iftttwall

We have previously documented how, with the fourth quarter earnings season almost completed, Q4 EPS are poised to drop by 3.3% Y/Y, making this the third consecutive quarter of declining year over year earnings, in other words an earnings recession and a half.

And with this quarter’s earnings almost done, attention shifts to Q1 2016 where things are going from great to bad to absolutely abysmal. Here, it appears that Wall Street was just a “tad overoptimistic” on first quarter’s earnings, as consensus has imploded from a +5% expected increase in YoY EPS as of September 25, to a -7.4% plunge according to Factset (and even worse according to Bloomberg).

The companies have validated this implosion in earnings: for Q1 88 companies have issued negative EPS guidance and 22 companies have issued positive EPS guidance. Additionally it’s not just energy: in Q1 the following sectors are expected to post annual EPS declines: Energy (-92.8%), Materials (-19.5%), Industrials (-10.9%), Info Tech (-7.3%), Financials (-4.3%), Consumer Staples (-2.6%), and Utilities (-0.2%). In fact, only three of ten sectors are expected to see their EPS rise: Healthcare, Consumer Discretionary and Telecom Services.

SocGen’s Andrew Lapthorne had some thoughts on this last week saying that “forward earnings expectations are now falling fast, so whilst MSCI World has fallen by around 15% since May last year, 2016 EPS levels are now down 12% over the same period. The poor profit reality is now catching up with weak equity prices.”

What seems to be happening is that the Q4 reporting season is leading to significant cuts to 2016 expectations. Whilst similar effects occurred last year, this is somewhat of a departure from the past when year-ahead forecasts tended to be cut steadily throughout the year. It would appear the perennial bullishness in forward consensus numbers is so out of kilter with economic reality that companies are moving earlier to correct the anomaly to the extent the consensus growth forecast for this year is already fast approaching zero.

 

Whilst a big part of the downgrade is via the Oil & Gas sector, [there are] big cuts in an ever wider selection of stocks and sectors. Global 2016 EPS forecasts were cut by 3.6% in over the last four weeks or so: we make that the worst monthly cuts to forward estimates since early 2009.

But while near-term forward EPS expectations have been crashing, for now what is keeping full year 2016 EPS up (which have tumbled from +4.3% at the start of the year to just 1.9%) is a hockey stick in Q3 and Q4 EPS expectations that would make the butt of all forecast jokes, the IMF, proud:  somehow consensus expects the growth rates for Q3 2016 and Q4 2016 to be +4.7% and +9.4%.

It’s not going to happen.

However, what caught our attention is not the ongoing slaughter in corporate profitability which in any other world would be a sufficient condition to confirm an economic recession; it is what Warren Buffett said earlier about non-GAAP earnings which he blasted in his annual letter:

… it has become common for managers to tell their owners to ignore certain expense items that are all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.” If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?

 

Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring “earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors…. When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak.

We also decided to not play part in this charade, and took a look at S&P500 earnings on a GAAP and non-GAAP basis. After all, there are those who still say the market is cheap despite what is an earnings bloodbath around the globe.

And indeed, even the unprecedented decline in earnings, non-GAAP 2015 EPS for the S&P500 are poised to print 118, which at an S&P of 1940 implies a P/E multiple of 16.5x. Hardly exorbitant.

And then one looks at the actual, GAAP earnings. What one finds is absolutely shocking.

If using I/B/E/S GAAP earnings, which exclude the barrage of pro-forma write offs, addbacks, “non-recurring items” and countless other “misleading numbers that can deceive investors”, what one gets is a true shocker: instead of 118 in LTM EPS for the S&P 500 (shown in red in the chart below) the true, Warren Buffett-approved number (shown in blue in the chart bellow) is a paltry 91.5! This is also the lowest S&P500 GAAP earnings per share since 2010.

Needless to say, a GAAP P/E above 21 is the highest since the financial crisis.

So what is going on here? The chart below showing the amount of EPS “writeoffs” and pro-forma adjustments should explain it. In 2015, 26.5 of the total non-GAAP in S&P earnings, is the result of accounting gimmicks.

Just so there is no confusion: the GAAP to non-GAAP adjustment has nothing to do with the overall deterioration in corporate revenues and declining profitability. The two are parallel, because while both non-GAAP and GAAP EPS are clearly declining, what Wall Street is doing is using every possible contrivance to make the descent appear far less disastrous.

