The Problem With Corporate Debt

Submitted by Pater Tenebrarum via,

Taking Off Like a Rocket

There are actually two problems with corporate debt. One is that there is too much of it… the other is that a lot of it appears to be going sour.



Harvey had a good time in recent years…well, not so much between mid 2014 and early 2016, but happy days are here again!


As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:

“Businesses racked up debt in the January-to-March period at the fastest pace in three quarters, according to data released Thursday.


Business debt grew at a blistering 7.9% annual rate in the first quarter, the Federal Reserve said. Business debt has expanded by around 8% in three of the last five quarters. Companies still have substantial cash on the sidelines, as their stockpiles edged down to $1.89 trillion from $1.9 trillion.”

(emphasis added)

While Marketwatch told us how much cash companies are holding, for some reason it didn’t deign to tell us how much corporate debt there actually is, in dollars and cents. It would be nice to be able to compare these figures, wouldn’t it?

Here is a chart that shows the sum of commercial loans held by US banks and outstanding US non-financial corporate bonds:


1-Corporate debt total

US non-financial corporate debt… can’t have too much of a good thing! – click to enlarge.


Now, as we all know, this debt as been incurred in order to engage in wise capital investment, so it will be very easy to pay it back with future profits…. well, not really, actually. A lot of it appears to have been wasted in decidedly unprofitable investments. This should be no surprise with administered interest rates at zilch for many years.

The rest has been judiciously deployed for financial engineering purposes, such as stock buybacks, m&a activity and even dividend payments. This, we hear, has been quite good for the stock options of many a corporate executive. Who would want to begrudge them that?


Charge-Offs and Delinquencies Soar

We are just guessing here….but we believe there must be a few irate bank managers somewhere. Quite possibly they are irate with themselves, for having lent too much money to too many deadbeats. Here is a chart we have frequently shown before: the annual rate of change of the sum of charge-offs and delinquencies in commercial loans (we thank our late friend BC for the inspiration – may he RIP).

Believe it or not, this number is growing at a record fast pace as of Q1 2016 – at 122% y/y it is surpassing even the rate of change peak seen near the trough of the “Great Recession” of 2007 – 2009. And this is happening with the Federal Funds rate target at a measly 0.25-0-50% corridor and the broad money supply (TMS-2) still growing at more than 8% y/y!



The annual rate of change of the sum of delinquencies and charge-offs of commercial loans (black line, lhs), vs. the FF rate (red line, rhs) reaches a new record high. Good thing that corporate debt is “growing at a blistering pace” as well of late, otherwise this might get noticed – click to enlarge.


Well, who knows, but maybe buying junk bonds here isn’t the best idea ever. Just a hunch, mind.



Corporate debt remains a major Achilles heel of the echo bubble. Color us slightly astonished that so little attention is seemingly paid to it (with the notable exception of Stanley Druckenmiller, who made mention of it at a recent hedge fund conference). In our experience, the things that attract little attention are often worth watching very closely.



All aboard the Junk Express! There is no alternative for the discerning fixed income investor!


Addendum: Fitch Blurb

We just noticed this small blurb from Fitch in our mail, summarizing the latest developments in junk land:

U.S. HY Energy Defaults Tally $13 Billion in May; June TTM Default Rate Approaching 5%


The June trailing 12-month (TTM) U.S. high yield bond default rate is closing inon 5%, reaching 4.7% after another $3 billion of defaults thus far this month, The $46.4 billion of recorded defaults this year is just $2 billion less than the total for the entire 2015.


Through mid-June, energy and metals/mining accounted for 84% of defaults ($38.9 billion). The May energy TTM rate stood at 14.6% following $12.7 billion of sector defaults last month while the E&P rate is at 28.6%. The average high yield bid levels are at 92.9, up from 91.1 last month and from 83.7 in February when crude oil prices were at their low point

 (emphasis added)

via Tyler Durden

DOJ Will Censor All References To Islamic Terrorism From Orlando 911 Call Transcripts

In the ongoing war of words between president Obama on one hand, who has repeatedly said that Orlando shooter Omar Mateen was “self-radicalized” and was not influenced by Islamic elements, and Donald Trump prominently on the other, where the Republican presidential candidate has repeatedly alleged that Mateen’s actions were provoked by “radicalized Islam” which has prompted Trump to renew his calls for a temporary ban on Muslim immigrants as well as profiling Muslims already in the US, it appears that the president is about to get some much needed help from none other than the Department of Justice, which will step into the debate, by releasing Mateen’s 911 transcripts however only after heavy edits which censor and remove all references to Islamic terrorism.

As RealClearPolitics writes, in an interview conducted earlier today with NBC’s Chuck Todd, Attorney General Loretta Lynch said that on Monday the FBI will release edited transcripts of the 911 calls made by the Orlando nightclub shooter to the police during his rampage. One minor matter: the transcripts will be heavily edited.

