Tag: news

Yes, Virginia… There Can Be ‘Red’ Christmases

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

In 1897, Virginia O’Hanlon asked her father if Santa Claus was real. He said she should ask The Sun, a prominent New York City newspaper of the day. Back then there was no fake news apparently, so if the Sun put it in print that there was a Santa Claus, there must be a Santa Claus.

Francis Church, an editor for The Sun, penned the response which contained the now famous phrase “Yes, Virginia, there is a Santa Claus.”

As the holiday season rolls around, many investors have a similar question; will there be a Santa Claus rally? In this article, we examine historical data to see whether Saint Nick will provide holiday cheer to investors or the Grinch will foil their wishes.

The Santa Claus Rally

The Santa Claus Rally, also known as the December effect, is a term for the occurrence of more frequent than average stock market gains as the year winds down. For longer-term investors, this article serves as a whimsical note on what might or might not occur this December. Traders willing to measure trades in hours and days, not months or years, might find useful data in this article to make a few extra bucks. Regardless of your classification, we use the traditional disclaimer that past performance is not indicative of future results.

For this analysis, we studied data from 1990 to current to see if December is a better period to hold stocks than other months. The answer was a resounding “YES.” The 28 Decembers from 1990 to 2017, had an average monthly return of +1.70%. The other 11 months, 308 individual observations over the same time frame, posted an average return of +0.62%.

The following graph shows the monthly returns as well as the maximum and minimum intra-month returns for each December since 1990. It is worth noting that more than a third of the data points have returns that are below the average for the non-December months (+0.62%). Further, if the outsized gains of 2008 and 1991 are excluded, the average for December is +1.05%. While still better than the other months, it is not nearly as impressive as the aggregate 1.70% gain.

Data Courtesy Bloomberg

Next, we analyzed the data to explore if there are periods within December where gains were clustered. The following two graphs show, in orange, aggregate cumulative returns by day count for the 28 Decembers we analyzed. In the first graph, returns are plotted alongside daily aggregated average returns by day. Illustrated in the second graph is the percentage of positive days versus negative days by day count along with returns.

Data Courtesy Bloomberg

Visually one notices the “sweet spot” in the two graphs occurs between the 10th and 17th trading days. The 17thtrading day, in most cases, falls within a day or two of Christmas. The table below parses data for the aggregated Decembers into three time frames; early, mid and late December to highlight the “sweet spot.”

Summary

This year, the 10th through 17th trading days are December 14th through the 26th. If 2018 plays out like the average of the past 28 years, there might be some extra goodies under the tree for those playing the Santa Rally. We caution, as shown earlier, that there have been Christmases where investors relying on the rally woke up to find coal in their portfolio stockings.

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France Deploys 12,000 Riot Cops; Closes Eiffel Tower; Coup Attempt Feared As Yellow Vests Plan “Act IV”

French authorities will deploy at least 12,000 riot police and gendarmes in Paris on Saturday according to BFM, as the Elysee prepares for “act four” of the Yellow Vest movement’s violent protests against the Macron government. 

A total of 12,000 civil servants mobilized, not counting the number of police stations and judicial police. –BFM (translated)

In addition to the closure of the Eiffel Tower on Saturday, several Paris museums have announced that they won’t be open this weekend. 

“The demonstrations announced Saturday, December 8 in Paris cannot guarantee the safety of visitors, the Sete has made the decision to close the Eiffel Tower,” announced the Societe de la Tour Eiffel which operates the monument. 

Despite Macron’s government delaying a planned fuel hike by six months, the Yellow Vest movement has called on its followers to “stay on our course,” over Facebook and gather for “The Act IV”  on Saturday the 8th, in what will be the fourth week of protests. 

Coup attempt?

French intelligence services have reported to the Elysee Palace – the official residence of President Macron, in light of “calls to kill” and “carry arms to attack” government officials, parliamentarians and police, according to Le Figaro. “They are putschists. We are in a coup attempt,” said Le Figaro‘s sources. 

On Thursday, Yellow Vest leader Eric Drouet said “Saturday will be the final outcome. Saturday is the Elysee,” adding “we all would like to go to the Elysee.” 

Le Figaro also reports that Saturday’s demonstrations may involve unprecedented violence, as it may include “a hard core radicalized” element,  from “both the extreme right and extreme left.” 

Four people have died over the last several weeks of protests across France – including an 80-year-old woman who died of shock after a police tear-gas canister was launched into her apartment window as she was trying to close it. Over 400 people were arrested in last weekend’s violent protests, while more than 130 were injured. 

Macron’s administration has struggled to calm the protesters – initially delaying a planned fuel tax hike by six months, and then floating a tax increase for the wealthy. Thus far, none of it has worked. 

Yellow Vest protesters recently told Russian state-owned RT that the government has lost touch with its people, and that they have to “put humane attitude first, and not the money.” Another protester said that they “would prefer to be at work, than to find [themselves] on the streets shouting, hoping for nothing.”