Meanwhile, the addbacks to the S&P’s EPS are now the highest since the 2008 financial crisis, and in nominal dollar terms, are already an all time high. Consider that the market cap of the S&P is $17.7 trillion – this means that using the non-GAAP P/E of 16.5x one gets S&P 2015 earnings of $1.1 trillion, while real, actual earnings amount to just $830 billion. In other words, a record quarter of a trillion dollars in S&P “earnings” is in the form of pro-forma addbacks and other writeoffs which are only considered earnings in the most ridiculous of Wall Street worlds, one which even Warren Buffett is mocking. 

This also means that 22.5% of the S&P “value” is the result of “misleading numbers that can deceive investors” in the words of Warren Buffett.

Incidentally, the last time the difference between GAAP and non-GAAP was this vast, the financial system collapsed and had to be rebooted with trillions in taxpayer bailouts at which point GAAP and non-GAAP were roughly identical.

So what does this all mean?

Simple: if using GAAP earnings, and applying the market’s already generous 16.5x non-GAAP P/E, one gets a fair value of the S&P 500 of 1,500, or 25% lower than the recent prints in the S&P 500.

Finally, keep in mind that all of this also excludes the reality that futures earnings, both GAAP and non-GAAP, in Q3 and Q4 are about to be reduced drastically lower, further reducing the E in P/E, and dragging the overall market lower.

What can possibly short-circuit this positive feedback loop which leads to ever lower earnings, and increasingly lower prices? Two years ago we would have said another major central bank intervention or trillions in new Chinese loans. However, with both of these loopholes largely played out – China’s debt/GDP of 350% means that the entire nation is on the brink of a Minsky Moment collapse at any, well, moment, while recent central bank intervention have only led to even greater market volatility – this time around we don’t know what the true answer is. In fact, it just may be that this time around the market will actually have to crash, like it did in 2008 when the GAAP to non-GAAP spread was just as vast, for the great Wall Street “phony earnings” game to start from scratch.

via Zero Hedge http://ift.tt/1pg7akP Tyler Durden

Submitted by Claire Bernish via TheAntiMedia.org,

So-called political pundits are an ubiquitous sight on mainstream news, particularly during the run-up to a presidential campaign — but their ties to the candidates they analyze remain obfuscated, downplayed, or altogether left out by host networks.

As The Intercept’s Lee Fang reported, “Several consultants who work at firms retained by Hillary Clinton’s campaign and her affiliated Super PACs appear regularly on the major television networks, frequently touting Clinton.”

This cozy bedfellow relationship might not be an issue if the extent of their involvement with the candidates’ campaigns were forthrightly revealed by the networks. Instead, the failure by omission not only muddies the line between impartial analysis and campaign propaganda, it also marks a failure of journalistic integrity.

“Journalism 101 teaches that reporters and TV news hosts must properly identify their sources and analysts,” Ithaca College associate professor of journalism, Jeff Cohen, told Fang. The Intercept’s requests for comment from NBC, CBS, CNN, and ABC News were not answered.

Precision Strategies, co-founded by Stephanie Cutter, has been hired by Hillary Clinton’s campaign, which has paid the firm $120,049 since June 2015 to perform “digital consulting.” Cutter, meanwhile, made appearances on multiple networks without so much as a hint of her current association with Clinton’s campaign. Instead, she is often introduced as a former campaign official for President Obama. Such association with a campaign doesn’t exactly lend itself to unbiased opinion.

“I think that Hillary Clinton has done everything right,” Cutter told NBC’s Meet the Press prior to the first presidential primaries on January 17. “She has run a good campaign. She has outperformed in debates. She’s raised money. She’s got a great ground game.”

It stands to reason the viewing audience had no knowledge of Cutter’s firm’s affiliation with Clinton’s campaign — and her virtual unavoidable bias in such a proclamation. But had they been aware, perhaps viewers would have been better positioned to judge for themselves whether or not that statement rang true.

As Fang noted, Cutter had previously appeared on Meet the Press, also without any indication by hosts of her association with the Clinton campaign — but also proffering similarly pro-Hillary statements. On ABC News’ This Week, Cutter appeared as a Clinton “supporter,” and on CNN, she was called a “Democratic strategist” — but those networks failed to divulge the direct involvement of Precision Strategies with Clinton’s campaign.