“What we’re not going to do is further proclaim this man’s pledges of allegiance to terrorist groups, and further his propaganda,” Lynch said.

“We are not going to hear him make his assertions of allegiance [to the Islamic State].” Why: so Obama’s statement that he was “self-radicalized”

The Washington Post reported last week that the gunman made multiple phone calls while holding hostages: “The gunman who opened fire inside a nightclub here said he carried out the attack because he wanted ‘Americans to stop bombing his country,’ according to a witness who survived the rampage.”


Salon reported that: “Everybody who was in the bathroom who survived could hear him talking to 911, saying the reason why he’s doing this is because he wanted America to stop bombing his country.”


The Washington Post also noted that during his 911 call from the club, the gunman referenced the Boston Marathon bombers and claimed “that he carried out the shooting to prevent bombings, [echoing] a message the younger Boston attacker had scrawled in a note before he was taken into custody by police.”

As a reminder, Obama said that “we see no clear evidence that he was directed externally”… Well, aside from all the facts perhaps which explains the DOJ’s drastic intervention and obvious attempt to cover up the truth.

Obama went on: “It does appear that at the last minute, he announced allegiance to ISIL. But there is no evidence so far that he was in fact directed by ISIL, and at this stage there’s no direct evidence that he was part of a larger plot.” 

And what better way to make Obama’s point that Mateen was self-radicalized than to purposefully delete any and all actual Islamist references.

It gets better: FBI Director James Comey said at a press conference that the shooter’s past comments about Islamist groups were “inflammatory and contradictory.” So it’s best to just protect the public’s tender ears and just censor said comments entirely.

Loretta Lynch says the FBI will release: “A printed transcript [that] will begin to capture the back and forth between him and the negotiators.”

She concluded that “we’re trying to get as much information about this investigation out as possible,” she said.

What she did not add is that the DOJ would then release only those parts of the transcript which she and the president, found appropriate for general consumption.

And speaking of transcripts, here is what Loretta Lycnh told Chuck Todd:

LORETTA LYNCH: What we’re announcing tomorrow is that the FBI is releasing a partial transcript of the killer’s calls with law enforcement, from inside the club. These are the calls with the Orlando PD negotiating team, who he was, where he was… that will be coming out tomorrow and I’ll be headed to Orlando on Tuesday.


CHUCK TODD: Including the hostage negotiation part of this?


LYNCH: Yes, it will be primarily a partial transcript of his calls with the hostage negotiators.


CHUCK TODD: You say partial, what’s being left out?


LYNCH: What we’re not going to do is further proclaim this man’s pledges of alleigance to terrorist groups, and further his propaganda.


CHUCK TODD: We’re not going to hear him talk about those things?


LYNCH: We will hear him talk about some of those things, but we are not going to hear him make his assertions of allegiance and that. It will not be audio, it will be a printed transcript. But it will begin to capture the back and forth between him and the negotiators, we’re trying to get as much information about this investigation out as possible. As you know, because the killer is dead, we have a bit more leeway there and we will be producing that information tomorrow.

Full video:

via Tyler Durden

The Economy Is Not What It Seems

Submitted by Lance Roberts via,

Over the past several years, I have repeatedly discussed the ongoing detachment between the economic reports versus what was happening in the actual underlying economy. Last year, I wrote:

“Currently, there is little evidence that is supportive of higher overnight lending rates. In fact, the current environment continues to support the idea of a  “liquidity trap” that I began discussing in 2013. To wit:


…a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.'”

The importance of a liquidity trap can not be dismissed as the feedback loop of monetary interventions negatively impact growth by misallocated capital to non-productive uses.

Despite mainstream economists hopes that somehow “this time will be different,” the ongoing massaging of economic data through seasonal adjustments to obtain better headlines did not translate into actual prosperity.  Of course, “reality” is a cruel mistress and despite ongoing hopes and overstatements, “fantasy” eventually gives way. 

The chart below shows the S&P 500 index with recessions and when the National Bureau of Economic Research dated the start of the recession.


There are three lessons that should be learned from this:

  1. The economic “number” reported today will not be the same when it is revised in the future.
  2. The trend and deviation of the data are far more important than the number itself.
  3. “Record” highs and lows are records for a reason as they denote historical turning points in the data.

Economic Growth Not What It Seems

The last two-quarters of economic growth have been less than exciting, to say the least. However, these rather dismal quarters of growth come at a time when oil prices and gasoline prices have plummeted AND amidst one of the warmest winters in 65-plus years.

Why is that important? Because falling oil and gas prices and warm weather are effective “tax credits” to consumers as they spend less on gasoline, heating oil and electricity. Combined, these “savings” account for more than $200 billion in additional spending power for the consumer. So, personal consumption expenditures should be rising, right?


What’s going on here? The chart below shows the relationship between real, inflation-adjusted, PCE, GDP, Wages and Employment. The correlation is no accident.


Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, can not be repealed. 

