Month: September 2017

When I took Econ 101 and 102 as a young college student back in antediluvian times the textbook we were assigned was Paul Samuelson’s Economics: An Introductory Analysis. This book is the all-time best selling economics textbook and is still around today (19th ed.).

I had the 1961 edition. In it, Samuelson, a prominent Keynesian economist who won the Nobel prize in economics, predicted that the economy of the Soviet Union would overtake the U. S. economy in 23 years (by 1984). Even as late as the 11th edition (1980), Samuelson stood by his prediction.

As anybody who knows anything about the Soviet Union, their top-down centrally planned economy was a disaster that left its citizens in poverty. It was inefficient, wasteful, driven by coercion, politics, corruption, and cronyism. Consumer wishes were ignored. Goods were under-produced or overproduced. There were shortages of everything, except vodka and hydrogen bombs.

There was a joke floating around Moscow at the time about shortages: Yuri Gagarin’s daughter (he was the first man in space and hero of the Soviet Union) answers the phone: “No, mummy and daddy are out,” she says. “Daddy’s orbiting the earth, and he’ll be back tonight at 7 o’clock. But mummy’s gone shopping for groceries, so who knows when she’ll be home.”

They were far, far behind us.

So how is it possible that Samuelson and his fellow Keynesians could even consider that a planned economy could work better than a free economy? For 11 editions he persisted in believing that failed theory. And a generation of students left school with the idea that a centrally planned economy could work.

Mainstream economists today aren’t much better.

For example, one would think that you could rely on those economic wizards at the Federal Reserve, those guardians tasked with the dual mandate of creating full employment and stable prices, but they got it wrong too. In the run-up to the Crash of ’08 and the Great Recession, Ben Bernanke, the then chairman of the Fed, not only didn’t see it coming but he failed to grasp the magnitude of the problem when it hit.

The truth is that almost no mainstream economist predicted the Crash of ’08 or the ensuing Great Recession. Most economists, Bernanke included, were forecasting that the economy would recover soon and any downturn would be mild, and certainly there was no recession on the horizon.

If these are the brightest guys in the room, why didn’t they understand what was happening? It makes you wonder if these guys really understand how economies work. The obvious answer is that they don’t.

Therein lies the problem: contemporary economics is not able to explain what happens in the real world. The lack of valid theory, the improper use of mathematics (econometrics) and raw empirical research as a substitute for good theory has led contemporary economics to a dead-end. Even worse, they recommend economic policies that often achieve the opposite of what they intended and make problems worse. And, we end up paying for their mistakes.

Oh, dismal science, you have failed us.

So here we are trying to figure out what to do. Do we buy a house? Do we change jobs? Do we start a new business? Do we move to another town or state? Do we invest in the stock market? Do we invest in Bitcoins? Do we take on (more) debt? Do we buy a new car? Should we save or spend? Should we retire?

It would have been nice to know back in 2006, for example, that everything would eventually blow up (as it did in 2008). But the conventional wisdom then was that things were fine, don’t worry; it was the worst possible advice.

Business cycles occur on a regular basis. And boom-bust cycles are now the norm. At any given time, we are somewhere in the business cycle. The Fed, the generator of these cycles through its monetary policy, is always fighting the last war by attempting to bail out the last bust, and by doing so creates the next boom. If you don’t know where we are in the cycle, you can get crushed.

But, who can you trust?

It’s obvious that you can’t rely on conventional economic wisdom.

If you dig a little deeper you will find that some economists did see the 2008 bust coming, but they were ignored or laughed at. Most of these economists were free market types who understood the causes of the boom-bust business cycle. Also, some contrarian investors were aware of the problems and when the bust came, they made billions for their clients.

Let me impart a basic truth: no one can accurately predict the future. But, if you hear the train coming down the track, it’s best to get off the rails.

I am not an economist, merely a student of the science. I have shed my Keynesian upbringing as well as what the mainstream likes to think is economic “science”. On the other hand, free market economics has only helped my understanding of the economy and its cycles. I try to do what essayist Richard Epstein said, “True freedom comes only to a lucid mind unbound by conventional wisdom and suspicious of received opinions.” It’s not easy. But being a contrarian helps.

