Back in January 2000, AOL bought Time Warner for $162 billion, which was considered an astonishing amount of money back then.
Their goal was to create a tech/media giant. And they failed miserably.
Time Warner was having a difficult time establishing an online presence, so they thought they would benefit from AOL’s 26 million dial-up subscribers.
And AOL, the leader in “online” at the time, was supposed to benefit from Time Warner’s cable network and content.
At the time – peak dotcom madness – tech firms could do no wrong, and investors praised the ambitious merger.
But January 2000 was literally THE top of the market. The dot-com bubble burst almost immediatley afterwards. Recession followed.
In addition, AOL was bleeding subscribers as cheaper and faster broadband Internet providers stole market share.
By 2002, the merged companies were performing so poorly that they had to take a $99 billion write-off– the largest in corporate history– to account for the deterioration of AOL’s business.
They say history doesn’t repeat, but it often rhymes. And today the tech world and media world are once again in a frenzy to merge.
Earlier this month, telecom giant AT&T completed its acquisition of media titan Time Warner following a 2-year ordeal to obtain government approval.
Now, the fact that these two private companies had to fight in court against the government simply to be able to merge is pretty ridiculous.
But this letter isn’t about the heavy hand of government.
It’s about debt.
Because, including the whopping amount of debt that AT&T inherited, the deal between the two companies was valued at $108 billion.
$108 billion. That’s an awful lot of money that AT&T paid for Time Warner.
Yet in exchange for such a princely sum, Time Warner will only contribute around $1 billion in annual Free Cash Flow to AT&T.
This is crucial to understand.
Remember that, in simple terms, Free Cash Flow represents the final profit available to shareholders after all capital investments, taxes, and other expenses have been deducted.
Plus, because Free Cash Flow filters out most accounting gimmicks, it’s one of the better representations of a company’s true profitability.
So that means AT&T bought Time Warner for about 100x Free Cash Flow, equivalent to a yield of just 1%.
AT&T believes, however, that certain ‘synergies’ exist between the two companies, which could increase that Free Cash Flow level to $3 – $3.5 billion.
Yet even if they’re successful in achieving that target, AT&T’s effective return will only rise to 3%.
That’s the best case scenario… which is hardly worth writing home about.
I mean, seriously, you could do better than that buying government bonds. Why take on so much risk for such a trivial return?
But in order to achieve this 3% target return, AT&T had to (a) dilute its existing shareholders, and (b) take on tens of billions of dollars in debt.
According to AT&T’s own press release, the company now has $180.4 billion of net debt.
And we needn’t go back too far in the past to highlight how ridiculous this is.
In 2010, AT&T generated $15.4 billion in Free Cash Flow. And at the time it had $57.5 billion in net debt.
By the end of 2017, the company’s free cash flow had increased 20% to $18.5 billion.
Yet its debt more than DOUBLED to $125 billion.
Think about that– a 20% increase in Free Cash Flow, yet a 100% increase in debt.
And now, post-merger, the company is increasing debt another 44% to $180 billion, while Free Cash Flow is increasing about 5%.
This is a massive imbalance. The role of any company’s management is to allocate resources in a way that safely maximizes returns for shareholders.
Yet AT&T seems to be doing the opposite– taking on riskier levels of debt to generate diminishing returns.
They’re not alone.
Already, global corporate debt excluding financial institutions stands at a record $11 trillion. And just like AT&T, debt has grown much faster than Free Cash Flow.
There’s also currently a bidding war between Disney and Comcast for just a portion of 21st Century Fox’s assets.
The bid is now $71.3 billion, though it’s possible the final amount could be MUCH higher… and another ridiculous multiple of Fox’s Free Cash Flow.
According to the Wall Street Journal, the combined AT&T/Time Warner and Comcast/Fox entities would carry a combined $350+ billion of debt.
That’s larger than the size of the Colombian economy.
It’s pretty remarkable to even be able to borrow that amount of money, let alone for assets which produce relatively small returns.
This is one of the telltale signs of being near the top of a bubble– when companies throw caution to the wind and take on substantial risk for minimal benefit.
It’s worth thinking back to the housing crisis and financial meltdown a decade ago.
Prior to the collapse, banks spent years loaning money at practically 0% to borrowers with bad credit.
