Month: September 2014

Because Mario Draghi wasn’t joking about that whole NIRP thing. And yes, negative deposit rates mean just that.

As the letter says, don’t worry: Bank of America has an extensive team of “liquidity and investment management solutions” experts who will gladly advise you to rotate your money out of deposits and into financial stocks, preferably that of BAC itself.

via Zero Hedge http://ift.tt/1m6DiVk Tyler Durden

Submitted by David Stockman via Contra Corner blog,

While Janet Yellen and her band of money printers work themselves into a tizzy over whether two buzz words – “considerable time” –  should be dropped from their post-meeting word cloud, they might be better advised to just read the newspapers. This morning’s WSJ brings word that the lending boom which our monetary central planners are eager to stimulate is apparently off-to-the-races.

Well, sort of. The item in question is a $122 billion globally syndicated loan to facilitate an M&A deal between the world’s two largest beer companies—AB InBev with a 20% global market share and SABMiller with 10%.  Needless to say, the only possible reason for creating a monstrosity with $60 billion in sales spread among scores of highly differentiated regional and national beer markets is the “synergy” euphemism—-that is, the “savings” from thousands of job terminations especially in those two paragons of job growth known as North America and Europe.

So the purpose is self-evidently the opposite of the Fed’s intent—whether the sweeping job cuts which Wall Street will peddle to justify the deal actually happen or not. In any event, the deal has virtually nothing to do with real market economics.

Both companies are already giant M&A roll-ups representing a string of mergers that have been going on for two decades, including the $52 billion InBev purchase of Anheuser-Busch six years ago. But you don’t have to be an expert in the beer industry to realize that these rollups were mainly the product of cheap debt and financialization, not free market economics. Recall that the beer industry ran out of true economies of scale 30 years ago when world class breweries reached their maximum efficient size in terms of production and distribution.

What has been happening in the business since then is nearly the opposite—that is, the rise of diseconomies of scale in marketing and branding. The latter is surely attested to by the explosion of specialty premium brands and micro-breweries.

Stated differently, in the absence of drastic financial repression by the world’s central banks there would be no case whatsoever for the globe-spanning beer merger now at hand. The latter will only create more dis-economies of scale as all the pieces and parts from two decades of financially driven M&A create another artificial, discombobulated enterprise which is too big to manage and wrong-sized for the nature of the market which it serves.

But since cheap debt always trumps expensive labor, Wall Street’s M&A machinery will create another giant malinvestment. And having once again shot themselves in the foot, our monetary central planners will bray that the labor market is still too weak and that it must therefore keep rates lower for longer.

Just maybe, however, the Fed’s new financial stability monitoring group might note something suspicious about this mega-debt deal percolating up through the deal machinery. Namely, that both companies are already vastly over-valued momentum plays that can be explained only by the fact that the financial markets have been turned into gambling casinos based on zero cost carry trades, the availability to speculators of sub-economic downside insurance protection and the triumph of “buy-the-dips” one-way trade.

Specifically, the TEV (total enterprise value of debt plus market equity) of the two beer giants combined is currently around $340 billion, yet in the most recently reported LTM period InBev generated just $19 billion of free cash flow (EBITDA less CapEx) and SABMiller under $6 billion. In sum, their combined number for that crucial valuation metric is just $25 billion, meaning that they are trading at 14X free cash flow.

Folks, these two momo plays are in the suds business, not social media! The overwhelming share of their cash flow is generated in Europe and North America were volume has been flat for two decades, as shown below. Even on a global basis, industry growth over the last 17 years has averaged only 2% per annum; and most of that is attributable to China where competition is plentiful, prices cheap, profits scare and the government is increasingly unfriendly to foreign companies.

So what we have here is a giant overvaluation bubble in the suds business. Yet the result of current central bank policy is just more of the same. In fact, at the rumored $122 billion, the loan now brewing would amount to 6.5X free cash flow. In a no-growth business in a world where interest rates must eventually normalize–that is sheer lunacy. But it well explains why our monetary politburo is so reluctant to let interest rates normalize and is so deathly afraid of a Wall Street hissy fit.

