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So now the race is on — a dangerous new Cold War style arms race between Russia and the United States that is. Reuters has issued an alarming report which highlights “Russia will race to develop two new land-based missile launch systems before 2021 to respond to Washington’s planned exit from a landmark nuclear arms control pact, it said on Tuesday.”

The Intermediate-Range Nuclear Forces Treaty (INF) effectively collapsed over the weekend following the US announcing Friday that it’s suspending all obligations under the treaty. Predictably Moscow’s response was swift with President Vladimir Putin saying in a Saturday meeting with his foreign and defense ministers that Russia will now pursue missile development previously banned under its terms.

Putin said “ours will be a mirror response” in a tit-for-tat move that the Russian president ultimately blames on Washington’s years-long “systematic” undermining of the agreement.

And now Russia’s Defense Ministry is essentially saying “game on” — per Defense Minister Sergei Shoigu’s new orders issued on Tuesday: “From Feb. 2, the United States suspended its obligations under the INF treaty,” Shoigu told a meeting of defense heads. “At the same time they are actively working to create a land-based missile with a range of more than 500 km which is outside the treaty’s limits. President Putin has given the defense ministry the task of taking symmetrical measures.”

What will these “symmetrical measures” consist in? Putin outlined this in prior statements over the weekend, according to Reuters:

Washington had made clear it planned to start research, development and design work on new missile systems and Moscow would do the same, Putin said.

The Russian military should start work on creating land-based launch systems for an existing ship-launched cruise missile, the Kalibr, and for longer-range hypersonic missiles which travel at least five times the speed of sound, he said.

Crucially, however, he noted that there were no plans to deploy short and mid-range missiles to Europe unless the US does it first — a worst nightmare scenario that has rattled European leaders ever since talk began from Trump that the 1987 treaty could be scrapped. 

Putin still seemed to allow some degree space for last minute concessions as “still on the table” possibly in line with the Trump administration’s desire to modernize and update a new treaty taking into account new technological and geopolitical realities, such as China’s ballistic missile capabilities. 

“Let’s wait until our partners mature sufficiently to hold a level, meaningful conversation on this topic, which is extremely important for us, them, and the entire world,” Putin said during his weekend comments. But also lashing out during the press conference that followed the meeting with top officials Putin described:

Over many years, we have repeatedly suggested staging new disarmament talks, on all types of weapons. Over the last few years, we have seen our initiatives not supported. On the contrary, pretexts are constantly sought to demolish the existing system of international security.

Specifically he and FM Sergei Lavrov referenced not only Trump’s threats to quit the agreement, which heightened in December, but accusations leveled from Washington that the Kremlin was in violation. The White House has now affirmed the bilateral historic agreement signed by Mikhail Gorbachev and Ronald Reagan will be suspended for 180 days. Lavrov insisted that Moscow “attempted to do everything we could to rescue the treaty.” 

Both sides are now blaming the other’s refusal to return to the table. On Tuesday US disarmament ambassador Robert Wood stated before a U.N.-sponsored Conference on Disarmament in Geneva that the United States would reconsider its withdrawal from the INF treaty “should Russia return to full and verifiable compliance.”

“This is Russia’s final opportunity to return to compliance,” Wood said; however, this clearly doesn’t appear much of a humble open-handed invitation urging Moscow to return in good faith.

It now appears both sides are hardening in their position, which doesn’t bode well for a potential future return of a Cold War style arms race. Indeed it appears to have already begun. 

via ZeroHedge News http://bit.ly/2S8HmKl Tyler Durden

Authored by Chris Hamilton via Econimica blog,

Math, being math, is pretty helpful in figuring out problems.  Today’s problem is how long employment (and associated economic activity) can move upward.  Math seems to suggest mid 2019 is the likely terminus for both the growth in employment and likely economic activity.  I’ll detail why 2019 can offer an increase of just 65 thousand potential new employees per month and why this will put the brakes on the US economy.

The most reliable gauge of changing economic demand is the changing population.  Even more telling is the growth in employment, broken down among the different age segments that make up the workforce.  The chart below details the year over year change in employment since 1970 among 15-24yr/olds (yellow columns), 25-54yr/olds (blue column), and 55-64yr/olds (red columns).  Lastly, the black line represents the total 15-64yr/old population change.  The decelerating total population growth among the working core should be pretty well known.  However, the decelerating employment growth among 15-24 and 25-54yr/olds should be noted while the substitution of the 55-64yr/old employees also pointed out.

