from $11 in 2015, and the Crunchy Asian Salad to $15.50 from $10. But that still isn’t enough to cover increased labor costs, he added.
But might there possibly be a middle ground? Another mechanism for setting higher wages that doesn’t make it too onerous for businesses to operate, forcing them to lay off workers?
A few days before the Emeryville story appeared in WSJ, the paper published another piece about how restaurants are being forced to “sweeten pay packages” for employees since record-low unemployment and a shortage of teenagers looking for after-school jobs has left them with a shortage of workers. It’s also becoming increasingly difficult for these mostly fast-food and fast-casual restaurants to find and retain workers, as the quit rate for food-and-service jobs is at a record high.
Many restaurants are raising wages by their own volition, whether or not they’re situated in a state or city that has been hiking wages.
It almost sounds like the free market is doing a pretty efficient job of setting wages in the labor market – but no amount of empirical evidence, it seems, will stop the social justice warriors (mostly white kids who grew up in the middle or upper-middle class) from demanding higher wages for low-wage workers. They clearly don’t realize – or they’re refusing to accept – that what they’re really doing is taking jobs and hours away from these same workers whom they’re supposedly trying to help.
via ZeroHedge News https://ift.tt/2Yl43gL Tyler Durden
Manufacturing output contracted in both the first and second quarters of this year, according to the Federal Reserve’s report on industrial production. That was the first back-to-back decline since the soft patch in 2015 and 2016 — and one of the key factors, along with trade frictions and slowing global growth, driving the Federal Reserve to lower interest rates next week.
Manufacturing isn’t the economy, as Goldman Sachs economists pointed out in a report last week. Its share of gross domestic product has fallen to 10%, according to Goldman’s calculations.
Baum Disputes Goldman Claim
Baum disagrees with Goldman Sachs, and so do I, for even more reasons.
Here are some of Baum’s reasons.
Unlike the services sector, manufacturing tends to be cyclical. Manufacturers can choose to postpone capital investment projects when the future doesn’t look bright, but the public still needs teachers, nurses and firefighters, even in recession.
“In real terms, growth in manufacturing has kept up with growth in the rest of the economy over the last 70 years,” according to a 2017 study by economists at the St. Louis Fed. Its “share of real GDP has been fairly constant since the 1940s, ranging from 11.3% to 13.6%.” So the often touted “shrinking share” is really a function of the change in the price level.
Four of the 10 components in the Conference Board’s index of leading economic indicators are manufacturing-related. Ranked in order of importance, they are: average weekly hours in manufacturing; the ISM new orders index, which was added in 2012, replacing the ISM vendor deliveries index; manufacturers’ new orders for consumer goods and materials; and manufacturers’ new orders for non-defense capital goods excluding aircraft.
Things can always change, but it seems safe to say that as manufacturing goes, so goes the nation. Judging from a century of data, it seems safe to say that what happens in manufacturing doesn’t stay in manufacturing. Instead, it has spilled over to the economy at large. So ignore the small yet significant manufacturing sector at your own peril.
One thing that we cannot stress often enough is that the manufacturing sector is far more important to the economy than its contribution to GDP would suggest. Since GDP fails to count all business spending on intermediate goods, it simply ignores the bulk of the economy’s production structure. However, this is precisely the part of the economy where the most activity actually takes place.The reality becomes clear when looking at gross output per industry: consumer spending at most amounts to 35-40% of economic activity. Manufacturing is in fact the largest sector of the economy in terms of output.
Sure enough, in GDP accounting, consumption is the largest component. However, this is (luckily) far from the economic reality. Naturally, it is not possible to consume oneself to prosperity. The ability to consume more is the result of growing prosperity, not its cause. But this is the kind of deranged economic reasoning that is par for the course for today: let’s put the cart before the horse!
In addition to what Tenebrarum states, please note that government transfer payments including Medicaid, Medicare, disability payments, and SNAP (previously called food stamps), all contribute to GDP.
Nothing is “produced” by those transfer payments. They are not even funded. As a result, national debt rises every year. And that debt adds to GDP.