 

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The Canary In The Coal Mine Has Died…

Authored by Chris Hamilton via Econimica blog,

What happens when asset valuations rise well in excess of income?  Generally bubbles form and then burst.  With that in mind…

Wilshire 5000 (red line representing all publicly traded US equities), disposable personal income (dark blue line), real disposable personal income (light blue line), and federal funds rate (black dashed line).  During each bubble, assets have appreciated far faster than incomes to support those higher asset prices.   Lower interest rates and higher leverage have been used to incent greater quantities of debt…to be paid in the future.  All data is through Q3 but not inclusive of the volatility seen thus far in Q4.

And what role did lower interest rates play in rising asset valuations (and the encouragement of higher leverage)?  Quite a bit.  Chart below shows the household net worth as a percentage of disposable personal income versus the federal funds rate…and that is not a pretty picture.  Assets valuations have never been higher in comparison to disposable income (what is left to all American’s after taxes are paid).

But the HHNW data only goes through Q2 2018…and I still expect to see one more bump in Q3…but after that, the die is cast, and asset valuations will likely be far lower, starting with Q4 and on.

How could we have guessed it???  Credit card delinquencies among the not top 100 US banks versus household net worth as a % of disposable income (chart below).  Essentially, on the way up, it’s a party and many folks (including those most marginal) feel rich.  But at some point the higher asset prices push rents too damn high, etc. etc. and the marginal consumer OD’s on credit.  Then the delinquencies begin.  Consumers and banks both find themselves over their skis and in need of cutting back.  A vicious cycle typically ensues.

Finally, I’ve inverted the credit card delinquencies among the not top 100 banks versus HHNW as % of DPI (chart below).  That seems telling.  The other 4600+ US banks not getting interest on excess reserves, not too big to fail, have overextend to make a buck and keep up with the big banks. 

Now we find that the marginal US consumer is misusing subprime credit cards and the proverbial “canary in the coalmine” is dead. 

A typical pullback would see total household net worth decline about 25% until incomes are again more in-line and we have already seen a 10% pullback in US equities.  But, my guess is this next retrace will not be typical and instead has great potential to be quite “atypically” severe.

Perhaps the current market turmoil, the massive surge in federal spending coupled with slashed corporate taxation…maybe there’s something behind all this more than the “trade war” narrative allows?  It could be the massive surge in the “not in labor force” yet to come HEREor the minimal further growth in employment HERE or the next round of housing trouble now underway HERE.  Or maybe it’s a little bigger than that, something like the growth in global energy consumption collapsing, the details and causes discussed HERE.

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A Powerful Dissent Charges Judges Who Casually Uphold Magazine Restrictions With Disrespecting the Second Amendment

Yesterday the U.S. Court of Appeals Court for the 3rd Circuit upheld New Jersey’s 10-round limit on gun magazines, echoing five other federal appeals courts that have found such laws to be consistent with the Second Amendment. “New Jersey’s law reasonably fits the State’s interest in public safety and does not unconstitutionally burden the Second Amendment’s right to self-defense in the home,” Judge Patty Shwartz concludes in an opinion joined by Judge Joseph Greenaway.

A powerful dissent by Judge Stephanos Bibas, the third member of the 3rd Circuit panel, argues that the majority’s reasoning fails to take the Second Amendment as seriously as the Supreme Court said it should be in District of Columbia v. Heller, the landmark 2008 decision that overturned a local ban on handguns. “The Second Amendment is an equal part of the Bill of Rights,” Bibas writes. “We must treat the right to keep and bear arms like other enumerated rights, as the Supreme Court insisted in Heller. We may not water it down and balance it away based on our own sense of wise policy.”

New Jersey, which has banned magazines holding more than 15 rounds since 1990, imposed the stricter limit last June in response to mass shootings. The law requires owners of “large capacity magazines” (LCMs) to surrender them to the state, render them inoperable, modify them so they cannot hold more than 10 rounds, or sell them to authorized owners (such as retired police officers, who are exempt from the ban) by December 10. New Jersey residents who fail to comply by Monday will become felons, subject to a maximum fine of $10,000 and up to 18 months in prison for possessing previously legal products.

Judges Shwartz and Greenaway note that “millions of LCMs have been sold since 1994” and that “LCMs often come factory standard with semi-automatic weapons.” They “assume without deciding that LCMs are typically possessed by law-abiding citizens for lawful purposes and that they are entitled to Second Amendment protection.” But because New Jersey’s LCM ban “does not severely burden the core Second Amendment right to self-defense in the home,” they apply “intermediate scrutiny,” which requires that a challenged law advance “a significant, substantial, or important interest” in a way that “does not burden more conduct than is reasonably necessary.” By contrast, “strict scrutiny” requires that a challenged law be “narrowly tailored” to advance a “compelling governmental interest.”

The majority concludes that “New Jersey’s LCM ban reasonably fits the State’s interest in promoting public safety,” because “LCMs are used in mass shootings” and limiting them may reduce the number of rounds fired in such attacks. “Reducing the capacity of the magazine to which a shooter has access means that the shooter will have fewer bullets immediately available and will need to either change weapons or reload to continue shooting,” Shwartz writes. “Weapon changes and reloading result in a pause in shooting and provide an opportunity for bystanders or police to intervene and victims to flee.”