None of this would happen in a world with honest interest rates and stable two-way capital markets for the simple reason that the financing could not be raised; boards and CEOs would have no momentum driven stock market inducing them to engage in patently irrational mergers; and, in any event, short sellers would swiftly punish serial roll-up machines that destroy rather than create sustainable economic value.

So here is a news flash for the Fed’s financial stability monitoring committee. The combined beer companies today have about $60 billion of net debt. The merger deal in question would thus double the new company’s debt in order to destroy several thousand breadwinner jobs.  You think that might suggest that there are some bubbles out there after all?

 

 

 

 

via Zero Hedge http://ift.tt/X8V1zr Tyler Durden

Three charts… “The West is done, it’s over! We screwed it all up. Do you want your great-grandchildren speaking Chinese?”

 

Market Performance (from the close before Lehman BK) – Silver +71%, Gold +61%, S&P +58%

 

Federal Reserve Balance Sheet – Plus $3.5 Trillion

 

And The Recovery? From 62% of the nation employed to less than 59%…

 

 

Bonus Movie: forward to 7:30 – “The West is done, it’s over! We screwed it all up. Do you want your great-grandchildren speaking Chinese?”

via Zero Hedge http://ift.tt/1BGZk4B Tyler Durden

Three charts… “The West is done, it’s over! We screwed it all up. Do you want your great-grandchildren speaking Chinese?”

 

Market Performance (from the close before Lehman BK) – Silver +71%, Gold +61%, S&P +58%

 

Federal Reserve Balance Sheet – Plus $3.5 Trillion

 

And The Recovery? From 62% of the nation employed to less than 59%…

 

 

Bonus Movie: forward to 7:30 – “The West is done, it’s over! We screwed it all up. Do you want your great-grandchildren speaking Chinese?”

via Zero Hedge http://ift.tt/1BGZk4B Tyler Durden

It was over a year ago, when we wrote about “The True Chinese Credit Bubble” and we showed the following chart which succinctly explains everything that happens in China’s economy:

… by “everything” we mean the now traditional feedback mechanism of “boosting growth”, which starts with a monetary easing impulse i.e., a credit shock, which boosts GDP by up to 1% annualized, and then promptly fades to subtract from growth in quarters 2 and onward since the credit injection, and then when the response goes from euphoric to depressed, it forces the PBOC and the SOEs to inject even more credit to offset not only the initial weakness but the subsequent stimulus response, and so on.

Which is why we warned a few months ago that the joy from the latest “mini-stimulus” that took place in China would be very short-lived. Over the weekend, we were again proven right when virtually every metric of China’s economy missed expectations. Which in turn unleashed the usual suspects who one after another, have once again had to admit that contrary to prevailing mass delusions, such a thing as an escape velocity stimulus event as far as China’s economy is concerned, simply does not exist.

And, as a result, we get blurbs such as this one from Evergreen GaveKal who now, after the fact, are Monday-morning quarterbacking as follows:

“So Much For China’s Mini-Stimulus”

So much for the ‘mini-stimulus’. The data on China’s economic performance in August released over the weekend were dismal, showing a significant and unexpected decline in growth. The boost from the government’s suite of supportive policies was always going to be temporary, but renewed weakness is appearing much sooner than expected. We had previously thought that policy could keep growth stable for a couple of quarters (see Fears For China’s Growth Postponed), but it only really worked for two months (May and June). So it looks as if the government has already lost its bet that it could keep GDP growth near its 7.5% target with only minimal intervention. With China transitioning out of its high investment phase, growth is on a downward trajectory. To alter that trajectory would require large scale monetary easing, but the government does not yet look inclined to support such a big shift in strategy. All of which points to more of the same: modest policy support and weaker growth.

The August numbers were dire: growth of industrial value-added slumped to 6.9% year-on-year, from 9% in July, to give the lowest reading since 2009. Official statisticians blamed a high base effect for the slowdown, since growth was 10.4% last August. But their explanation is hardly convincing, as growth on a sequential basis was also extremely weak. Meanwhile fixed asset investment growth declined to 14% in August from 16% in July, as the private sector remained cautious and the pickup in spending by state-owned enterprises ended. The brightest spot was the external sector, where export growth accelerated and the trade surplus hit record highs in both July and August. There is also good news from the labor market: new urban jobs have increased by 9.7mn in the first eight months of the year, almost achieving the full year target of 10mn.