Manufacturing’s Share of GDP is Hugely Underestimated
Thus, in addition to Baum’s excellent comments on the the cyclical nature of manufacturing, manufacturing’s share of GDP as attributed by economists is simply wrong.
Private jets are exclusive modes of transportation that are growing increasingly popular with the world’s super-rich, according to Bloomberg. And they’re being used to go everywhere, from the Bahamas, Puerto Rico and the Cayman Islands.
Flights on private jets were up about 10% last year and flights to the islands in the Americas numbered almost 30,000. This helped make the islands in the Americas the number one destination for non-commercial aviation.
Knight Frank partner Alasdair Pritchard said: “Private jets are the path of least resistance for travel. If you can afford it and then experience it, you wouldn’t go back.”
Private jets remain one of the “trophy assets” for the super rich, in addition to super-yachts, that can have price tags up to $50 million. Maintaining and managing a private jet can be “almost as expensive as buying one,” between fuel costs and a team needed to manage the aircraft.
More than 66% of arrivals to the Bahamas originated in the U.S. or Canada. With Miami and the U.S. mainland just an hour away, the proximity of private flight origins in the Bahamas highlights how the rich like to use private jets for short trips. In Europe, they are used similarly, where aircraft often land in places like Mallorca, Ibiza and Sardinia – the three most popular island destinations for private jets.
Joe Stadler, head of ultra-high-net-worth clients at UBS Group AG, said:
“All the people who fly private tell me they wouldn’t from London to Hong Kong. To do that one-day trip, they will go private. Increasing use of private jets is a function of how crowded public airports are now. The more crowded they are, the more delays there are, and the more cumbersome it is to fly from A to Z.”
The Philippines, Maldives and Bali marked the top destinations in the Asia Pacific region. That region saw private aircraft arrives rise more than 80%, indicative of the wealth boom in China, a country that minted a new billionaire every other day.
The super rich buy private jets not only for convenience, but also for privacy. Oprah Winfrey said that she bought a jet after a fan had confronted her at an airport. For those not willing to buy, they can still own part of a jet or acquire timeshares through companies like VistaJet and NetJets. About 33% of those who own private jets are worth more than $500 million.
Recall, in March of this year, we wrote about how some private jet managers were scamming the ultra rich out of millions by charging them for services they didn’t need and food they didn’t eat.
via ZeroHedge News https://ift.tt/2YuIAlw Tyler Durden
You can see it in the GDP numbers, even before they were revised. Globally synchronized growth was always less impressive than what it was made out to be. It’s as true overseas as in the US. The upswing was endlessly hyped, but there was so much less behind it in reality.
Reflation #2 was a whole lot better than Reflation #3, not that the second one made the difference. In this disparity, though, you can see why the bond market was never fooled. Globally synchronized growth never had a chance. It was even more empty than the 2014 predictions for overheating.
One big reason, in the American part of the system anyway, has been corporate profits. The Euro$ #3 downturn wasn’t just a manufacturing recession, more importantly it was also a profit recession. Small wonder the labor market slowed down following 2014. Even as the unemployment rate fell, however you want to measure hiring there was a clear lull (another reason why the LABOR SHORTAGE!!! was only ever present in anecdotes).
How much profits would have recovered from Euro$ #3 would have dictated the ultimate intensity of Reflation #3. Initial estimates have been suggesting that there was at least some rebound, small as it may have been.
The latest benchmark revisions to GDP, however, erase those hopes. Profits may never have recovered at all – interrupted yet again by “something.”
The GDP aggregate for corporate bottom lines is now thought to be a whole lot less especially over the last year and a half since Euro$ #4 showed up. The trend unleashed by Euro$ #3 may have been countered by renewed growth throughout 2016 and 2017.
At best, depending on the specific series, whatever little positive there might have been during Reflation #3 has now largely disappeared with 2018’s estimates trimmed substantially.
More than the headline GDP revisions, this new set of profit data really exposes the economy’s vulnerabilities heading further into the fourth downturn. Federal Reserve Chairman Powell and the FOMC have already singled out business investment as cause for downside concern. That’s not going to get any better with this sort of profit picture.