The 3rd Circuit’s choice of intermediate rather than strict scrutiny relies on some rhetorical sleight of hand. “If the core Second Amendment right is burdened, then strict scrutiny applies; otherwise, intermediate scrutiny applies,” Shwartz writes. “Thus, laws that severely burden the core Second Amendment right to self-defense in the home are subject to strict scrutiny.”

In his dissent, Bibas highlights the majority’s slipperiness in applying strict scrutiny only when the right to self-defense in the home is “severely” burdened. “The Second Amendment’s core is the right to keep weapons for defending oneself and one’s family in one’s home,” he writes. “The majority agrees that this is the core. So whenever a law impairs that core right, we should apply strict scrutiny, period.” By weighing the severity of the burden imposed by the LCM ban before settling on a level of scrutiny, Bibas says, the majority “puts the cart before the horse,” since “we never demand evidence of how severely a law burdens or how many people it hinders before picking a tier of scrutiny.”

If the size of a magazine can make a difference in the hands of a mass shooter, Bibas notes, it also can make a difference in the hands of a law-abiding person using a gun in self-defense. “The government’s entire case is that smaller magazines mean more reloading,” he writes. “That may make guns less effective for ill—but so too for good. The government’s own police detective testified that he carries large magazines because they give him a tactical ‘advantage[],’ since users must reload smaller magazines more often. And he admitted that ‘law-abiding citizens in a gunfight’ would also find them ‘advantageous.’ So the ban impairs both criminal uses and self-defense.”

More generally, “Any gun regulation limits gun use for both crime and self-defense. And any gun restriction other than a flat ban on guns will leave alternative weapons. So the majority’s test amounts to weighing benefits against burdens.” Justice Steven Breyer advocated such a “balancing approach” in his Heller dissent, Bibas notes, and “the Heller majority rejected it.”

Even under intermediate scrutiny, Bibas argues, New Jersey has not met its burden, relying on “anecdotes and armchair reasoning” rather than evidence that limiting magazine size reduces mass shooting casualties. “The government has offered no concrete evidence that magazine restrictions have saved or will save potential victims,” he writes. “New Jersey cannot win unless the burden of proof lies with the challengers. It does not.” But the majority “effectively flips the burden of proof onto the challengers, treating both contested evidence and the lack of evidence as conclusively favoring the government.” Furthermore, he observes, “the majority offers no limiting principle,” since “its logic would equally justify a one-round magazine limit.”

Bibas also faults the majority for neglecting the “tailoring” required by intermediate scrutiny. New Jersey already had a 15-round magazine limit, and it also has a discretionary carry permit law that severely restricts who may bear guns in public. Yet the state presented no evidence that such policies are so inadequate that the further step of imposing a lower magazine limit is necessary.

Bibas argues that “the majority’s watered-down ‘intermediate scrutiny’ is really rational-basis review,” a highly deferential standard that asks only if a policy is rationally related to a legitimate government interest. “Though the Supreme Court has yet to specify a tier of scrutiny for gun laws,” he says, “it forbade rational-basis review.”

Why does the 3rd Circuit majority, like the other courts that have upheld legal limits on magazine capacity, treat the right to keep and bear arms so casually? “It offers only one reason: guns are dangerous,” Bibas writes. “But as Heller explained, other rights affect public safety too. The Fourth, Fifth, and Sixth Amendments often set dangerous criminals free. The First Amendment protects hate speech and advocating violence. The Supreme Court does not treat any other right differently when it creates a risk of harm. And it has repeatedly rejected treating the Second Amendment differently from other enumerated rights. The Framers made that choice for us. We must treat the Second Amendment the same as the rest of the Bill of Rights.”

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To Apollo’s Leon Black, Credit Markets Are In “Bubble Status”

One week ago, an increasingly gloomy Morgan Stanley (which recently called the start of a bear market for US stocks) issued its 2019 credit forecast, which was a scathing preview of the challenges facing both HY and IG credit: “the credit bear market, which likely began when IG spreads hit cycle tights in Feb 2018, has begun and will continue in 2019, with HY and then eventually loans underperforming, as headwinds shift from technicals to fundamentals.”

Now the Wall Street titans are joining the call.

During the Goldman Sachs Financial Services Conference on Wednesday, Apollo co-founder Leon Black pointed out the obvious, namely that the credit markets are facing excesses as investors chase yield. As a result the credit markets “have gone to bubble  status,” according to Black, who somewhat predictably, also said that equity markets have not. After all, warning of a bubble in the equity markets would mean that a private equity firm would have to go in hibernation for the foreseeable future. Bonds, however, are other people’s problems:

“The amount of covenant-less debt is more than 2007. You have a thirst for yield that exists on a global basis. So there is true excess.”