Breaking out population growth versus employment growth among each age segment:

15-24yr/olds year over year population change (red line) versus year over year change in employment among them (blue columns).

25-54yr/olds year over year population change (red line), versus year over year change in employment among them (blue columns).

55-64yr/olds year over year population change (red line), versus year over year change in employment among them (blue columns).

During each economic cycle, jobs grow faster than the population until peak employment hits and absent further jobs growth, recession ensues.  The chart below shows peak employment for every recession back to 1969.

2015 through 2018: Population Growth vs. Jobs Growth

To highlight my point, I detail the population growth versus jobs growth among the primary working age population from 2015 through 2018…plus I note the new normal primary population growth nexus, the elderly, with very low labor force participation rates:

15-24yr/olds

• population -835 thousand
• employees +442 thousand
  • 50.5% labor force participation

25-54yr/olds

• population +1.6 million
• employees +4.55 million
  • 79.7% labor force participation

55-64yr/olds

• population +1.9 million
• employees +2.1 million
  • 63.7% labor force participation

65-69yr/olds (fyr)

• population +1.8 million
  • 32% labor force participation

70-74yr/olds (fyr)

• population +2.6 million
  • 19% labor force participation

75+yr/olds (fyr)

• population +2.1 million
  • 8% labor force participation

2019 Population Growth and Potential Labor Force Growth

Given we pretty much know the 15+yr/old population growth for 2019 by age segment, a quick estimate of potential labor force growth is easy enough.  Since the majority of the population growth in 2019 will be among elderly with very low labor force participation rates, 15+yr/old population growth of approx. 2.3 million nets an annual potential labor force increase of about 760 thousand (an increase of 64 thousand a month).  It doesn’t take a genius to determine if jobs are growing by up to 300 thousand per month but the potential labor force is growing by just 64 thousand per month, and core age segments are already at typical “full employment” (as noted above)…peak employment is fast approaching.  However, over the next five years, this trend only worsens with average potential labor force growth sagging under 60 thousand monthly (all this is premised on ongoing high rates of immigration…any slowdown in immigration will directly reduce the potential workforce).

Come Summer of 2019, employment among the 25-54yr/old population segment will likely reach the typical breaking point slightly above 80% employment.  Simultaneously, employment among 55-64yr/olds will likely peak out at a new record high, potentially up to 65%.  Employment among 15-24yr/olds may have already peaked at 50.7% in 2018 and is likely to continue rolling over for multiple reasons.  With such minimal upcoming population growth among the 15-64yr/old potential workforce and such outsized employment gains, coupled with such low labor force participation rates among the 65+yr/old  population…growth in employment and associated economic activity will soon hit a brick wall…previously known as recession.  This is the primary reason why this was likely the final positive interest rate cycle in America, detailed HERE.

Again, the reason jobs growth will be hitting a brick wall is pretty straight forward.  The vast majority of the US population growth is now coming among those that are unwilling/unable to work, particularly the 75+yr/old (chart of growing elderly US populations below).

Just for comparison, the chart below shows the annual change in the 15 to 64yr/old population versus annual change in 65+yr/olds.  That the US (and nearly all advanced and developing economies) have been struggling since the late ’90’s as this reversal in “magnetic North” takes place should be no surprise.

Lastly, highlighting when the boomer growth wave crested in each age segment (1=15-24yr/olds, 2=25-54yr/olds, 3=55-64yr/olds) and the impact on the 15 to 64yr/old annual population growth (dashed line).  Obviously, we are entering the minimum 15 to 64yr/old growth period over the next decade while simultaneously the elderly population skyrockets (above).

via ZeroHedge News http://bit.ly/2SpEdoM Tyler Durden

Having recently warned about the growing socio-economic chasm of income and wealth inequality which has led to a worrying anti-capitalist backlash, Howard Marks – the co-founder and co-chairman of Oaktree Capital Management – is back with another interview, this time for Goldman’s “Top of Mind” periodic publication, he shifts the topic away from populism and the blowback to central bank policies, to where we are in the business cycle (assuming one still exists now that central banks always step in any time there is even a modest threat of a bear market), explaining how investor attitudes towards risk are a valuable gauge for assessing where we are in said cycle, which in turn advises how “smart investors” should behave. He also reveals what “late cycle excesses” worry him the most, arguing that excesses in the credit markets are a key source of risk to the economic expansion.

