Bankers were thrilled last year when Wall Street bonuses climbed for the first time in years after falling more than 15% in 2015. But unfortunately, even with equity markets around the world at record highs in 2017, volatility across asset class plunged this year – with the Dow seeing its least volatile year on record by some measures – has plunged, decimating bonus pools across asset classes, Bloomberg said.
As bank earnings have portended, a drop in trading revenue across asset classes over the past year will likely lead to cutbacks in the bonus pool for equity and fixed income traders.
However, the disappointment was widely anticipated, and traders have probably been bracing for light bonus checks all year. Just last year, Wall Street investment banks saw earnings from their fixed-income trading businesses rise for the first time in four years. But the drop in volatility this year has weighed on trading profits across the industry.
At Bank of America Corp., rates traders are likely to see bonus pools shrink by as much as 10%, according to people briefed on the discussions. Those teams at JPMorgan Chase & Co., the world’s biggest trading bank, are set for declines of about 5%, according to Bloomberg’s sources.
“Rates didn’t do poorly on an absolute basis, it just didn’t do as well as last year because of the lack of significant catalysts,” said Options Group Inc. Chief Executive Officer Mike Karp.
“Everyone hoped the French and German elections would create some activity, but it didn’t happen."
Most bond and equities personnel can expect smaller 2017 pay packages because of low volatility and a lack of disruptive events, recruiter Options Group said last month. Equities trading may see bonuses remain flat or fall as much as 5 percent, while fixed-income traders could fare a bit worse, according to Johnson Associates Inc.
But give the number of catalysts that passed the market by this year, the drop in fixed-income trading revenues is even more surprising than the plunge in equities, and could be more severe, according to Bloomberg.
Elections in Germany and France, as well as three Federal Reserve interest-rate hikes, didn’t generate the type of volatility seen following the UK’s vote to leave the European Union, or President Donald Trump’s upset victory in the November 2016 election.
As DB said in its 2018 derivative outlook, "events produced very little vol in 2017. Vol spikes were few and shallow, and so technical market risks were never truly triggered."
The rise of automation and a shrinking number of hedge funds have also helped weigh on compensation by curbing demand for Ivy League-educated financial pros.
On top of a weak year, other more structural trends are weighing on compensation. Struggles across the hedge-fund industry and the fewest startup funds since 2000 have made the threat of bank traders leaving less acute.
And all firms are looking for ways to automate some of the more straightforward tasks in the trading business, which may eventually lead to jobs being cut.
Debt-trading revenue at the five biggest Wall Street firms declined by 7 percent in the first nine months of the year, fueled by drops of 23 percent at Goldman Sachs Group Inc. and 11 percent at JPMorgan. Equity trading was little changed, with Citigroup Inc. and Bank of America posting the only increases.
Any hope that the fourth quarter would redeem the year has been quashed. Several bank executives this month forecast that trading revenues will be down at least 15%.
“The market backdrop that has been in place since the beginning of the year has continued into the fourth quarter,” Goldman Sachs Chief Financial Officer Marty Chavez said in November. “Volatility continues to be low and client activity continues to be subdued."
The outlook is even grimmer for firms across the Atlantic. Traders at European banks are facing some of the worst bonuses in years, as the declines in both debt and equity revenue are steeper than those at US firms.
Lenders including Barclays Plc, Deutsche Bank AG and Credit Suisse Group AG may see bonus pools for fixed-income traders drop by at least 10%. Some bankers might even be forced to accept “doughnuts” – industry slang for a 0% bonus.
Unfortunately, as we pointed out last week, this drop in volatility hasn’t made markets safer. Instead, they appear more fragile than ever, as the number of five-sigma drawdowns increased dramatically this year…
As BofA pointed out, "2017 stands out for generating an unprecedented number of 5 sigma 1-day SPX drawdowns, suggesting US equities are unusually fragile today by historical standards."
Investors were finally treated yesterday to some of the most important compromise provisions to come out of the House-Senate conference on the Tax Cuts and Jobs Act. Among them were:
21% corporate rate
Reduction of the top wage rate to 37%
20% deduction on pass-through income
Full corporate expensing of capital investments for the next five years
Repealed corporate AMT
Mandatory one-time tax on corporate cash held overseas (taxed at 15%) and foreign-domiciled PP&E purchased with foreign earnings taxed at 10%
$10K deduction on individual state, local, and property taxes
Mortgage interest deduction on the first $750K of a mortgage
Doubling of the estate tax exemption
Lower individual rates are temporary and will be phased out over time
Net, net, this tax reform bill could a few very notable things from a macroeconomic and balance of payments perspective if economic agents obey the incentives.
First, on the margin it incentivizes capital investment in the United States by, at least temporarily, raising the return on invested capital for owners of said capital.
Second, it will add about $1tn of debt to the nation’s balance sheet over the next ten years after taking into consideration the boost to growth the bill could generate.
When considering the possible effects of changes to the tax code and budget deficits it’s useful to recall some fundamental identities of national income accounting.
First, an individual’s income (i) can only be allocated in any of three ways: consumption (C), savings (S) or taxes (T).
