The Ominous Message in 200 Years of Global Public Finances

Submitted by F.F.Wiley via Cyniconomics blog,

After our recent article showing the history of non-defense budget balances for large, developed countries, some readers wondered how our results might change with defense spending included.

Here’s a new chart showing total budget balances:

 

fiscal balance with defense

As in the first chart, we started in 1816 with four countries (the U.S., U.K., France and Netherlands) and then added seven more at different points in time, while weighting each country by its GDP. (Click here for data sources and more details.)

New chart, same story

The message is basically the same, regardless of whether you isolate non-defense budget balances as in the earlier chart or look at total balances as above.

That is, current fiscal risks are unlike any the world has ever seen.

Echoing our thoughts from the earlier post:

The [growing deficits of the past 50 years] suggest that we’ve never been in a predicament comparable to today. Essentially, the world’s developed countries are following the same path that’s failed, time and again, in chronically insolvent nations of the developing world.

Look at it this way: the chart shows that we’ve turned the economic development process inside out. Ideally, advanced economies would stick to the disciplined financial practices that helped make them strong between the early-19th and mid-20th centuries, while emerging economies would “catch up” by building similar track records. Instead, advanced economies are catching down and threatening to throw the entire world into the kind of recurring crisis mode to which you’re accustomed if you live in, say, Buenos Aires.

The diminishing ability of wars to explain public finances

The new chart shows more clearly how the purposes of public borrowing have evolved. In the 19th and early-20th centuries, governments borrowed mostly to fund wars. In fact, any military history is incomplete without consideration of warring nations’ access to capital. You can argue that government borrowing not only enables wars, but that the ability to borrow heavily is a major determinant of whether your army wins or loses, more important in many cases than military prowess.

(Niall Ferguson claims exactly this in his bestseller, The Ascent of Money: A Financial History of the World. Are you interested in the Napoleonic Wars, U.S. Civil War and World War 1 – three periods of significant public borrowing as shown in the chart? Ferguson links the ultimate outcomes of each of these wars to the victors’ superior access to government bond investors.)

Fast forward to today, and deficits have broken free of the costs of tanks, bombs and warplanes. Considering current public finances, it’s hard to imagine another widespread war that doesn’t lead to financial mayhem. A surge in military spending would surely end any hopes that large, developed nations won’t eventually be forced into defaults and/or wealth confiscation.

Worse still, it’s looking more and more as though we’re headed for disaster even without a future spike in military spending. The risks of a severe fiscal crisis are obvious in our earlier chart showing non-defense budget balances, and they’re just as apparent with defense spending added back in.

Bonus chart

The chart below separates budget balances into two pieces – the non-defense portion (as in the earlier post) and defense spending. We’ll add more detail in the future, including a country-by-country breakdown of the underlying data.

fiscal balance ex-defense 2


    



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New map means confusion for some candidates, voters

NAACP hails judge’s decision as ‘historic win-win’; new map creates district to ensure a minority candidate will be elected in Fayette

The switch to district voting for Fayette County Commission and Board of Education elections will prevent about 60 percent of Fayette voters from casting ballots in four local races during the May primary and the November general election.

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U.S. Senator Wants to Ban Bitcoin – To be Followed by Book Burning Ceremonies and Witch Hunts

Before the U.S. gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.

– Senator Joe Manchin, in his letter calling for a ban on Bitcoin

Whenever you hear a politician say he or she wants to do something to “protect hard-working Americans,” you know this person is so full of shit that whatever proposal being peddled should be treated with extreme skepticism. It’s incredible to me that this sort of infantile and transparently superficial language actually still works on people, but apparently it does.

Seemingly frustrated that the cessation of actives at Mt. Gox hasn’t destroyed Bitcoin, Senator Joe Manchin III is taking matters into his own hands. You know, for your own good. His solution is to “ban” Bitcoin, and he outlined his rationale (if we can call it that) in a fear ridden, garbled letter to a diverse group of power players in D.C., which include Treasury Secretary Jack Lew and Federal Reserve Chairwoman Janet Yellen.

Let’s examine some of the low points in this incredibly desperate and pathetic letter. Mr. Manchin III writes:

By way of background, Bitcoin is a crypto-currency that has gained notoriety in recent months due to its rising exchange value and relation to illegal transactions.  

Um, no not really. It has gained notoriety recently for being accepted at major retailers such as Overstock.com and the fact that its largest exchange has collapsed.

Lie number 1.

Secondly, no currency is more utilized for money laundering than the U.S. dollar and our banking system that actively supports it. If the government was really so concerned about such behavior why did HSBC get off the hook for laundering billions on behalf of Mexican drug cartels with a mere slap on the wrist?

Lie number 2.

