iftttwall

Over the weekend, when discussing the biggest “conundrum” in the markets, namely the all time high prints in the S&P coupled with record outflows from equities…

… quoted SocGen, who in turn paraphrased us, as saying that “we are currently facing a conundrum. Despite the S&P 500 rising 24% ytd to record-high levels in recent days, we have yet to see any signs of exuberance. Indeed, both the positioning and market sentiment indicators do not seem to point to excess complacency.”

While there was much more in the linked discussion of what is behind this paradox of constant outflows yet consistent all time highs, as part of its 2020 year ahead outlook, SocGen had an especially interesting tangent on how central banks have corrupted markets, namely how we now live in a world where equities are behaving like bonds, and are purchased for current income (dividends) while bonds are now acting like equities, and are being bought for capital appreciation (see the doubling in price of Austria’s 100 year bonds earlier this year).

Commenting on this inversion, SocGen’s Alain Bokobza writes that “the universe of negative-yielding bonds currently stands at $12tn, a level we have never seen at this stage of the economic cycle… This configuration is pushing investors to search for yield, changing the nature of assets.”

For insightful lessons on this, SocGen looks to Japan where as JGB yields moved deeper into negative territory, the French bank’s allocation framework called for a more neutral stance on sovereign bonds, while favoring the equity complex.

In a way, investing in equities in an environment characterised by very low sovereign bond yields allows investors to collect the combined dividend and buyback yield.

At this point, the risk of continued Japanification of DM yield curves as we wait for renewed signs of slowdown which are inevitable with China’s credit impulse paralyzed – especially US Treasuries – is pushing investors into riskier assets, shaping global portfolios as barbells.

Looked at from the perspective of Treasury yield, i.e., the Fed model, SocGen writes that “the cushion from dividends and buybacks looks attractive.” And with the S&P 500 dividend and buyback yield is at 5.3%, vs the 10y UST’s yield of 1.8%: the spread of 3.5% is, for now, acting like a support for the S&P 500.

Incidentally, the fact that the dividend/buyback yield is so much higher than the 10Y bond yield, is also the main reason why so many companies engage in stock buybacks, which would be a successful capital allocation exercise, if it wasn’t done at the expense of aggressively leveraging the company without getting some future cash flow upside in the process.

And speaking og buybacks, there has been a massive wave of share buybacks over the past two years, with 2019 set to eclipse the record buybacks executed in 2018 (there may be a modest drop in announced buybacks in 2019 vs the prior year). As of 1 September 2019, S&P 500 companies have repurchased $829bn in stocks over the past 12 months, financed either through debt or repatriated cash. But mostly through debt.

This is an issue because as SocGen states, some time in 2020 the market will start to focus more on the link between buybacks and debt, at which point the jig will be up and the single biggest buyer of stocks since the financial crisis, amounting to over $15 trillion in cumulative buybacks…

… will be gone.

In this context, perhaps the most important question for future returns is which sector(s) might struggle to initiate debt-financed share repurchases because they are already heavily leveraged? SocGen believes buybacks in the consumer discretionary sector could be at risk, given the current median leverage ratio of 5.91x and net buyback yield of 3.6% (gross buyback yield of 3.8%), even more so as stock repurchase programmes were rather widespread within the sector. In fact, 83% of corporates in the sector had initiated buybacks ytd as of September, in line with the index as a whole, while the top 10 buyback programs accounted for just 64% of the sector total.  As such, being short consumer discretionary versus consumer staples would be a good way to protect against the leverage story within the US equity markets, as well as ahead of further rate cuts from the Fed.

Via SchiffGold.com,

America’s economy is built on consumption. Average Americans have been pushing the US economy along, spending money they don’t have. But as we’ve reported, there are signals that the credit cards might be close to maxed out. Now there appears to be another warning sign – the wealthy are reining in their spending.

In August, Spencer Schiff wrote an article noting the importance of consumer spending to the US economy and the consequences that will follow if Americans suddenly tighten up their wallets. The mainstream has also taken notice. During a CNBC interview, economist Jim O’Neill said the US economy is becoming “riskily dependent” on the “overleveraged consumer.”

The economy’s strength … depends so much on consumption, which is fine unless financial conditions tighten unexpectedly when a lot of indebted US consumers won’t be able to afford to keep up the consumption their doing.”

Well, it looks like the rich are tightening their belts.

According to a report at Yahoo Finance, spending by the rich has slowed over the last year. This could be an early warning of a recession. Spending by the top 10% of households by income makes up nearly half of overall consumption in the US.

According to an analysis of Federal Reserve data by Moody’s Analytics, spending by the top 10% fell by 1% in the second quarter from the same period in 2018. And a four-quarter average of outlays by the high earners has slipped on an annual basis the past three quarters, marking the first such declines since the Great Recession of 2007-09, according to the Yahoo Finance report. Mark Zandi, chief economist at Moody’s Analytics, said this could be a big problem for the US economy.

High-income consumers have been the Atlas holding up the US and global economies. But they appear tired, and if they founder, so too will the economic expansion.”