This income is generated from the domestic sale consumption goods (C), investment goods (I), government services (G) or net exports (X-M).
Therefore, C+S+T=C+I+G+(X-M). We can further simplify the identity to T-G=(I-S) + (X-M).
This is to say, deficits (surpluses) on the left side of the equations will result in either a lower (higher) private investment relative to savings, a lower (higher) trade balance, or both. In today’s analog this means that increases in the deficit from the tax proposals will either reduce the nation’s domestic private excess of investment over savings, will cause the trade deficit to expand further into negative territory, or will induce a combination of both. Because this equation must balance (pesky math!), it cannot be otherwise.
So, then, given our current economic conditions and incentives embedded in the tax bill, what is the most likely outcome of either a lower I-S, a lower X-M or both, and what are the ramifications for the USD?
It’s clear that the tax bill is designed to stimulate domestic investment. Indeed, taxes on capital profits are being reduced at both the corporate and pass-through level, corporations will be allowed to fully expense – rather than depreciate over time – new capital investments (this lowers current period earnings and thus taxes), and companies with large overseas cash piles will have less disincentive to repatriate foreign earnings, among other features. At first glance this would lead one to to conclude that I-S (the excess of investment over savings) will increase and X-M (the trade deficit) will dip further into negative territory. That is to say, in order to finance a capital expenditure boom and fiscal stimulus, foreign capital would need to be imported and the reciprocal would be a upward pressure on the USD and a much larger trade deficit. Such a configuration would also call for higher interest rates.
But, how likely is this scenario?
To what extent will the primary beneficiaries of this tax bill (namely corporations and individuals benefiting from lower rates on pass-through income) invest heavily in capital stock rather than use the proceeds to buy back stock, pay dividends, pay down debt, or make acquisitions?
Luckily, there are a few important data series that shed some light on this.
First, capacity utilization (blue line, left axis in the chart below) – the percent of operating capacity that is being used in production rather than sitting idle – shows a pattern of peaking at a lower level than each previous peak since 1973. It also remains at a historically low level currently. Capital investment (red line, right axis) peaks consistent with peaks in capacity utilization. In other words, we have every reason to believe capacity utilization, and capital investment as a percent of GDP, will peak at a lower level than the last cycle, which is not far above current levels. Additionally, with a still high level of capacity not being utilized, the private sector may have little need to add meaningfully to the current capital stock.
Next, it’s important to distinguish between the type of business investment this tax policy promotes and that which it does not promote. Specifically, tangible fixed capital investment is incentivized while the policy is indifferent to intangible capital investment. This is important because intangible business investment is the only category of non-residential fixed investment that is structurally growing (light blue line in the chart below). Therefore, given the changing nature of business investment thanks to technological innovation, its unlikely that even strongly promoting tangible fixed capital investment from a policy perspective will change the long-term trend. As we will see next, we are skeptical that this tax policy will even interrupt the long-term trend.
Finally, as the last four charts below show, business fixed investment in tangible capital hasn’t been declining because of lack of cash flow, but rather because businesses have preferred to save profits in order to to distribute them to shareholders in the form of dividends and stock buybacks, or invest in R&D. Indeed, the operating cash flow margin for the largest 85% of companies in the United States is at a two-decade high (chart 1), but capex as a percent of operating cash flow is near a two-decade low (chart 2) while dividends and buybacks have been up every year since 2011. Meanwhile, R&D investment as a percent of operating cash flow (chart 4) has been up every year since 2011. This suggests to us that tangible capital investment is a much lower priority to companies than paying shareholders and investing in R&D. Increasing the marginal return on tangible capital investment may be unlikely to change this trend.
These three important trends – structurally declining capacity utilization and structurally declining fixed investment at a time when companies are flush with cash – suggest to us that the beneficiaries of this tax plan are more likely to save, rather than invest, marginal profits.
There hasn’t been an impediment to capital investment, to the contrary. As a corollary, growth in I-S and the decline in X-M may both be a lot smaller than envisioned and the USD may thus be rather unaffected the sweeping new legislation.
A 31-year-old former beauty queen is suing her married ex-beau, claiming the hedge fund manager gave her an STD and renegged on promises to leave his wife and buy his much-younger mistress a Ugandan ostrich farm.
It’s hardly a surprise that a messy high-profile divorce with this many lewd details has garnered extensive coverage from the world’s tabloids, including the New York Post and the Daily Mail.
The plaintiff, former Miss Germany International Aline Marie Massel, 31, revealed the alleged seamy details of her two-year illicit relationship with Autonomy Capital CEO Robert Charles Gibbins in new court documents.
According to her lawsuit, Massel first met Gibbins at Le Bilboquet French bistro in New York City back in June 2014.
Aline Marie Massel
During their first encounter, she claims that Gibbins, 47, told her that he was unmarried and wooed her with promises to buy her the farm mentioned above.
“He promised to buy a large estate for them in Canada called the Royal Antler… and an ostrich farm in Uganda,” according to court papers.