Which gets back to the question of “who can you trust?” Based on my 40+ years of observing and studying the economy and investments, I have formed some guidelines which have worked for me. Perhaps they may help you:

1. Free market economists tend to be contrarians and you should listen to them—but if they are selling you something, run for the door.
2. Contrarian investors are worth listening to—but if they are selling you something, run for the door.
3. Because someone was right before doesn’t mean they’ll be right again.
4. There are permabears and permabulls. Simple Internet searches will reveal who is who. Avoid both.
5. If you increasingly hear experts say we are not in a bubble, we probably are.
6. If you get advice from someone who says, “this time is different”, run for the door.
7. If the stock market is making all-time highs, such as the present, it probably is too high.
8. If home prices are at an all-time high, such as the present, they may be too high.
9. If commercial real estate prices are at all-time highs, such as the present, they may be too high.
10. If personal and corporate debt are at all-time highs, such as the present, there may be greater risk to asset values.
11. A lot of debt at this stage in the cycle will kill you on the downside.
12. Booms can last longer than you think.
13. Be patient.

^{Source: AnIndependentMind.com}

via http://ift.tt/2yDbY9l Econophile

Well that all escalated rather quickly…

Brent spiking (Kurds and Korea), Gold spiking (Korea), AAPL tumble (weak orders), FANG bloodbath… large into small and growth into value.

The day's broad activity was driven by North Korean headlines which sparked a bid for gold (and early anxiety over Europe after Germany's election)…

 

Gold regains the lead year-to-date…

 

But Stocks suffered some more serious drawdowns with Tech stocks worst 4-day loss in 3 months to one-month lows… Small Caps reached a new intraday record high early on (and Trannies clsoed green)…

 

Nasdaq VIX Spiked above 16 – back to the upper end of recent trading band but notably not as big a spike as prior tech wrecks…

 

S&P VIX spiked above 11 intraday (back above its 50- and 100-DMA) as S&P lost its 2500 level… but the machines did their best to ramp the S&P back

 

And VVIX (expectations for the uncertainty of VIX going forward) has never been higher relative to VIX…

 

Big switch from growth to value today…

 

FANG Stocks worst day since early June.

 

Facebook's (election-related headlines) and Netflix's (Fox streaming headlines) worst day since Nov 2016…

 

AAPL down 12 of the last 15 days (and down almost 10% from its record highs) closing below its 50- and 100DMA (filling the earnings night gap higher)…

 

Bank stocks continue to decouple from the yield curve…

 

Treasury yields fell on the day on a safe haven bid with more 2s30s flattening…trading died after the kneejerk on korea headlines…

 

Interstingly, the dollar index was well bid today (back to FOMC-Day highs)…

 

Driven by EUR weakness on the heels of Merkel's horrible election outcome…

 

Despite the dollar strength, Gold surged off its 50DMA (and Silver off its 100DMA) back above $1310…

 

WTI Crude surged above $52 (on the back of Kurdish referendum fallout concerns) and RBOB  followed oil prices higher…

 

But Brent spiked to its highest since July 2015 with a massive backwardation and dramatically rich to WTI…

 

Finally, Bitcoin also spiked on the North Korean headlines…

 

Well that didn't work… yet…

 

via http://ift.tt/2yCtLgU Tyler Durden

It's hanging around someone's neck…

 

Source: Townhall.com

via http://ift.tt/2hv0IUW Tyler Durden

Via The Daily Bell

$60 Billion plus is the U.S. dollar equivalent to how much Bitcoin is currently in circulation. That amount of money would keep the Estonian government running at current expenditures for almost 60 years.

$60 billion is more than double Estonia’s Gross Domestic Product.

So what if Estonia released a cryptocurrency that was that successful? It’s not a stretch to think the first government-sponsored crypocurrency would do as well or better than Bitcoin. It would still have to be structured properly on the blockchain with secure technology. But the legitimacy an actual country and government could give to a digital cryptocurrency is immense.

Just from the money Estonia made off a Bitcoin level token offering, they wouldn’t have to charge taxes anymore. The country could become a bastion of unprecedented wealth, as every investor and business in the world would want to move to a zero tax rate jurisdiction.

The idea has been floated to start a digital currency based on the Estonia e-residency program.

But the idea is still in the infant stages, not an official government proposal as some rumors indicated. The confusion came from the fact that the Managing Director of Estonia’s e-residency program Kaspar Korjus posted an article discussing the possibility of a government-backed cryptocurrency.