That is why more than a handful of countries, and their banking systems, have cautioned against the use of Bitcoin.  Indeed, it has been banned in two different countries—Thailand and China—and South Korea stated that it will not recognize Bitcoin as a legitimate currency.  

Since when are we taking cues from Thailand (a country where you get thrown in jail for insulting the king), or China, a country that censors huge swaths of the internet?

Plus China didn’t ban Bitcoin, and South Korea was making significant BTC investments last I checked.

Lie number 3.

I am most concerned that as Bitcoin is inevitably banned in other countries, Americans will be left holding the bag on a valueless currency.

Well many Americans, including people I know, have likely lost significant BTC at Mt. Gox. Not a single one is calling for a ban on Bitcoin. So perhaps we should listen to the individuals actually affected, rather than some self-righteous political hack.

Lie number 4.

Look we all know what is actually happening here. You are doing your best to protect the parasitic legacy financial system that has done more harm to the U.S. economy than Bitcoin ever could. You are just the latest in a long list of historical opportunists looking to scapegoat ideas that don’t fit into a corrupt status quo you depend on.

Advocating the ban of revolutionary technology is no different from Nazis burning books. We all know what happens next.

His full letter can be found here.

In Liberty,
Michael Krieger

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U.S. Senator Wants to Ban Bitcoin – To be Followed by Book Burning Ceremonies and Witch Hunts originally appeared on A Lightning War for Liberty on February 26, 2014.

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JCP’s Quarter In Charts: Retailer Generates Least Amount Of Cash Flow In Holiday Quarter In Recent History

Moments ago JCP did what it does best: released results that missed expectations, with Revenues in the traditionally strongest, holiday (Q4) quarter of $3.78 billion below the $3.86 billion expected, and comp sales up 2.0% below the 2.1% expected. Additionally, the company’s profit margin was 28.4%, the second lowest in recent history, and only better than the 23.8% posted a year ago when the company was openly imploding. But the red flag was Free Cash Flow, driven entirely by inventory liquidation, was $246 million: the lowest such amount for the holiday quarter also in history. Whether or not this miss was not quite as bad as a worst case miss could be, whatever that means, is unclear but for now the traditional post-earning squeeze has pushed the stock higher. How long this particular squeeze persists is unclear, but likely depends on the longer-term viability of the company, and recent trends. To determine what these are, here are some charts showing how the company has performed in recent years.

First, here is JCP’s all important Free Cash Flow. While in Q4 JCP generated a little over $200 million in cash, it is the next three quarters that matter, as this is when the company burned the bulk of its cash. As a reference point: last year, in the Q1-Q3 period, JCP burned $3 billion.

 

JCP better not intend on burning $3 billion this year too. Why? Because as it reported, it expects its liquidity “to be in excess of $2 billion at year-end.” Really? How? Because that inventory build and $2-3 billion cash need will hardly grow on trees.

Next, we look at revenue: while this missed as we noted above, it was the only bright spot in the earnings report – the good news: it wasn’t an all out crash, even if like FCF, it was the lowest revenue for the holiday quarter in recent history.

 

Next, and perhaps most troubling, was the reason for the company’s subar free cash flow creation: in a nutshell, the company did not sell nearly enough inventory in the quarter. As the following chart shows, JCP liquidated, and thus generated “only” $812 million in inventory cash in the quarter: in prior years this number was always greater than $1 billion. This likely means even greater mark downs in coming quarters as JCP scrambles to dump even staler products.

 

Last and almost least, was JCP’s profit margin in the quarter. Surprisingly, it was a substantial 28.4%. Why? See the chart above – the company opted to not liquidate stale inventory and pull  margins down even lower. This was “good” for the profit margin, but bad for cash flow creation, and even worse for future quarter margins.

Finally, the cherry on top in the newsflow had nothing to do with JCP per se, but with the SEC: as readers will recall, it was back on September 26 when the company announced on CNBC it would not do a follow on offering only to announce, a few hours later, that it was doing precisely such a follow on equity offering. We were disgusted and appalled. We are more disgusted and appalled by the SEC which has announced the following:

  • J C PENNEY: SEC NOT RECOMMENDING ACTION
  • J C PENNEY: SEC NOTICE SAID AGENCY CONCLUDED INVESTIGATION

And that, in a nutshell, is all you need to know about our criminal markets.


    



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Morgan Stanley Underwrites TSLA Convertible Offering Day After 100% Stock Price Upgrade

Tesla has just announced it intends to issue a $1.6 billion convertible note offering "for the development of a "Gigafactory" and a "Gen III" vehicle." While not that unusual – and of course, why not take advantage of low cost financing and a surging momentum in your stock – what we did find at least intriguing was the underwriters included Morgan Stanley. This is the same firm (though we would be very sure that Chinese walls ensured total lack of knowledge) that doubled their price target (from $153 to $320) for TSLA yesterday (following the analyst's now almost clairvoyant questions during the earnings conference call). Paging Henry Blodgett?