Gibbins showered his mistress with gifts during the two-year affair, including a Faberge purse, while taking her for Japanese massages in Midtown Manhattan and flying to the World Cup in Brazil, her suit says.
Massel discovered Gibbins was married a few weeks after they got together when Gibbins’s wife texted her a taunting message: “You are not the first and will not be the last."
Massel with Robert Charles Gibbins
However, Massel, who now works as a Tesla model, says her new partner promised that he would leave his wife.
In one of the story’s most bizarre details, Massel said that she caught the STD HPV from Gibbins, who insisted on not wearing a condom when the two had sex. According to the suit, Massel says Gibbins never told her he was infected with the virus.
Massel “felt deceived and upset with [Gibbins] as he had been her only intimate partner since her last health screening and he did not disclose his sexually transmitted disease to her,” the suit said.
The pair continued to date after Massel learned of her infection. The hedge funder paid for her lavish Manhattan apartment, and would take her on expensive international trips. When she became pregnant, her lover threatened to cut off financial support unless she had an abortion.
Gibbins’s lawyer also warned Massel about “how difficult it would be to raise a child alone,” while Gibbins' wife also got involved, according to the suit, allegedly texting: “Have the baby if you want it so much. I cannot wait to see you getting fat and ugly."
Massel believes that Gibbins then hired a private detective to follow her until she had the abortion. She also believes Gibbins was worried she’d blab about his attempt to purchase a Ukrainian bank that was a “notorious location for money laundering."
A representative for Gibbins told the New York Post: 'These baseless allegations are without merit, and Mr. Gibbins will defend himself vigorously.'
A bizarre story of a police raid on a Finnish journalist's home is drawing international attention, especially as it occurred in a country known for its protection of press freedoms. The journalist is Laura Halminien from Finland's largest daily newspaper, Helsingin Sanomat, where she published a bombshell investigative report on Saturday based on previously leaked documents connected to a Finnish intelligence operation which closely monitors Russian military movements just across the border in the St. Petersburg region.
The report gave details of Finish Defense Intelligence Agecy (VKoeL) secretive facilities and ongoing operations regarding surveillance of Russia, with special focus on a signals surveillance complex in the city of Tikkakoski in central Finland. The Tikkakoski complex is said use a high tech and advanced monitoring system to observe Russian military maneuvers based on electromagnetic radiation.
Main offices for Finland's largest daily newspaper, which is now under investigation over the leaks. Image source: Hakaniemi
The unusual police search occurred on Sunday evening, when authorities showed up the journalist's home without a warrant, yet in response to a possible fire. According to Reuters the series of events unfolded as follows:
Finnish police searched a reporter’s home and seized her computer after she tried to destroy the hard drive to protect sources linked to a security story, her newspaper reported. The journalist, Laura Halminen, said she tried to smash up her computer with a hammer in her home, but the laptop then started smoking and she called the fire brigade, according to an interview published by her employer Helsingin Sanomat.
Police officers who came to her home with the fire service to investigate the blaze then took her computer and searched her property, police said…
In a subsequent interview with her newspaper Halminen said that she "wanted to destroy the computer to ensure that the source of the information is well-protected.” As the Saturday article was based on leaked 'top secret' intelligence files – some of them reportedly going back ten years – the newspaper faces a criminal investigation over obtaining and publishing the documents.
According to the Helsinki Times, Finland's president, Sauli Niinistö, took the unusual step of publicly slamming the newspaper for compromising national security. Niinistö said in a brief statement, "Secret documents have been handed over to Helsingin Sanomat. A criminal investigation has been initiated on that. Exposing the content of highly classified documents is critical to our security and could result in serious damage."
But also according to the Helsinki Times, the investigative story – which was the first installment in a planned series on the sensitive program – is about much more than a spy operation targeting Russia, but about Finland's domestic spy capabilities. The Helsinki Times reports:
According to Helsingin Sanomat, the main reason behind publishing the article and exposing the classified documents now is the new bill being prepared for the Finnish parliament to give this facility and other security police agencies authority to survey internet communications inside the country. The article includes images of documents with "Top Secret" stamps on the top, from 1999.
Saturday's front page from Finland's largest daily, Helsingin Sanomat, purporting to show a secretive Finnish spy facility which targets Russia.
Similar to the 2013 revelations of NSA domestic warrantless monitoring of Americans' communications (based on the Edward Snowden leaks), Helsingin Sanomat reporters see the Finish Defense Intelligence Agecy program as potential excuse for spying on Fins while citing ambiguous "reasons of national security".
The newspaper's editor-in-chief, Kaius Niemi, told Finnish media that the four hour police search of his journalist's house was "outright exceptional" as Finland prides itself as a world leader in press freedom. The group Reporters Without Borders recentlyranked Finland as third in its 2017 World Press Freedom Index (behind its Scandinavian neighbors Sweden and Norway). Niemi also stated, “I believe these events are very disconcerting when it comes to the operational preconditions of the press and the protection of sources [in Finland].”