And more than that, these risky borrowers didn’t even have to put down any money. Banks commonly loaned up to 105% of a property’s purchase price… and used their depositors’ savings to do it.
Bear in mind, banks often made less than 1% on these mortages.
So just like the AT&T example today, banks from a decade ago took on huge levels of risk in exchange for miniscule returns…
… until eventually the entire system blew up.
That’s not to say there’s some imminent financial catastrophe looming.
But it would be silly to ignore the impact of adding hundreds of billions of dollars worth of debt to acquire assets which contribute comparatively tiny returns.
President Trump doubled-down on his plan for “immediate” deportation of illegal immigrants this morning, explaining in a tweet that “hiring many thousands of judges, and going through a long and complicated legal process, is not the way to go,” adding that this deterrence approach “is the way to go to stop illegal immigration in its tracks.”
Hiring manythousands of judges, and going through a long and complicated legal process, is not the way to go – will always be disfunctional. People must simply be stopped at the Border and told they cannot come into the U.S. illegally. Children brought back to their country……
….If this is done, illegal immigration will be stopped in it’s tracks – and at very little, by comparison, cost. This is the only real answer – and we must continue to BUILD THE WALL!
But, as NBC News reports, that hasn’t stopped civil rights attorneys from flocking to the Texas border to ‘protect’ the rights of illegal immigrant parents not to be separated from their children – the exact same policy that is utilized on American parents when they commit a crime with children in tow.
Attorneys have become a lifeline for migrants in detention, responding as would clergy to a disaster or tragedy, as the legal labyrinth of immigration has become more complicated.
Although many are accustomed to the immigration system’s complexities, attorneys are finding the situation created by the Trump “zero-tolerance” prosecutions full of never-before-seen hurdles and restrictions that hamper their access to children and parents and are making their work to ensure those with valid asylum and other claims get to stay more difficult.
Ali Rahnama, an immigration attorney from Washington, D.C. who works on public policy and high impact litigation, said he woke up last Monday and felt he needed to be on the border. He found a private donor to pay for him and a few colleagues to fly to the border.
Another attorney, Sirine Sheboya, is choking back emotion over the lengths mothers and fathers are going to be reunited with their children.
“We have people in there who are considering not continuing on with really strong asylum claims,” she said stopping to catch her breath as the emotion breaks through, “because they think that maybe they will get reunified with their kids faster if they give up their claim. That’s just wrong.“
“We have men and women saying, ‘My 5- and 6-year-old was holding my leg and was taken away,'” said Rahnama, who visited parents and guardians being held in the Port Isabel Detention Center. “They go to court and are told their child will be there when they come back and they come back and there is no child,” he said.
Of course, it’s not just attorneys, Democratic politicians are descending for their moment of social justice and never-Trump warrior glory.
Sen. Elizabeth Warren, D-Mass., spent 2½ hours in the Port Isabel Detention Center on Sunday night. After the visit, she told reporters stationed outside the center that officials of Immigration and Customs Enforcement told her that the center isn’t where parents and children will come together as federal officials have said.
“The [immigration] officials made clear this is not a reunification center. There will be no children brought here. There will be no families brought together in this place,” Warren said. “All that’s happening here is the detention of mothers and fathers who lost their children.”
Warren said she spoke to nine mothers and none the whereabouts of their children or had spoken to them.
“They are crying they are weeping,” she said. “They have said they will do anything … just, please, let them have their babies back.”
One quick question to Ms.Warren – what would you do with the children of an American parent, who took his children along with him as he committed a crime? Do they deserve better or worse treatment under the law than an illegal immigrant – who crosses the border not at a port of entry and then proclaims they are seeking asylum?
NBC News reports that DHS said late Saturday that some of the more than 2,000 children – about 522 – have been reunited with parents. Officials said Port Isabel would be its reunification center.
Sometimes it’s not just children who attorneys have to locate, but some of the parents as well. Efrén Olivares of the Texas Civil Rights Project can no longer find three clients who were part of a group of five parents who complained in a petition filed with the Inter-American Human Rights Commission, part of the Organization of American States, about the child separations.
“They were either released to the U.S. with notice to appear (at a court at a later date) or were deported. We are looking diligently to contact them. We gave them a number and asked them to contact us if they were released,” Olivares said.
“We have not heard from them.”
Surprise!