Maria Cardona, who contributes to CNN, has long served as a partner with lobbying firm, the Dewey Square Group. Dewey Square partners have not only contributed and fundraised for the Clinton campaign, the firm has been paid for consulting work for Hillary’s Super PACs. Cardona, Fang noted, contributed the individual maximum to the Clinton campaign — and is a DNC superdelegate who “pledged support for Clinton last year, before any of the primary elections.”

Again, Cardona is most often introduced or presents herself on CNN’s various networks as “a neutral Democratic strategist or CNN contributor,” and occasionally as a Clinton “supporter” — but not once, The Intercept found, as a direct campaign contributor or as a Dewey Square paid campaign consultant.

Hari Sevugan and Lynda Tran are directly involved, through 270 Strategies, with Hillary Clinton’s campaign, as well. Tran co-founded 270 Strategies, whose website proudly boasts of its consulting advice to her campaign; and, as Fang explained, the firm was paid $75,200 by one of Hillary’s Super PACs — and $301,621 by a second. Sevugan and Tran make regular appearances on MSNBC and CBS News — without any divulgement about the nature of their affiliation with the Hillary camp, of course — where they often downplay Senator Bernie Sanders legitimate challenges to Clinton’s popularity.

Do you still think the game isn’t rigged?

After Fang’s requests for comment from both CBS and 270 Strategies went unanswered, Tran’s appearance on CBS News on Saturday came with an even more telling introduction than usual:

“Before we start, we should disclose that several employees of 270 Strategies do some work for the Hillary Clinton campaign, however, Lynda, you do not.”

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

Three days ago in “Canary, Meet Coal Mine: These Are The Tranches Where The CLO 2.0 Meltdown Begins,” we revealed precisely where the rot is starting to show in the CLO market which, you’re reminded, is starting to unravel amid a string of downgrades in HY energy and a general aversion to junk as the US heads into a default cycle.

Certain buckets have been hit harder than others with the single-Bs plunging nearly 21% and the BBs dropping 9.2%. Broadly speaking, new issue spreads for BBs and Bs have blown out by 225 bps and 350 bps, respectively over the past 12 months and both S&P and Moody’s recently announced their first downgrades of post-crisis US CLO tranches.

In the crosshairs are deals from Silvermine that have double-digit exposure to US O&G.

As we noted on Thursday, there are other factors pressuring the market including the 5% risk retention rule, which requires managers to retain a stake in the first-loss tranche. That could be a game changer for managers without extremely deep pockets and could well weigh further on supply, which is already collapsing.

Of course if you think you’ve got a nose for picking credits there may be an opportunity for you in the equity tranche, Morgan Stanley thinks. “We reiterate our view that the levels of distress in the US market may create ‘option-like’ payoffs in CLO equity in the secondary market, especially in deals by managers who are better ‘credit pickers,’” the bank wrote.

Well now, Citi is out with a fresh look at the space and apparently, they too think there may be some opportunities amid the turmoil. There are some useful observations in Citi’s note about forced Mezz selling amid margin calls in 2.0 BBs and we’ll profile that later this evening, but for now consider the following screengrab from the title of Citi’s new note and the excerpt from a Retuers piece out last month.

From Reuters: “Citigroup retained its market-leading position at the top of the US Collateralized Loan Obligation (CLO) arranger league table in 2015 for volume and deal count.”

In case the implication there isn’t clear enough, allow us to spell it out. First, have a look at CLO 2.0 mezz performance:

Clearly, that’s the absolute last place you want to be right now and yet the biggest CLO arranger on Wall Street is apparently suggesting that these tranches are so enticing, that the bank’s structured credit team is having a hard time coming to terms with the fact that they are about to get “even more attractive.”

Trading accordingly.

via Zero Hedge http://ift.tt/1RvJXE8 Tyler Durden

Submitted by Michael Lebowitz via 720Global.com,

At 720 Global we follow a large number of fundamental and macroeconomic indicators to help forecast the markets. In addition we also monitor technical indicators to gain further confidence when making market forecasts and assessing the likelihood of outcomes. Although we do not spend much time writing about technical analysis, we view it as an important tool in evaluating human investment behavior.  When technical indicators line up with the fundamental metrics, the reinforcement provides a greater level of confidence in the analysis.

