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Authored by Simon Black via SovereignMan.com,

In 1999 my colleague Tim Price had front row seats to the first Internet bubble.

He tells a great story about being a private client portfolio manager at Merrill Lynch in London at the time, and describes how clients were clamoring to buy technology stocks.

‘Giddy’ doesn’t really do the mania justice. ‘Insane’ comes closer to describing the popular mood.

James Glassman and Kevin Hassett had just published a book, Dow 36,000 (the title speaks for itself), and Merrill Lynch thought it fitting to give a copy to every single person on staff.

The NASDAQ stock index, which was heavily comprised of the technology companies that everyone loved so much, consistently hit fresh all-time highs. It was practically a daily occurrence.

Stock valuations soared; companies that lost grotesque amounts of money were “worth” billions of dollars simply because investors no longer cared about conventional metrics like profit.

Warren Buffett blasted this “irrational exuberance” and wrote that “a bubble market has allowed the creation of bubble companies– entities designed more with an eye to making money off investors rather than for them. . .”

But Buffett was dismissed as a foolish old man.

1999/2000 was also when investment guru Jim Cramer told everyone to buy incredibly expensive tech stocks at all-time highs– like Digital Island, 724 Solutions, and Exodus Communications.

(If you haven’t heard of any of those companies, it’s because they all spectacularly flamed out after losing billions of dollars of their investors’ capital.)

Tim tells a story about a website that existed back then called f**kedcompany.com.

The website showcased ridiculous businesses that were burning through money, and over time it developed into a chat room for venture capitalists, stock investors, and professional asset managers.

Tim describes a post he read once in 1999 from somebody who called himself ‘Stanford MBA’.

It was brief and to the point:

“We have stumbled upon the perfect business model. We will lose money on every sale, and we will make up for up it in volume.”

The market peaked just a few months later. And when it came crashing down, the NASDAQ lost 78% of its value.

As a matter of fact, when adjusted for inflation, the NASDAQ is still 17.6% below its March 2000 peak.

In other words, investors have waited nearly two decades and STILL haven’t recovered their losses from the dot-com bubble.

With the benefit of hindsight, it’s easy to see the obvious warning signs.

The mania in 1999 was palpable. No one cared about profit. Retail investors were piling in at record pace. And the ‘experts’ said it would last forever.

We’re seeing similar indicators today.

Some of the largest, most popular companies in the world have been inflating their stock prices by borrowing money to purchase their own shares. Others, including ExxonMobil, AT&T, Verizon, Netflix, etc. have NEGATIVE free cash flow, meaning that their businesses are burning through cash and increasing debt.

Yet despite this cash burn, stock valuations are currently at their highest levels since the financial crisis, and have only been higher two times in history. (One of them was the Great Depression.)

And retail investors have been piling in at record levels; Charles Schwab recently reported unprecedented amounts of investors are opening new brokerage accounts.

Of course, if stocks are highly overvalued, bonds are even more ridiculous.

Governments that are completely bankrupt have been able to borrow trillions of dollars at yields which are NEGATIVE.

Perhaps most astonishingly, last month the government of Argentina sold $2.75 billion worth of bonds that will not mature until the year 2117– ONE HUNDRED YEARS from now.

(Bear in mind that Argentina has spent 75 out of the last 200 years in some state of default.)

And the experts tell us that the good times will last forever. No other than Janet Yellen stated a few weeks ago that we will not see another financial crisis in our lifetimes.

The list goes on and on. Stocks are at all-time highs. Bonds are at all-time highs. Real estate is at all-time highs.

So is, by the way, consumer debt, government debt, and margin debt. (The latter means that investors are borrowing record amounts of money to buy stocks.)

None of this makes sense.

Astrophysicist Neil DeGrasse Tyson opens his book Astrophysics for People in a Hurry with a great quote: “The universe is under no obligation to make sense to you.”

The same can clearly be said about financial markets. They can remain irrational and expensive for years even though it makes absolutely no sense.

And yes, markets could become even MORE irrational and expensive.

But this is hardly a reason to participate in such madness.

There are always other options… including the option to do nothing at all.

Personally I am building up a large cash position right now and waiting patiently for a major correction (or even crash).

This is one thing we do know for certain– nothing moves up or down in a straight line. Asset prices rise and fall in boom/bust cycles.

And when those crashes occur, having cash is critical.

Remember the 2008 crash? Bank lending dried up. It was nearly impossible to borrow money to invest.

And the most incredible opportunities were available exclusively to investors who had plentiful cash and the will to act.

This might mean waiting months or even years for the opportunity to strike.