Meanwhile, the Defense Committee of Russia's State Duma issued a statement expressing surprise at the revelations of advanced Finnish spy technology stationed along Finnish-Russian border. According to Sputnik:
"We always say that we are ready to build good-neighborly relations. We did not expect something like this from our colleagues in Finland, if this information is confirmed," first deputy chairman Andrei Krasov told the Gazeta.ru media outlet, calling the intelligence-gathering center's mission a "rather unexpected move."
As there's more to the investigative series that was scheduled to come out after Saturday's story, the newspaper could potentially succumb to the political pressure unleashed in the wake of the initial report and decide to halt publication of the rest of the series. In addition to the country's president, a number of Finnish parliamentarians have reacted fiercely, citing threats to national security.
In response the newspaper has issued an open letter which, while defending the decision to publish, also admitted that it could have done a better job in preparing the public and lawmakers on explaining why the story is vital to the health and democracy of the country.
On Friday, Kevin Brady of the House Ways and Means Committee was on my radio program discussing the “Tax Cuts & Jobs Act” bill which was released later in the day.
Here are the details of the release he referenced in the interview.
Of course, the real question is how are you going to “pay for it?”
Even as Kevin Brady noted in our interview, when I discussed the “fiscal” side of the tax reform bill, without achieving accelerated rates of economic growth – “the debt will balloon.”
The reality, of course, is that is exactly what will happen because there is absolutely NO historical evidence that cutting taxes, without offsetting cuts to spending, leads to stronger economic growth.
Those, of course, are the long-term concerns that will lead to lower rates of returns for equity-based investors and will continue to suppress interest rates for the next decade as the “Japanification” of the U.S. continues.
Let’s Be Like Japan
“Bad debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the ‘painkilling’ effect wears off, U.S. and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.” – Keiichiro Kobayashi, 2010
While Kobayashi will ultimately be right, what he never envisioned was the extent to which Central Banks globally would be willing to go. As my partner Michael Lebowitz pointed out last week:
“Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).”
As he noted, the belief was that by driving asset prices higher, economic growth would follow. Unfortunately, this has yet to be the case as debt both globally and specifically in the U.S. has exploded.
“QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome.”
While Mr. Brady is very optimistic about future rates of economic growth, even Ms. Yellen in her latest policy announcement was not so sure. The Fed’s average of long-term growth expectations is currently running at just 1.9%.
The continuing mounting of debt from both the public and private sector, combined with rising health care costs, particularly for aging “baby boomers,” are among the factors behind soaring US debt. While “tax reform,” in a “vacuum” should boost rates of consumption and, ultimately, economic growth, the economic drag of poor demographics and soaring costs, will offset any of the benefits.
The complexity of the current environment implies years of sub-par economic growth ahead as noted by the Fed last week. Of course, the US is not the only country facing such a gloomy outlook for public finances, but the current economic overlay displays compelling similarities with Japan in the 1990s.
Also, while it is believed that “tax reform” will fix the problem of lackluster wage growth, create more jobs, and boost economic prosperity, one should at least question the logic given that more expansive spending, as represented in the chart above by the surge in debt, is having no substantial impact on economic growth. As I have written previously, debt is a retardant to organic economic growth as it diverts dollars from productive investment to debt service.
Of course, one only needs to look at Japan for an understanding that QE, low-interest rate policies and expansion of debt have done little economically. Take a look at the chart below which shows the expansion of the BOJ assets versus growth of GDP and levels of interest rates.
Notice that since 1998, Japan has not achieved a 2% rate of economic growth. Even with interest rates now pushing into negative territory, economic growth remains mired below one-percent, providing little evidence to support the idea that inflating asset prices by buying assets leads to stronger economic outcomes.
But yet, the current Administration believes our outcome will be different.
The reality is that the U.S. is now caught in the same liquidity trap as Japan. With the current economic recovery already pushing the long end of the economic cycle, the risk is rising that the next economic downturn is closer than not. The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs.
This is the same problem that Japan has wrestled with for the last 20 years. While Japan has entered into an unprecedented stimulus program (on a relative basis twice as large as the U.S. on an economy 1/3 the size) there is no guarantee that such a program will result in the desired effect of pulling the Japanese economy out of its 30-year deflationary cycle. The problems that face Japan are similar to what we are currently witnessing in the U.S.:
A decline in savings rates to extremely low levels which depletes productive investments
An aging demographic that is top heavy and drawing on social benefits at an advancing rate.
A heavily indebted economy with debt/GDP ratios above 100%.
A decline in exports due to a weak global economic environment.
Slowing domestic economic growth rates.
An underemployed younger demographic.
An inelastic supply-demand curve
Weak industrial production
Dependence on productivity increases to offset reduced employment
The lynchpin to Japan, and the U.S., remains demographics and interest rates. As the aging population grows becoming a net drag on “savings,” the dependency on the “social welfare net” will continue to expand. The “pension problem” is only the tip of the iceberg.
If interest rates rise sharply it is effectively “game over” as borrowing costs surge, deficits balloon, housing falls, revenues weaken and consumer demand wanes. It is the worst thing that can happen to an economy that is currently remaining on life support.