In this article we highlight a simple technical indicator that has proven prescient over the last 15 years.  Currently, this indicator supports much that we have posited regarding equity valuations and what they portend for the future direction of prices. 

Moving Averages
Moving averages are the average price at which an index or security has traded over the last number of days, weeks, months or even years. For instance, today’s 20­day moving average for the S&P 500 is its average closing price over the prior 20 days. Many investors use moving averages to help gauge where a security or index may encounter support or resistance. Due to the widespread use of moving averagesit is not uncommon to see prices gravitate toward moving averages.

Another way investors employ moving averages is to compare them across different time frames. For example, an investor may compare the 20­day moving average to the 50­day moving average. It is said that when a shorter term moving average is higher than a longer term moving average the underlying stock or index has positive momentum and vice versa. Therefore, when shortterm moving averages crossto the upside or the downside of longer term moving averagesit can signal an inflection point where momentum has changed direction.

20/10
The indicator that is currently catching our attention, and may be worthy of your attention, is a comparison of the 10­month and 20­month moving averages on the monthly S&P 500 index. Monthly moving averages are similar to the aforementioned 20­day example but instead of daily closing prices, monthly closing prices are used.

The chart below shows the monthly price of the S&P 500 since 1999 in blue. It is flanked by the 10­ and 20­month moving averages in green and red respectively. Note that when the 10­month moving average rises above the 20­month moving average, it has signaled the early stages of a sustained rally in the S&P 500. Conversely when the 10­month moving average falls below the 20­month moving average it has signaled a prolonged decline.

S&P 500 and 10­ and 20­ Month Moving Averages

In the following graph we drew circles around the 3 instances that the 10­month moving average crossed below the 20­month moving average and “positive momentum stalled”. Alternatively boxes are used to show when the opposite happened and “negative momentum stalled”.

S&P 500 and 10­ and 20­ Month Moving Averages – Crosses Highlighted

The graph below enlarges the past year to show that as of late February 2016 the 10­month moving average dipped below the 20­month moving average – a potential indication of “stalled positive momentum”.   

S&P 500 and 10­ and 20­ Month Moving Averages – Prior Year

Important Disclosure: The moving averages shown above are based on the value of the index in late­February 2016. The crossing of the two moving averages will not be “official” until the end of the month. By our calculations, a closing price of 1993 or lower on the S&P 500 on February 29th would cause the 10­month moving average to drop below the 20­month moving average.

[ZH – here is the update as of Friday's close]

Summary
Some investors are pure technicians and only use technical analysis to allocate capital. Others disregard it entirely; swearing it off as voodoo. As chart patterns are merely a reflection of capital flows resulting from human decision making, we believe technical analysis offers useful insight and can be helpful in gaining further conviction around an investment idea.

If, by the end of February, there is indeed a crossover of the moving averages, we will have a higher level of confidence that the near­constant march higher in prices since 2009 has reversed trend.  If history proves prophetic, buckle up. Stock prices may be in for a precipitous decline.

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

For a long time there was still some skepticism whether Turkey was providing military and other support to members of the Islamic State. As we reported last week, that skepticism was promptly eliminated following the release of transcripts of phone calls that took place between Turkish military officers and Mustafa Demir, the ISIS commander in charge of the Syria-Turkey border.

The transcripts are part of a court case on ISIS at the Ankara 3rd High Criminal Court. “The issues alleged in the case came to light because of an investigation launched following information given by six Turkish citizens whose relatives joined ISIL,” Today’s Zaman reports. “Upon the application by the relatives, monitoring of the communications of 19 people started, and a prosecutor named Derda Gökmen reportedly filed a claim against 27 suspects.”

The transcripts are as follows:

Date: Nov. 25, 2014; 8:26 p.m.

A.A.: Was that you, the ones with a torch?
Mustafa: Well, with a little torch, where are you big brother? At the place where I told you to be?
A.A.: Yeah. We also saw you, your men…
Mustafa: Is it possible for you to arrange that I talk with the commander here, regarding the business here? What if we could establish a contact here as we helped you…
A.A.: Okay. If there are any needs [as far as your request is concerned], [tell them] to inform me here.
Mustafa: If it will be enough to contact you [to settle the issue], no problem.
A.A.: I’ll pass this now. I have two military posts [at the border] there. If worse comes to worst, I’ll tell that to the commander of the station and have him take a look…

**** ****

Time: 7:12 p.m.