So since it’s a bubble, and it is – still – a seller’s market (but that is changing fast) Black said that in this environment his private equity business tries to get as much covenant-lite as possible, and fixed rate debt. And of course, Apollo takes the opposite approach in its credit business where the firm makes sure to have covenants.

“We try to play a more conservative, cautious role in a bubble environment,” said Black, noting that the PE firm’s credit and insurance operations offer the most growth potential.

Black is right to be skeptical about the “bond bubble”, because as Morgan Stanley’s Adam Richmond predicted last month,the vulnerabilities, which are always tough to spot on the way up, will become increasingly apparent on the way down; as is always the case. In the chart below, Morgan Stanley shows an updated version of a table it uses to monitor the excesses in this cycle. In short, the excesses/imbalances are very much present, driven in part by such a long period of extremely low rates, which drove investors to reach aggressively for yield, and non-Financial corporates, in particular, to issue significant volumes of debt. And here even more bad news from Morgan Stanley, which notes that in many cases these risks look even worse today than when the bank last ran the analysis at the end of 2017. Below Morgan Stanley provides a few examples why the bear market in credit will become increasingly more self-evident:

  • In the leverage loan market, covenant quality is weaker than in 2007, the cushion beneath the average loan is lower and 1st lien leverage levels are higher. 48% of LBO transactions are levered over 6x vs 51% in 2007, but as a part of those leverage numbers, 27% of deals have EBITDA adjusted for prospective cost savings/ synergies vs only 15% in 2007. 22% of loan issuance was B- or lower in 2018 vs 15% in 2017 and 13% in 2007, driven in part by record CLO demand/issuance.
  • IG debt outstanding has grown by 142% in this cycle and non-Fin BBB debt has grown by 181%. IG leverage is 0.68 turns above 2007 levels today. Non-Financial corporate debt/GDP has never been higher. And IG interest coverage, which used to be a bright spot is now below 2007 levels.
  • The loan market has grown by 88% in this cycle, with 24% growth just since the beginning of 2017. Much has been made about a shrinking HY market. Remember, HY debt outstanding has still almost doubled in this cycle, just much of that growth occurred in the first half, not that different from how it played out in 2006/07, when most of the leveraged finance growth also came from loans.  Additionally, 64% of speculative grade debt has a corporate family rating of B2 or lower today vs 53% in 2007.
  • 2018 was a record year for M&A loan issuance and 25% of IG supply was issued to fund M&A this past year, while stock buyback volumes (ex-fin) hit a record this past year.
  • Certain investors have reached out the risk spectrum for yield aggressively in this cycle, given rates at or below zero globally for many years, with non-US ownership of US corporate bonds increasing to 30%, as one example, although declining in 2018 on the back of rising currency hedging costs.
  • While consumer balance sheets are clearly healthier in this cycle, non-mortgage consumer debt/GDP is just off of record levels.
  • CRE prices are ~25% above prior cycle peaks. We have seen lax underwriting quality in this cycle in pockets of consumer credit (e.g., autos), also shown in the table.

Finally, here is the Morgan Stanley credit cycle – or as Black might call it “bubble” – checklist. As the bank puts it, “a variety of indicators pointing to a very late-cycle environment, and in many cases at more extreme levels than even this time last year.”

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Rumors Of The Demise Of The Blockchain Industry Have Been Greatly Exaggerated

Authored by Omid Malekan via Medium.com,

The sharp decline in the price of cryptocoins has spurred an outpouring of commentary from columnists and academics who  –  suspicious of the asset class all along  –  now feel vindicated. But their focus on falling prices this year is just as foolhardy as the evangelists focus on gains last year, and somewhat misses the point. The biggest blockchain headline of 2018 isn’t that prices have crashed, but that adoption has accelerated throughout the decline.

Among the entrepreneurs and developers building out the technology, there is a growing sense of satisfaction that an industry primarily known for its hypothetical promise is finally starting to deliver. If you can manage to look past sensational stories of “who lost how much in Bitcoin,” what you’ll find are far more interesting stories on adoption and implementation. Whereas 2017 was the year of whether, 2018 is going out as the year of when and how.

This is an important shift, despite ongoing challenges. Blockchain is a foundational technology, so adoption isn’t just about new systems, but a re-architecting of how business is done. That’s no small task, as we were reminded recently when the parent of the New York Stock Exchange announced a delay in the launch of its physical-backed Bitcoin futures. Tempting as it might be to interpret that news as yet another setback in the midst of a bear market, it’s a startling reminder of how far things have come. Not that long ago, the idea of one of the worlds biggest financial companies adopting Bitcoin felt like a pipe dream. Today, we lament a short delay.

Once rolled out, those futures will be an important bridge between legacy financial markets and natively digital ones. This sort of infrastructure is vital to making good on the industry’s loftier promises, and encouragingly, where progress seems to have accelerated, as told by the people who would know. Konstantin Richter, the CEO of Blockdaemon, a leading blockchain infrastructure company, recently told me:

“We are seeing a strong increase in individual nodes getting deployed. Enterprise demand has increased also.”

That simple statement says a lot, because nodes to a blockchain are like servers to a network. That people and companies are deploying them could only mean they plan on using the technology.