But when it comes to investing, the long-term risk-adjusted rewards of being patient and conservative almost invariably outweigh the short-term gains of chasing the latest fad.

Do you have a Plan B?

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Mark Zuckerberg, the 30-something billionaire founder of Facebook, hasn’t lived a ‘normal’ life…at least not at any point in the recent past.  He grew up in a suburb of New York City and now hobnobs with the elites of Silicon Valley, at least when he’s not enjoying that massive chunk of Kauai that he recently purchased for his own private use.

So what do you do when you’ve become completely disconnected from the ‘foreign’ world that all of middle America calls ‘reality’ and have no idea why you just got massively blindsided by a national election that you thought was a foregone conclusion?  Well, you take a trip to Williston, North Dakota.

As Zuckerberg apparently learned for the first time while visiting oil workers in a tiny North Dakota town, there are entire industries that exist outside of Silicon Valley…industries that provide great wages and support thousands of American families.  And, as it turns out, those people are sick and tired of having their jobs threatened by their own government and being demonized by Hollywood liberals for their efforts to provide economical access to energy.

Zuckerberg shared his full thoughts in a Facebook post:

The invention of new techniques to fracture rock (fracking) to extract oil led to a boom where tens of thousands of workers moved from all around the country to pursue new jobs in this industry.

 

They come here because these are good jobs where people with a high school diploma can make $100,000 a year.

 

When the Dakota Access Pipeline was approved, that removed $6-7 per barrel of cost from producing oil in the region, which brought more investment and jobs here. A number of people told me they had felt their livelihood was blocked by the government, but when Trump approved the pipeline they felt a sense of hope again. That word “hope” came up many times around this. One person told me the night the pipeline was approved, people lit fireworks and rode trucks with American flags down Main Street to celebrate.

 

Many people I talked to here acknowledged this, but also feel a sense of pride that their work contributes to serving real needs we all have every day — keeping our homes warm, getting to work, feeding us, and more. They believe competition from new sources of energy is good, but from their perspective, until renewables can provide most of our energy at scale, they are providing an important service we all rely on, and they wish they’d stop being demonized for it.

 

Of course, Zuckerberg also took the opportunity to cast the men he met as just a bunch of misogynist criminals…

This sudden influx of mostly men tripled the size of the town in just a few years. When oil prices dropped, some of this industry left and so did many people. This has led to some unique community dynamics.

 

First, the ratio of men to women in the city is now 10:1. That’s actually lower than 30:1 at its peak.

 

The women I met said they feel safe, but they had unique stories. Some told me about finding out their boyfriends had families back home.

 

This gender imbalance has led to crime though. It is well-documented across the world that societies with many more men than women have more crime.

…but, at least it’s a start…

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

Authored by Kevin Muir via The Macro Tourist blog,

Bernanke presided over the Great Financial Crisis of 2008. Greenspan had the 1987 crash, along with the 2000 DotCom bust. Volcker had the bond debacle of the early 1980’s and the subsequent Latin American debt crisis.

For the past 35 years, every Fed Chairperson has been tested with some sort of financial event.

Until now…

Janet Yellen was sworn into office as the Chair of the Federal Reserve on February 3rd, 2014 and since then, it has been fairly smooth sailing for financial markets. Sure there have been bumps along the way, but in the grand scheme of history, they have been fairly benign.

Yellen’s term ends in late January 2018, and although no one has confirmed it, let’s face it – she isn’t staying on. She will be 71 at that time, and although Greenspan stayed on as Chairman until he was 80, I just don’t see Yellen wanting to spend her golden years running monetary policy for this administration. Not only that, there is no way Trump will leave her in charge. The White House is already preparing markets for a change, floating Gary Cohn’s name as a potential successor.

So Janet has six more months of steering this global supertanker of an economy. Does she rock the boat and attempt to quell her critics that claim she has been too easy for too long? Or does she simply try not to make waves and see if she can keep the balls in the air until her handoff? Or does she cruise into the sunset at 197 miles per hour, letting the markets run hot, not caring about the problems she might leave for her successor?

I had really believed the world’s Central Bankers had agreed to a hawkish shift in the wake of the recent overly easy financial conditions. There were many signals from various Central Bank officials throughout the globe. But yesterday at the Humphrey Hawkins’ testimony, Yellen seemed to completely abandon any notion that Federal Reserve officials were targeting financial conditions. Instead she delivered a boilerplate Central Bank head speech.

Markets took this as a signal that all their concerns about the Federal Reserve taking away the punch bowl prematurely were overblown.

