Tag: news

Submitted by Jeffrey Snider via Alhambra Investment Partners,

Last week the Federal Reserve updated its quarterly Financial Accounts of the United States Z1 (formerly Flow of Funds) meaning that we can recheck valuation levels of the stock bubble from alternate points of view (data). The most common valuation given by the report is Tobin’s Q which compares the estimated value of corporate equities (liability) to nonfinancial corporate business net worth rather than earnings. It is an alternative view that incorporates elements of the balance sheet (notably leverage) while maintaining an anchor to fundamental economic composition.

Since QE3, valuations according to the Q ratio had gotten as far out of balance as the early dot-com bubble, circa 1996. For my own analysis, I modify the Q ratio by subtracting commercial real estate assets from net worth to avoid having one bubble “justify” another; as rising real estate values turn into a bubble themselves they would artificially increase corporate net worth and then skew the valuation through purely financial means. This modified Q shows valuations a bit further along in comparison to the dot-com bubble, circa late 1997/early 1998.

The Z1 series estimates that corporate equities peaked in Q1 2015 at $23.1 trillion, which pushed the modified Q valuations to a new “cycle” high in that quarter. In the original Tobin’s Q format, valuations peaked in the middle of 2014 which suggests the influence of commercial real estate at least over that small window. Both valuation methods show, of course, the more recent stock market stumble which has had very little effect overall in bringing about more balanced appraisals for stock prices systemically. The Q3 2015 estimates for corporate equities show a 10% decline from the Q1 peak, so this series does capture a good deal of the mid-summer turmoil as far as valuation effects are concerned.

That view seems to align very closely with other fundamental methods, including reported corporate earnings and Robert Shiller’s CAPE ratio.

Extremes in valuations suggest extremes in expected forward returns. They do not tell us how those extremes come about, only that when valuations are at highs forward returns are historically low – to the point of not justifying even long-term holdings. Low valuations show the opposite. Pairing the modified Q ratio to 10-year forward returns easily demonstrates the relationship.

So far holding stocks from even just after the dot-com crash across a 10-year horizon is lacking in returns, owing in large part to the events in and around 2008. The biggest cost of the panic and Great Recession was not necessarily the huge drawdown, but the cost in time as it took years (and continued unnatural “aid”) for the rebound just to get back to even.

At the end of 2005, for example, the modified Q ratio was still historically high at 1.82 owing to the fact that the dot-com crash, bad as it was, did not reset the valuation extremes as most bear markets do (such as the end of the 1970’s/early 1980’s). For that valuation, 10-year returns were just clocked (omitting dividends) at 62.8% nominally and 38% in “real” terms, adjusting for the CPI. On an annualized, compounded basis, that works out to just 4.6% per year nominally and a pathetic 3.0% in real terms even though stocks were back near record highs (above 2000 on the S&P 500 and almost $22 trillion in Z1) in December 2015. By way of comparison, a 10-year US treasury yielded about 4.39% on the last day of 2005.

The best returns were generated when valuations in this format were 1.5 and less on a consistent basis. The serial asset bubbles are not helpful because they do not lead to the fundamental paradise monetarists suggest of them (when they allow themselves to consider bubbles as bubbles). The Z1 series also provides useful data for considering the inefficiency of asset inflation in raw economic terms.

We can compare corporate equities to GDP as a fundamental valuation yardstick, which presents an even greater imbalance to historical experience (though this view is skewed by overseas activity; in other words, some corporate equity value is derived from true economic gains not included in GDP).

As with the Q ratios, the selloff last year erased very little of the valuation extreme leaving corporate equities still historically overvalued (by quite a bit).

In terms of economic efficiency, we can compare business debt (both corporate and non-corporate) to GDP to examine the economic effects of leverage on businesses. Also an imperfect view, this relationship however continues to show the long-term process of more debt/less growth that is undoubtedly a major factor in structural economic issues we see in the 21st century. In more recent quarters, this disparity has increased again as the economy has stumbled despite companies that are adding debt more freely (average Y/Y growth in credit market liabilities was 6.9% in 2015 compared to 5.2% 2012-14).

The economic efficiency of business leverage in Q4 2015 was as bad as Q1 2008, and not much better than the lowest point Q1 2009.

This ineffectiveness also manifests in the household sector as compared to consumer spending. If there was an actual “wealth effect” as economists propose we should see a less extended (in the extreme) relationship between household net worth (derived in Z1 mostly via equity and home prices) and final sales to domestic purchasers (the GDP report series that totals overall American consumer purchases regardless of where the goods or services were produced).