Why did domestic growth slow so sharply after a decent second quarter? Fundamentally, China’s growth is slowing because private sector investment sentiment is weak: fixed asset investment by non-state companies has been steadily decelerating since 2010. In part this reflects a necessary adjustment of companies’ growth expectations—no one expects GDP of 10% growth anymore—but there is also much uncertainty about how the transition away from the investment-driven model will play out. The government has used state sector investment to smooth this slowdown, and the latest boost led to a slight rebound in the second quarter. But the support from state investment did not last, as monetary policy did not get looser, and fiscal spending was forced to slow to stay within budget guidelines.

So the weak growth ultimately derives from a failure to sustain the pickup in credit growth that began in May and June. Our estimate of total credit growth slowed to 15% year-on-year in August, after reaching 17% in June, as loan growth was only modest and shadow financing has collapsed. Both bankers’ acceptances and trust loans declined outright in July and August—a simultaneous sustained decline that has never happened before. The People’s Bank of China has traditionally been more hawkish than the rest of the government, and its support for ‘selective easing’ was half-hearted at most (see The Risks Of Selective Easing). While it did inject more liquidity into the traditional banking system, it also rolled out new regulations on interbank borrowing that contained the growth of shadow finance. At the same time, banks are getting much more cautious about lending, given the increase in their own bad loans, the poor state of corporate balance sheets, the deteriorating property market and falling commodity prices. It is likely the crackdown on fraud in trade finance in Qingdao has also made banks more risk-averse. Given all this, banks are unwilling to accelerate lending without very strong support from the central bank—support which so far has not been on offer.

So will policymakers change their mind and deliver a bigger easing in monetary policy to arrest the slowdown in growth? China’s GDP growth has been on a mostly downward trajectory since 2007, and short term growth is greatly dependent on credit. So policymakers are facing a tough choice: accept higher debt in order to get higher short term GDP growth—which brings longer term risks—or accept slower growth in the near term. The signals have been extremely inconsistent this year, but at the World Economic Forum last week, Premier Li Keqiang said the government is comfortable with growth “a bit lower” than its target. At the time Li was clearly aware of the weak August data, yet he said the government would not engage in major monetary stimulus. The central bank also still seems unwilling to loosen monetary policy as it is worried about China’s rising debt. Therefore we believe that the government will just continue with its ‘selective easing’ policies, and will not take more radical measures such as an interest rate cut, or at least not in the near term. With the help of net exports GDP growth in 2014 can stay slightly above 7%. Nevertheless, it will miss the government’s 7.5% target.

* * *

At least GaveKal is correct in observing that a massive stimulus here will do nothing to boost the long-term trendline higher. Which is much more than we can say about most other sellside penguins, for whom the failure of the latest mini-stimulus is simply the catalyst China needs to launch… a maxi-stimulus.

Or, as Einstein would call it, insanity.

via Zero Hedge http://ift.tt/1Dc2TBg Tyler Durden

It was over a year ago, when we wrote about “The True Chinese Credit Bubble” and we showed the following chart which succinctly explains everything that happens in China’s economy:

… by “everything” we mean the now traditional feedback mechanism of “boosting growth”, which starts with a monetary easing impulse i.e., a credit shock, which boosts GDP by up to 1% annualized, and then promptly fades to subtract from growth in quarters 2 and onward since the credit injection, and then when the response goes from euphoric to depressed, it forces the PBOC and the SOEs to inject even more credit to offset not only the initial weakness but the subsequent stimulus response, and so on.

Which is why we warned a few months ago that the joy from the latest “mini-stimulus” that took place in China would be very short-lived. Over the weekend, we were again proven right when virtually every metric of China’s economy missed expectations. Which in turn unleashed the usual suspects who one after another, have once again had to admit that contrary to prevailing mass delusions, such a thing as an escape velocity stimulus event as far as China’s economy is concerned, simply does not exist.