Below we present Marks’ full interview with Goldman’s Allison Nathan.

Allison Nathan: What do you make of the recent market volatility?

Howard Marks: To me, it just confirms that markets are psychologically volatile. On October 3, everything was fine; on October 4, the equity market began one of the biggest declines ever seen over such a short period of time, leading to the worst December since the Global Financial Crisis (GFC). Fundamentally, of course nothing had changed overnight, and not much has changed even over the prior few months; mostly it’s just that the market swung from looking at things optimistically to looking at them  pessimistically. The truth is, most things can be viewed either positively or negatively, and the bias of onlookers influences which perception prevails at any point in time.

All that said, I have argued since roughly mid-2017 that markets were excessively optimistic. And excessive optimism, faith in the future, and greed leave the market vulnerable to this type of sentiment-driven correction. So this episode just illustrates how much market violence emotion can wreak, especially from a place of too much exuberance.

Allison Nathan: How do you determine whether or not markets are too exuberant?

Howard Marks: By assessing how people are thinking and behaving around you. In general, as investors, we can’t predict where we’re going, but we should be able to tell where we are. We can do that by “taking the temperature of the market” through questions like: Where does market psychology stand? To what extent has this psychology been priced in? Are attitudes toward risk prudent or cavalier? Answering these types of questions doesn’t help predict the future, but it does help investors get the odds on their side, because they are better able to determine whether markets are more exposed to upside potential or downside risk. And in my assessment, last year the markets were more exposed to downside risk.

Allison Nathan: But couldn’t at least some of last year’s optimism have been fairly attributed to strong US economic growth?

Howard Marks: What matters most to markets is not a good quarter or a good year, but what the future looks like. Case in point, last year we had some of the fastest US economic growth since the GFC, but some of the worst market performance. In my view, the economic strength post the US tax bill was like a shot of adrenaline in the economy; far from creating a stable platform for more rapid growth, I thought it would give us a couple of good quarters before either receding or necessitating more restrictive actions from the Fed to avoid excessive inflation. But people reacted very positively to it, and—most importantly—they extrapolated into the future the strong growth we were experiencing. I was getting email from people saying, “Look at Australia—they haven’t had a recession in 26 years. Maybe the US won’t have a recession for 26 years.” That kind of Pollyannaish thinking told me there was too much hot air in the balloon. When assets begin pricing in the notion of permanent prosperity, it usually turns out to be an illusion.

Allison Nathan: Does this kind of behavior suggest to you that we are nearing the end of the economic expansion?

Howard Marks: I’m not an economist, and I don’t believe in forecasting; as investors we never know what’s going to happen, like I said, but we can know something about the odds. We’re in the second half of the 10th year of an economic recovery, and US economic recoveries have never lasted more than 10 years. That doesn’t mean that on the 10th anniversary of the current expansion iron gates will come down and the economy will descend into recession. My guess is that this recovery will indeed turn out to be the longest in history, and thus that more Fed rate hikes to correct late-cycle excesses are probably in store. I would be shocked if today’s interest rates are the highest of this cycle. But the odds that the expansion goes on much longer are not great. And knowing that, we can feel somewhat confident that over the next few years, we’ll probably see slower growth and—at some point—a recession, which means pessimism will likely predominate over some period of time, just as optimism has in recent years.

Allison Nathan: What does this mean for markets?

Howard Marks: Two questions I’m often asked are: “Are we in a bubble?” and “Are we going to have another crash?” This is understandable because those who came into the market as much as 25 years ago have seen two bubbles and two crashes. But markets aren’t always about extreme ups and downs; there are bull markets and bear markets, rises and corrections.

With that in mind, I don’t believe that we’re in a bubble, and I don’t think we’re going to have a crash. Stock P/E ratios are pretty much in line with the postwar average. Banks are not highly levered. Most investing hasn’t taken place in vehicles as highly levered as the mortgage and loan vehicles of 2006-07. And I don’t see an analog for subprime mortgages today. So in many ways, the current environment is less precarious than 11 or 12 years ago. But for an investor, I think the next five years simply aren’t going to be as good as the last ten.