Japan, like the U.S., is caught in an on-going “liquidity trap” where maintaining ultra-low interest rates are the key to sustaining an economic pulse. The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures. The lower interest rates go – the less economic return that can be generated. An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return.
More importantly, while there are many calling for an end of the “Great Bond Bull Market,” this is unlikely the case. As shown in the chart below, interest rates are relative globally. Rates can’t rise in one country while a majority of economies are pushing negative rates. As has been the case over the last 30-years, so goes Japan, so goes the U.S.
Unfortunately, for the Administration, the reality is that cutting taxes, and MORE debt, is unlikely to change the outcome in the U.S. The reason is that monetary interventions and government spending don’t create organic, and sustainable, economic growth. Simply pulling forward future consumption through monetary policy continues to leave an ever-growing void in the future that must be filled. Eventually, the void will be too great to fill.
But hey, let’s just keep doing the same thing over and over again, which hasn’t worked for anyone as of yet, hoping for a different result.
I’m not allowed to say what I am about to say, according to the mainstream media.
They claim the only reason I would make this argument is that I am full of hate.
The truth is, I don’t want to see the media dupe people with a mental health condition into making destructive decisions.
I came across a news story about an entire family in transition. First, the son began a transition to female, and then the daughter to male, followed by their mother to male. The mother then met someone transitioning to female, and they are now engaged.
Is it “wrong” to say, mother, son, and daughter? Is that now considered “hate speech”? It is almost impossible to coherently discuss transgender issues without running afoul of politically correct speech.
All I know is that I had to read the article twice to understand who started as male, who was female, and what they now identified as. Already politically correct speech is clouding the ability to convey basic facts.
The Media Bullies Anyone Who Wants to Have a Rational Discussion
CNN invited Ben Shapiro on as a stand-in punching bag to discuss Caitlyn Jenner. This was in 2016 just after Jenner won some award for being super brave about transitioning.
Do you see the way they all team up on Shapiro and try to beat him into submission? They tell him he is full of hate. They say he is angry inside. They bully him. They yell at him.
And the strong-jawed person with long blond hair sitting next to Shapiro threatens him with violence while laying hands on him saying, “You cut that out now, or you’ll go home in an ambulance.”
What the hell is going on?
Shapiro is simply trying to have a discussion about biology and sex. He can’t even get his point out because all the other guests attack him for using the correct words to describe objectively true facts.
What is accepted as true on CNN is the statement, “We both know, that the chromosomes do not necessarily mean that you are male or female.”
But in the real world of biology, that is exactly what that means.
Yet the public is supposed to accept the falsity without protest, or even discussion. Shapiro was threatened with violence for asking a transgender person what chromosomes are present in their cells. The message is if you don’t want to be singled out and bullied, accept what we tell you as the truth.
The media uses phrases like “gender confirmation surgery” and “sex assigned at birth.”
A surgery which changes superficial indicators of sex confirms your gender. A biological fact at birth is an arbitrary assignment.
What Does the Science Really Say?
Make no mistake, the people pushing all this confusion are not at all consistent nor scientific.
They say that gender is a social construct that can be chosen. That is redefining what the word gender means, but fine. We can make a distinction between gender (cultural expression of sex) and sex (biological anatomy).
So then who cares if a boy likes dresses and tea parties, and a girl likes getting dirty and playing video games?
But the media isn’t done. They turn around and say you can change your biological sex to match your gender expression.
This is not true.
They can redefine the word gender to refer to stereotypical expressions of sex. But they cannot ignore the science that sex is defined by the chromosomes in your cells.
You can’t even get an accurate picture of any science behind gender dysphoria from supposedly scientific publications. They join in to blur the lines between science and propaganda.
National Geographic ran a story exploring the lives of transgender children. Except that they also throw in a case of a chromosomal condition where a child is born with both male and female genitalia. Another case details an enzyme deficiency which causes a child’s sexual organs to appear female until puberty when a surge of testosterone causes the male development of the sexual organs.
These conditions are real medical anomalies which blur the biological lines between the male and female sex. They are entirely different from the mental condition in which people self-identify as the opposite sex but show absolutely no physical attributes of that sex.
I don’t doubt that these people feel like the opposite sex. They are allowed to feel and act as they wish.
What they cannot do is force me to play along. They cannot force me to ignore science, and pretend that they are capable of becoming the opposite sex. They cannot force people to lie to their children and teach them that you can switch from one sex to the other. You cannot.
But you can go to extremes in how you express your gender. This includes irreversible mutilation meant to make your genitals look like those of the opposite sex. This also includes barely tested hormones and drugs which could very well cause serious health issues.
The media is helping to push life-altering drugs and surgery on people, including children.
The media is convincing people to make decisions they may regret, and imbibe substances that are untested, and carry serious risks.
And the media’s lies about the science behind “gender reassignment surgery” is making life harder for people with the mental condition called gender dysphoria.
What is Going on Here?
It all seems like an elaborate test to see how easy it is to control people. When the news says jump, we are supposed to say how high. There is to be no discussion of science, and no room for dissenting opinions.