More importantly, while there is currently “no sign of recession,” what is going on with the main driver of economic growth – the consumer?

The chart below shows the real problem. Since the financial crisis, the average American has not seen much of a recovery. Wages have remained stagnant, real employment has been subdued and the actual cost of living (when accounting for insurance, college, and taxes) has risen rather sharply. The net effect has been a struggle to maintain the current standard of living which can be seen by the surge in credit as a percentage of the economy. 


To put this into perspective, we can look back throughout history and see that substantial increases in consumer debt to GDP have occurred coincident with recessionary drags in the economy.

“No sign of recession? Are you sure about that?”


As I wrote last week:

“Despite rumors to the contrary, since 2013, the bond bull market remains alive and “kicking.” This is no surprise as I have written many times in the past, as interest rates, and ultimately bond prices, are a direct reflection of real economic strength and inflationary pressures.”


“Furthermore, the recent decline in rates likely suggests a much weaker economic environment than is currently expected. The last time that rates were this low, and potentially heading lower, was during the economic slowdown in 2012 which bordered on a recession.


In 2012, the Federal Reserve was in extreme accommodation mode, profits were growing and multiples were expanding. That is not the case today.


The takeaway of all this is the risk to equities may be higher than currently expected.  If rates, economic data trends, and valuation reversions are sending the correct message, the forthcoming negative revisions to the underlying data will derail the current bullish thesis of a profits recovery in the making.”

I Told You So

So, why all the rehash of commentary from the past three years.  Simple. Because, of the following:

“The Department’s Bureau of Economic Statistics (BEA) regularly makes small revisions to its published statistics as more information becomes available over time. But in a massively large adjustment, the BEA just revised downward — by $346 billion — the real (after-inflation) GDP for 50 states and the District of Columbia, covering the 11-year period from 2005 through the end of 2015.


According to BEA’s newest data, real GDP was overstated by about $125 billion from 2007 through 2008, during the period leading into the start of the Great Recession. But the overstatement shrank to about $70 billion in 2009.


During 2012 and 2013, when the U.S. economy had what some have referred to as a micro-recession, the overstatement of real GDP growth ballooned to about $275 billion. Despite over $100 billion in revisions to real GDP growth in 2014 and 2015, the overstatement continued to grow to $324 billion, or 2 percent of GDP.”

This announcement of negative adjustment to GDP is obviously no surprise to regular readers of this newsletter. Since the beginning of this year, I have been hammering on the problem of seasonal adjustments.

“Importantly, the extremely warm winter weather is currently wrecking havoc with the seasonal adjustments being applied to the economic data. This makes every report from employment, retail sales, and manufacturing appear more robust than they would be otherwise. However, as the seasonal trends turn more normal we are likely going to see fairly negative adjustments in future revisions. This is a problem that the mainstream analysis continues to overlook currently, but will be used as an excuse when it reverses.”

Here is my point. While my call of a forthcoming “recession” may seem far-fetched based on today’s economic data points, it should be remembered that no one was calling for a recession in early 2000 or 2007 either.

Furthermore, given the weakness in corporate profits and declining return on equity, it is extremely likely the current economic estimates are substantially weaker as well. This suggests that by this time next year, we will once again find out the economy was as weak as corporate profits were already suggesting. Unfortunately, by the time the data is adjusted, and the eventual recession is revealed, it won’t matter as the damage will likely have already been done.


While being optimistic about the economy and the markets currently is far more entertaining than doom and gloom, it is the honest assessment of the data and the underlying trends that is useful in protecting one’s wealth longer term.

Is there a recession currently? No.

Will there be a recession in the not so distant future? Absolutely.

While calls for a “massive recession” may very well turn out not to be true, even a mild recession could have a substantial impact on personal wealth given the current deviation in prices from long-terms norms.

Getting to say “I told you so” isn’t the point of this missive. What is important is understanding that “bullish exuberance” will likely meet its same fatal ending as it always has. Understanding that “risk” is simply a function of how much you will “lose” when you are eventually wrong is the key to surviving the next major market downturn. 

“In a bear market, the man who wins is the man who loses the least.” – Dick Russell


The Monday Morning Call – Analysis For Active Traders

Markets Fail At Resistance

Last week, I discussed the failure of the market to hold its breakout about 2100 which keeps the market confined within the bearish trend that began in May of last year. Here is the updated chart that discussion.


As I stated two weeks ago in this missive:

With the market now overbought on a WEEKLY basis, there is little “fuel in the tank” to substantially drive prices higher in the short-term.

In the chart above, I added vertical red dashed lines which denote the combination of both oversold conditions AND a stochastic sell signal. The combination of these two factors suggests more price weakness over the next couple of weeks. 

As has been repeatedly been the case, with risk outweighing reward at the moment, a more cautious stance to portfolio management should be considered.

The next chart shows the now 13-month long sideways trading range of the market. However, most importantly, the downward trending price pattern remains in place. The recent failure at the downtrend resistance line remains a concern.