It is, though, the labor market which is most susceptible to this (more) ugly condition. The foundation for a second half rebound, even just keeping the economy afloat without getting worse, is predicated on a strong labor market. Companies that are booking less bottom-line income aren’t going to be hiring at the same pace.
This data underscores the concerns already showing up in the labor market data (apart from the unemployment rate).
Companies that are making less profits hire less (and maybe start to layoff some), workers sense that downward tilt and as consumers become more cautious in their spending. There’s the explanation for the housing data; a real lack of confidence.
It also explains why businesses are increasingly shy and even cutting back from capex. You don’t make as many new capital-intensive commitments if you aren’t making as much profit. In the same way you don’t add to staff, you might even cut back on capital expenditures the more this condition lingers.
Again, the revisions suggest even more forcefully the underlying economic vulnerabilities very different from the fundamental strength underlying Powell and his more optimistic (or less pessimistic) viewpoint.
This cannot just be a concern for the economy, either. Since profits are the basis for equity investing (in theory, don’t laugh), the fundamental stock condition looks more and more like the late nineties than anything resembling the early eighties.
Valuations are way, way out of line except in comparison to the dot-coms – precisely because like the late nineties there has been no profit growth. Investors have been betting, and continue to bet, that the economy eventually booms. The E part of PE, the thinking goes, will rise to meet the exceedingly high level of P at some point.
These revisions suggest it’s more rationalizing than rational. After all, 2014 was five years ago already. The longer this disconnect continues, does it make it more likely or less that E will shoot upward to justify current P? There was a small case to be made when 2018 profits were slightly higher than 2017 – that the positive trend might continue and then amplify as the Fed might be right about the inflation breakout and economic acceleration.
Going the other way in 2018 instead just confirms the next interruption. And that’s before getting to whatever full condition of Euro$ #4’s downturn might be in 2019. At the very least, it’s another couple years squandered.
Share prices rebounding from the landmine are staking everything on rate cuts to be the answer – even the initial bet on QE3 and QE4 hasn’t panned out. These vulnerabilities are a lot deeper than 25, 50, or even 75 bps on fed funds.
via ZeroHedge News https://ift.tt/2K0QfA5 Tyler Durden
It’s the electric future utopia that we were all promised: entitled assholes stealing your electricity because they can’t read their futuristic car’s range indicator.
Here’s one “green energy” Earth-saving scenario to chew on: Your landscaper comes to your door early one morning asking you to move your car so that they can service your lawn. Except, your car is the in driveway. So you venture outside to see someone else’s Tesla, sitting on your lawn, with an extension cord running across your grass and plugged into the side of your home.
According to WPBF ABC, this is exactly what happened to Phil Fraumeni, who has lived at his house in Lake Worth, Florida for 20 years.
“It was plugged into my electric outlet on my house,” Fraumeni told the local news.
The car wasn’t stolen and the owner was later tracked down. He was told by the owner that he was visiting a friend in the neighborhood when the Tesla’s battery died.
“From what the boy said from midnight the night before, so 12 hours it was charging,” Fraumeni said.
Ultimately, Fraumeni was a good neighbor about the situation. He didn’t press charges and didn’t even charge the owner for the electricity.
via ZeroHedge News https://ift.tt/2YmYw5b Tyler Durden
“After watching seven hours of a spectacle that felt much more cruel than enlightening, I cannot avoid pondering a question which honestly gives me no joy to ponder: just how much damage has MSNBC in particular done to the left?”The Hill’s Rising star began, before excoriating her former employer’s “fevered speculations” about an “Infowars conspiracy theory” and the way it hosted people like Jonathan “maybe Trump has been a Russian asset since the 1980s” Chait and “conspiracy gadfly Louise Mensch” in search of ratings bumps.
“This whole setup has done more damage to the Democrats’ chances of winning back the White House than anything that Trump could ever have dreamed up,” Ball argued.
“Think about all the time and the journalistic resources that could have been dedicated to stories that, I don’t know, that a broad swath of people might actually care about?
Healthcare, wages, the teachers’ movement, whether we’re going to war with Iran? I’m just spitballing here.