Four things jump out at us…

1. During the recent conference call, MS analyst Adam Jonas seems to be advancing the idea of a capital raising for this battery factory on the behalf of Musk, who just agrees with the concept…

Adam Jonas: Elon, the stock price and the results have been obviously performing very well lately. You’ve got some great investment opportunities and some growth opportunities ahead of you, not only in the auto business but also in the non-auto business and the battery business. So I’m just wondering, how are you thinking about being opportunistic and pulling in some fresh capital to help derisk the plan, plan for a force majeure, or to see some of these opportunities that you have.

 

Elon Musk: Yes, I think that’s a good idea. I agree with that. I think that would be the smart move. We can talk more about that next week with — and also discuss the Gigafactory plans. Unfortunately, I can’t say anything [indiscernible] right now, except that I agree. I think your advice is good.

 

Adam Jonas: Okay. And I don’t want to follow up [ph] or anything, but as a follow-up to that, I guess, is a — would a capital raising be a prerequisite to launch the Gigafactory? Or is that an understatement?

 

Elon Musk: I think it’s necessary to have it occur in 3 years. It’s not necessary if we allow that time frame to expand.

2. Morgan Stanley raises their price target for TSLA by over 100%

January 25: Raising our price target to $320 from $153 previously.

We understand the change to our fair valuation of TSLA shares is significant – more than $13bn on a fully diluted share count of 142m.

 

This magnitude of value attribution is equivalent to an additional $1.7bn of after tax free cash flow by 2020, growing at 5% with a 12% discount rate. A $1.7bn NOPAT number is enormous within the scope of Tesla’s existing business path (our current forecasts call for $0.8bn of net income by 2015 and $2.1bn by 2020).

 

However, from the perspective of a global auto industry (>100 million annual unit sales and >$2 trillion of revenues by 2020) or a global electric utility industry (0.7 billion households combined in US + Europe + China out of households 1.4 billion globally) it is a tiny number. Our previous forecast of 500k complete TSLA vehicles by 2028 would account for 40bps of global market share.

 

Successful? Yes. Disruptive? Not really at all.

3. Day after Stock soars $60, Morgan Stanley underwrites a huge convertible note issue for TSLA (implicitly reducing an dilution via the stock ramp).

Tesla announced today an offering of $1.6 billion aggregate principal amount of convertible senior notes in an underwritten registered public offering. Of the total offering, Tesla will offer $800 million aggregate principal amount of convertible senior notes due 2019 and $800 million aggregate principal amount of convertible senior notes due 2021. In addition, Tesla intends to grant the underwriters a 30-day option to purchase up to an additional $120 million in aggregate principal amount of convertible senior notes due 2019 and an additional $120 million in aggregate principal amount of convertible senior notes due 2021, for a total potential offering size of up to $1.84 billion.

Goldman, Sachs & Co., Morgan Stanley, J.P. Morgan and Deutsche Bank Securities are acting as joint book-running managers for the offering.
 

and 4. In the disclosures, of course, Morgan Stanley admitted it would seek compensation from Tesla (which it did)…

In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Autoliv, Avis Budget Group Inc, BorgWarner Inc., Dana Holding Corp., Delphi Automotive PLC, Ford Motor Company, General Motors Company, Goodyear Tire & Rubber Company, Hertz Global Holdings Inc, Johnson Controls, Inc., Lear Corporation, Magna International Inc., Tenneco Inc., Tesla Motors Inc., TRW Automotive Holdings Corp.

As long as CNBC (and everyone else in the status quo hugging mainstream media) keeps pumping every word from the sell-side as gospel, this will never end…

While we are sure this is a mere coincidence and that sell-side research which absolutely cannot pay its own way has learned its lessons, as one smart chap wrote us…

This is exactly the modus operandi of the dot-com analysts: roping retail investors in at higher and higher levels while the companies concerned massively diluted shareholders leading to an implosion… I cant remember a time apart from Dotcom where price targets were jacked up in this way right before a capital raising.


    



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Brown wants term limits for commission

The Fayette County Commission will vote Thursday on a recommendation to apply term limits to existing and future commissioners.

The restrictions would limit commissioners to serving no more than two consecutive four-year terms. Proposed by Commission Chairman Steve Brown, the restrictions would be made retroactive to those holding office since 2011, which would include Brown and fellow commissioner Allen McCarty.