The vertical blue-dashed lines denote market sell signals where subsequent price action has been poor, to say the least. While a “sell signal” is NOT CURRENTLY in place, it will not require much further deterioration in price to trigger one. 


As I stated last week:

“As shown in the top part of the chart above, when the markets are as overbought as they are now, it has generally been at, or near, a short-term peak in the market.”


The short-term outlook continues to suggest more vulnerability to selling. The failure of the markets to hold support at 2080 now sets the market up to test support at 2040.

Stop loss levels remain in place at 2040 currently. A break of 2000 will initiate a market-neutral hedging strategy to reduce overall equity exposure and related portfolio risk.

Interest Rates & Bonds

Despite all of the “bullish bantering” by the nattering nabobs who have actually never lived through a bear market, interest rates are currently telling you several things:

  1. The economy is substantially weaker than headlines suggests (hence the coming negative revisions)
  2. Money is seeking safety over risk which leaves equity markets at risk of reversions.
  3. Inflationary pressures are likely lower than advertised, and;
  4. Recession risks are rising (recessions average 30% bear market declines)

As shown in the chart below, interest rates are now pushing towards their lowest rates on record which were set in 2012 during the “micro-recession” and debt-ceiling default debate.


However, there IS some short-term good news for equity bulls.

With interest rates extremely oversold, making bonds extremely overbought, a reversal in rates should be expected. Such a reversal should lead, at some point, to a shift back into equities for a counter-trend rally. Unfortunately, as shown above, and below, for those continuing to expect an end to the “bond bull” market, such a counter-trend rally would only likely approach 2%ish.


As a quick side note, the death of the “Great Bond Bull Market” is greatly over-exaggerated. As I have written many times in the past, rates are a function of economic growth, inflation, and monetary velocity.

As my friend Charles Hugh-Smith recently penned:

Take a declining population with declining rates of productivity growth and load it up with debt, and you get a triple-whammy recipe for permanent stagnation.”

While this sounds like what is currently happening in the U.S., he was actually talking about Japan. But the similarities are quite staggering between the two countries, and as with Japan, the ingredients for higher interest rates are simply “gone.”

Furthermore, historically speaking, there is plenty of evidence, much like Japan, we are just beginning an extremely long period of low interest rates. Such will contribute to the expectation of a low-return environment over the next 10-20 years as economic growth remains mired at lower levels.


While the “Great Bond Bull” market of the last 30-years, which has been a huge tailwind to overall portfolio returns has been largely harvested, the next 20-years will likely be a trading range that will have to be managed not unlike an equity portfolio.

The new paradigm for adding to portfolio returns will require taking advantage of interest rate declines to shorten-duration and harvest profits, while extending duration and adding to bonds on advances.

Yes, Virginia, you will now have to actively manage risk on BOTH sides of portfolio allocation. However, effectively doing so will set advisors apart from their “buy and hold” counter-parts and create real “value” for their clients.

via Tyler Durden

Orlando Shooter’s Employer Admits It Made A “Clerical Error” Regarding His Mental Health

As details continue to emerge surrounding Orlando shooter Omar Mateen, so do the holes in the narrative.

Case in point, last week’s statement by the shooter’s employer, G4S, the world’s largest security company, that he had passed a 2007 psychological text without any problems. The document that G4S submitted to Florida state listed psychologist Carol Nudelman. But after news of the document was reported, by the Miami Herald and other media, Dr. Nudelman, whose last name is now Blumberg, issued a statement saying she hadn’t evaluated any tests for the security company after 2005. The attorney for Nudelman (or Blumberg) added on said Sunday that she did not
live in Florida in September 2006 when the psychological assessment was
purportedly performed.

Oops. What happened then? Well, as the WSJ reported earlier today, G4S reported that it made a “clerical error” in documents submitted to the state of Florida in 2007 regarding the mental health of Mateen, the gunman whom authorities have named as the person who killed 49 people in an Orlando nightclub last week. Specifically, the company said that it listed the wrong name for the psychologist who evaluated a test for Mateen that was required under state law for him to carry a firearm as a security guard.

So here comes the new narrative: G4S said Mateen’s evaluation in September 2007 using the Minnesota Multiphasic Personality Inventory, a common psychological assessment tool, was in fact conducted by a third-party vendor called Headquarters for Psychological Evaluation. The security firm said Mateen had an above-average rating and that he had a favorable recommendation for employment. “Dr. Nudelman’s name appeared on the license as scoring the exam; it was a clerical error,” G4S said.

As previously reported, G4S added that it didn’t conduct a psychological evaluation of Mateen in 2013 after he was investigated by the Federal Bureau of Investigation for telling co-workers at a Port St. Lucie courthouse that he had ties to terrorist groups.