Progress is accelerating on the “re-architecting how business is done” front too. According to Christiana Cacciapuoti, the executive director of Adledger, a non-profit building new standards for blockchain-based online advertising, the consortium now counts all of the big four ad agencies as members, something that wouldn’t have happened if there was no there there.

The same could be said of names like Walmart and Fidelity, both of which announced major blockchain-based initiatives this past summer. Many more seem to be watching, as expressed by Mike Dudas, founder of The Block, a leading blockchain news and intelligence service. When I asked him whether interest had declined with price, he said “despite the decline, corporate interest is accelerating, and we’ve seen significant professional uptake in our coverage.”

Perhaps the strongest vote of confidence came from Clarissa Horowitz, VP of Marketing at Bitgo, a leading cryptocoin custody tech and service provider. Bitgo announced a new qualified custodian service aimed at institutions just a few months ago, just as the price decline accelerated. Custody being a service only needed by those who deal with the actual coins, I wondered if demand had been tepid. Her response? “Interest has been off the charts.”

From my own vantage point, demand for my education service and sales of my book are as strong as ever. The critics hear all of this, but still obsess over falling prices. To be fair, so do some industry insiders. But if there’s one lesson everyone watching crypto markets should heed from traditional ones, it’s that price seldom matters as much as most people think.

Just in the past two months, shares of graphic hardware maker Nvidia have lost half of their value. Tellingly, no one is interpreting this to mean the end of the industry. Semiconductor stocks have always been volatile, and a volatile asset making big moves is not that revealing. Naysayers have tried to pin the collapse on falling demand from crypto miners, but that doesn’t explain why the stock surged 50% earlier this as the price of Bitcoin got cut in half.

So why did the stock collapse? For a myriad of complicated reasons, including the broader correction in tech stocks. That correction, by the way, has knocked a trillion dollars off the market cap of just five tech companies, more than the losses in all cryptocoins combined. But nobody is interpreting it to mean the end of smartphones or social media. Wild price swings are often more about marginal changes in sentiment than actual changes in output, a fact perhaps even more true for commodities.

The recent decline in oil prices for example, has little to do with supply and demand, as neither has changed much as prices have fallen. Drawing major conclusions from short-term price swings is tempting, but can be a trap. Ten years ago, a far bigger collapse in oil lead many to predict the end of the US shale boom. History proved them wrong, as American oil output today is triple what it was back then, with most of the gains having occurred in the teeth of the bear market. The decline in prices only drove drillers to become even more efficient at fracking. A decade later, that new way of drilling has really taken over, for the simple reason that it’s a better way of doing things.

Blockchain technology is also a better way of doing things. It’s core tenets of transparency, democracy and cooperation are universally considered desirable in almost any other context. So why do so many remain skeptical? One answer is jealousy from those who missed out on the boom, but there’s more to it.

The bigger issue — haunting enthusiasts and skeptics alike — is the truly transformative nature of this technology.

If optimists such as myself are proven right, then we are about to undergo a major re-architecting of many aspects of society, toppling incumbent leaders and anointing new ones. Entrepreneurs worship the mighty god of disruption, but in its path lies the pain of the disrupted.

Just recently, the CEO of the celebrated startup Transferwise declared that his company saw no implementation of blockchain tech that made its online payment service faster or cheaper. His comments made the rounds given the backdrop of falling coin prices, but I took them to be rather bullish. If my overall thesis pans out, then the Transferwises of the world will never find a good use for blockchain, because the technology eliminates the need for them altogether. People can already exchange and send digital dollars all over the world using decentralized blockchain rails, for a fraction of even what Transferwise charges. The only drawback is that the front-end and user experience is not nearly as polished as those offered by a centralized payment service.

That problem will eventually be solved, because a shared global ledger is a better way of handling payments than the fragmented and siloed solutions of today, in the same way that a shared spreadsheet in the cloud is a better way of cooperating with colleagues than passing around a notebook. So to all those who continue to obsess about prices, I offer a simple reminder that what matters most are the opportunities that lie ahead, not the price declines that lay behind. This was true in the energy sector a decade ago, and even more true in the tech sector two decades ago.

Back then, during the aftermath of the dot com bust, the shares of a little online bookseller traded at a mere $6, having lost 95% of their value. Critics took the magnitude of that decline — even greater than the current crypto one — to mean that the promise of eommerce had been exaggerated. But Jeff Bezos and his team still believed that online shopping was a better way of doing things, so despite the raging bear market, they proceeded to significantly expand Amazon’s offering. History, and a subsequent 30,000% appreciation in the stock, proved them right. Sometimes, the biggest takeaway from a major price decline is the emergence of a great opportunity.