I agree with Ben Shapiro. There is no hatred in my opinion. I don’t even have a problem with adults transitioning if that is what they want to do. I believe in freedom, so I would never want to restrict any individual’s action that doesn’t hurt anyone else.
But I think the media is using and abusing people with a serious mental health issue.
I don’t think the “solutions” put forward are healthy. And I will not be bullied into joining a mass delusion about the ability to change sexes.
I won’t join in and encourage transgender people to get surgery and take drugs that are dangerous. I certainly won’t lie to kids about the definition of male and female.
And I believe it is child abuse to allow a kid to take hormones and mutilate their genitals in an attempt to appear as the opposite sex.
On the other hand, think parents should allow their kids the freedom to dress and act however they want. If their interests are those more typical of the opposite sex, so be it. If your son wants to wear dresses, grow his hair out, and be addressed as she, I don’t think it is crazy for a parent to allow this. By all means, let your kids express themselves freely.
But once you start giving hormones and life-altering surgery to ten-year-olds, that is child abuse.
When it comes to adults, I also have absolutely no problem with people dressing however they want to dress, and cutting their hair in whatever way they want. By all means, eschew traditional gender roles. Act the way you want to act. Honestly, who cares what other people think? Who cares what I think?
But it is from a compassionate standpoint that I urge people who identify as the opposite sex to think twice about surgery and drugs. What happened to not having to change in order to love yourself? What happened to being perfect the way you were born?
I understand that people may truly wish they had the opposite sexual organs. But it is not at this point possible to acquire functioning sexual organs of the opposite sex. You can mimic the way they look, but you cannot change your biological sex.
The Compassionate Way to Deal With Gender Dysphoria
In the transgender family, the kids wanted to express the opposite gender before the mother. So the parents do not appear to have directly influenced the kids’ gender identification. The mother claims transgenderism runs in the family. And this may very well be the case. Mental conditions are often hereditary.
But again Shapiro brings up a good point. We don’t tell schizophrenics that they are hearing real voices in their heads. That would be cruel. Instead, we attempt to help them.
The suicide rate for transgender people is alarmingly high. But Shapiro claims the rate is the same before and after a transition. That means transitioning does not alleviate mental anguish.
So is it really so crazy to think of other possible solutions?
Maybe mutilating sexual organs and taking hormones to make the body mimic the opposite sex is not the best treatment.
You cannot change the chromosomes in your body. You cannot produce sperm if you are a woman, and you cannot ovulate if you are a man. That is science. And still, when Shapiro says these things, he is called a bigot, a hate-monger, and so on and so forth.
But like Shapiro, we should not yell back at the bullies. We should not engage them at their level.
Now more than ever, rational people must stay cool, calm, and collected. This is a message of compassion, not of hate.
The media is not compassionate to transgender people suffering from mental anguish. They feed into their delusions. They encourage “solutions” that do not actually solve the problem. The media tells transgender people that they can mask their condition with surgery and drugs.
They should encourage people to get psychological help to accept themselves without altering their bodies. And they should be honest about the science behind sex changes.
Except for some rare medical disorders, you are the sex you are born.
If people want to express themselves as a gender typically associated with the opposite sex, that is their choice. I would never bully someone for that, and I sincerely hope others would treat them with respect as well.
But compassion and civility do not require the denial of biological fact.
Turning Point
Is this a deliberate attempt by the media to brainwash people? It certainly seems like a concerted effort to derail an objective discussion. It’s like they are testing how easily they can control what people say and think.
This is a crucial point where we will decide if freedom of speech and freedom of thought still exist. Will we move forward “allowed” to discuss science and mental health without being threatened with violence?
Or will we be bullied into submission, afraid to speak or even think the wrong way? Will we become thought criminals for daring to think against the mainstream viewpoint?
Labelling people as hateful for disagreeing ensures a narrow perspective. It is a way to ignore legitimate viewpoints by pretending they come from a position of ignorance and anger.
Rational people should have no problem putting emotions aside to discuss the science behind gender and sex.
Finally, why do they need my, or Ben Shapiro’s approval anyway? Why does that even matter to them? We aren’t saying they should be stopped from expressing themselves. We aren’t threatening them with violence–quite the opposite!
There are people that don’t like the way I live my life. In fact, Ben Shapiro considers certain things I do sinful. And I don’t care because I don’t need Ben Shapiro to endorse and accept every aspect of my behavior.
Live the life you want to live, and by all means resist anyone who tries to stop you. But don’t try to force others to endorse or praise your actions and beliefs.