Here is immigration expert Steve Cortes corrected host Fredricka Whitfield on the reality of family separation at the U.S. southern border during CNN’s Newsroom Sunday (via The Daily Caller)…
The U.S. Border Patrol does not separate immigrant families who claim asylum if they appear at a legal point of entry to the U.S., Cortes, the former head of President Donald Trump’s Hispanic Advisory Council, said.
Until recently, only the families that tried to come into the country outside a point of entry – making them illegal immigrants – were separated.
Trump issued an executive order Wednesday that directed the Border Patrol to detain illegal immigrant families together and to begin reuniting children with their detained parents.
Whitfield asked Cortes how he thought Trump’s plan to reunite “immigrant families” would work out.
“Look, it will be a difficult process, but here’s the thing. The best way for — when you say immigrant families, by the way, it’s important to say illegal immigrant families,” Cortes responded, pointing out the omission. “That’s a very, very important adjective to add in there. Immigrant families have never been separated.”
“Illegal immigrant families have been separated, and I would say separated for a very good reason,” Cotez continued. “Why? Because their parents, unfortunately, or guardians … decided to commit a crime with children in tow. Much like an American committing a crime with children in tow, you get separated from you children. And that’s a terrible consequence for the kids.”
Whitfield defended her characterization of immigrants crossing the border illegally, pointing out that many were crossing the border seeking asylum.
“If you show up to a port of entry in the United States with your children and request asylum lawfully, you are not separated from your family,” Cortes shot back, referring to the difference between applying for affirmative and defensive asylum.
Affirmative asylum applies to immigrants entering the U.S. at a port of entry, or immigrants who apply within a year of entering the U.S., whether or not their entry was legal. Immigrants entering the country illegally can apply for defensive asylum while they are being processed for deportation.
“It’s not [legal]. You have to come to a check point, raise your hand and say, ‘I’m here for asylum,’” Cortes said.
“You can’t sneak across the border and then say, once you’re caught, ‘Oh, I meant to apply for asylum. That’s just not correct.”
Finally, we note another of President Trump’s tweets this morning that sums the state of America and its media up very well…
Such a difference in the media coverage of the same immigration policies between the Obama Administration and ours. Actually, we have done a far better job in that our facilities are cleaner and better run than were the facilities under Obama. Fake News is working overtime!
And while we are well aware that comprehending the facts behind this sudden maelstrom of migrant misery headlines, here is the reality of how this all started courtesy of ‘The Last Refuge’ excellent twitter thread…
1.Once you see the strings on the marionettes you can never watch the pantomime the same way you did before you noticed them.
2. DATELINE – May 2011 – President Obama travels to the Rio Grande sector of the border to push for his immigration platform (ie. Amnesty). He proclaims the border is safe and secure and famously attacks his opposition for wanting an “alligator moat”.
3. November 2012 – Election year campaign(s). Using wedge issues like “War on Women”, and “Immigration / Amnesty”, candidate Obama promises to push congress for “amnesty”, under the guise of “Comprehensive Immigration Reform”, if elected.
President Obama wins reelection.
4. December 2012 – Immediately following reelection President Barack Obama signs an Executive Order creating the “Deferred Action Program“, or DACA. Allowing millions of illegal aliens to avoid deportation.
5. According to White House own internal documents and research, this Deferred Action Program is what the Central American communities immediately began using as the reason for attempted immigration.
7. May 2013 – President Barack Obama visits South America. Following a speech for Mexican entrepreneurs, Obama then traveled to Costa Rica, his first visit as president.
9. The regional network includes the leaders of Belize, El Salvador, Guatemala, Honduras, Nicaragua and Panama. President Obama meets with the leaders of the Central American Countries.
10. Summer 2013 – Numbers of Illegal Unaccompanied Minors reaching the Southern U.S. border from El Salvador, Guatemala, Honduras, Nicaragua doubles. 20,000+ reach U.S. Southern border by travelling through Mexico. Media primarily ignores. fpc.state.gov/documents/orga…
11. October 2013 – At the conclusion of the immigrant travel season. White House receives notification that tens of thousands of illegal Unaccompanied Minors should be anticipated to hit the Southern U.S. border the following Summer [2014].