G4S said it doesn’t conduct psychological exams of security guards after they are hired. It said that at the time of the FBI investigation Mateen complained that he had made the statements in anger after being harassed by coworkers.  “It is not our policy—nor the policy of any security provider or law enforcement agency that we are aware of—to demand psychological exams in such situations,” the company said in a statement.

Perhaps it should have: in a stunning new report emerging this afternoon, Alternet writes that before Omar Mateen gunned down 49 patrons at the LGBTQ Pulse Nightclub in Orlando, “the FBI attempted to induce his participation in a terror plot. Sheriff Ken Mascara of Florida’s St. Lucie County told the Vero Beach Press Journal that after Mateen threatened a courthouse deputy in 2013 by claiming he could order Al Qaeda operatives to kill his family, the FBI dispatched an informant to “lure Omar into some kind of act and Omar did not bite.”

While self-styled terror experts and former counter-terror officials have criticized the FBI for failing to stop Mateen before he committed a massacre, the new revelation raises the question of whether the FBI played a role in shifting his mindset toward an act of violence. All that is known at present is that an FBI informant attempted to push Mateen into agreeing to stage a terror attack in hopes that he would fall into the law enforcement dragnet.

We will follow up with more on this fascinating angle but for now we await to see if at least this revised version of G4S’s story is true: as the WSJ concludes, a representative for Headquarters for Psychological Evaluation – the company which supposedly was the real one to evaluate Mateen, did not respond for a comment on Sunday.

via Tyler Durden

Are You Listening, Canada: Australia Slaps Chinese Home Buyers With New Taxes

In a move that we strongly urge Canada (and every other nation which is the end-target of Chinese hot money laundering) to evaluate, Sydney announced it would impose new taxes on foreigners buying homes as concerns grow that a flood of mostly Chinese investors is crowding out locals and killing the “Great Australian Dream” of owning property. As Sydney prices rise to record levels – the Australian city is ranked only second to Hong Kong as major cities with the world’s least-affordable housing – new potential homeowners have been increasingly forced out of the market with foreigners blamed as a key factor the AFP reports.

We can only assume that China’s infamous offshore money laundering nexus of Vancouver did not make the list because some Chinese oligarch paid enough money to make that particular city name disappear.

Sydney (pictured) is ranked only second to Hong Kong as
major cities with the world’s least-affordable housing

As for Sydney, the crackdown on foreign oligarchs is long overdue: “the governments want to respond to a perception about housing affordability and the impact of foreign investment on that,” KPMG Australia’s indirect tax specialist Michelle Bennett said. “(Politicians) are raising money from people who aren’t voting, so superficially you can understand that it’s possibly not bad politics,” she added, but warned the measures could be a “blunt instrument” that could hurt the market.

As AFP notes, last year, leading apartment developer Lend Lease sold out more than Aus$600 million (US$445 million) worth of new units in Sydney’s Darling Harbour in under five hours, with the Australian Financial Review reporting that one-third of buyers were foreign. Lend Lease said the sale broke local records but such reports have also fuelled calls for government action to protect Australian buyers.

Prior to Sydney’s move, other Austrlian states had already implemented protections and in response to China’s unprecedented influx of cash, the New South Wales, Victoria and Queensland state governments have introduced or are set to slap new property and land taxes on foreign buyers, sparking an outcry from developers fearful that they will flee to other markets such as New Zealand and Canada. “It is very bad. Without the Chinese nothing would ever get built,” the country’s richest man and head of prominent developer Meriton, “high-rise” Harry Triguboff told the Australian Financial Review last week.

To emphasize his point, Trigubov decided that it’s appropriate to swear: “Never mind the bullshit stories, sales volumes have already dropped and prices are coming down steadily. The Chinese buyers are already disappearing.”

We are confident millions of locals who are completely priced out of the market, would have a comparably angry response.

Furthermore, predictions of the collapse of Australia’s housing market are greatly exaggerated: the proposed tax in Sydney’s New South Wales state to be announced this week would be only 4% , in Queensland it is 3% and in Victoria 7%. The island continent experienced an average 7.25% annual housing growth over the past three decades according to the central bank, attracting Chinese investment into commercial and residential real estate.

As AFP adds, the Chinese invested Aus$4.2BN in 2011-12, rising to Aus$24.3BN  in 2014-15 according to Australia’s Foreign Investment Review Board, making them the largest overseas buyers. But foreign investment – including in local firms and agricultural land – is politically sensitive and last year the national government forced some offshore owners to sell properties after tightening regulations.

Housing affordability, and the role of property investors, has also been a key battleground ahead of national elections on July 2.

Still, now that much Chinese demand will shift away, many are already lamenting the “inevitable” Australian housing bubble burst: “with housing prices appearing to be coming off the boil and the economy transitioning away from a mining boom, analysts say the state taxes could backfire.

“It’ll have ramifications down the track when the market goes through a pretty significant downturn in terms of construction and developers are finding it hard to get projects going,” BIS Shrapnel’s managing director Robert Mellor said.