Allison Nathan: What late-cycle excesses worry you the most?

Howard Marks: I worry about the amount of debt in the system and about companies’ exposure to rising interest rates. I recently wrote about what I call “the seven worst words in the world”: too much money chasing too few deals. Demand for credit instruments in the last few years has been very strong, driving an influx of capital to the leveraged loan and private lending markets. Such large capital inflows tend to drive up prices, drive down credit standards, drive up risk, and drive down prospective returns. I believe that generally has happened in the credit markets. So I worry about the debt load more than I do about, say, a collapse in stock prices.

Allison Nathan: Are credit markets the most likely cause of the next downturn?

Howard Marks: “Cause” is a funny word. Yes, I would guess that the next big problem in the economy will emanate from the credit markets. But will that start the next recession? Not necessarily. The problem might start because of a trade war or for some other reason. One of my favorite oxymorons is that “we’re not expecting any surprises.” But of course it’s surprises that have the power to knock the market for a loop; after all, very few people saw the subprime crisis coming.

When we learned about the Civil War, we learned about Fort Sumter being the powder keg. Today, leverage in the system seems to me like the area of greatest exposure, but I can’t be sure what the powder keg will be. I’m not cavalier enough to pretend that I know where the trouble will emerge.

Allison Nathan: The GFC was a key buying opportunity for you. Would the limited firepower of monetary policy give you pause before buying risky assets during the next major downturn?

Howard Marks: It will matter if we have a severe recession. In 2007, I held five-year Treasuries that paid six-plus percent. Today, the five-year pays two-plus percent. So by definition, the Fed has less firepower with which to respond to a recession. That’s bad. But the scenario that you’re describing would otherwise probably be a good time to invest: pessimism up, prices down, people pulling in their horns. Weighing those pros and cons is what makes this a tough business, and that’s why nobody gets it right all the time.

Allison Nathan: Considering the Q4 sell-off and the recent rally, how would you rate investor optimism today? Do expectations look more reasonable to you?

Howard Marks: I see the Q4 price action as a dash of cold water that cooled off some enthusiasm. Credit spreads widened and it was hard to raise money. These were positive signs of prudence. That said, those losses have been recovered to a large degree. So I would say that the market is chastened but back to being somewhat optimistic.

Allison Nathan: So how should investors be positioned today?

Howard Marks: To me, the key question is whether this is a time for aggressiveness or a time for caution. I believe it’s a time for caution. Warren Buffett said it best: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” If investors are scared, as they were in the fourth quarter of 2008 or early 2009, I believe you should be aggressive. But if investors look like flaming optimists, then watch out. As I said, I still see some optimism in the market today. So I would want to be in stable, higher-quality and defensive assets more so than in aggressive, optimism-oriented assets.

Of course, it’s not all or none, buy or sell. For example, slower growth would normally mean holding more US than non-US assets, because the US is the more dependable economy. But US securities are also the most expensive. Normally, caution would call for holding more bonds than stocks. But long-term fixed income instruments would suffer the most if rates rise. And at least in the US, bonds are more expensive than stocks. So the trouble is, things aren’t black and white. But overall, I see absolutely zero reason to express the aggressiveness that was appropriate ten years ago. The easy money has been made for this cycle, and today’s conditions call for a more cautious portfolio.

via ZeroHedge News http://bit.ly/2Dlhvon Tyler Durden

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

That statement is going to make me real popular, right? Any criticism of Robert Mueller for many people equals support for President Trump. But it doesn’t, and Mueller really is a coward and a liar, and it’s not hard to make that case, it’s even easier than how he makes his cases, because we can actually prove ours. We also don’t have to pervert the law, but he does.

Robert Mueller is a coward because he again, in his indictment of Roger Stone last week, makes claims against people who can’t defend themselves, and who moreover have in at least one case, that of Julian Assange, previously and repeatedly denied those claims. And Robert Mueller’s a liar because many of his claims are evidently not true; but though he will never be able to prove them, and he knows it, he still makes his ‘case’ based on them.