Risk was back on baby! Speculators grabbed both stocks and bonds more quickly than your favourite characters die on Game of Thrones.

But the absurdity of this chase could best be summed up from this great tweet from Gains, Pains & Capital:

Yup, can’t say I disagree. Too much of what passes for analysis these days is merely pundits trying to forecast Central Bankers’ next move. I am by no means immune. I spend far too much time trying to read the tea leaves of each Federal Reserve officials’ speech.

One of my favourite traders, the terrifically nice guy Anthony Crudele (and host of the Futures Radio Show), sent out of this tweet that really struck a chord with me:

This Fed transparency has become more of a liability than an asset. Instead of providing policy clarity, it creates confusion as various factions of the Federal Reserve board debate their positions in a public forum. The end result are these violent whipsaws as markets overinterpret each different Fed officials’ speech as a potential change of policy, whereas the reality is that their views are barely changing from speech to speech.

There is no doubt in my mind that two of the most important FOMC board members, Fischer and Dudley, are concerned about financial conditions becoming too easy, and are proponents of tightening every second meeting until the speculative fervor subsides. I had assumed Yellen was in the same camp, but yesterday’s speech throws that into question.

Yet I can’t help but wonder if Yellen simply doesn’t want to upset the apple cart towards the end of her term. She can see the finish line and I have no doubt she is hoping to make it without a financial crisis. Like a sports team that is up by a goal in the dying minutes of a game, she is simply trying to not make a mistake. So instead of reinforcing Dudley and Fischer’s message, she plays it safe.

Does that mean the Fed has changed course? I don’t know, but think the market is once again over extrapolating the most recent Fed officials’ data point. Regardless of the fact that the speech was from the Fed chair, I am going to stop getting jerked around by each speech and try to remind myself of the FOMC board’s longer term objective. The worries about overly easy financial conditions have not suddenly disappeared, and in fact, the violent rally will probably further convince Fed officials that overheating financial markets are a real concern.

Unfortunately, I don’t have any answers, but the one thing I will suggest is to stop assuming each and every Fed speech represents a change in policy. The reality is that they don’t have a clue what they are doing, and are flying by the seat of their pants much more than most realize.

And I will leave you with this one last thought. Often when a team is up by a goal and trying to play out the clock, they inadvertently change the type of game they have been playing that got them there in the first place. By doing so, they cause the very outcome they hoped to avoid.

via http://ift.tt/2t7VfMt Tyler Durden

Yellen's speaking again… give it all you've got!!

 

Stocks stalled early on (around 1010ET) thanks to inflation comments from Yellen, but that dip was bid back to the highs…then they took a little spill when Fed's Brainard admitted "asset valuations do look a bit stretched" around 1400ET. Once again the rally-monkeys came out – even as it became clear that GOP will not have the votes for the revised healthcare bill…

Nasdaq up 5 days in a row – the longest streak since May… Early Small Caps weakness was ramped all the way back into green…

 

Futures show that in general markets went nowhere today…

 

On the week, Trannies are hovering just into the green as Nasdaq outperforms…

 

Retail was bid today (best day of the year), because suddenly they're all fixed, and financials were higher ahead of tomorrow's earnings..

 

FANG Stocks spiked up to a key resistance level then faded to end the day lower…

 

VIX was clubbed back to a 9 handle once again every time Nasdaq dared to dip red…

 

Treasury yields shot higher this morning and extended their rise through Yellen's testimony…

 

With 30Y spiking almost 8bps off the lows to return to unchanged for the week, before bonds rallied into the close…

 

The Dollar Index slid once again (but saw quite a reversal overnight…

 

AUD is the best performer among the majors this week (along with the Loonie) as EURUSD remains unch…

 

Despite headlines of OPEC compliance crashing to six-month lows, WTI had a sudden early bid and that ignited momentum back to pre-DOE levels, back above $46…

 

Gold rolled over from earlier gains as the dollar rallied this afternoon, but the precious metal closed only marginally lower…

 

Bitcoin leaked back lower again…

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Vol-sellers beware. That's the message from Natixis Global Asset Management’s Brett Olsen and Nicholas J. Elward, in their latest note, as they warn "it stands to reason that the market will see a reversion to the mean and find the VIX trading in the 20+ range before too long."

There has been much discussion lately about how stock market volatility is at near historic lows. The Chicago Board Options Exchange Volatility Index^® (or VIX), a measure of implied or future volatility, is at a level of roughly 10 as of June 30, 2017. If one looks at the history of the VIX, it has typically averaged closer to 20.