This would enable Estonia to invest in new technologies and innovations for the public sector, from smart contracts to Artificial Intelligence, as well as make it technically scalable to benefit more people around the world. Estonia would then serve a model for how societies of the future can be served in the digital era…

As with e-Residency however, the longer term opportunities could be far greater and possibly beyond anything we can currently comprehend.

In time, estcoins could also be accepted as payment for both public and private services and eventually function as a viable currency used globally.

I would call their current online services a “beta program.” They are still figuring out exactly who wants their services and why.

E-residency currently costs $50. It allows e-residents from Estonia and abroad to open an e-business all online. It is basically a package of online tools for people who want to do international business more easily. It is still somewhat limited, but their list of products is growing. You can sign documents online with a special ID card, and open bank accounts. You are being sold a legitimate online identification.

Clearly excited about the possibilities, Kaspar Korjus wants to see the program expanded. There are countless services governments could offer to set a precedent for the digital era. Could one of the precedents be raising revenue through selling services instead of coercive taxation?

The precedent has been set.

The Estonian government is offering products to their citizens and foreigners which are not mandatory to buy. If they release a successful digital currency the wealth of the tiny nation, with only 1.3 million residents, could skyrocket.

Imagine if they started selling actual citizenship, with your very own passport, and access to a bank account outside your home country’s jurisdiction. There would be a tremendous worldwide market for such a product from a real legitimate government.

Currently, their e-residents are not truly Estonian residents. But that could change. If you could slash your taxes to zero, why wouldn’t you become an Estonian resident? They could even charge a pretty high one-time price for that product. It could save people enormous amounts of money in taxes.

Here is an actual path that a country could follow to become a voluntary service provider instead of a coercive monopoly. And it actually would make more sense for them to do this from a profit perspective.

Pull the Thread and it All Unravels

Suppose the model worked, and voluntary revenue dwarfed coerced (tax) revenue. Why, at that point, wouldn’t a government switch to providing all their services voluntarily?

Once other countries realized the potential, they would immediately step up to compete for e-residents. The countries with the largest exit flow would be forced to change their policies or face a mass exodus.

Consumers would finally have a real choice in government. They would be able to control their options. They would have jurisdictions fighting over their allegiance.

The current Estonian e-residency program doesn’t require that you change your physical location. So then imagine that you could align yourself under a specific jurisdiction without moving. Governments would become worldwide service providers. Their protection, insurance, safety nets, and so forth would all be available via an online portal. You would have access to their e-services anywhere.

Governments could become the voluntary agency of individual consumers. It would all be determined by the products and services that individuals wanted from a government. Want protection from unjust laws and regulations? Want retirement and unemployment insurance? Want a SWAT team to rescue you if you wind up kidnapped anywhere in the world?

Of course, the major objection to this would be if the services, especially law, was available to some and not to others. But what exactly is it like now, starting with the bail system, and ending with cushy prisons if you can afford it? Throw in better lawyers who win more cases, and the occasional shady backroom deals that get someone off.

Yet the best part about government competing for business would be that they would be subject to exit. You couldn’t run a justice system as corrupt as the current ones if people could take their business elsewhere.

That’s the vision for a digital era government. It would be more effective than voting. You don’t keep people happy? Say goodbye to your revenue.

via http://ift.tt/2y4GADN TDB

If a surge in covenant-lite levered loans is any indication that debt and equity markets are nearing the final stages of their bubbly ascent, then perhaps now is a good time for investors to take their profits and run.  As the Wall Street Journal points out this morning, levered loans volumes in the U.S. are once again surging, eclipsing even 2007 levels, despite the complete implosion of bricks-and-mortar retailers and continued warnings that “the market is getting frothy.”

Volume for these leveraged loans is up 53% this year in the U.S., putting it on pace to surpass the 2007 record of $534 billion, according to S&P Global Market Intelligence’s LCD unit.

 

In Europe, recent loans offer fewer investor safeguards than in the past. This year, 70% of the region’s new leveraged loans are known as covenant-lite, according to LCD, more than triple the number four years ago. Covenants are the terms in a loan’s contract that offer investor protections, such as provisions on borrowers’ ability to take on more debt or invest in projects.