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Household Wealth Hits A Record $109 Trillion… There Is Just The Usual Catch

In the Fed’s latest Flow of Funds report released at noon today, the US central bank released the latest snapshot of the US “household” sector as of Sept 30, 2018. What it revealed is that with $124.9 trillion in assets and a modest $15.9 trillion in liabilities, the net worth of US households rose to an all time high $109 trillion, increasing for 12 consecutive quarters and up $2.1 trillion as a result of an estimated $245 billion increase in real estate values, as well as a $1.9 trillion increase in various financial assets like corporate equities, mutual and pension funds, and deposits as the market soared to just shy of new all time highs in the second quarter, even if it needed some time in Q3 to reach a new record just days before the quarter ended.

Total household assets in Q2 rose $2.3 trillion to $122.7 trillion, while at the same time total liabilities, i.e., household borrowings, rose by only $132 billion from $15.6 trillion to $15.7 trillion, the bulk of which was $10.2 trillion in home mortgages.Homeowners’ real estate holdings minus the change in mortgage debt rose by $320.1 billion (a positive number means that the value of real estate is growing at a faster pace than household mortgage debt).

The breakdown of the total household balance sheet as of Q3 is shown below.

And the historical change of the US household balance sheet:

And while it would be great news if wealth across all of America had indeed risen as much as the chart above shows, the reality is that there is a big catch: as shown previously, virtually all of the net worth – most of it in the form of financial assets – and associated increase thereof, has only benefited a handful of the wealthiest Americans.

As the following chart from Deutsche Bank shows, the wealth inequality in the US is now as bad as it just during the Great Depression, with the top 0.1% of the US population owning as many assets as the bottom 90%.

Source: Torsten Slok, Deutsche Bank
 

In the CBO’s latest, if somewhat dated, Trends in Family Wealth analysis published in 2016, the budget office showed a breakdown of the net worth chart by wealth group, which sadly shows how the “average” American wealth is anything but, and in reality most of that $100 trillion belongs to just 10% of the US population.

While the breakdown has not caught up with the latest data, it provides an indicative snapshot of who benefits. Here is how the CBO recently explained the wealth is distributed:

  • In 2013, families in the top 10 percent of the wealth distribution held 76 percent of all family wealth, families in the 51st to the 90th percentiles held 23 percent, and those in the bottom half of the distribution held 1 percent.
  • Average wealth was about $4 million for families in the top 10 percent of the wealth distribution, $316,000 for families in the 51st to 90th percentiles, and $36,000 for families in the 26th to 50th percentiles. On average, families at or below the 25th percentile were $13,000 in debt.

In other words, roughly 75% of the $2.2 trillion increase in assets went to benefit just 10% of the population, who also account for roughly 76% of America’s financial net worth.

It also means that just 10% of the US population owns roughly $93 trillion of all US assets, while half of the US population has virtually no wealth, and if anything it is deeply in debt.

Even worse, when looking at how wealth distribution changed from 1989 to 2013, a clear picture emerges. Over the period from 1989 through 2013, family wealth grew at significantly different rates for different segments of the U.S. population. In 2013, for example:The wealth of families at the 90th percentile of the distribution was 54% greater than the wealth at the 90th percentile in 1989, after adjusting for changes in prices.

  • The wealth of those at the median was 4 percent greater than the wealth of their counterparts in 1989.
  • The wealth of families at the 25th percentile was 6 percent less than that of their counterparts in 1989.
  • As the chart below shows, nobody has experienced the same cumulative growth in after-tax income as the “Top 1%”

The above is particularly topical at a time when either party is trying to take credit for the US recovery. Here, while previously Democrats, and now Republicans tout the US “income recovery” they may have forgotten about half of America, but one entity remembers well: loan collectors. As the chart below shows, America’s poor families have never been more in debt.

The share of families in debt (those whose total debt exceeded their total assets) remained almost unchanged between 1989 and 2007 and then increased by 50 percent between 2007 and 2013. In 2013, those families were more in debt than their counterparts had been either in 1989 or in 2007. For instance, 8 percent of families were in debt in 2007 and, on average, their debt exceeded their assets by $20,000. By 2013, in the aftermath of the recession of 2007 to 2009, 12 percent of families were in debt and, on average, their debt exceeded their assets by $32,000.

The increase in average indebtedness between 2007 and 2013 for families in debt was mainly the result of falling home equity and rising student loan balances. In 2007, 3 percent of families in debt had negative home equity: They owed, on average, $16,000 more than their homes were worth. In 2013, that share was 19 percent of families in debt, and they owed, on average, $45,000 more than their homes were worth. The share of families in debt that had outstanding student debt rose from 56 percent in 2007 to 64 percent in 2013, and the average amount of their loan balances increased from $29,000 to $41,000.

And there – as we say quarter after quarter – is your “recovery”: the wealthy have never been wealthier, while half of America, some 50% of households, own just 1% of the country’s wealth, down from 3% in 1989. Finally, America’s poor have never been more in debt.

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Bolton Was Aware Huawei CFO Was Arrested While Having Dinner With Xi

The market isn’t going to like this…

During an interview with NPR’s Morning Edition, National Security Advisor John Bolton revealed that he knew in advance that Canadian police were preparing to arrest Huawei CFO Wanzhou Meng, meaning that Bolton knew that Meng was being taken into custody when he sat down alongside President Trump for Saturday’s dinner trade talks with Chinese President Xi Jinping.