I actually heard some pundit on Chris Hayes last night opine that independent women in middle America were going to be swayed by what Mueller said yesterday. Are you kidding me?
This is almost as bonkers and lacking in factual basis as that time Mimi Rocah said that Bernie Sanders is not pro-women because that was what her feelings told her. Rocah, by the way, a political prosecutor with no political background, is only opining at MSNBC because of her role in leading viewers to believe that any day now SDNY is going to bring down Trump and his entire family.”
Ball argued that the fact that MSNBC is doing so much damage to the Democratic Party in the name of ratings proves that MSNBC isn’t “on Team D in the same way that Fox News is on Team R”, saying they’re really just in it for the money. But this is where Ball gets it wrong. It is of course true that ratings are a factor, and that conspiracy theories can be used to sell advertising space, but MSNBC would have had a much easier time marketing conspiracy theories about Trump’s loyalties to Israel and Saudi Arabia, both of which would have had vastly more factual evidence to back them up. The only difference is that the US-centralized empire doesn’t have agendas that it wants to advance against those two countries.
Ball is correct that MSNBC doesn’t serve the Democratic party, but she’s incorrect that it serves only money. MSNBC, which is now arguably a more aggressive war propaganda network than Fox News, serves first and foremost the US national security state. And so do all the other western mainstream news networks.
Consider the way the Syrian province of Idlib is being reported on right now, to pick one of many possible examples. Al-Qaeda-controlled Idlib is the final stronghold of the extremist militant groups that the US and its allies flooded Syria with in a premeditated campaign to effect regime change, and Syria and its allies are fighting to recapture the region. They are using methods that are identical to those commonly used by the US and its allies, yet the bombing campaigns of the US-centralized empire receive virtually no critical coverage while western mainstream outlets like CNNand the BBC are churning out brazenly propagandistic pieces about the evils of the Assad coalition’s airstrikes.
“Civilians are dying in Idlib, just as they died in their thousands in recent US UK air strikes in eg Raqqa and Mosul,” political analyst Charles Shoebridge observed on Twitter today.
“The difference is that when it’s (often unverified) claims that Russia or Syria are doing the killing, US UK media make it front page news.”
One trick Al-Qaeda in #Syria has used extensively to get the US to intervene militarily is having children plead their case. Another trick, as seen in this CNN video, is to have people with American accents do it. Both have been effective with the naive.pic.twitter.com/xkIjmchCzw
This marked discrepancy is due to the fact that western mass media outlets serve not a political party, nor even money, but the power structures of the western empire. This is the real reason why Russia hysteria has been mainlined into mainstream consciousness day in and day out for three years. Not for ratings, not to hurt Trump, not to help the Democrats, but because Russia is viewed as a disobedient geopolitical adversary by the US-centralized power alliance. That’s all it’s ever been.
There are many gaping plot holes in the Russiagate narrative that outlets like MSNBC have been bashing everyone over the head with, but the most obvious and easily provable of them is the indisputable fact that Donald Trump has escalated tensions against Russia more than any US president in decades. You never hear anyone talk about this self-evident fact in all the endless yammering about Russia, though, because it doesn’t advance the agendas of either of America’s two mainstream parties, and it doesn’t advance the interests of US imperialism. Democrats don’t like acknowledging the fact that Trump has been consistently and aggressively working directly against the interests of Moscow, and Trump supporters don’t like acknowledging that their president is just as much of a neocon-coddling globalist as those they claim to oppose, so the war machine has gone conveniently unchallenged in manufacturing new cold war escalations against a nation they’ve had marked for destruction since the fall of the Soviet Union.
In a very interesting new Grayzone interview packed full of ideas that you’ll never hear voiced on western mass media, Russia’s Deputy Foreign Minister Sergei Ryabkov spoke openly about the various ways that Russia, China, and other nations who’ve resisted absorption into the blob of the US power alliance have been working toward the creation of a multipolar world. Ryabkov said other nations have been watching the way the dominance of the US dollar has been used to economically terrorize noncompliant nations into subservience by way of sanctions and other manipulations, with Washington expecting that the dollar and the US financial system will remain “the cardiovascular system of the whole organism.”