 

“If feels like the market is getting frothy,” said Henrik Johnsson, co-head of global debt-capital markets at Deutsche Bank AG . “We’re overdue a correction.”

Meanwhile, volumes are surging even as traditional lender protections have become basically nonexistent.  As S&P LCD points out, over 70% of levered loans issued so far in 2017 are considered “covenant-lite” versus only 30% of those issued in 2007.

Before the financial crisis, the boom in leveraged loans was one of the signs of markets overheating. As the crisis intensified in 2008, investors in U.S. leveraged loans lost nearly 30%, according to the S&P/LSTA Leveraged Loan Index.

 

Regulators are taking note. In its last quarterly report, the Bank for International Settlements noted the growth of covenant-lite loans and pointed out that U.S. companies are more leveraged than at any time since the beginning of the millennium. That could harm the economy in the event of a downturn or a rise in interest rates, said the BIS consortium of central banks.

 

The leveraged loan market has long been favored by private-equity firms raising cash to fund company takeovers. Investment banks arrange the loans and typically parcel them out to other lenders and investors.

 

Loan terms are now “more aggressive here in Europe,” said Christopher Kandel, a partner at law firm Latham & Watkins LLP, citing provisions giving borrowers greater flexibility to pay out dividends or incur additional debt.

 

Cov-lite loans barely existed in Europe before the financial crisis. “That will be the test for investors,” said Taron Wade, a director at S&P Global. “How they perform through the cycle.”

Not surprisingly, when the debt markets lose all discipline, Private Equity firms are all too happy to step forward and allow lenders to fund their “swing for the fence” acquisitions.  As the WSJ notes, the average leverage of PE deals in 2017 has exceeded 2007 levels with nearly a third of all deals levered over 6x.

That is particularly true in the U.S., where nearly a third of loans to private-equity backed companies this year are leveraged six times or more, according to LCD’s calculations of companies’ debt to earnings before interest, tax, depreciation and amortization. That is despite 2013 guidelines from U.S. regulators, including the Federal Reserve, on loan underwriting stating that leverage of more than six times “raises concerns for most industries.”

 

Five of the six largest new loans backing leveraged buyouts this year have exceeded those levels, according to Dealogic and Moody’s Investors Service.

 

The largest was a $3.15 billion loan taken earlier this year by Team Health Holdings Inc. to fund Blackstone Group LP’s leveraged buyout of this health-care provider. In January, Moody’s estimated that Team Health’s leverage was at around 7.5 times.

We’ve been saying this a lot lately but it seems like we’ve seen this movie before…

via http://ift.tt/2jYB3Zf Tyler Durden

Authored by Paul Brodsky via Macro-Allocation.com,

Golden Age

Once upon a time the capital markets consisted of a fairly closed community, comprised on one side by mostly clever, well-connected men working together in syndicate to maintain control over national economic and financial affairs, and on the other side by mostly high earners spread disparately across the land hobnobbing with the syndicate’s local representatives.

It was a privileged ecosystem sanctioned by legally-greased law makers and reluctantly accepted by the great unwashed that acquiesced because capitalism was better than recently defeated fascism and postWar communism, and because, with hard work and production, they too could join the club.

A sequential series of naturally-occurring events successfully transformed and democratized the formerly clubby ecosystem, but in doing so embedded CAT 5 risks into the global productive economy. Consider…

• Over-spending by US lawmakers in the 1960s led to the end of the global fixed exchange rate monetary system in the 1970s. US dollars and global assets could begin to be leveraged without limit. Global exporters of oil demanded more money in exchange for their finite resource.
• In the early 1980s, the value of dollars (i.e., US interest rates) was raised to levels that created demand to hold them again, which in turn allowed global trade could resume.
• Wall Street outsider, Drexel Burnham, using unregulated credit as tool to challenge the control of businesses and asset prices formerly determined unilaterally by the closed ecosystem.
• Self-directed retirement accounts were created in 1986. They were promoted and adopted throughout society and opened the door for widespread interest in stocks and bonds.
• The advent and broad adoption of digital technology in the 1980s and 1990s allowed limitless trade processing and easy record keeping.
• Asset prices rose over time because debt could be easily refinanced at ever lower rates.
• Law makers were consistently corrupted by their access to unlimited spending, brought about by the debt-generated appearance of broad prosperity through asset growth and political support from beneficiaries nearest to the credit distribution system.
• Market regulators and economic policy makers were consistently corrupted by law makers exerting pressure on them not to upset the debt-fueled broad economy.
• Economies successfully migrated from emphasizing private sector production and saving to emphasizing public/private financial management of equity and debt assets that cross collateralized government and household balance sheets.         