This weak relationship is all the more distressing given the emphasis placed upon the wealth effect during the QE regimes – they got asset price inflation to reignite but without sufficient spending to justify the grave imbalances detailed above. This inefficiency suggests common sense (yet again), meaning that spending is far more about income (and permanent income) than asset bubbles. The wealth effect was meant as another of Keynes’ proposed “pump priming” methods, but it, too, has failed to materialize like the others (redistribution). Spending for the sake of spending does not lead to more fruitful and sustained economic activity, to which the whole global economy can now easily attest.

That leaves stocks, in particular, far too close to historical extremes in terms of valuations without any justification (economic and otherwise) for that. This broad survey of alternate stock measures only confirms that view. If valuations are to return to a more considered level, economically speaking, the liquidations in August and January would be just the start. In any case, we can expect very low returns moving forward though it is left to the imagination as to how that comes about. It might simply be further continuation of the past twenty months or so (“rising dollar”) of somewhat volatile but mostly sideways trading, or it might propose, given economic instability and the high degree of financial inefficiency from all sides “supporting” that shaky foundation, a third go at the bubble cycle.

via Zero Hedge http://ift.tt/1UCKI0J Tyler Durden

Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Since 1983, when Hong Kong adopted its currency board system, speculative bets against the Hong Kong dollar (HKD) have ended in the graveyard. Just ask Bill Ackerman. He bet the house in a 2011 attach on the HKD, and he lost big. Now, it’s reported that the likes of George Soros and Kyle Bass are rolling the dice against the HKD. They will lose, too.

So, why is there so much confusion and misunderstanding about exchange rates — particularly fixed exchange rates delivered by currency board systems, like Hong Kong’s? To answer that question, we must develop a taxonomy of exchange-rate regimes and their characteristics. As shown in the accompanying table, there are three types of regimes: floating, fixed, and pegged.

Prepared by Prof. Steve H. Hanke, The Johns Hopkins University.

In fixed and floating rate regimes the monetary authority aims for only one target at a time. Although floating and fixed rates appear dissimilar, they are members of the same free-market family. Both operate without exchange controls and are free-market mechanisms for balance-of-payments adjustments. With a floating rate, a central bank sets a monetary policy, but the exchange rate is on autopilot. In consequence, the monetary base is determined domestically by a central bank. With a fixed rate, there are two possibilities: either a currency board sets the exchange rate and the money supply is on autopilot, or a country is “dollarized” and uses the U.S. dollar, or another foreign currency, as its own and the money supply is again on autopilot.

Under a fixed-rate regime, a country’s monetary base is determined by the balance of payments, and the base moves in a one-to-one correspondence with changes in its foreign reserves. With either a floating or a fixed rate, there cannot be conflicts between monetary and exchange rate policies, and balance-of-payments crises cannot rear their ugly heads. Floating and fixed-rate regimes are inherently equilibrium systems in which market forces act to automatically rebalance financial flows and avert balance-of- payments crises.

Most people use “fixed” and “pegged” as interchangeable or nearly interchangeable terms for exchange rates. In reality, they are very different exchange-rate arrangements. Pegged-rate systems are those in which the monetary authority aims for more than one target at a time. They come in many varieties: crawling pegs, adjustable pegs, bands, managed floats, and more. Pegged systems often employ exchange controls and are not free-market mechanisms for international balance-of-payments adjustments. They are inherently disequilibrium systems, lacking an automatic adjustment mechanism. They require a central bank to manage both the exchange rate and monetary policy. With a pegged rate, the monetary base contains both domestic and foreign components.

Unlike floating and fixed rates, pegged rates invariably result in conflicts between monetary and exchange rate policies. For example, when capital inflows become “excessive” under a pegged system, a central bank often attempts to sterilize the ensuing increase in the foreign component of the monetary base by selling bonds, reducing the domestic component of the base. And when outflows become “excessive,” a central bank often attempts to offset the decrease in the foreign component of the monetary base by buying bonds, increasing the domestic component of the monetary base. Balance-of-payments crises erupt as a central bank begins to offset more and more of the reduction in the foreign component of the monetary base with domestically created base money. When this occurs, it is only a matter of time before currency speculators spot the contradictions between exchange rate and monetary policies and force a devaluation, interest-rate increases, the imposition of exchange controls, or all three.

With Hong Kong’s currency board, the monetary base (reserve money) must be backed by foreign reserves — 100%, or slightly more. The accompanying chart shows that this so-called currency board “backing (or ‘stock’) rule” is strictly followed in Hong Kong. The “flow rule” — that reserve money must change in a one-to-one relationship with changes in the currency board’s foreign exchange reserves — is also strictly followed in Hong Kong (see the accompanying chart).