It’s also public knowledge that Mueller has lied since at least the WMD facade. On February 11 2003, then FBI director Mueller testified before Congress: 

“..as Director Tenet has pointed out, Secretary Powell presented evidence last week that Baghdad has failed to disarm its weapons of mass destruction, willfully attempting to evade and deceive the international community. Our particular concern is that Saddam Hussein may supply terrorists with biological, chemical, or radiological material.”

We know today he was lying, as was Colin Powell (and the entire Bush administration). Which is also interesting because a number of Mueller’s accusations against various ‘suspects’ are basically just that: someone has lied to Congress and must be punished for it. This is again the case in Roger Stone’s indictment, which would ring awfully hollow without it. And we don’t have to know how true that accusation is to realize that it’s being brought by someone who himself lied to Congress, but was never indicted for it. That is curious no matter how you look at it.

So what would happen if Mueller takes any of his present indictments into a courtroom? Note: as long as he treats those he indicts the same way he treated Paul Manafort and others, he’ll probably never have to present anything in a court; every ‘suspect’ will sign a plea deal because he threatens to destroy them, their freedom, their finances, their families. But what IF he did, purely hypothetically? What proof -not allegations- could he present to a judge about Russians hacking US-based servers or computers?

And what evidence of Julian Assange working with Russians, or with the Trump campaign? He has none. All there is is US intelligence agencies making claims without providing evidence. And they are a party to the whole story, they are not mere observers, so no judge worth his/her salt can accept their word on anything just because it’s them saying it. Even the FBI has to present evidence. In court, that is.

In the meantime, in the absence of a courtroom, Robert Mueller has been free to accuse people for 20 months now, without proof. And what those 20 months have shown us culminates in the Roger Stone indictment, which makes clear -once more- that there was no collusion between Russia and the Trump campaign.

Given his legal status, Mueller should be invested with the power to demand he gets the opportunity to talk to Assange. And in the unlikely event that he’s not provided with that opportunity by his superiors, at the very least he must stop talking about Assange. Can’t talk TO him, then stop talking ABOUT him. Sure, he never mentions his name, but that’s just more cowardice. We all know who Organization 1 is in Mueller’s indictments. And we all know who spoke for Organization 1 before he was muzzled.

Mueller could for instance travel to the Ecuadorian embassy in London, after negotiating, both with the man himself and with ‘authorities’ from Ecuador, UK and US, to have a meeting with Assange. Considering his importance as head of an investigation into collusion that might topple a president and start a new cold war with Russia, that should be easy to do. But Mueller hasn’t talked to Assange. Nor has he indicated that he tried.

Mueller accusing Assange without talking to him should raise suspicions that he is not interested in finding the truth, but has other goals. And that shines a dark light on his entire investigation. Because of the fact itself, but also because Assange is a pivotal person in the entire Russia collusion narrative. Mueller can’t make his case without accusing, defaming Assange.

Assange is crucial in the Mueller indictment of 12 Russians issued conveniently three days before the Trump-Putin summit in Helsinki, he’s crucial in the case made against Paul Manafort, and he’s again crucial in the indictment of Roger Stone. Without Assange, Mueller’s hands are empty. Julian is presented as the conduit between Trump and Russia. No conduit, no connection. And Assange has always denied the entire thing, all of it.

People who have been accused of, let alone indicted in, a crime, must be given their day in court, says American law, to be able to defend themselves against their accusers. But Assange is not, which means Robert Mueller is no less than a grave threat to the entire American justice system. Not Mueller alone, for sure, but he, along with the Attorney General and Deputy AG (and believe it or not, the President), are immediately responsible for the way the justice system is being perverted. That is very serious business.

As I said above, Mueller first, supposedly accidentally, dragged Assange into his investigation three days before the July 16 2018 Trump/Putin meeting in Helsinki, when he indicted 12 Russians and ‘Organization 1’. That indictment is here. It was arguably the first tangible thing that came out of the investigation, and while it was heralded as gospel by everyone who wants Trump to hang, it was shot so full of holes by others in no time that the term ‘tangible’ perhaps needs to be replaced.

That first indictment was not based on facts, it was based on faith (in US intelligence). 12 Russians who can’t defend themselves were grouped together as Guccifer 2, whose Russian lineage was also shot to smithereens within hours, and then there was Assange. Last week’s indictment, that of Roger Stone, perhaps -we can’t even be sure- alludes to Stone colluding with either Russians or Assange, but it carries no evidence of any collusion.