“That will not be the case,” Ryabkov said. “People will bypass, in literal terms. And people will find ways how to defend themselves, how to protect themselves, how to guarantee themselves against any emergencies if someone comes up at the White House or whatever, at the Treasury, at the State, and says ‘Hey guys, now we should stop what is going on in Country X, and let’s squeeze them out.’ And this country sits on the dollar. So they will be done the moment those ideas will be pronounced. So China, Russia and others, we create alternatives that we will most probably continue using not just national currencies, but baskets of currencies, currencies of third countries, other modern barter schemes.”
“We will use ways that will diminish the role of dollar and US banking system with all these risks of assets and transactions being arrested, being stopped,” Ryabkov concluded.
That, right there, is the real reason you’re being sold Russia hysteria today.
And it isn’t just on the matter of financial systems in which the unabsorbed powers are uniting against the imperial blob. Russia and China just carried out their first joint air patrol on Tuesday, drawing a hostile response from imperial vassals Japan and South Korea.
“Russian and Chinese bombers on ‘first’ joint patrol in the Asia-Pacific region. The China-Russia alliance has become a reality and will last for long time,” reads a post by one Russian Twitter commentator in response to the news.
The emergence of this alliance, which the Chinese government has warned Washington is ‘not vulnerable to interference’, has been something the west has feared for a long time. A Pentagon white paper published this past May titled “Russian Strategic Intentions” mentions the word “China” 108 times. Some noteworthy excerpts:
“The world system, and American influence in it, would be completely upended if Moscow and Beijing aligned more closely.”
“The allies’ goal should be deterrence. At the same time, the US should bilaterally engage Russia to peel them away from China’s orbit.”
“He also encourages the development of the US’s ‘capability to effectively foster distrust and unease between the Russia Federation and China.’”
“Along with Beijing, Moscow seeks a multipolar world in which US hegemony comes to an end. As Alexander Lukin recently pointed out, the ‘common ideal of a multipolar world [has] played a significant role in the rapprochement between Russia and China.’”
“Russia and China were explicitly mentioned in the 2018 National Defense Strategy as the great powers with which the US is in competition. Both Russia and China have come a long way since the 1990s, and the ‘friendship’ that emerged in the immediate post-Tiananmen period and continued to grow over the years now today appears to be one of the strongest bilateral alliances on the planet.”
“Together, Russia’s tentacles on its former Soviet neighbors and Moscow’s strategic alliance with Beijing in pursuit of a multipolar world (in which the US is no longer the global hegemon) form the two main pillars upon which Putin’s grand strategy rests. All other aspects of its foreign policy behavior can be traced back to this dual-pronged grand strategy.”
I think you get the picture. From the Pentagon’s point of view, US hegemony good, Russia-China alliance very, very bad. Analysts like the white paper’s authors, and even The New York Times editorial board, have urged the drivers of US foreign policy to attempt to lure Moscow away from Beijing, the latter rightly perceived as the greater long-term threat to US dominance due to China’s surging economic power. But diplomacy has clearly been ruled out toward this end, with only a steadily escalating campaign to shove Russia off the world stage now deemed acceptable.
Russian and Chinese bombers on ‘first’ joint patrol in the Asia-Pacific region.
The #China–#Russia alliance has become a reality and will last for long time. pic.twitter.com/SpE7MRsXrk
This is all happening because after the USSR fell and America emerged as the undisputed ruler of a unipolar world, it was determined with the help of influential neoconservative think tankers that the US must maintain this unipolar paradigm at all costs. As soon as that view became the establishment orthodoxy, any threat to US hegemony was now interpreted as a threat to national security. An “attack” on America was no longer limited to physical attacks on US soil, or even on US allies and assets: any attempt to escape unipolarity is now treated as a direct attack on the empire.
This is why we’ve seen nations like Iraq, Libya and Syria spoken about by the propagandists as “enemies” as though they pose some kind of direct threat to the American people. There was never any actual threat to the physical United States, but those nations were not complying with the dictates of US hegemony, and that noncompliance was treated as a direct attack.