12. An estimated 850% increase in the number of Unaccompanied Alien Children (UAC’s) were reported to the White House. fpc.state.gov/documents/orga…
[In 2012 less than 10,000 were projected]
13. January 2014 – In response to the projections, the Department of Homeland Security (DHS) posts a jobs notification seeking bids to facilitate 65,000 Unaccompanied Alien Children. fbo.gov/index?s=opport…
14. IMPORTANT. This job posting was January 2014. The Obama administration was *planning for* 65,000 childhood arrivals. In January 2014 they were taking contractor bids for services to be used later in year. Almost no-one noticed.
15. On January 29, 2014, the federal gov. posted an ad seeking bids for a vendor contract to handle “Unaccompanied Alien Children“. Not just any contract mind you, a very specific contract – for a very specific number of unaccompanied minors: “65,000.” fbo.gov/index?s=opport…
17. Spring 2014 – With a full year of DACA, successful transport and border crossing without deportation – DHS begins to notice a significant uptick in number of criminal elements from El Salvador, Guatemala, Honduras and Nicaragua; which have joined with UAC’s to gain entry.
19. June 2014 – Tens-of-thousands of UAC’s from El Salvador, Guatemala, Honduras and Nicaragua hit the border and the headlines. Despite the known planning, and prior internal notifications, the White House claims it did not see this coming.
21. June 20th 2014 – Congressional leadership and key Latino Democrats from the Democrat Hispanic Caucus meet with representatives from El Salvador, Guatemala, Honduras and Mexico. kfgo.com/news/articles/…
23. July 3rd, 2014 – President Obama requests $3,700,000,000 ($3.7 billion) in supplemental budget appropriations to deal with the border crisis. Only $109 million is for actual border security or efforts to stop the outflow from El Salvador, Guatemala, Honduras, and Nicaragua.
24. Hidden inside the massive budget request is Obama seeking legal authorization to spend taxpayer funds for lawyers and legal proceedings on behalf of UAC’s and their families. Congress is being asked to approve/fund executive branch’s violation of immigration law (DACA).
26. July 10th, 2014 – Facing pushback from congress as well as sticker shock at the amount he is requesting, President Obama sends his DHS team to Capitol Hill to ramp up anxiety, and threats of consequences: politico.com/story/2014/07/…
27. “We are preparing for a scenario in which the number of unaccompanied children apprehended at the border could reach up to 90,000 by the end of fiscal 2014,” Johnson’s testimony reads: politico.com/story/2014/07/…
28. Not only did the White House know what was going to happen (as far back as 2012), but White House actually constructed events to fall into a very specific pattern and intentionally did NOTHING to stop the consequences from the DACA executive order issued in December 2012.
29. This is the origin of the crisis.It all started with DACA. Having tracked this issue so closely through the years it often feels futile to discuss. It is an ongoing insufferable political game/scheme within the issue of illegal immigrants and “children”.
30. Massive illegal immigration is supported by both sides of the professional political machine. There are few issues more unifying for the K-Street purchased voices of DC politicians than keeping the borders open and the influx of illegal aliens as high as possible.
31. The U.S. Chamber of Commerce pays politicians to keep this system in place. All Democrats and most Republicans support mass immigration. Almost no DC politicians want to take action on any policy or legislation that stops the influx.
32. There are billions at stake. None of the GOP leadership want to actually stop illegal immigration; it’s a lucrative business. Almost all of the CONservative groups and politicians lie about it.
33. The religious right is also part of the problem. In the past 15 years illegal immigration and refugee settlement has been financially beneficial for them.
34. There is no greater disconnect from ordinary Americans on any singular issue than the policy positions of Democrats and Republicans in Washington DC surrounding immigration.
President Donald Trump is confronting their unified interests.
35. All political opposition to the Trump administration on this issue is structured, planned & coordinated. The issue is a valuable tool for the professional political class to sow chaos amid politicians. The resulting crisis is useful for them; therefore they fuel the crisis.