Overall consumer spending is still increasing, but that pace has slowed as well. According to Yahoo Finance, household outlays increased 2.9% at an annual rate in the third quarter, down from a robust 4.6% early in the year.

CNBC noted the slowdown in spending by the wealthy a few months ago. Luxury real estate is having its worst year since the financial crisis. Sales at art auctions are down for the first time in years. Retailers that cater to the wealthy are also struggling. Tiffany’s revenue fell 4% in the Americas in the second quarter.  Barney’s filed for bankruptcy. And Nordstrom has posted three quarterly revenue declines.

According to CNBC,  “recent data suggest that the US wealthy are beginning to shut their wallets.”

Meanwhile, “savings of the rich has also exploded, more than doubling over the past two years, suggesting that the wealthy are hoarding cash.”

There are a number of reasons that the wealthy have tightened their wallets, according to the Yahoo Finance report.

• Worry about the stock market. Although it has hit record highs in recent weeks, the broader market is only up 6.2% since September 2018 after the big drop last fall. Many fear the market is overvalued and primed for a crash.

• Home prices aren’t rising at the same rate they were. Prices of the top-third, most expensive homes rose just 3.1% in October from a year earlier. Inventories of luxury homes have increased and sales have tanked. This could be a sign housing bubble 2.0 has popped.

• Wage growth for the wealthy has stagnated.

• Trump’s tax cuts eliminated many deductions and increased the tax burden on many wealthy Americans.

There is also seems to be a general some economic unease among the rich and a sense that it’s time to tighten their belts.

It would make sense that a spending slowdown would start with the wealthy since they tend to be more attuned to what’s going on in the economy. They didn’t get rich by being dumb with their money. The fact that the rich have shifted from spending to saving could be a canary in the coal mine.

In what is astoundingly awkward and embarrassing timing, pro-Haftar LNA forces besieging Tripoli have now admitted they ‘mistakenly’ shot down a US military drone over the Libyan capital last week.

The incident occurred just as Trump admin officials were holding an unprecedented series of meetings with an official representing Gen. Khalifa Haftar’s political team named Aref al-Nayed even though Washington still gives official recognition to the UN-backed GNA government in Tripoli (Trump began praising Haftar, however, last April).

Over the weekend US Africa Command (AFRICOM) stated in a press release that an unarmed, likely a surveillance drone was lost over Tripoli last Thursday [Nov. 21]. However at the time it remained a mystery as to how the some $16 million drone was downed, with the Pentagon giving very few details other than to say the incident remains under investigation.

And now mystery solved:

A senior official in the LNA’s general command said they mistook the U.S. drone for a Turkish-made drone used by the Tripoli-allied militias. The LNA also downed an Italian drone southeast of Tripoli in recent days.

Pro-Haftar forces have essentially imposed a ‘No Fly Zone’ over Tripoli as their air power, which includes Russian MiG fighters and their own drone arsenal, is considered superior to that the the besieged Government of National Accord.

According to the Associated Press the LNA apologized for downing the American drone and has “agreed with the Americans to coordinate their operations over Tripoli and its surrounding areas to avoid similar incidents in the future.”

“The LNA fighters did not share photographs of the U.S. drone online as they usually do when they shoot down drones, including the Italian one last week,” another official was quoted by the AP as saying.

Oil-rich Libya was thrown into civil war nearly a decade ago when NATO forces overthrew Moammar Gadhafi. It’s been another great blunder in Western military forces who’ve spent the last several decades crusading around the Middle East, sparking wars across the continent. 

The latest outbreak of fighting has been based in Tripoli. Since about 2015, Libya has seen its government splintered into two, one based in Tripoli and the other in the country’s east. The eastern government forces have been attempting to recapture Tripoli since April, and fierce fighting in the capital continues into the late year.  

The other embarrassing contradiction in this latest drone shoot down incident is that Khalifa Haftar holds American citizenship (after his over two decades in exile in D.C. during the latter part of Gadhafi’s rule). So basically a dual US citizen is commanding forces that just shot down a US drone. 

Authored by Simon Black via SovereignMan.com,

Late last week, Amazon founder Jeff Bezos gave away nearly $100 million to more than a dozen charities across the United States.

It would take the average person more than 1,000 centuries to accumulate that much money. Yet Bezos gave it away in a single day.

And it’s not like that was the first time he’d ever given to charity. Bezos has already donated billions of dollars to other philanthropic endeavors.

You’d think that such generosity would be appreciated. Yet when Forbes announced Bezos’ gift last week, Twitter user punkassbamboo complained:

“A whopping .09% of his net worth. Thanks so much Jeff.”

This is classic Bolshevik mentality: punkassbamboo and his fellow Bolsheviks see themselves as victims… and everyone else as the enemy. And no matter what the enemy does, it’s never enough.

So despite giving away $98.5 million to help the homeless, Bezos is just a stingy billionaire asshole.

The legions of Bolsheviks like punkassbamboo, of course, have absolutely no trouble finding sympathetic politicians who threaten to confiscate the wealth of businesses, entrepreneurs, and anyone who has achieved success.