Bolton

However, Bolton said he was “unsure” whether Trump was aware of the arrest. We reported last night that Wanzhou was arrested in Canada and will likely be extradited to the US following an investigation into suspected violations of US sanctions against trade with Iran. The arrest is widely believed to be driving Thursday’s selloff, as it will likely throw a wrench in the works of trade talks with China (last night, we noted that Wanzhou’s arrest would be equivalent to China arresting the daughter of Tim Cook or Jeff Bezos).

Bolton also claimed that the US isn’t “aiming” at pushing for changes in China’s “political structure.” But if changes do result from China opening up its economy…well…that wouldn’t necessarily be a bad thing.

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With an Erroneous Tweet, Alexandria Ocasio-Cortez Inadvertently Reveals That Medicare-for-All Proponents Still Don’t Have a Plan

Rep.-elect Alexandria Ocasio-Cortez (D–N.Y.) tweeted this week that two thirds of the cost of Medicare for All could be offset by cutting $21 in Pentagon spending wasted on accounting mistakes:

Not only was she wrong, but she was wrong in a way that shows how even the most prominent and influential proponents of single payer are still disconnected from the realities of budgeting policy and politics.

Arguably the biggest question dogging proponents of Medicare for All is how to pay for it. A recent study by the Mercatus Institute found that the single payer plan drawn up by Vermont Sen. Bernie Sanders would cost more than $32 trillion over a decade, requiring implausibly large reductions in payments to medical providers as well as enormous tax hikes—more than doubling all corporate and individual income tax rates.

Even if you think the economy could withstand such a large and rapid shift of resources from the private to the public sector, an assumption I don’t share, the politics make such a transition effectively impossible. Sanders’ left-leaning home state of Vermont couldn’t stomach the tax hikes required to implement a state-based single-payer system. It’s even harder to imagine a majority of the rest of the country supporting a plan like this. The dual questions of how to pay for it and how to build political support for whatever pay-for is settled on represent a substantial practical challenge to any single-payer campaign. With her tweet, Ocasio-Cortez was attempting to respond to this challenge.

One might charitably describe her response as an error predicated on a misunderstanding. The report she referenced, from an article in The Nation, looked at 18 years of Pentagon budgets; Medicare for All would cost about $32 trillion over 10 years. And the Congressional Budget Office projects that the U.S. will spend about $7 trillion on the military over the next decade, so eliminating all Pentagon spending—an unrealistic goal even if you believe that the military budget is far too large—wouldn’t even free up a quarter of the necessary funds. In addition, the article she cited doesn’t actually say there’s $21 trillion that could be diverted to something other than Pentagon spending. It found that defense dollars are being tracked and shifted around in dubious ways, with the same dollar sometimes accounted for multiple times. The money she wants to spend doesn’t even exist.

As mistakes go, this is embarrassing but in some ways excusable. Legislators, especially new ones, are typically not policy wonks. They leave the policy details to the experts and then sell the big picture.

And therein lies the real problem for Medicare for All. Right now, there are no details. It’s all big picture.

It’s not just that there’s no consensus about which plan to use or some squabbles about granular details. It’s that there’s no plan at all. Despite the uptick in support for Medicare for All among prominent Democratic politicians, no one has yet laid out a clear way to pay for the program. As Matthew Yglesias recently noted at Vox, given the increased salience of Medicare for All in Democratic politics, it’s rather striking how little progress has been made toward developing a clear and relatively detailed policy proposal to back up the idea.

The closest thing supporters have to an answer right now is an argument that there’s no particular need to worry about how to pay for it, because, between public and private payers, America already spends so much on health care that a single payer system would be easy to afford; in fact, they say, single payer would reduce America’s total health care spending by about $2 trillion.

That argument assumes large reductions in payments to doctors and other health care providers, and that’s not a great assumption, given both the heavy resistance from medical professionals and Congress’ long history of refusing to slash provider payments. But even if you accept it, you’d still need a financing mechanism to redirect dollars from where they currently are in the private sector to the public sector. Some sort of tax would need to be put in place, and that tax would almost certainly hit a large number of people, likely including quite a few in the middle class. Until someone lists the combination of taxes and/or spending reductions that would be required to finance the system, single-payer advocates cannot credibly be said to have a plan.

But there’s a bigger issue, which in some ways is even more telling: It’s not always clear what Medicare for All means. Much of the time, as with the Sanders plan, it’s a euphemism for single-payer health care. But often it appears to be an empty slogan for some sort of yet-to-be-defined expansion of the government’s role in providing health coverage—which is to say, something other than single-payer.

Part of the recent enthusiasm for Medicare for All has come from polls showing that the idea is increasingly popular. But polls showing that a majority of Americans support Medicare for All also show that support drops below a majority when it is described as single-payer. Americans, in other words, don’t support single payer. They support Medicare for All, which…isn’t actually a plan. It’s an empty catchphrase symbolizing more government support.