This “if you’re not obeying us you’re attacking us” mentality is ridiculous on its face and no right-thinking citizen would ever consent to it, which is why the consent manufacturers need to promote imaginary nonsense like weapons of mass destruction, a Russian “attack” on American democracy, and a conspiracy theory about the Kremlin infiltrating the highest levels of the US government. It’s got nothing to do with actual fears of those nations posing any threat to actual Americans. It’s about continuing to rule the world.
* * *
The best way to get around the internet censors and make sure you see the stuff I publish is to subscribe to the mailing list for my website, which will get you an email notification for everything I publish. My work is entirely reader-supported, so if you enjoyed this piece please consider sharing it around, liking me on Facebook, following my antics onTwitter, throwing some money into my hat on Patreon orPaypal, purchasing some of my sweet merchandise, buying my new book Rogue Nation: Psychonautical Adventures With Caitlin Johnstone, or my previous book Woke: A Field Guide for Utopia Preppers. For more info on who I am, where I stand, and what I’m trying to do with this platform, click here. Everyone, racist platforms excluded, has my permission to republish or use any part of this work (or anything else I’ve written) in any way they like free of charge.
There was a startling revelation in yesterday’s GDP revision: according to the preliminary Q2 GDP results, implied operating profits for the period totaled $1,900 billion, down 5% from Q1, which would represent the third consecutive quarterly decline, and off over 7% from the year ago levels, one the largest declines recorded in several years. Yet, as ugly as the Q2 numbers appear to be on the surface, what are even more troubling are the sharp downward revisions for the last two years. According to the annual GDP revisions operating profits for 2017 were lowered by $93 billion, or 4.4%, and profits for 2018 were reduced by a whopping $188 billion of 8.3%.
The revised corporate profit numbers show that contrary to conventional wisdom that corporate profits have been increasing, operating profits peaked in Q3 2014 and have been moving sideways ever since, before declining over the past year. Operating profits in the GDP accounts and S&P 500 operating profits over the long run track fairly close to one another, although there can be large differences in any given year. Yet, what is truly bizarre is that over the past 5 years operating profits have gone nowhere – and have in fact declined – while during this period S&P 500 prices have increased over 50%.
How is that possible? Simple: this is where the Fed steps in with the oldest trick in the book – multiple expansion.
As Goldman’s David Kostin writes in his latest Weekly Kickstart piece, markets are currently discounting 65 bp of easing by the end of 2019 and an additional 35 bp of easing by year-end 2020. Of course, as any Finance 101 textbook will explain, stock prices are a function of two things: profitability and interest rates. And since there has been no profit growth in five years, and virtually no profit growth is expected, the only variable that matters is interest rates, and from an investor’s standpoint, lower rates increase the value of equities, all else equal.
Which brings us to a startling observation: since there has been no EPS growth in 2019, more than 95% of the S&P 500’s YTD climb has been driven by an expansion in P/E multiples as 10-year US Treasury yields fell and the P/E multiple expanded from 14x to 17x. In other words, the reason why the S&P trades at all time high levels above 3,000 is just one: Jerome Powell.
Of course, every finance major knows the reason why low interest rates are positive for risk assets: simply stated, they increase the capacity of firms to pursue investment spending. As Goldman notes, S&P 500 investment for growth (capex, R&D, and cash M&A) grew by a median of 8% during the three quarters following the start of the past four Fed cutting cycles, while spending beyond the first three quarters was determined by the health of the US economy. Following the 1995 and 1998 “insurance” cuts, investment for growth continued to grow for 12 quarters after the Fed’s first cut. In contrast, investment cratered following the 2001 and 2007 cuts as the economy fell into recession. (Incidentally, Goldman is quick to note that its economists see a low probability of recession in the near term, which supports the bank’s view that investment will continue to grow, and estimates S&P 500 capex (+8%), R&D (+9%), and cash acquisitions (+13%) will all grow during 2019.)
Besides spending on investment, companies have another option of how to spend excess cash: namely, return it to shareholders via buybacks and dividends. How has such activity changed before and after prior rate cuts?