Signs of a softening housing market could also be why states appear to be trying to “grab some revenue while it’s on offer”, leading property data provider CoreLogic’s Australia research head Cameron Kusher said.

In any event, it remains to be seen just what the impact of the next tax will be: “the people that are buying for the long-term… maybe at some point to migrate to Australia, I don’t think it would act as too much of a deterrent for them,” he said.

And should the Chinese balk at the Australian market, concerned about further tax increases and more punitive measures targeting foreign investors, the biggest losers would once again be Vancouver (and Toronto) residents, where home prices will get even more exponential-er, as every last Chinese buyer focuses on the one country that no matter how obvious the bubble, simply refuses to do anything and implement similar or not so similar taxes and other barriers to foreign purchases.

via Tyler Durden

Mrs.Watanabe Defies The BOJ Once Again While Betting On Robots

As the BOJ continues to load up on Nikkei ETFs in hopes that the rest of the market will be faked out and buy Japanese equities, Mrs. Watanabe continues to be a nemesis.

In addition to being in the market for DM government bonds, Japanese investors are also piling into Nikko Asset Management's Global Robotics Equity Fund, which would be fine with the BOJ, except that only a third of the fund is allocated to Japanese equitites. As the FT reports, the fund's assets are divided up roughly in thirds among the US, Japan and Europe, holding a portfolio of 41 stocks relating to robotics and automation. The fund's top holdings are Japanese factory automation group Keyence, and US-based Rockwell Automation.

The fund launched on August 31, 2015 with assets of about $1 billion, however that has now swelled to nearly $5 billion being driven by retail investors who like a yen-based fund that diversifies into six other currencies including the USD, Euro, and Swiss Franc. Since inception, the fund has gained only .6%, however thanks to the BOJ and its maniacal pursuit of negative interest rates, a .6% return doesn't appear all that bad to investors (especially since the fund's benchmark Nikkei 225 is down more than 10% over that same time period).

"When we originally thought up this fund, we thought this was going to attract young, male investors. Actually, our distributors are telling us that women and older investors are buying strongly. You have to remember that Japan is a country where people are very familiar with robots." said Naofumi Chiba, the fund's creator, adding that Japanese investors can see that not only are companies such as Google, Amazon and Facebook pouring money into robot companies, but they can already see the effects of a shrinking population at home.

So the older generation of savers are choosing to diversify away from Japanese equities and JGBs, causing further head scratching for Abe and Kuroda. Funny how that works, central planners cannot simply control every decision made by individuals, yet it is tried every single time by the smartest people in the room.

The fund, with its bet on the future of self-driving cars, helper automations, artificially intelligent drones and human-free factories may have started at just the right time. Recall that China has already made a plan to become more dependent on robotics in order to overtake the likes of Germany, Japan, and the US in terms of manufacturing sophistication, which means that the rest of the world won't be far behind in that effort (WalMart drones replacing humans in its distribution centers for example). Also, the size of the global robot and AI market is set to grow to $153 billion by 2020 according to BAML, with robots performing 45% of manufacturing tasks by 2025.

We'll leave readers with this interesting video, which shows how the Japanese have embraced cutting-edge robotics. This is a prototype of the Smart Cyber Operating Theater (SCOT), which helps surgeons track a patient's condition in real time.

From the Japan Times

Currently designed for brain tumor surgery, SCOT helps surgeons to track a patient’s condition in real-time by displaying on a computer monitor information such as the grade of tumors and the level of nervous system damage — information for which, until recently, surgeons have had to rely on their experience and intuition.


Surgical skill is still the most important part of an operation, but the project aims to improve surgical precision and patient safety with the help of the online system.


Surgery has long employed cutting-edge technology. But in many cases, the information provided by various devices hasn’t been available in an organized format, Muragaki noted.


In smart surgery, on the other hand, information from each medical device is consolidated in real-time, reducing the burden on doctors and shortening surgical time, a project member said.


The information collected during surgery can also be shared online, allowing experienced doctors to advise their less-experienced counterparts remotely during operations.


The stored data can also be studied by medical students and inexperienced doctors so they can improve their technique. In the event of a surgical error, the data can be used to analyze mistakes and avoid them in the future.


The standard version of SCOT, which essentially displays a patient’s real-time information, has been in operation at Hiroshima University hospital since May. The “hyper” version, which has additional functions such as remote control of robotics based on the real-time information, will start operating at Tokyo Woman’s Medical University by summer 2019.

* * *

via Tyler Durden

Wayne State University Drops Math As General Requirement, Will Replace It With “Diversity”

By Derek Draplin of Michigan Capitol Confidential

A faculty committee has proposed adding a three credit hours requirement in diversity to the general education curriculum at Wayne State University. It also recommended that WSU drop its university-wide requirement in mathematics, an idea that was carried out on June 13.

“We are proposing the creation of specific ‘Diversity’ courses, with students required to take one course in this designation,” said a document from the General Education Reform Committee, which is recalibrating what the university will expect from all students who earn a degree from the state university. It released the proposal in May.