36. Washington DC and the activist media, are infested with illegal immigration supporters; the issue is at the heart of the UniParty. Follow the money. It’s the Acorn business model:
37. Southwest Key has been given $310,000,000, in taxpayer funds so far in 2018. And that’s just one company, in one part of a year. Prior CTH research showed this specific “Private Company” nets 98.76% of earnings from government grants. taggs.hhs.gov/Detail/RecipDe…
38. Lutheran Immigration and Refugee Service, which provides foster care and other child welfare services to migrant children. “Faith Based Immigration Services” is a code-speak for legalized human smuggling. taggs.hhs.gov/Detail/RecipDe…
39. The “faith-based” crew don’t want it to stop, because facilitating illegal alien import is now the financial bread and butter amid groups in their base of support.taggs.hhs.gov/Detail/RecipDe…
40. The man/woman in the pew might not know; but the corporation minister, preacher or priest (inside the process) surely does. BIG BUSINESS !! taggs.hhs.gov/Detail/RecipDe…
41. These immigration groups, get *MASSIVE* HHS grants and then pay-off the DC politicians and human smugglers. Billions of dollars are spent, and the business end of immigration has exploded in the past six years.
42. It’s a vicious cycle. Trafficked children are more valuable than adults because the organizations involved get more funding for a child than an adult. Each illegal alien child is worth about $56,000 in grant money. The system is full of fraud.
43. Approximately 65% of the money HHS provides is spent on executive pay and benefits, opaque administrative payrolls, bribes, kick-backs to DC politicians and payoffs to the South American smugglers who bring them more immigrants.
45. All of those advocates gnashing their teeth and crying on television have no idea just who is controlling this process; and immigration idiots like Ted Cruz are only adding more fuel, more money, to the bottom line:
“This has to stop,” Texas Sen. Ted Cruz said when asked about the separation of migrant families at the border in his state.
He’ll also be introducing legislation “that will mandate that kids must stay with their parents.” pic.twitter.com/2j0Z515d88
46. By threatening to secure the border, President Trump is threatening a Washington DC-based business model that makes money for a lot of connected interests.
47. Beyond enrichment schemes, the entire process of immigration, and Washington-DC legalized human smuggling, has side benefits for all the participants; child sexploitation, child labor, and yes, much worse (you can imagine).
48. So the next time you see this type of terribly misplaced “crying girl” corporate propaganda:
49. Maybe, just maybe, we can remember the *real* consequences of actual legalized human smuggling that has been created -within the business- by U.S. political policy. This “crying girl”:
The Dallas Fed survey of Texas manufacturing soared to 36.5 in June (from 26.8), back near its highest since 2004. The problem, however, is this spike is being driven by soaring prices as production slows – flashing a big red stagflationary alarm once again.
We have seen this stagflationary surge before – it led a recession in 2008 and prompted QE2 in 2011…
And perhaps just as worrisome for the micro-picture is the pressure on margins and prices paid soar more aggressively than prices received… for now…
Respondents are clear…
Nonmetallic Mineral Product Manufacturing
The price of steel raw materials is causing costs to increase.
Fabricated Metal Product Manufacturing
Steel tariffs to NAFTA partners is a mistake. Higher steel prices could slow down strong projects and the manufacturing recovery which started in fourth quarter 2017.
I can’t believe the effect the tariff response has had on the metals trade. Somebody needs their head examined if they think this is good for the American economy.
We are about to raise prices for the first time in six years due to the rising cost of steel and aluminum. That is going to cause some uncertainty, with our customers looking elsewhere to purchase the products we manufacture.
Machinery Manufacturing
There is lots of uncertainty among manufacturers regarding the impact of the steel tariffs. Even steel sourced from the U.S. is rapidly increasing in price due to capacity constraints.
We are operating at the lowest levels of our 70-year history. Chinese imports continue to depress pricing of our products.
Inflationary pressures are of concern. Freight costs per mile are up. Metals are costing more, impacting a large number of purchased parts. Tariff escalation is not going to help.
Business remains strong.
President Trump—trade, tariffs and diplomacy—is leading to more uncertainty.
Printing and Related Support Activities
The lingering effects of Hurricane Harvey have still impacted our volume. Through May, our volume is down 7 percent from last year at this time.
We are busy now because of a large single order that we entered in May and that is being worked on now and into July. We are feeling the need to raise labor wages, which will require a price increase, but since all our materials seem to be increasing in cost, why should we miss an opportunity to include a small increase to cover rising wages? I am very concerned long term about this goofiness with tariffs and possible foreign-country retaliation. Much of what we use in materials and equipment comes from Europe and a little from Asia.
Food Manufacturing
Tariffs impacting the price of stainless steel are a concern. We also are in an agriculture-related environment, and commodity price increases and stability are of concern.
Apparel Manufacturing
The Army is ordering huge volumes of apparel, which we anticipate will continue for another nine months.