And, as a result, we get blurbs such as this one from Evergreen GaveKal who now, after the fact, are Monday-morning quarterbacking as follows:

“So Much For China’s Mini-Stimulus”

So much for the ‘mini-stimulus’. The data on China’s economic performance in August released over the weekend were dismal, showing a significant and unexpected decline in growth. The boost from the government’s suite of supportive policies was always going to be temporary, but renewed weakness is appearing much sooner than expected. We had previously thought that policy could keep growth stable for a couple of quarters (see Fears For China’s Growth Postponed), but it only really worked for two months (May and June). So it looks as if the government has already lost its bet that it could keep GDP growth near its 7.5% target with only minimal intervention. With China transitioning out of its high investment phase, growth is on a downward trajectory. To alter that trajectory would require large scale monetary easing, but the government does not yet look inclined to support such a big shift in strategy. All of which points to more of the same: modest policy support and weaker growth.

The August numbers were dire: growth of industrial value-added slumped to 6.9% year-on-year, from 9% in July, to give the lowest reading since 2009. Official statisticians blamed a high base effect for the slowdown, since growth was 10.4% last August. But their explanation is hardly convincing, as growth on a sequential basis was also extremely weak. Meanwhile fixed asset investment growth declined to 14% in August from 16% in July, as the private sector remained cautious and the pickup in spending by state-owned enterprises ended. The brightest spot was the external sector, where export growth accelerated and the trade surplus hit record highs in both July and August. There is also good news from the labor market: new urban jobs have increased by 9.7mn in the first eight months of the year, almost achieving the full year target of 10mn.

Why did domestic growth slow so sharply after a decent second quarter? Fundamentally, China’s growth is slowing because private sector investment sentiment is weak: fixed asset investment by non-state companies has been steadily decelerating since 2010. In part this reflects a necessary adjustment of companies’ growth expectations—no one expects GDP of 10% growth anymore—but there is also much uncertainty about how the transition away from the investment-driven model will play out. The government has used state sector investment to smooth this slowdown, and the latest boost led to a slight rebound in the second quarter. But the support from state investment did not last, as monetary policy did not get looser, and fiscal spending was forced to slow to stay within budget guidelines.

So the weak growth ultimately derives from a failure to sustain the pickup in credit growth that began in May and June. Our estimate of total credit growth slowed to 15% year-on-year in August, after reaching 17% in June, as loan growth was only modest and shadow financing has collapsed. Both bankers’ acceptances and trust loans declined outright in July and August—a simultaneous sustained decline that has never happened before. The People’s Bank of China has traditionally been more hawkish than the rest of the government, and its support for ‘selective easing’ was half-hearted at most (see The Risks Of Selective Easing). While it did inject more liquidity into the traditional banking system, it also rolled out new regulations on interbank borrowing that contained the growth of shadow finance. At the same time, banks are getting much more cautious about lending, given the increase in their own bad loans, the poor state of corporate balance sheets, the deteriorating property market and falling commodity prices. It is likely the crackdown on fraud in trade finance in Qingdao has also made banks more risk-averse. Given all this, banks are unwilling to accelerate lending without very strong support from the central bank—support which so far has not been on offer.

So will policymakers change their mind and deliver a bigger easing in monetary policy to arrest the slowdown in growth? China’s GDP growth has been on a mostly downward trajectory since 2007, and short term growth is greatly dependent on credit. So policymakers are facing a tough choice: accept higher debt in order to get higher short term GDP growth—which brings longer term risks—or accept slower growth in the near term. The signals have been extremely inconsistent this year, but at the World Economic Forum last week, Premier Li Keqiang said the government is comfortable with growth “a bit lower” than its target. At the time Li was clearly aware of the weak August data, yet he said the government would not engage in major monetary stimulus. The central bank also still seems unwilling to loosen monetary policy as it is worried about China’s rising debt. Therefore we believe that the government will just continue with its ‘selective easing’ policies, and will not take more radical measures such as an interest rate cut, or at least not in the near term. With the help of net exports GDP growth in 2014 can stay slightly above 7%. Nevertheless, it will miss the government’s 7.5% target.

* * *

At least GaveKal is correct in observing that a massive stimulus here will do nothing to boost the long-term trendline higher. Which is much more than we can say about most other sellside penguins, for whom the failure of the latest mini-stimulus is simply the catalyst China needs to launch… a maxi-stimulus.

Or, as Einstein would call it, insanity.

via Zero Hedge http://ift.tt/1Dc2TBg Tyler Durden