The committee report said, “These courses will provide opportunities for students to explore diversity at the domestic level and consider the ways in which it intersects with real world challenges at the local, national and/or global level.”

In announcing the change in mathematics, the university said, "This decision was made largely because the current (math) requirement is at a level already required by most high school mathematics curriculum."

Committee co-chair Monica Brockmeyer told the Detroit Free Press, “We felt the math requirement was better left to the various programs and majors to decide and to decide what levels of mathematics would be needed.” She added, “We still continue to support mathematics at Wayne State.” The university has announced that the math requirement in the general education curriculum will be dropped until 2018, or until it is replaced by a new program.

Ashley Thorne, the executive director of the National Association of Scholars, which promotes liberal arts education and academic freedom, was critical of the recommendations.

“Colleges and universities use general education requirements to ensure that students learn the subjects it deems most important,” Thorne said in an email. “Wayne State University’s decision to drop math and add diversity to its requirements reveals that its leaders do not have their priorities straight.”

“Mathematical ability is an objective and practical skill that will serve students the rest of their lives, which is why it has traditionally been a core part of college curricula. ‘Diversity’ is not an academic subject. It is a concept invented to classify people by their social identities,” she said. “Focusing on individuals’ race, ethnicity, sex, and sexuality in this way has been demonstrated to lead to racial animus, segregation, stigmas, discrimination, and poor academic performance. It also politicizes education.”

The College Fix first reported on the diversity requirement. Brockmeyer, who did not immediately respond to a request for comment, made $176,760 in 2015 in her job as the associate provost for academic success.

The committee’s proposal for the new curriculum recommended replacing the math requirement with a quantitative requirement and creating “quantitative experience courses.” It’s unclear if the quantitative courses will replace the math requirement. The goal of those courses, according to the committee, would be for students to develop "the ability to interpret quantitative representations of information (such as graphs and tables), and the ability to use quantitative information to communicate in a purposeful way."

In the 2015-16 fiscal year, 32 percent of Wayne State’s general fund budget of $602 million — or $190 million — came from Michigan taxpayers in the form of state aid.

According to the most recent information released by WSU about its demographics, 27,578 students are enrolled. Black students make up the largest minority, at 4,881 students, or approximately 18 percent of the student body. The 2,057 Asian students represent 7 percent. There are 15,004 white students, making up 54 percent of the student body.

via Tyler Durden

Meanwhile In Missouri…

A personalized license plate that reads ‘JIHAD 1’ has been allowed in the state of Missouri…. (because 'DEATH TO THE INFIDEL" was too long?)


After examining the policies for granting or denying personalized license plates, a Department of Revenue representative told local News4 that they had no legal authority to deny the word. However, as reports, a similar personalized license plate that read ‘J1HAD’ was rejected by the state in 2009.

The state did not provide an explanation for why that particular license was rejected while this one was allowed, according to News 4.


The ‘JIHAD 1’ license plate, which was seen on a car in St Louis county, belongs to a Muslim couple who have a 14-year-old son named Jihad, whose name inspired the license plate, News 4 reported.


The family also noted that Jihad, a traditional Muslim name, has a spiritual meaning for Muslims, contrary to violence and terrorism associations with the word.


‘Jihad is very common and it doesn’t mean Holy War,’ Faizan Syed, the executive director of the St Louis Chapter Council on American Islamic Relations told News 4.


‘It means someone who is struggling, so when you name your kid Jihad, it means someone who is going to struggle to be better.’


However, he added that the word ‘has the ability to confuse’ and said since the average American thinks of Jihad as a certain thing, ‘it’s probably better for this individual not to use it.’

In Illinois, the word Jihad is banned from being used on license plates, according to the station.

Among other license plates banned over the years in both states include ‘KKK’, ‘HATERZ’ and ‘K1LLER.’

via Tyler Durden

“Black Wednesday” Memories Haunt Traders Ahead Of Thursday’s Referendum

Ahead of Thursday’s historic Brexit referendum vote, market jitters are bringing back memories of September 16, 1992, when the UK was forced out of the EU’s exchange-rate mechanism, or ERM, as speculators’ borrowing exhausted the central bank’s resources to keep the pound above its floor.

This is better known as the day George Soros “broke the Bank of England”, making over $1.5 bilion profit in the process.  On that day, the U.K. decided to let the pound float freely rather than to suffer the high interest rates needed keep the currency within its limits. As a result the central bank raised its key rate to 12% from 10%, then announced a second increase to 15%. By the evening of that same day, which became known as “Black Wednesday,” the government withdrew from the ERM, a pre-euro system of European exchange-rate integration.

24 years later, traders recall one of the longest days in the history of the currency.