Two weeks ago, as part of our continuing coverage of the Steinhoff fiasco in which it emerged that the ECB was the mystery and (not so) proud buyer of just issued Steinhoff (now junk) bonds (maturing in 2025 but set for bankruptcy much sooner) and which lost more than half of their value overnight when it the company announced it was caught in what may be a terminal accounting fraud scandal, we said that “, it seems virtually guaranteed that the banks will suffer steep haircuts on their Steinhoff exposure” and “so will the ECB, which on Friday was rumored it was considering selling its Steinhoff bonds. It is not exactly clear how this would take place, since the ECB’s QE by definition only buys, not sells, at least for now.“
This just barely perceptive shift in the ECB’s posture from “buyer of first, last and only resort” to “potential seller“, has potentially huge implications, and was duly noted by one of the best credit strategists on Wall Street, BofA’s Barnaby Martin, who in a note over the weekend look at the “gift that keeps on giving”, or at least “kept on giving”, and adds to our speculation, writing that “one consistent feature of the last year and a half has been the ECB buying copious amounts of corporate bonds week-in, week out. Such has been the need to promptly restore inflation in the Eurozone – to ensure the debt sustainability of the periphery – that unique monetary policy has been the order of the day. No other central bank has dived headlong into buying corporate bonds. And given the slow return to 2% inflation in Europe, as confirmed by the ECB yesterday, for 2018 we again expect Draghi to be pronounced in buying credit, pushing spreads even tighter.”
We showed the ECB’s unprecedented impact on the bond market this July, when we charted the collapse in Eurozone credit spreads following the announcement of the ECB’s CSPP, or corporate bond buying program.
And while until just two weeks ago, Draghi’s dedication to purchasing virtually any and every piece of (non-junk) corporate paper in Europe was undisputed, “2017 is ending on somewhat of a sour note, in the form of rising idiosyncratic risk…the most distinctive of which has resulted from the Steinhoff bonds.“
While Martin doesn’t see the Steinhoff fiasco as derailing the ECB’s drive to purchase corporate debt next year, “we do see a risk that the CSPP becomes more cautious. The risk, therefore, is that the ECB’s efforts to compress credit spreads is reduced. And if they start to buy more higher quality names then this would weaken the compression trade in corporate bonds next year.“
And while one can speculate about Drahig’s intentions, it looks like the ECB’s language towards owning Fallen Angels has become more explicit, and more tentative of late. This is a major risk for what until recently was one of the best performing bond categories – those which have been recently downgraded from IG to junk, i.e. fallen angels – because, “If true, we think that this has the potential to make the spreads of Fallen Angels behave more like Falling Knives. Credit investors should therefore anticipate more pronounced price drops in names that migrate from IG to HY” the BofA strategist warns.
Putting the Steinhoff Debacle in Context
As we have repeatedly written here in the past year, there has been no bigger buyer of European corporate credit in the past two years than the European Central Bank: the ECB, which currently owns just over €131 billion of European corporate bonds, or 17.9% of the total outstanding amount, is likely to finish 2017 having bought just over €80bn of Euro-denominated corporate bonds in 2017 alone. According to BofA, such is the quantum of monthly QE buying relative to net supply, that CSPP creates an obvious “scarcity of product”, causing credit spreads to keep grinding tighter. As Chart 1 highlights, Euro high-grade spreads have widened in only 5 of the last 19 months (and have only widened in 2 months of this year).
Further, as shown in Chart 2, the share of SMEs reporting higher turnover increased significantly from April to September 2017 as the ECB program continued compressing spreads to record tights. The move is especially visible in Italian SMEs’ turnover. According to BofA, this provides further encouragement for the ECB, as the latest survey on Access to Finance for Enterprises shows that Euro Area SMEs reported increasing profits for the first time since the beginning of the survey in 2009.
That was then, this is now
Until two weeks ago, and the revelation that the ECB is a deep holder of an unknown amount of Steinhoff bonds, the confidence autopilot was solidly engaged, and it seemed like there is nothing on the horizon that could deter the ECB from being the corporate bond buyer of last resort. That’s when Steinoff hit, and as discussed here first, the 2025 bonds fell from 83 to 39 since the end of November on the back of the CEO resigning due to suspected accounting irregularities.
Latest ECB disclosure shows that the ECB own some of the recently issued Steinhoff Europe AG bond – an €800m 2025 issue. Note that Steinhoff International Holding’s headquarters are in South Africa, yet the recent Euro bond was issued out of an Austrian entity, ensuring CSPP eligibility.
Here there was some good, and some bad news for buyers and holders of junk bonds.
During last week’s ECB press conference, Draghi said that the ECB’s losses with respect to the Steinhoff holdings were a lot less than consensus has been suggesting, although he did not divulge an actual number (in light of Draghi’s previous lies, one should apply a giant grain of salt to anything the ECB claims is or isn’t the case). The history of CSPP new issue “allocations” suggests an average of 11%, but we do not know what the facts are here, and the ECB refuses to provide them.
Whatever the real loss and exposure, in Chart 4 Martin shows that the mark-to-market drop on the Steinhoff bond is far greater than anything else the ECB has realised on their CSPP portfolio to date.
To be sure, Draghi downplayed the Steinhoff debacle, arguing in last week’s ECB meeting that the Steinhoff loss is very small in the grand scheme of things to the ECB’s CSPP portfolio, of which roughly 90% of the CSPP portfolio has tightened since purchase (green line in Chart 4).