Paper Manufacturing
We see a slight softness in order volume. We will wait and see how July turns out.
We lost a large contract, and it will decrease our production for the short term. We expect to get additional new business to replace it.
But – after all that – The Dallas Fed Survey rebounded dramatically?
In a bizarre development, one day after the FT, WSJ and Bloomberg all reported that the US is preparing restrictions on Chinese investments in the US, moments ago Steven Mnuchin tweeted – on behalf of Donald Trump – that the stories are “false, fake news.”
On behalf of @realDonaldTrump, the stories on investment restrictions in Bloomberg & WSJ are false, fake news. The leaker either doesn’t exist or know the subject very well.
However, while some read into this as a potential “risk on” catalyst, what Mnuchin also said that the “statement will be out not specific to China, but to all countries that are trying to steal our technology.“
In other words, not just China but everyone’s investments in the US could be limited!
His tweet:
On behalf of @realDonaldTrump, the stories on investment restrictions in Bloomberg & WSJ are false, fake news. The leaker either doesn’t exist or know the subject very well. Statement will be out not specific to China, but to all countries that are trying to steal our technology.
On behalf of @realDonaldTrump, the stories on investment restrictions in Bloomberg & WSJ are false, fake news. The leaker either doesn’t exist or know the subject very well. Statement will be out not specific to China, but to all countries that are trying to steal our technology.
You deserve a realistic account of the economy you’re joining.
Dear high school graduates: please glance at these charts before buying into the conventional life-course being promoted by the status quo.
Here’s the summary: the status quo is pressuring you to accept its “solutions”: borrow mega-bucks to attend college, then buy a decaying bungalow or hastily constructed stucco box for $800,000 in a “desirable” city, pay sky-high income and property taxes on your earnings, and when the stress of all these crushing financial burdens ruins your health, well, we’ve got meds to “help” you–lots of meds at insane price points paid for by insurance– if you have “real” insurance without high deductibles, of course.
Here’s the truth the status quo marketers don’t dare acknowledge: every one of these conventional “solutions” only makes the problem worse. Student loan debt only makes your life harder, not easier, as the claimed “value” of a college degree is based on the distant past, not the present. The economy is changing fast and the conventional “solutions” no longer match the new realities. But don’t expect anyone profiting from the predatory profiteering higher-education cartel to admit this.
The high cost of housing isn’t “solved” by buying in at the top of an unprecedented bubble. Buying into bubbles only makes the problem worse, for all bubbles eventually pop.
The “solution” to crushing levels of debt is not to borrow more just to prop up a rotten, corrupt, dysfunctional and self-serving status quo. In effect, the young generations are being groomed to be the hosts for the parasitic classes that feed on young taxpayers, student loan debt-serfs, young buyers of bubble-priced housing, unaffordable sickcare “insurance” and all the rest of the status quo “solutions.”
As writer Peter Turchin has explained, societies in decline overproduce elites.Those promised an elite slot who are left out become the engine of social unrest.
The status quo claims that getting a college diploma more or less guarantees you a slot in the elite class of folks with secure incomes and opportunities to get ahead and build real wealth.
The reality is only the top 5% of the work force are doing well. So of the 33% of the work force with university diplomas, the system only creates slots for the top 15% of that educational elite. The next 15% (the rest of the top 10% of the entire work force) can pick up the 2nd tier technocrat positions and everyone else gets the scraps: insecure jobs, mediocre pay, limited opportunities.
Before you accept that becoming a debt-serf to get a college diploma is a “solution,” check out the other side of that trade: the mostly older, wealthier folks profiting from your debt-serfdom:
This parasitic predation is guaranteed by your federal government: you know, the institution everyone looks to for “solutions.”
How did millions of students earn college diplomas before the hyper-financialization of the economy and before assistant deans made $350,000 a year in “competitive” salaries? It’s a mystery lacking any mainstream explanation.
Speaking of debt–here’s the nation’s total debt level: note that the amount of debt required to push GDP higher keeps increasing far faster than GDP:
As for plunking down hundreds of thousands of dollars for that little cheaply constructed stucco/particle board/plastic box: housing prices in hot markets such as Dallas and Seattle have far exceeded the previous hyper-financialized housing bubble top in the mid-2000s:
Don’t worry about soul-crushing commutes, homeless encampments or rapidly rising taxes: asset bubbles make everything bearable, until they pop.