Here, courtesy of Bloomberg and for the benefit of traders who were still in school (or may not have been born), is a recap of how veteran FX traders saw, and reacted to, events on “Black Wednesday” two and a half decades later in what has been dubbed “one of the longest days in the history of sterling.” Will Thursday be an even more historic day for FX trading? We will know the answer in just four days…

John Glover, now a Toronto-based managing director at risk- advisory firm Validus Risk Management:

  • “At the time I was running the USD/Deutsche Mark options book for a Canadian bank, but we did run a very large GBP/USD book
  • ‘‘GBP had been the focus in the days leading up to the ERM exit, losing somewhere around 5% of its value in two or three days
  • ‘‘For a day or so, no one could understand what was happening, unless of course you were at a bank where Soros was a client of the gilts desk
  • ‘‘That day, the only GBP flows going through were institutionals that had to get out of longs, and it was pretty much only the BOE that was buying”
  • “Our central bank desk struggled to get through to the bank as the phone lines were jammed. Corporates were sitting on the sidelines
  • ‘‘Our GBP options book made more in two weeks than they ever had in a year”

David Woolcock, now London-based global head of sales and business development at Eurobase:

  • “I was the treasury manager for Credit du Nord in London, managing a dealing room of six people and responsible for a proprietary risk portfolio
  • “It was very hectic in the run-up to the exit, which took place afterhours in London. The morning started with the normal pressure on the weak currencies. However, soon the selling of sterling really ramped up on rumors of heavy sales from a known source
  • “With the money markets barely functioning and wild exchange-rate oscillations still occurring on very wide quotes for nickel and dime amounts, it was an eerie market that was full of ghoulish barrack-room humor! Sterling was trading outside the agreed bands, and the game was up
  • “Brexit is a known unknown and so the markets are probably in ’sell the rumor buy the fact’ mode
    “If the vote if for an exit, the debate about what will actually happen to the government will keep the markets nicely volatile, but given the length of time the whole process would take, things would soon be business as usual”

Peter Frank, now a London-based FX strategist at BBVA:

  • “I was working on a bond-trading desk back then, and it was complete mayhem
  • “I remember everyone just screaming and shouting and running around in panic, with dealers shouting prices down several phones at once
  • “An exit from the EU would be similar because it will be chaotic and markets will trade in a very whippy fashion if the leave campaign wins [but] Brexit would be different because it has been openly discussed for years”
  • “Opinion polls have also been close between ‘remain’ and ‘leave’ on a consistent basis, there has always been a strong possibility of Brexit happening
  • “This is different to the ERM in which there was only ever a hypothetical danger of ERM break-up”

Pierre Lequeux, London-based founder of currency advisory firm Argonautae:

  • “I was working on the quantitative and trading desk of BNP London. This was essentially a prop trading desk, and I had my own risk limit and could trade pretty much anything from FX to commodities rates and equity indices
  • “I remember 1992 more vividly. One of the reasons is that it proved to be a one of our best months ever. All our positions in gilts, FTSE, GBP/DEM and other Deutsche mark crosses went our way, I guess because many trends had started way before Sept. 16, when the market really gapped”
  • “1992 was a very different market than what we have today. The speed of access to market and information is way faster. This is a massive differencing factor, and if the market is upset the intraday volatility will be much worse”

Charles-Henri Sabet, London-based chief executive of London Capital Group:

  • “I was trading for my company, TCC Sa. We had an excellent day at the desk. We were all selling GBP/DEM; the only one buyer was BOE, at 2.7860 supporting the floor, then at 6.00 pm they took their bid out and it went down to 2.2000
  • “The FX market was a lot of fun with market makers and risk takers, not like now that FX market is run by geeks
    ‘‘We could see huge spreads in the case of a Brexit because there may be no interest to take risk, but after one hour, we will probably back to reality.”

Thierry Wizman, now a New York-based analyst at Macquarie Group:

  • “I was not trading at the time, but I was working at the Federal Reserve”
  • “My memories have more to do with the notoriety that George Soros gained from breaking the BOE, rather than concern or fear about what this could mean for the global economy. Most people saw this as a good thing for the U.K., since inflation and more competitiveness would come out with being unshackled from ERM
  • “I distinctly recall that while the BOE disdained Soros and other speculators, there were many people in the U.K. who considered him to be a hero at the time”
  • “There are analogies to today. Many people will see the U.K. as being unshackled from Brussels to be a good thing, although the speculators will have much less of a role in bringing this about this time.”
  • “The U.K. tabloids, I suppose, are playing the role of speculators this time around”

* * *

Much more in this BBC special on “Black Wednesday”

Source: Bloomberg

via Tyler Durden

Cable Spikes Above 1.44 As “Remain” Odds Top 75%

Extending the post-Jo-Cox-death rally, Cable has surged 75pips in early trading, back above 1.44 at 10-day highs, as bookmaker odds swing back higher. Based on “oddschecker” lines, “remain” now has an implied 75% chance of winning on Thursday…

GBPUSD is now 450 pips off the “Cox is Dead” headline bottom…

via Tyler Durden