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Connecticut Cop Charged With Sexual Assault of Teenage Girl: Time to Start Tracking, Penalizing, Maybe Even Firing Problem Cops

nah, points on your license palPolice from five Connecticut towns
participated in a botched raid in Easton in 2008, one that was
predicated on a warrant that permitted cops to “search for a small
quantity of drugs and to seize anything in the house where a box
the size of a breath mint container and two glass pipes might
be hidden,” as the Connecticut Post
reported
on the disastrous raid. It ended with alleged drug
user
Gonzales Guizan killed at the hands of police. An
attorney’s general report cleared cops, based mostly on their own
testimony, but while Easton
tried to fight
a decision to allow a civil lawsuit to go
forward, it ended up on the hook for $3.5 million. None of the
police officers or the supervisors who thought a five-force raid on
an alleged petty drug user was worth the effort and exertion of
violence were held accountable for their actions. But now the
arrest of one officer, William Ruscoe, in nearby Trumbull on
charges of sexual assaulting a teenage girl,
with the possibility of more victims coming forward
, calls to
question the systemic policy decision not to hold police officers
accountable in the kind of fatal and unnecessary situations like
the one they created in Easton in 2008.

If you’ve ever had to go on your state’s DMV website to pay a
ticket, you might have noticed the state reminding you that
“driving is a privilege, not a right,” usually by way of explaining
why in addition to paying a fine “points” are added to your
license. Accumulate enough points, and your
license is suspended
. Participate in a raid that ends with the
fatal shooting of a citizen while in the employ of the government,
however, and have access to more labor protections and due process
“rights” than almost any other profession in the world. Incidents
of police abuse and nothing else happening are available aplenty.
There is something seriously wrong with our relationship to
government  when we accept driving as a privilege and carrying
a badge and gun and exercising a monopoly on violence as a
right.

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Federal Judge Rules Texas Same-Sex Marriage Ban Unconstitutional, Pro-Assad Forces Kill 175 Rebels in Ambush, Ukrainian Opposition Leader Nominated as Premier: P.M. Links

  • A federal judge in Texas has ruled the state’s ban on
    same-sex marriage
    unconstitutional.
  • Ukrainian opposition leader
    Arseniy Yatsenyuk
    has been nominated as the country’s premier
    until presidential elections in May.
  • The Pentagon’s plan retire the A-10
    Thunderbolt
    , nicknamed the Warthog, is receiving
    pushback. 
  • Pro-Assad forces led by Hezbollah ambushed and killed
    175 rebels
    outside of Damascus.
  • An appeals court has ruled that Google must remove the
    Innocence of Muslims
    video from Youtube after one of
    the actors featured in the film, which sparked protests around the
    world, claimed that she could copyright her performance.
     
  • Ways and Means Chairman Rep. Dave Camp (R-Mich.) has unveiled a

    tax reform bill
    that would
    raise taxes
    on Wall Street banks.

Follow Reason and Reason 24/7 on
Twitter, and like us on Facebook. You
can also get the top stories mailed to you–sign up
here

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Ed Krayewski on What’s Good About the Netflix-Comcast Deal

it's taking soo much longer than loading google.comLast weekend, Netflix and
Comcast reached a deal to allow Netflix to connect directly to
Comcast’s servers to stream video content. The deal means Netflix
subscribers who use Comcast can expect a smoother experience, with
less buffering and pixilation. Perhaps more importantly, the
deal shouldn’t cost Netflix subscribers or Comcast users
any extra money. What it does do is handle the reality that Netflix
accounts for up to a third of U.S. internet traffic in peak hours
in a way that improves the consumer experience. And that’s a good
thing, writes Ed Krayewski, no matter how much net neutrality
proponents try to fit a round peg into a square hole.

View this article.

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Third Time Not The Charm For Stock Pump-And-Dump

Shorts were well-and-truly squeezed this morning providing (yet again) just enough ammo to push the S&P back into the green for 2014 and the Russell to new record highs as the pump-and-dump we noted earlier continued for the 3rd day. However, soon after Europe closed, the fabulous five (TSLA, AMZN, FB, AMZN, and TWTR) all stopped levitating and stocks began to drop back to JPY's reality once again. Treasuries continue to rally (-6bps on the week) to 2-week low yields (leaving stocks disconnected) and while early (and considerable) USD strength faded in the afternoon, the USD index ends up 0.2% on the week (with EUR weakness leading). Gold and Silver were monkey-hammered early on but the former recovered some of its losses to end +0.35% for the week so far. While stocks ended unchanged-ish, VIX (following last night's epiuc WTF moment) rose to 14.4% and credit spreads closed wider on the day.

 

"most shorted" were smashed higher out of the gate but faded fast this afternoon…

 

The fabulous five opened strong but faded soon after Europe closed…

 

Another day, another pump-and-dump…

 

Which left the S&P red for 2014 once again…

 

Treasuries continue to rally, notably disconncted from stocks

 

The USD soared early on but gave some back as the US session stretched on…

 

Credit markets were less exuberant than stocks once again…

 

Gold and Silver suffered as the USD surged but gold recovered some of its losses… notice the PM selling started when Europe opened and finished when Europe closed…

 

Charts: Bloomberg


    



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