Communication made by the telephone registered in the name of A.B.

A.B.: We’re where you gave [him] the vehicle, we are in the mine [field]. We’ve put on a light. We have stuff; come here from that side, the men are here…
Mustafa: Okay, big brother, [I’m] coming.
A.B.: Come urgently; I’m in the mine [field] with a torch. Come running.
Mustafa: Well, big brother, is it the place where I gave First Lieutenant Burak a car?
A.B.: Yeah, just a little further down from that place. Our two vehicles are on the Turkish side [of the border].
Mustafa: Okay.
A.B.: We are also in the mine.
Mustafa: I’ll right be there, big brother.

And while there was at least some mystery whether Turkey was supplying ISIS with weapons, supplies and others goods and services in exchange for “ISIS oil” there has never been any doubt as to who provides Turkey with its own weapons. The following disclosure by the US Department of Defense revealing a $683 million procurement order by Turkey for BLU-109 “bunker buster” bombs makes sure of that:

Contracts

 

Press Operations

 

Release No: CR-036-16
February 26, 2016

 

Ellwood National Forge Co., Irvine, Pennsylvania (W52P1J-16-D-0041); and General Dynamics Ordnance and Tactical Systems, Garland, Texas (W52P1J-16-D-0042), were awarded a $682,900,000 firm-fixed-price, foreign military sales contract (Turkey) for BLU-109 penetrator bomb bodies and components.  Bids were solicited via the Internet with three received, with an estimated completion date of Dec. 31, 2020. Funding and work location will be determined with each order. Army Contracting Command, Rock Island Arsenal, Illinois, is the contracting activity.

Yes, the “war against ISIS” in which Turkey both drops US-made “bunker buster” bombs on the Kurdish opponents of Turkey’s “president for life” Erdogan, and provides weapons to ISIS, sure is profitable… to US corporations.

via Zero Hedge http://ift.tt/1n5iw9l Tyler Durden

via Zero Hedge http://ift.tt/1QkgKNm williambanzai7

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

As the Apple vs. FBI battle rages in the court system and throughout the halls of Congress, Obama decides to do what he does best. Using “his pen” to make consequential decisions unilaterally.

Just another day in the American banana republic.

The New York Times reports:

WASHINGTON — The Obama administration is on the verge of permitting the National Security Agency to share more of the private communications it intercepts with other American intelligence agencies without first applying any privacy protections to them, according to officials familiar with the deliberations.

 

The change would relax longstanding restrictions on access to the contents of the phone calls and email the security agency vacuums up around the world, including bulk collection of satellite transmissions, communications between foreigners as they cross network switches in the United States, and messages acquired overseas or provided by allies.

 

The idea is to let more experts across American intelligence gain direct access to unprocessed information, increasing the chances that they will recognize any possible nuggets of value. That also means more officials will be looking at private messages — not only foreigners’ phone calls and emails that have not yet had irrelevant personal information screened out, but also communications to, from, or about Americans that the N.S.A.’s foreign intelligence programs swept in incidentally. 

 

Robert S. Litt, the general counsel in the office of the Director of National Intelligence, said that the administration had developed and was fine-tuning what is now a 21-page draft set of procedures to permit the sharing.

 

Until now, National Security Agency analysts have filtered the surveillance information for the rest of the government. They search and evaluate the information and pass only the portions of phone calls or email that they decide is pertinent on to colleagues at the Central Intelligence Agency, the Federal Bureau of Investigation and other agencies. And before doing so, the N.S.A. takes steps to mask the names and any irrelevant information about innocent Americans.

 

The new system would permit analysts at other intelligence agencies to obtain direct access to raw information from the N.S.A.’s surveillance to evaluate for themselves. If they pull out phone calls or email to use for their own agency’s work, they would apply the privacy protections masking innocent Americans’ information — a process known as “minimization” — at that stage, Mr. Litt said.

 

Executive branch officials have been developing the new framework and system for years. President George W. Bush set the change in motion through a little-noticed line in a 2008 executive order, and the Obama administration has been quietly developing a framework for how to carry it out since taking office in 2009.