As WikiLeaks tweeted: 

“The indictment doesn’t have any reference to Stone talking to Assange, or Assange talking to Stone, or anyone at WikiLeaks telling him anything, whatsoever. It’s literally old men reading the news and wishing for things.

The job of a Special Counsel, his/her mandate, is to gather evidence of those crimes (s)he has been tasked with investigating. That mandate can be wide, but certainly not unlimited. The job at hand is not to suggest that things MIGHT have happened. It is not to blindly follow everything US intelligence may or may not claim is true, because all accusations will eventually have to be proven in a courtroom.

And it is not to point fingers at people for things the Special Counsel can’t prove they’ve done, or to accuse people who cannot defend themselves against whatever it is he or she might say (because then (s)he might say anything).

Mueller has never charged Assange with anything, despite the fact that Julian is all over all of his indictments. Mueller also refuses to talk to Assange, ostensibly because that way he can continue to accuse him of all manner of unproven ‘crimes’, and if he doesn’t have to prove what he accuses Assange of, he can accuse anyone of being in touch with Assange and conspiring to enact all sorts of collusion.

It’s a pity that America is so divided into a pro-Trump and anti-Trump side, and never the twain shall meet, because the perversion of the justice system exemplified by the Mueller investigation is very real; it’s rotting from the inside. This has not about Trump, if anything it’s about the justice system granting someone the right to defend themselves, which is being violated by Robert Mueller on a daily basis.

In early 2017, the DOJ attempted to set up meetings with Assange, who in the process offered evidence that there was no Russian involvement in the files WikiLeaks published in 2016. Those attempts, when near completion, were halted by Mueller’s very good friend James Comey and Senator Mark Warner (D-Va.).

Warner last week in his capacity as Senate Intelligence Committee Vice Chairman said about the Stone indictment: 

“It is clear from this indictment that those contacts [between Stone and WikiLeaks] happened at least with the full knowledge of, and appear to have been encouraged by, the highest levels of the Trump campaign..” No, Mr. Warner, that is sort of the exact point here. It is not clear. Nor is it true. And you know that, sir.

A year and a half later, in July 2018, Senator Rand Paul said that if Assange would agree to testify in the US, “I think that he should be given immunity from prosecution in exchange for coming to the United States and testifying” Nothing came from that either. Where was Mueller?

Every single American should be alarmed by this perversion of justice. Nothing to do with what you think of Trump, or of Assange. The very principles of the system are being perverted, including, but certainly not limited to, its deepest core, that of every individual’s right to defend themselves.

Just so Robert Mueller can continue his already failed investigation into collusion that has shown no such thing, and which wouldn’t have been started 20 months ago if we knew then what we know now.

Get off your Trump collusion hobby-horse, that quest has already died regardless, and start defending the legal system and the Constitution. Because if you don’t, what’s to keep the next Robert Mueller from going after you, or someone you like or love? It’s in everyone’s interest to demand that these proceedings – like all legal proceedings- are conducted according to the law, but in Mueller’s hands, they are not.

And that should be a much bigger worry than whether or not you like or dislike a former game-show host.

via ZeroHedge News http://bit.ly/2UGhd2g Tyler Durden

Weeks after Goldman Sachs worst quarterly FICC revenue line print since the financial crisis left the bank’s reputation as the savviest trading house on Wall Street in tatters, Bloomberg and WSJ have reported that the bank is considering serious cutbacks in its trading business, including curtailing its fixed income trading and possibly cutting its commodity trading unit entirely.

Not long after the last of the Goldman’s former ruling triumvirate of Lloyd Blankfein, Gary Cohn and Harvey Schwartz left the bank, the unit from which all three men began their ascent to the top of the storied investment bank – namely, the commodities trading unit – is now on the chopping block, per WSJ. After suffering its worst year on record in 2017, commodities trading revenue improved slightly last year. But analysts say the unit is unlikely to match the profitability from the 2000s, when commodities trading contributed some 15% to the bank’s pre-tax profits.

In more than one sense, news that the bank could shutter its commodities unit is a surprise: Goldman stuck with commodities trading even as other banks cut back. Goldman even recently announced an expansion into a green energy business for corporate clients while dipping its toe into nascent LNG markets.