Every single Bolshevik politician plays the same tune: rich people are selfish, corporations are bad, and there’s too much wealth concentrated in the hands of the few.

Bernie Sanders constantly tells his supporters that the 3 wealthiest people in the country have more money than the bottom 50%.

He’s right; the wealth gap in the United States hasn’t been this extreme since right before the Great Depression.

And these Bolsheviks feel compelled to ‘fix’ this.

US Presidential candidate Cory Booker, for example, absurdly proposes to tax unrealized capital gains, while Elizabeth Warren wants a wealth tax.

They’re both remarkably stupid ideas, but they’re essentially different variations of the same concept: confiscating legitimately earned wealth.

And this is the part that I find truly incredible– because, when you think about it, there are actually TWO ways of closing the wealth gap.

1. You could either make wealthy people less wealthy.

2. Or you can help poor people become less poor.

But they never, ever once, have considered the second approach. They ONLY focus on the first one. Raise taxes on rich people. Raise taxes on corporations.

Wealthy people are wealthy for a reason: they’ve either started a successful business, or they have incredible financial acumen.

Yet the Bolsheviks never say, “Let’s make it easier for punkassbamboo to build relevant skills, raise capital, start a business, and become a successful millionaire entrepreneur.”

But do you know who has done that? Jeff Bezos.

Amazon is such a massive economic force that it has spawned entire industries of people who earn a good living providing services and selling products through the platform.

Bezos has made it possible for anyone with zero skills, poor education, and almost no capital, to start a business selling products on Amazon.

There are thousands of websites and YouTube videos to learn how to do this FOR FREE. And Bezos has made it so easy that a budding Amazon entrepreneur can be up and running in a matter of hours.

And the amount that you can earn online is substantial.

I’ve mentored dozens of Amazon business owners at my annual entrepreneurship workshop–

One former student was selling more than $20 million of products per year with just one employee, and others became so successful that they sold their Amazon businesses for several million dollars.

None of these entrepreneurs came from money. They built successful businesses from scratch by educating themselves and capitalizing on the opportunity that Jeff Bezos created.

Something tells me that no one has ever become a millionaire because of Elizabeth Warren… and no one ever will.

Elizabeth Warren lists more than 50 detailed plans on her website. They include things like breaking up tech companies, taxing wealthy people, keeping low-paying manufacturing jobs in the US, etc.

But not a single plan focuses on closing the wealth gap by making it easier for people like punkassbamboo to become successful.

Frankly that doesn’t fit the Bolshevik agenda.

Success has a funny way of building someone’s confidence and independence. When you work hard and become successful, you begin to see yourself achieving even more.

But Bolshevik politicians depend on their supporters seeing themselves as victims, not as champions.

Their power comes from keeping people angry, afraid, and downtrodden.

So they’ll never aim to close the wealth gap by helping poor people become successful.

With interest (even among Democrats) in the impeachment process sliding, the House Judiciary Committee is set to take over the impeachment probe of President Trump next week, scheduling a Dec. 4 hearing.

As The Hill reports, behind Judiciary Chairman Jerrold Nadler (D-N.Y.), the committee will hear from legal scholars as Democrats weigh whether the evidence turned up in their weeks-long impeachment inquiry warrants the drafting of articles aimed at removing the president from office.

The hearing, scheduled for next Wednesday, will focus on the definition of an impeachable offense and the formal application of the impeachment process. The panel will invite White House lawyers to attend and participate.

Ahead of the hearing, Nadler wrote to Trump requesting his participation – or that of White House counsel – as part of ensuring “a fair and informative process.”

Nadler announces first Judiciary Committee impeachment hearing and tells Trump he can participate. https://t.co/WsVyodGwSj pic.twitter.com/mgUEmD3Efo

— Dan Friedman (@dfriedman33) November 26, 2019

And onwards the circus goes…

Via SaraACarter.com,

“Adam Schiff has been my congressman since 2012. He became my congressman through the redistricting process,” said Jennifer Barbosa, an independent who is challenging Rep. Adam Schiff (D-CA). Schiff is wasting federal funds trying to impeach President Trump, while his state continues to suffer from an unprecedented homelessness crisis, pointed Barbosa.

“Since he became my congressman he has not presented any legislation that’s become law. In terms of homelessness, what he’s done is he’s basically rubber-stamped Maxine Waters’ bill to deal with homelessness, and her bill essentially replicated the same failed policies that [L.A.] Mayor [Eric] Garcetti has implemented in our city over the past few years.”

“We know they’re not working,” Barbosa continued.

“So, what we need to do in terms of homelessness… we need to stop allocating federal funds for affordable housing which costs $500,000-700,000 per unit and really focus on mental health services for the people who are living on the street.”

When in U.S. Congress in @AdamSchiff’s place, I promise to NOT commence $70 million doomed-to-fail Impeachment Hearings less than 1 year before a Presidential Election or 3 weeks before a November 21 government shutdown.
That’s not what representatives are elected or paid to do. pic.twitter.com/S2hFI8XW7V

— Barbosa for Congress (@TeamJenBarbosa) November 6, 2019