Over the last 20 years, there has been only one other period of volatility this low, over the 2004–2006 timeframe. This period was characterized by economic expansion and a strong stock market as the economy moved out of the 2000–2003 tech bubble burst. This period of calm came to an end with extremely high volatility as we entered the Great Recession of 2008.

There are several factors that could cause the VIX to increase in the coming months; personally, we believe it may double. Here are four reasons why:

1) Geopolitical unrest – There continues to be concern among many market analysts around North Korea, Russia and a variety of Middle Eastern nations – including Turkey, Iran, Saudi Arabia, Syria, and Iraq. Depending upon what a small number of political leaders decide to do in their countries, in their regions, and even more widely, we could suffer increased global unrest, which may cause increased global stock market volatility. In addition to the actions taken by political leaders, the threat of terrorism remains unpredictable and could contribute to rising volatility.

 

2) Instability in the American political landscape – Ever since the election of Donald Trump in November 2016, we have seen strong stock market returns. The Trump administration has promised investor friendly policies, such as tax reform and deregulation. There are also expectations of more infrastructure spending, which could help increase business growth and employment in the United States. However, despite these expectations, there have been many distractions as these legislative goals are being pursued, including the ongoing investigation into the Trump campaign’s connections with Russia and continued disagreements between and among legislators of both parties. Each of these distractions has the potential to create further frustration among both business leaders and voters alike. Moreover, it remains possible that the investigations into the Trump administration could result in material changes in executive branch leadership. Current political dynamics have the potential to translate quickly into increased market turbulence.

 

3) Advance to the back-end of the US business cycle – The U.S. is in the 8th year of an economic expansion, one of the longest in history. According to historical data, most business cycles last an average of about 6 years. Considering the age of the current expansion, a sustained market correction – and the increased stock market volatility that could come along with it – may loom.

 

4) Retrenchment of central banks’ easy credit policy – The U.S. and many other countries across Europe have seen declining or very low interest rates dating back nearly 10 years. However, this business-friendly credit environment may be coming to an end in the U.S., and we expect soon in Europe as well, as interest rates are set to rise. In addition to this, the U.S. is likely to begin tapering its bond buying program later this year, which has also had an impact on keeping rates low. The ending of the Federal Reserve’s quantitative easing (QE)² program will eliminate an artificial stabilizer in the economy. We expect this could increase the probability of higher stock market volatility in the near future.

 

[ZH: and as we have noted previously, the collapse in China's credit impulse means volatility to set to come no matter what…]

 

 

Readying for the road ahead

With these volatility-increasing risks before us, we strongly believe the VIX could double within a year. This predication is just that, a prediction, based on the above risks and the fact that the level of volatility is currently at near historic lows.

Nevertheless, we believe it stands to reason that the market will see a reversion to the mean and find the VIX trading in the 20+ range before too long.

In order to prepare for this greater level of volatility, investors should carefully review their portfolios so they are aware of the risks they are taking. A range of investment strategies, including lower volatility investment strategies, are available to investors looking to reduce risk and increase diversification in their portfolio.

Read their Latest Insights page for more analysis of current market conditions.

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

On Thursday morning the CBO released a surprisingly upbeat assessment of Donald Trump’s proposed budget, calculating that it would cut the cumulative US deficit by 30% over the next decade, preventing the US debt from spiraling out of control (even further).

That. however. may be an overly optimistic assessment, especially following the release of the latest monthly budget data, which showed that not only did the US deficit surge to $90 billion, far above the $38 billion consensus estimate, and a “NM” compared to the $6.3 billion budget surplus in June of last year, but the US also saw the biggest one month outlay on record, at $429 billion, 33% higher than the $323 billion in outlays one years ago.

What prompted this massive surge in outlays?

The biggest reason for the outlier print is that according to Stone McCarthy, outlays increased by at least $54 billion relative to baseline because the Treasury revised up its estimates of the subsidy cost of housing and student loans it guarantees.

The cost of those loans is treated in the budget on a present value basis, not a cash basis. Treasury periodically revises these costs. (It should be noted that the associated increase in outlays doesn’t impact Treasury borrowing or debt under the debt limit.) If not for these special factors, Treasury would have reported another small surplus for June… however it did not.

On the revenue side, things were just as bad with the US Treasury collecting only $338.7BN, just 9% higher than the $330BN in June of 2016.

What makes the surge in the deficit especially surprising is that June is often a surplus month, as the Treasury receives large corporate and non-withheld individual tax payments in that month.

One theory explaining the shortfall in revenues reflects taxpayers delaying the recognition of income in 2016, anticipating tax cuts this year. That revenue should eventually be recovered. About a third of the revision was on the outlay size, with a large chunk due to changes in the estimated subsidy costs described above. Based on the CBO revisions, we think the deficit for the fiscal year, which has three months left, will be in the $650 billion to $700 billion range.