Economies became accounting schemes with mutable identities, which is where they stand today. Most Baby Boomers are blithely unaware or unconcerned about the gutting of production-based wealth creation and the unsustainability of the financially-based global economy they built. Gen Xers have trapped themselves between the unstoppable force of deflationary digitization they are building and the immovable object of The Boomers’ Rube Goldberg inflation machine.

Meanwhile, most Millennials care nothing of what was and could be, or of the structural changes they will be expected to endure. (Hey, Gen Xers and Millennials, stop voting for 70 year-olds! Find a 35 year-old to help reconstruct your future.)

A Soon-to-be Bygone Era

Check out the mystery graph immediately below.

Whatever it represents, we have been trained to think its hockey stick pattern must represent irrationality in some way, shape or form, right?

As we said…

We are fans of Mr. Buffett, admire his talent, and wish him a long, prosperous life, but we could think of no better way than his unquestioned success as a financial asset investor to get readers to begin thinking about what they accept as stable and what they accept as bubbles.

While the fact remains that Mr. Buffet has increased his net worth consistently throughout his long life (consistency the graph cannot show because his net worth at fourteen was too small relative to the last few figures), the parabolic rise of his net worth later in life poignantly symbolizes the timing of the underlying shift from production to finance. As he insists in his folksy, humble way, he happens to be the very rare exception in the universe of investors, and if it were not him it would be someone else.

As usual, he is right but oversimplifying things. We can do that too. His investment style, that began as Graham value and drifted into a hybrid that included macro and distressed, always had one unifying constant: inflation. Berkshire and its holdings include insurance and consumer brands with unrivaled moats. All or most of his businesses have had pricing power, which is to say insurance premiums paid today will likely always be higher than claims tomorrow in future dollars, and Coca Cola will likely always keep its profit margins whether a can sells for a nickel or $5. Further, the structure of Mr. Buffet’s investment portfolio means he has been able to defer most of his taxes in perpetuity. 

 
Mr. Buffet was born in 1930 and so he was positioned to make hay when the golden age of credit and asset inflation arrived. He has been a professional investor for sixty years. He increased his net worth by about 10,000 times in his first 30 years, from 1956 to 1986 (v. the S&P 500, up about 5 times), and by about 55 times in his second thirty years, from 1986 to now (v. S&P 500, up about 12 times). Don’t let his folksy humility fool you; his talent allowed him to get rich quick many times over six decades.

We have two main observations:

1) Warren Buffet is that very rare individual who was already well-staked, able to quickly identify the shift from production to finance, and then willing to optimize his investment strategy to suit it, and;

 

2) he would have performed even better with his original brand of value investing had the US policy makers not encouraged every Tom, Dick and Mary to use the public markets as piggy banks. 

Mr. Buffet’s experience in public asset markets is not repeatable.

Already high valuations, investor participation and economic leverage levels ensure that public markets will provide the mass of investors, and even one that may come along as talented as he, with the inability to produce significant real alpha. It was fitting that the Oracle himself predicted last week that the Dow Jones Industrial Average would hit 1,000,000 in the next hundred years. That implies only a 3.87% compounded annual return before inflation. Who are we to argue with the golden boy in his golden years?  

via http://ift.tt/2xBjfYS Tyler Durden

Following the startling, impromptu allegation on Monday morning by North Korea’s foreign minister Ri Yong Ho, who accused Trump of declaring war on North Korea, and warned Pyongyang would shoot down US jets, White House press secretary Sarah Huckabee Sanders on Monday dismissed North Korea’s claims as “absurd.”

“We have not declared war on North Korea and frankly the suggestion of that is absurd,” Sanders said during today’s press briefing.

Sanders: “We have not declared war on North Korea” http://pic.twitter.com/3Xxnyq80v7

— Washington Examiner (@dcexaminer) September 25, 2017

As a reminder, North Korea’s foreign minister said that Trump’s speech to the United Nations last week and his subsequent tweets were a “declaration of war.” “In light of the declaration of war by Trump, all options will be on the operating table of the Supreme leadership of DPRK,” Ri Yong Ho said. North Korea has also threatened to shoot down U.S. aircraft over international waters.