And yet – and this is the punchline – this event risk which we flagged back all the way in March 2016 when we said that “It is unclear what happens to those IG bonds that the ECB has purchased if and when they get downgraded to junk“, will be a notable talking point for the Governing Council according to the BofA strategist, who writes that “If, going forward, it reduces the ECB’s efforts to buy lower quality credit and compress spreads, then we see a risk that the compression trade in credit is less powerful in 2018.“
Things Are Already Changing
Indeed, as BofA observes, there are some small signs already of the ECB stepping back slightly from their blanket approach to credit buying, and addressing the question we first asked almost two years ago. In particular, Draghi seems to be taking a more defensive stance with regards to owning Fallen Angels. Note that the CSPP Q&A has been updated as of 29th November 2017, and the paragraph on ECB selling now reads as follows:
Q1.5 Will the Eurosystem sell its holdings of bonds if they lose eligibility?
The Eurosystem may choose to, but is not required to sell its holdings in the event of a loss of eligibility, e.g. in case of a downgrade below the credit quality rating requirement.
Previously this phrasing was far more specific, with forced selling (or otherwise) not even presented as an option:
Q8 Will the Eurosystem sell its holdings of bonds if they lose eligibility? For example, if they are downgraded and lose investment grade status?
The Eurosystem is not required to sell its holdings in the event of a downgrade below the credit quality rating requirement for eligibility.
And, as far as BofA can see, the ECB still owns 3 K+S bonds, which now have a BB S&P rating (the only agency to rate them) following a downgrade to high-yield last October. What can’t be determined, however – despite Draghi’s assurances of the ECB’s “unprecedented operational transparency” – is whether the ECB have been reducing their holdings of these bonds over time.
* * *
Which brings us to the biggest risk as identified by Bank of America’s credit strategist: what until two weeks ago was merely a fallen angel is now a falling knife. Here’s why:
With the ECB’s language towards owning Fallen Angels having become more tentative of late, we think that this has the potential to make the spreads of Fallen Angels behave more like Falling Knives in 2018.
Even though the European economy is enjoying a robust cyclical recovery, downgrade risk is still an issue for investment grade fund managers at present. Chart 5 shows that, by par amount, IG downgrades continue to outpace upgrades, and the ratio has actually deteriorated this year. Moreover, Chart 6 shows that credit markets globally have been experiencing negative ratings migration of late. In fact, BBBs now make up almost 50% of Euro, US and Japanese investment-grade markets.
According to Martin, this likely means that the ECB will take a growing interest in Fallen Angels.
So how much of a problem will this be for Draghi? Using S&P’s historical rating transition matrices, BofA estimates that €7bn of corporate bonds that the ECB own will end up as Fallen Angels prior to maturity (by bonds impacted, this is equivalent to €38bn of total outstanding debt). Chart 8 shows that over the last decade, the price drop severity of Fallen Angels has been declining. But if the ECB become a motivated seller of downgraded credits, we feel this dynamic could reverse.
In conclusion, and in Bank of America’s explicit warning, credit investors should therefore anticipate more pronounced price drops in names that migrate from IG to HY next year.
“After all, there may now be a big buyer (ECB) behind some of these credits that chooses to become a seller upon downgrade.”
The silver lining – if only for deep junk investors – is that Falling Knives could produce a source of technically cheap BBs for yield-starved investors to mull over…
Ten percent of corporations survive only because central banks have kept real interest rates negative.
The BIS defines Zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more.
In simple terms, Zombies are those firms that could not survive without a flow of cheap financing.
The above chart shows the median share of zombie firms across AU, BE, CA, CH, DE, DK, ES, FR, GB, IT, JP, NL, SE and US.
According to the BIS Quarterly Report one out of ten corporations in emerging and advanced countries is a "Zombie".
Let's dive into the report for more details.
The inability to come to grips with the financial cycle has been a key reason for the unsatisfactory performance of the global economy and limited room for policy manoeuvre.
Since 2007, productivity growth has slowed in both advanced economies and EMEs. One potential factor behind this decline is a persistent misallocation of capital and labour, as reflected by the growing share of unprofitable firms. Indeed, the share of zombie firms – whose interest expenses exceed earnings before interest and taxes – has increased significantly despite unusually low levels of interest rates.
Over the past 10 years, there has been a close positive correlation between the growth of corporate credit and investment. A build-up of corporate debt has financed investment in many economies, particularly in EMEs, including high investment rates in China. Turning financial cycles in these economies could therefore weigh on investment.
As with consumption, the level of debt can affect investment. Rising interest rates would push up debt service burdens in countries with high corporate debt.
Moreover, in EMEs with large shares of such debt in foreign currency, domestic currency depreciation could hurt investment. As mentioned before, an appreciation of funding currencies, mainly the US dollar, increases debt burdens where currency mismatches are present and tightens financial conditions (the exchange rate risktaking channel).
Empirical evidence suggests that a depreciation of EME currencies against the US dollar dampens investment significantly, offsetting to a large extent the positive impact of higher net exports.
End of the Rate Hike Cycle
For the above reasons, I believe the end of the global recovery is at hand.
And when the next bust happens, the last thing central banks will be doing is raising interest rates.