Combining these two means that YTD, the deficit jumped to $523.1BN vs $399.2BN last year.
While many analysts had a deficit base case for fiscal 2017 at roughly
$575BN (the year ends on Sept 30), the CBO recently revised its
projection for the fiscal 2017 up by $134 billion to $693 billion. Most of the CBO revision reflects weaker than expected revenues.

To summarize: what the unexpected surge in government outlays means is that quietly and mostly behind the scenes, the student debt bubble has begun to burst, and the Treasury is “provisioning” for it in real time, with all US taxpayers once again on the hook.

Finally, since the $1+ trillion student loan bubble is expected to end up with discharges of 35% if not higher, it means that over the next several years, the budget deficit will be incrementally boosted by approximately $350 billion as America’s taxpayers are once again taken to the cleaners, this time to bail out million of liberal arts majors who for one reason or another just can’t pay back their student loans.

h/t @SMRA

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Authored by Nick Cunningham via OilPrice.com,

The latest figures from the EIA show that despite some hiccups, the shale rebound is still on track. Last week, the sharp drawdown in inventories made headlines, but buried within the weekly figures was a bounce back in oil production, reigniting fears that the market will take much longer to balance.

(Click to enlarge)

The U.S. shale industry has already added almost a half million barrels per day since the end of last year, taking production up to 9.3 million barrels per day (mb/d). But production is expected to continue to grow rapidly, with projections putting output at a record-high 10 mb/d by next year.

The coming wave of new supply will only be possible with the generous help of Wall Street. According to the Wall Street Journal, major banks and investors have showered the industry with credit and equity, pouring an estimated $57 billion into the sector over the past 18 months. All of that money is being translated into a sharp rise in drilling even as oil prices slump.

But while individual companies hope to attract investors and boost profits by ratcheting up production, the industry as a whole is shooting itself in the foot. Some less efficient drillers are increasing production but losing money on every barrel produced.

There is a growing recognition that loose money and easy credit is helping contribute to another downturn in prices. “The biggest problem our industry faces today is you guys,” the CEO of Anadarko Petroleum, Al Walker, said at an investor’s conference in June, according to the WSJ. “It’s kind of like going to AA. You know, we need a partner. We really need the investment community to show discipline.”

Investors hungry for yield are throwing money into companies who then drill more, and the surge in production is hurting the industry as a whole. Despite efficiency improvements, the shale industry is expected to be cash flow negative by a combined $20 billion this year as oil prices sink.

The energy sector, by some estimates, has been the worst performer this year for investors, so many are getting burned even as they keep the money taps open. Whether in terms of commodity prices (energy fell 11 percent in the S&P Goldman Sachs Commodity Index) or individual companies (73 of the 90 companies in the MSCI World Energy Sector Index saw their share prices decline in the second quarter), the oil and gas industry has not been a great space to be in.

(Click to enlarge)

Investors are slowly waking up to the idea that they may not be able to make juicy profits by betting on a sharp rebound in oil prices. There is some early evidence that Big Finance is pulling back, with new equity issuance down recently.

Even if Wall Street starts to cut back on its investments in shale, it will take time for that spending contraction to show up in the production data. There is a roughly six-month lag time between the decision to begin drilling and oil showing up in the market, so the rush of new drilling that began in the first half of 2017 will ensure that production likely continues on its upward trajectory for the rest of the year.

But lower prices will ultimately cut into U.S. production, even if that doesn’t occur until 2018. According to Bank of America Merrill Lynch, a $1 per barrel increase or decrease translates into the addition or subtraction of 100,000 bpd of supply. As a result, “[w]ithin a $20 band, you get an almost 2m b/d swing,” said Francisco Blanch, Bank of America’s global head of commodities research, according to the FT. So while 2017 production will probably continue to increase, the outlook for 2018 is still sensitive to prices.

Nevertheless, the current oversupply woes have forced investment banks and other oil analysts far and wide to downgrade their oil price forecasts. For example, Bernstein Research slashed its price forecast for 2017 and 2018 from $60 and $70 per barrel, respectively, down to just $50. Bernstein doesn’t see oil averaging $60 per barrel before 2019.

Drastic cuts to oil price forecasts are spreading. BNP Paribas just axed its 2018 forecast for Brent by $15 per barrel to a lowly $48.

If those depressed price levels stick around, Wall Street will likely grow tired of shale drilling and start taking its money elsewhere.

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