“It’s never appropriate to shoot down another country’s aircraft when it’s over international waters,” Sanders responded. “Our goal is still the same. We continue to seek the peaceful denuclearization of the peninsula. That’s our focus. Doing that through both the most maximum economic and diplomatic pressures as possible at this point.”

On Saturday, Ri delivered a speech at the UN General Assembly in which he stressed that North Korea would inevitably target the US mainland with missiles as Trump called Pyongyang’s leader a “rocket man” on a suicide mission.

The threat to shoot down US bombers comes as the Pentagon reported on Saturday that several B-1B bombers flew in the international airspace just off the North Korean eastern coast. Chief Pentagon spokeswoman Dana White said the move was made to showcase US military options available to Donald Trump.

Sanders also disputed reports that Trump’s top aides warned him against using such heated rhetoric over concerns it would provoke Kim.

Separately, Sanders also defended President Trump’s escalating war of words with the NFL: “This isn’t about the president being against anyone,” White House press secretary Sarah Huckabee Sanders told reporters at her daily briefing. “This is about the president and millions of Americans being for something.”

Using the parlance of our times, Sanders was bombarded with questions about Trump’s description of players who kneel during the anthem as “sons of bitches” who should be fired.  She declined to defend his specific language, but said Trump was trying to rally the country around unifying themes like patriotism and respect for the military.

“I think that it’s always appropriate for the president of the United States to defend our flag, to defend our national anthem,” she said.

NFL Protest: “This isn’t about @realDonaldTrump being against anyone,” says White House Press Secretary Sarah Huckabee Sanders #SNT http://pic.twitter.com/HwzsuoVhOh

— Sky News Tonight (@SkyNewsTonight) September 25, 2017

As The Hill reported, the White House was challenged over Trump’s claim that his remarks had nothing to do with race. Reporters noted that former San Francisco 49ers quarterback Colin Kaepernick, the first NFL player to kneel during the national anthem, was protesting police brutality and racial inequality.

Sanders responded that the “focus” of the protests “has long since changed” and added that “if the debate is really for them about police brutality they should probably protest the officers on the field that are protecting them instead of the American flag.”

via http://ift.tt/2wP4BOH Tyler Durden

As last week ended, VIX was crushed back near record lows to ensure the S&P 500 closed above 2500 and to prove all is well in the world – despite quakes, storms, floods, nukes, and worst of all… Fed balance sheet unwind plans.

 

And VIX speculators have never been more short (implicitly levered long stocks)…

 

So why, given all this exuberance and complacency, is uncertainty around VIX's future trajectory at relative record highs?

As Bloomberg notes, renewed bets for swings in the CBOE Volatility Index have pushed the CBOE VVIX Index to a new peak relative to the VIX.

Since the ratio between the two gauges hit a record on Aug. 9, the VIX posted moves of more than 20 percent on four separate days, including a 44 percent surge on Aug. 10.

At the same time, exchange-traded products that benefit from market calm just had their biggest weekly outflows on record, while those that gain with greater stock swings gathered more money.

As Reuters reports, the long stretch of low volatility for U.S. stocks has made betting on continued calm a popular and lucrative trade, but traders and strategists warn that risks to the trade have mounted, while the potential for profits has shrunk.

Some traders, however, have grown more wary of increased risks to the trade.

“I think a lot of folks have gotten lulled into a false sense of security because the short trade has gone so well for so long,” said Matt Thompson co-head of Volatility Group at Typhon Capital LLC, in Chicago.

 

“We are still shorting volatility but we have an itchier trigger finger.”

Assets under management for the top two short volatility products is at $2.8 billion and their exposure to volatility is at an all-time high, according to Barclays Capital. But the very popularity of the trade has cranked up the risk.

And of course, we all know who ends up wearing it at the end…

Positioning in these products, primarily driven by retail players, may be more skewed to the short side than the broader market where institutional investors hold sway.

 

“I don’t think the risk is necessarily as big on the institutional side as it is on the retail side,” said Omprakash.

In fact, it seems that only FX options traders are seeing through the bullshit…

via http://ift.tt/2wPqNrW Tyler Durden