The executive branch can change its own rules without going to Congress or a judge for permission because the data comes from surveillance methods that lawmakers did not include in the main law that governs national security wiretapping, the Foreign Intelligence Surveillance Act, or FISA.

 

FISA covers a narrow band of surveillance: the collection of domestic or international communications from a wire on American soil, leaving most of what the N.S.A. does uncovered. In the absence of statutory regulation, the agency’s other surveillance programs are governed by rules the White House sets under a Reagan-era directive called Executive Order 12333.

 

Mr. Litt declined to make available a copy of the current draft of the proposed procedures.

 

“Once these procedures are final and approved, they will be made public to the extent consistent with national security,” Mr. Hale said. “It would be premature to draw conclusions about what the procedures will provide or authorize until they are finalized.”

Unbelievable.

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

In his latest letter to investors, Cherry-Coke-sipping Warren Buffett went full fiction-peddle-tard. As the man who perhaps best rode the coat-tails of an ever-increasing wave of American credit expansion exceptionalism (only to come undone in recent times as that game ends), it is no surprise that he explains "for 240 years it’s been a terrible mistake to bet against America, and now is no time to start." We don't mean to rain on his parade too much, but the following charts suggest "nothing lasts forever" and time is ticking.

For a man who runs a massive, highly-levered portfolio of assets exposed to 'Murica, it is hardly surprising Buffett would utter the following:

"For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.

 

America’s golden goose of commerce and innovation will continue to lay more and larger eggs.

 

America’s social security promises will be honored and perhaps made more generous.

 

And, yes, America’s kids will live far better than their parents did."

The trouble is – taking each statement…

Nothing lasts forever…

The World Bank's former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.

"The dominance of the greenback is the root cause of global financial and economic crises," Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. "The solution to this is to replace the national currency with a global currency."

Innovation may be limited by the constant manipulation of government and central banks…

One feature of capitalism that is rarely discussed is the premium placed on cooperation and collaboration. The Darwinian aspect of competition is widely accepted (and rued) as capitalism’s dominant force, but cooperation and collaboration are just as intrinsic to capitalism as competition. Subcontractors must cooperate to assemble a product, suppliers must cooperate to deliver the various components, distributors must cooperate to get the products to retail outlets, employees and managers must cooperate to reach the goals of the organization, and local governments and communities must cooperate with enterprises to maintain the local economy.'

 

Darwin’s understanding of natural selection is often misapplied. In its basic form, natural selection simply means that the world is constantly changing, and organisms must adapt or they will expire. The same is true of individuals, enterprises, governments, cultures and economies. Darwin wrote:"It is not the strongest of the species that survives, or the most intelligent, but the ones most adaptable to change."

 

Ideas, techniques and processes which are better and more productive than previous versions will spread quickly; those who refuse to adapt them will be overtaken by those who do. These new ideas, techniques and processes trigger changes in society and the economy that are often difficult to predict.

 

This creates a dilemma: we want more prosperity and wider opportunities for self-cultivation (personal fulfillment), yet we don’t want our security and culture to be disrupted. But we cannot have it both ways. Those who attempt to preserve their power over the social order while reaping the gains of free markets find their power dissolving before their eyes as unintended consequences of technological and social innovations disrupt their mechanisms of control.

 

Yet rejecting free markets also fails to preserve the power structure, for a citizenry denied the opportunity to prosper chafes under a Status Quo that enriches Elites and relegates the masses to stagnation and poverty.

 

The great irony of free-market capitalism is that the only way to establish an enduring security is to embrace innovation and adaptation, the very processes that generate short-term insecurity. Attempting to guarantee security leads to risk being distributed to others, or concentrated within the system itself. When the accumulated risk manifests, the system collapses.

The 2015 annual report from the Social Security Board of Trustees shows that the program’s disability component is in immediate trouble. Data from the latest report show that the disability fund will be depleted as soon as next year and unable to pay full benefits to beneficiaries.

 

This week’s first chart uses that data to show total income, expenditures, and assets in the Social Security Disability Insurance (DI) trust fund going back to 1980. The chart shows that the trust fund has been operating under deficits since 2009, as shown by the decline in the trust fund (green bars) and ever-growing gap between the payments (red line) and receipts (blue line).