The decision to close the unit, which will be presented to the bank’s board later this month, followed a review of each of the bank’s business units ordered in October by CEO David Solomon, who is facing increased pressure thanks to the 1MDB scandal. During the monthslong review, the bank determined that the unit ties up too much of the bank’s nearly $1 trillion balance sheet for too little profit, suggesting that it is getting in the way of Goldman’s push into other, more lucrative, businesses like main street banking.

Goldman is also looking into reducing the capital dedicated to its core trading business in its fixed-income group, according to BBG.

Senior officials reportedly told the bank’s leadership that the market-making business in the fixed income group was too big, and that operations within the division needed to be diversified.

However, a spokeswoman for the bank stressed that no final decision had been made.

“We’ve not yet reached any conclusions from our business-review process,” said Michael DuVally, a spokesman for the New York-based bank.

 

 

 

 

 

 

via ZeroHedge News http://bit.ly/2RGoCwB Tyler Durden

Authored by John Rubino via DollarCollapse.com,

The key insight of the Austrian School of Economics (maybe the key insight of ALL economics) is that the amount you borrow matters, but so does the use to which you put the money.

A case in point is US corporate debt, which has changed structurally lately in very scary ways. The short version of the story is that after the US cut interest rates to historically low levels to keep the Great Recession from swapping it’s capital R for a capital D, public companies figured out that they could borrow money for less than their stocks’ dividend yield, use the proceeds to buy back their outstanding shares, and generate free cash flow in the process. And – a nice added perk – the increased demand pushed their share price up and landed their CEOs even bigger year-end bonuses.

So that’s what they did, on an epic scale.

But – recall the Austrian School insight – the result was soaring debt without any new productive assets to offset the cost.

Generally speaking, debt rising faster than operating income equals diminished creditworthiness. So all that borrowing has produced several trillion dollars of debt that’s just one step above junk. Here’s an excerpt from money manager Louis Gave’s take on the subject.

The Size of Corporate Debt One Rung Above Junk Has Never Been Greater, Warns Louis Gave

Louis Gave at Gavekal Research says the greatest source of potential instability in the years ahead lies with the massive growth of the U.S. corporate debt market, particularly at the BBB-rated (near junk) level.

Gave recently told FS Insider that it has far outpaced the economy and could be due for a reset during the next downturn, which is increasingly becoming a concern by other strategists.

When it comes to potential trouble spots brewing in the financial markets or global economy, Gave said “if you ask a French client, they tend to point a finger at Italy. If you ask Italian clients, they point a finger at Deutsche Bank; and if you ask German clients, they point a finger at France. When I talk to my U.S. clients, most of them point a finger at China, which they see as having unsustainable high levels of debt and is an accident waiting to happen.”

However, Gave sees an even source of potential problems since, as he points out, the “size of corporate debt one rung above junk has never been greater” (see below).

The challenge today, Gave said, “is that part of the massive growth we’ve seen in the U.S. corporate bond market has really taken place in the BBB space. And so, if you start seeing an economic downturn (and the usual type of downgrades that occur in a downturn), then all of a sudden you have investment grade that becomes non-investment grade.”

Gave worries this could send shock waves through the financial markets since U.S. corporate debt is widely held by pension funds, investment banks, and large institutions all around the globe.

“There are real questions about all the energy debt that’s being issued by a lot of negative cash flow companies in the energy space,” he said, which also leads to questions about industrial, auto and real estate debt.

Gave asked listeners whether all this growth in debt has “funded the purchase of assets that allow the servicing of the debt and then the reimbursement of the debt or has this growth really funded a massive rise in share buybacks and financial engineering?” Gave said if the answer is the latter it would signify that our balance sheets are far more stretched out than they have been in previous cycles.

To sum up, hundreds of US companies are about to find their bond ratings cut to junk. They’ll then have to pay way up to refinance their debts (or in some cases to make payroll), setting off a death spiral that, if the history of past debt binges is any indication, will end with mass bankruptcies.

And as Gave notes, a ton of these bonds reside in the very same pension funds that are already due to implode in the next recession.

via ZeroHedge News http://bit.ly/2Twr6iU Tyler Durden