So it shouldn’t really be a surprise that Rep. Frank Pallone (D–N.J.), a single-payer supporter who is set to sit atop the House Energy and Commerce Committee, recently admitted that the votes don’t exist to pass single payer. Some Democratic lawmakers are attempting to shift the focus to merely expanding Medicare as it exists now, by letting anyone 50 or over buy in.

But even that idea reveals some of the internal conflicts on the left when it comes to health care: Sanders, arguably the leader of the Medicare for All movement, recently said he won’t support Medicare buy-in legislation. For Medicare for All backers, it’s all or nothing—but lacking financing details or any public consensus about what the phrase even means, it’s hard to say what “all” is.

The biggest takeaway from Ocasio-Cortez’s tweet, then, isn’t that a single legislator made an error, or even that single-payer proponents continue to have a considerable budget-math problem, although they do. It’s that Medicare for All backers still face the fundamental challenge of defining and building support for a plan that doesn’t yet exist. Until and unless that happens, Medicare for All will remain little more than a slogan advertising a fantasy of costless, frictionless government intervention.

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Trump: “I Won’t Be Here” When The Coming Debt Crisis Goes Nuclear

President Trump reportedly shrugged off concerns over the ballooning national debt, telling senior advisers in an early 2017 meeting “Yeah, but I won’t be here” when presented with “charts and graphics layout out the numbers and showing a “hockey stick” spike in the national debt” set to occur “in the not too distant future.” 

The alleged incident from nearly two years ago comes from the Daily Beast – citing “a source who was in the room,” which we note is anonymous – the standard operating procedure for most anti-Trump hit pieces. As such, one may want to take the report with copious grains of salt. 

Citing another anonymous White House official, the Beast reports that President Trump hasn’t addressed the national debt “in a truly meaningful way, despite his public lip service.” 

“I never once heard him talk about the debt,” said the totally anonymous source. 

Then again, former Trump official Marc Short – who went on record, refutes the anonymously sourced suggestion over Debt worries – telling the Beast that he believed Trump recognized “the threat that debt poses,” as evidenced by the president’s repeated concerns over “rising interest rates.” 

“But there’s no doubt this administration and this Congress need to address spending because we have out-of-control entitlement programs,” Short said, adding, “it’s fair to say that… the president would be skeptical of anyone who claims that they would know exactly when a [debt] crisis really comes home to roost.”

The Beast adds further to the notion that Trump is concerned about debt, however it’s ultimately up to the legislative branch which has the “power of the purse.”  

Recent reports have suggested that Trump is determined, at least rhetorically, to address the issue. Hogan Gidley, a spokesman for the president, noted that the president and his team have proposed policies to achieve some deficit reduction, “including in his first budget that actually would’ve balanced in 10 years, a historic, common-sense rescissions proposal.”

But Gidley also passed the buck to the legislative branch. “While the president has and will continue to do everything in his power to rein in Washington’s out-of-control spending,” he said, “the Constitution gives Congress the power of the purse and it’s time for them to work with this president to reduce the debt.” –Daily Beast

Growing our way out of debt?

Another person close to the Trump campaign, conservative Heritage Foundation economist Stephen Moore, suggested that Trump may not be focused on debt reduction because Moore convinced him that it can be solved by through other means than spending cuts or tax hikes. 

Moore, a conservative economist at the Heritage Foundation and an economic adviser to Trump’s 2016 campaign, recalled making visual presentations to Trump in mid-2016 that showed him the severity of the debt problem. But Moore told The Daily Beast that he personally assured candidate Trump that it could be dealt with by focusing on economic growth. –Daily Beast

“That was why, when he was confronted with these nightmare scenarios on the debt, I think he rejected them, because if you grow the economy… you don’t have a debt problem,” Moore said, adding “I know a few times when people would bring up the enormous debt, he would say, ‘We’re gonna grow our way out of it.'”

Moore recalls that Trump’s belief in robust economic growth would solve American’s problems, and allow his administration to justify expensive and ambitious proposals, such as cutting taxes, pursuing large infrastructure projects, and avoiding deep cuts to Social Security and Medicare. 

The results have not been what Trump and Moore have promised; at least not yet. Economic growth increased over the past year—including a robust 4.1 percent in the second quarter of 2018—but the federal deficit has ballooned as well, in part because the government has taken in less revenue because of the tax cuts. Current forecasts are not too rosy about the future economy.

Recently, both Trump and some Republican lawmakers have hinted at regret over their approach. Earlier this year, Trump conveyed his disappointment with signing a large spending bill, particularly after he saw typically friendly allies on Fox News tear into him for supporting legislation that they viewed as funding Democratic priorities, exacerbating the national debt, and ditching his pledge to build a gigantic border wall, according to a report at the time in Axios. –Daily Beast

That said, the Washington Post reported last late month that Trump has instructed his cabinet to trim fat within their budgets – however the President has also set strict limits on what types of programs can be cut – while also proposing increased spending in other areas. 

So – is President Trump truly cavalier about the national debt? Or is the Daily Beast’s source perhaps an ex-admin official with an ax to grind? 

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