 

 

 

 

 

Those deficits have been financed by redeeming nonmarketable government securities that were accumulated over the years when the program was bringing in more revenue than was being paid out. The government spent the surpluses on other government programs and credited the fund with the securities. But because the securities are nonmarketable, the government had to use general federal revenues to “redeem” them once the DI fund started to run deficits in order to cover the difference. With the illusion of the DI trust fund about to disappear, policymakers have no choice but to finally confront the financial imbalance that actually began years ago.

And that means your retirement is going to be 'stolen'…

Given the $42 trillion funding gap in these programs, it’s mathematically impossible for Social Security to continue funding the national debt.

 

This reality puts the US government in rough spot.

 

It’s not like government spending is going down anytime soon; it already takes nearly 100% of tax revenue just to pay mandatory entitlements like Social Security, and interest on the debt.

 

Plus the government itself estimates that the national debt will hit $30 trillion within ten years.

 

Bottom line, they need more money. Lots of it. And there is perhaps no easier pool of cash to ‘borrow’ than Americans’ retirement savings.

 

$7.3 trillion in US IRA accounts is too large for them to ignore.

And finally – if the next generation has a better quality of life than the last, then why is this happening…if you’re a millennial, you’d be forgiven for being disillusioned with the American dream.

As we recently noted, compared to young Americans in 1986, you’re three times as likely to think the American dream is dead and buried. As WaPo notes, "young workers today are significantly more pessimistic about the possibility of success in America than their counterparts were in 1986, according to a new Fusion 2016 Issues poll – a shift that appears to reflect lingering damage from the Great Recession and more than a decade of wage stagnation for typical workers.”

 

 

It appears that time is drawing near as Charles Hugh-Smith recently noted, the mainstream is finally waking up to the future of the American Dream: downward mobility for all but the top 10% of households.

Downward mobility and social defeat lead to social depression. Here are the conditions that characterize social depression:

 

1. High expectations of endless rising prosperity have been instilled in generations of citizens as a birthright.

 

2. Part-time and unemployed people are marginalized, not just financially but socially.

 

3. Widening income/wealth disparity as those in the top 10% pull away from the shrinking middle class.

 

4. A systemic decline in social/economic mobility as it becomes increasingly difficult to move from dependence on the state (welfare) or one's parents to financial independence.

 

5. A widening disconnect between higher education and employment: a college/university degree no longer guarantees a stable, good-paying job.

 

6. A failure in the Status Quo institutions and mainstream media to recognize social recession as a reality.

 

7. A systemic failure of imagination within state and private-sector institutions on how to address social recession issues.

 

8. The abandonment of middle class aspirations by the generations ensnared by the social recession: young people no longer aspire to (or cannot afford) consumerist status symbols such as luxury autos or homeownership.

 

9. A generational abandonment of marriage, families and independent households as these are no longer affordable to those with part-time or unstable employment, i.e. what I have termed (following Jeremy Rifkin) the end of work.

 

10. A loss of hope in the young generations as a result of the above conditions.

If you don't think these apply, please check back in at the end of the year. We'll have a firmer grasp of social depression in December 2016… and so will Warren!

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

Submitted by Chris via CapitalistExploits.at,

Have you ever wondered who these people are? The people who decide how much capital should cost, how much credit and cash should be issued. You know, the twits who dream up QE, ZIRP and NIRP.

Where do they come from? Who pays their wages? Where do they get these hair-brained ideas? Are they on medication?

Sadly we probably know most of the answers…

Central bankers are like alcoholics – drunk on stupidity and arrogance; and, like a suffering alcoholic, reticent to address the real problem.

Reading up on the dangers of alcohol, I’m told that it rots your liver, kills brain cells, makes you impotent, fat, gives you stomach ulcers, and eventually causes death.

Obviously too much of it is bad juju.

In a similar fashion, central bankers had an opportunity in the GFC to put the bottle down. But instead they raided the liquor cabinet and have turned our financial system into something grotesque.

Just as an alcoholic can’t cure alcoholism with binge drinking, central bankers cannot and will not cure the current economic malaise with “monetary” binge printing.

Sovereign debt is pretty high on my list of asymmetric opportunities. In fact, in 2014 we published an extensive report covering global debt which included both sovereign and private debt.