You deserve a realistic account of the economy you’re joining. Here’s reality: the vast majority of the gains reaped since your birth have flowed to the very top of the hyper-financialized wealth-power pyramid.
As Bucky Fuller noted in his famous dictum, “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”
Rather than fight a system designed to strip-mine you for life, seek a model for your life that obsoletes all the perverse conventional “solutions.”
* * *
I’m putting four books on sale which may help provide an alternative context for your life-decisions.
Stocks are sliding this morning on a familiar catalyst, in fact the same catalyst that has been blamed for most red prints in recent months: rising trade war rhetoric. But if the US has it bad, it’s nothing compared to the mauling that China has suffered in recent weeks: the Shanghai Composite is down from 3,559 on Jan 24 to close at just 2,859 on Monday, down 19.64% and on the verge of a bear market.
Today, SocGen’s Andrew Lapthorne also points us the surprising weakness in China, with the CS300 off 3.9% last week and down 10% so far in 2018, which he notes is in stark contrast to the Russell 2000, which has been among the strongest performing indices over the last three months.
Summarizing this divergence, Lapthorne writes that “if Trump’s ‘Trade War’ is about rebalancing the prospects of US companies versus, say, China, then markets appear very much on message. The Russell has outperformed the CS300 by a remarkable 22% since the beginning of April.”
What makes the divergence even more stark is that despite this weekend’s emergency measures by the PBOC, in which the central bank cut RRR releasing 700bn yuen into the financial system, Chinese stocks erased earlier gains overnight to close near session lows.
Or as one Bloomberg commentator summarized, “Judging by the year-to-date equity performance of Chinese and U.S. stocks, it looks like trade wars are easy to win...”
Or maybe not, and the divergence is merely a delayed reaction as US traders process what was painfully obvious to their Chinese peers: the “global growth scare” has been unleashed (by China as Nomura explained earlier), and sooner or later it will hit the US. Indeed, as Lapthorne points out:
“regular readers will know we are not keen on the Russell 2000 as corporate leverage is high and profits are struggling. So seeing the index fly up like that must have been painful for investors who were outright short. However, such a strong performance does mean implied volatility on the Russell 2000 (RVX) has been relatively subdued versus its bigger cousins (VIX). If the ‘Trade War’ fades, then a reversal of this relationship could be on the cards.”
Backing off from the Russell and focusing on the broader US market shows emerging signs of stress:
The S&P 500 has also been doing well this year but, as has been well reported, of the 3.0% gain, around 2.5% can be accounted for by just a few FAANG stocks. However such, an analysis perhaps overstates the narrowness of the US market, as for every big winner there is often a big loser as well. For example, the un-weighted average YTD performance of today’s S&P 500 constituents is +3.4% and the equal-weighted index shows a total return of 3.2% versus a weighted return of 4.0%.
Lapthorne concludes that while the FAANG performance is impressive – if concerning – S&P 500 strength is broader than often reported. That said 3.0% is hardly blockbuster, but it is certainly enough to win the market “trade war” with China, where one more down day and the Shanghai Composite will enter a bear market.
‘Safe-haven’ FANG stocks are getting slammed this morning, extending Friday’s losses as China trade war rhetoric tamps down the market’s enthusiasm for piling money into no-brainer extreme multiple stocks…
This is the biggest drop in FANG stocks in almost 3 months…
Following major disappointment in exiting-home-sales, May New Home Sales exploded higher, up 6.7% MoM (smashing expectations of 0.8% gain) helped by a major downward revision to April.
New home sales were flat or negative in 3 of 4 regions: Northeast: -10%, Midwest: 0%, West: -8.7%, but South soared from 347K to 409K annualized, a 17.9% surge, resulting in the 6.7% MoM increase
Perhaps the rebound in home sales was driven by the plunge in prices?
Median new home sale price dropped to $313k (from Dec highs at $343k) to the lowest since April 2017…
US Homebuilder stocks however, continue to track the macro trend weaker in US housing data…
VIX has spiked above 16 for the first since since May as trade war concerns spark derisking across global stocks. While The Dow sank red for 2018 last week, Transports just joined them…
And with Dow Futs down almost 300, VIX is back above 16…
The highest VIX since May…
Treasury yields limped higher into the open but suddenly went bid as the US cash markets opn…