According to Goldman’s analysis, buybacks continued to rise following the 1995 easing, but stopped growing following the start of the other three cutting cycles. Dividends have historically been stable following past Fed easing, only declining in aggregate as the economy headed into the Global Financial Crisis. Intuitively, companies have shown more willingness to withdraw spending on share repurchases than dividends.
Of course, this time may well be different, as even without a rate cut, share repurchases have continued to surge during 2019 and are expected to surpass the 2018 all time high, rising above $1 trillion. According to high frequency data from the Goldman Sachs repurchase desk, buyback executions have risen 26% year/year through mid-July, and Although S&P 500 repurchase authorizations have declined by 20% vs. the year-ago period, companies retain capacity to repurchase stock under multi-year authorizations. AS a result, Goldman estimates S&P 500 buybacks will climb by 13% to a new all-time high of $940 billion this year.
Which brings us to a second startling observation: for the first time in the post-crisis period, companies are returning more cash to shareholders than they are generating in free cash flow. During 2017, non-Financial S&P 500 firms returned 82% of free cash flow to shareholders in the form of buybacks (net of equity issuance) and dividends compared to 104% during the 12 months ending 1Q 2019. As Goldman further notes, net buybacks and dividends surged by 30% during the past 12 months while free cash flow (FCF) increased by a comparably modest 10%. Meanwhile, growth in FCF was not constrained by a surge in capital expenditures; S&P 500 cash flow from operations (CFO) also rose by 10% during this period. And since companies spent more on shareholder distributions than they generated, companies had to draw on their cash balances to finance spending growth.
Which brings us to the most striking observation of the day: the $272 billion drop in non Financial cash balances in the LTM period represents the largest percentage decline since at least 1980 (-15%). As a percentage of assets, non-Financial cash balances have declined from 12.7% in June 2018 to 10.4% today – the lowest level since March 2010.
It’s not just cash that is plunging – this precipitous drop in cash balances has coincided with a sharp increase in corporate leverage. Four years after we first noted back in 2015 that stock buybacks were mostly funded by new debt issuance, when we published “The Amazing Chart Showing What All The Debt Issued This Century Has Been Used For“, showing that virtually all debt issued this century was used to fund buybacks, the trend continues and net leverage (net debt/EBITDA) for the median non-Financial S&P 500 stock climbed to a new all-time high in 2019. As Kostin writes, “part of the increase in net leverage reflects the sharp decline in cash balances, but gross debt outstanding also climbed by 8% during the past 12 months. Unless earnings growth accelerates materially, companies will likely continue to fund spending by drawing down cash balances and increasing leverage.“
Which brings us to one final observation: the polar opposite takes on how record corporate leverage is perceived on Wall Street.
On one hand, earlier this month in the latest Bank of America Fund Manager Survey, we found that a record 48% of professional investors say corporates are excessively levered, while noting that the number of OECD zombie companies (those companies with an interest coverage ratio below 1) is at new post-GFC highs (548).
That, however, is not the case according to Goldman, which counters by noting that the recent outperformance of stocks with weak balance sheets suggests investors are comfortable with elevated leverage ahead of expected Fed easing.
So which is it – investors are freaking out about leverage or they are comfortable with it?
Judging by the market, Goldman has the upper hand for now because while stocks with weak balance sheets underperformed those with strong balance sheets by 24 pp (-3% vs. +21%) from the start of 2017 until the end of 2018 as the Fed tightened monetary policy, more recently, weak balance sheets have outperformed strong balance sheets by 450 bp since the start of June (+12% vs. +8%) as expectations for Fed easing have strengthened.
In other words, not only has the Fed pushed the S&P to an all time high by massively expanding PE multiples, but it is explicitly forcing improper capital allocation, by forcing investors to put money in companies that will be the first to default once the next recession finally hits.
There is just one risk: the fact that the market is expecting too much easing from the Fed, and as Kostin notes, Goldman’s economists believe that the Fed will be less dovish than implied by market prices. On the other hand, now that Powell is a slave to the market – an outcome he dreaded back in 2012 – it will only take a modest drop in the S&P for the Powell Put to be triggered again, resulting in yet another rate cut.
via ZeroHedge News https://ift.tt/2MjJDy8 Tyler Durden