I had my chief analyst “V” and his team thoroughly revisit where we’re at today in the world of drunken debt orgy, and the results are quite staggering. They could be summarized with:

“Deleveraging? What do you mean by deleveraging?”

Government debt has been growing since 2007 at an annual rate of 9.3% with three quarters of this coming from advanced economies. Talk about binge drinking to cure alcoholism…

One of the wonderful things about binge drinking is that reckless behaviour is best shared with friends. To really let your hair down and release the shackles it’s wonderful knowing that not only are you going to have a wild time, but when the morning comes you can share the hangover with similarly afflicted friends. Commiseration is so much better with company.

So Who Are These Binge Drinking Friends?

Well, here we have a list of the drinkers who need to endure a hangover and deleverage. The chart below is taken from a McKinsey study where they estimated what it would take for a dozen OECD countries to begin deleveraging in terms of fiscal policy and GDP growth.

The chart below shows what additional GDP growth and fiscal adjustment (as % of GDP) would be required to begin deleveraging:

Source: based on data from McKinsey.

The main conclusion: it’s just not possible. And here’s why…

In order to begin deleveraging these countries would need to sustain current GDP growth and budget surplus continuously.

Not gonna happen!

Instead, debts are expected to continue rising.

Missing from the above group is the Middle Kingdom and this is where a lot of asymmetry lies. Principally because few market participants are looking at it.

By international standards, China’s public debt level is rather benign – a mere 50% or so of GDP. But, as with virtually every animal in our sovereign debt zoo, it has a number of peculiarities worth looking at.

It is interesting to note that data on China’s government debt has changed since we did our original Global Debt Report. Below is the chart we took from the Trading Economics website in June 2014:

And this is the chart updated:

The sources have changed, with China’s Ministry of Finance replaced by the IMF, and we can see now with IMF “stats” that in fact the numbers for the previous ten years of data show an almost doubling. Funny that.

This shows how cryptic the Chinese authorities are in disclosing their financial data and how difficult it is to get to the truth. If something is being hidden, it’s probably not a mere omission.

Notably, more than half of China’s government debt is that of local governments, whose borrowing grew at a an annual rate of 27% between 2007 and 2014 – 2.5x faster than central government borrowing. Local government debt reached $2.9 trillion in 2014.

No Way Out

Capital moving into increasingly risky assets accelerated by credit formation have turned the banking sector into a truly enormous $34 trillion monster. At 340% of GDP and finding themselves at the end of the cycle, the need to recapitalize their banking system will become ever more apparent as loan impairment rockets higher.

The market seems to think that the PBOC has sufficient reserves to deal with this problem.

Not so fast…

Using up China’s foreign reserves for debt repayment will put pressure on the Chinese currency. A scenario we’ve already seen playing out. The country’s foreign reserves have declined by 20% since their $4 trillion peak in 2014.

Remember, since 2004 the yuan has appreciated some 60%. This has been a result of the influx of capital chasing Chinese growth as well as deliberate and consistent weakening of its trading partners currencies including the BOJ, ECB and, until recently, the US Fed.

We continue to think that the Chinese will be forced into a binge drinking session of their own, instituting a QE program which will put additional pressure on the yuan. After all, they’ll only be following from their already drunk American and European drinking buddies.

Right now they’re trying to stem capital outflows by opening up their bond markets under the guise of liberalizing their currency and internationalizing it.

As Dow Jones reports:

“China’s latest move to open up its over $6 trillion interbank bond market allows money to flow into the country at a time of rising capital outflows, and follows smaller moves last year to give foreign investors greater access to China’s labyrinthine capital markets. Foreign investors hold approximately 2% of China’s interbank bond market, which is the third-largest in the world.”

This isn’t the first time we’ve seen this game played. Don’t be fooled.

Buying into Chinese corporate or sovereign bonds will be an excellent trade. But certainly not here and not now.

As this plays itself out there will be opportunities to get long, once the currency has crashed and we’ve closed out short yuan positions, we’ll almost certainly find some Chinese blue chip corporate debt trading in double digit yields.

Right now the game is decidedly on… and that game involves being short.

Great investments are forged in difficult times, and times they are difficult.

via Zero Hedge http://ift.tt/21zv604 Tyler Durden