There has never been a system that followed currency board rules — like Hong Kong’s — that has been broken by a speculative attack. And Hong Kong’s will not be the first. Indeed, its currency board is operating exactly as it should, which is why it can’t be broken.

So, what will happen? When the U.S. Fed embraced quantitative easing, USDs flowed into Hong Kong. Now that the Fed has started to notch up the Fed funds rate, the flows have reversed. In consequence, the currency board is automatically tightening up, and both broad money and credit to the private sector are decelerating and are below their trend rates (see the accompanying chart).

This is just what is supposed to happen. We should expect a slow-down in the Hong Kong economy. But, the HKD will remain rock solid.

via Zero Hedge http://ift.tt/1TQY8Y7 Steve H. Hanke

Following their apparently delusional belief in the "success" of Tuesday night's violent protests, anti-Trump groups are plotting "Democracy Spring" threatening "drama in Washington" with the "largest civil disobedience action of the century." The operation, backed by Soros-funded MoveOn.org among others, warns on its website that "We will demand that Congress listen to the People and take immediate action to save our democracy. And we won’t leave until they do – or until they send thousands of us to jail."

 

With little fanfare and almost no news media attention, some of the same radical groups involved in shutting down Donald Trump’s Chicago rally last week are plotting a mass civil disobedience movement to begin next month. As Breitbart.com reports,

They intend to march across the East Coast in order to spark a “fire that transforms the political climate in America.”

 

…

 

The group is backed by numerous organizations, including the George Soros-funded groups MoveOn.org, the Institute for Policy Studies, and Demos.

 

Next month’s Democracy Spring chaos is set to begin with a meetup on April 2 at the Liberty Bell in Philadelphia.

 

“Then, in the spirit of Granny D, the Selma to Montgomery marchers, Cesar Chavez and the farmworker pilgrimage, and others who walked for freedom, we will set out on a 10 day, 140-mile march from Philadelphia to the Nation’s Capitol,” states the website.

 

In Washington DC, Democracy Spring expects “thousands of Americans” to engage in a “sit-in on the Capitol building in Washington DC in what will be the largest civil disobedience action of the century.”

What do they want?

Despite the fact that many of the main groups endorsing Democracy Spring are funded by billionaire Soros, the group complains that “American elections are dominated by billionaires and big money interests who can spend unlimited sums of money on political campaigns to protect their special interests at the general expense.”

But if the status quo goes unchallenged, the 2016 election — already set to be the most billionaire-dominated, secret money-drenched, voter suppression-marred contest in modern American history — will likely yield a President and a Congress more bound to the masters of big money than ever before.

The stage is set for a bold intervention to turn the tinder of passive public frustration into a fire that transforms the political climate in America, that sparks a popular movement that can’t be stopped.

The leaders of the group have already held training sessions, the website says. Democracy Spring states it is requiring “mandatory nonviolent civil disobedience trainings twice a day for those risking arrest from April 11th-16th.”

For those arrested, the group says it has already secured the legal aid of an unnamed lawyer “with decades of experience with civil disobedience cases.”

The group says that it is not plotting violence.

As Chris Cillizza concludes, Trump haters had a bad night Tuesday, and their actions won't make it any better any time soon…

So much of the anti-Trump coverage that is pushed on these primary nights simply misses the boat. It is driven by wishful thinking on the part of the "not Trump" crowd that is desperately seeking a glimmer of hope that their long nightmare is coming to an end.

 

There was very little actual evidence Tuesday night to justify the amount of celebrating within the party establishment about Trump's "demise." That doesn't mean that Trump will get the 1,237 delegates he needs — either before the Cleveland convention or during it. But what it does mean is that he remains in the pole position in this race as the only candidate with a real case to win the nomination outright between now and June 7 when the primary process comes to an end.

What was true before Tuesday is true now: 1. Trump is the only candidate who has a semi-plausible path to the 1,237 delegates and 2. That path is difficult but far from impossible.

Finally, In December, Kai Newkirk, campaign director of Democracy Spring, interrupted Trump at a CNN-hosted GOP debate, saying,

“The American people deserve free and fair elections, not billionaire auctions."

Which is ironic given the billionaires backing both the movement and the leading Democrat candidate.

It appears the democratic choice of millions of disgruntled Americans looking to change the status quo is not the kind of democracy 'spring' these protesters are hoping for.

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

While everyone knows about failed rollup Valeant’s equity troubles, which have sent its stock crashing to 5 year lows after the biggest one day drop in history earlier this week, a just as interesting development is taking place with its debt, which incidentally at $31 billion (and accumulated during the company’s relentless acquisition spree over the past few years) is nearly three times greater than the company’s equity capitalization, and is the locus of the biggest problem facing the company currently.

Recall that recently Valeant announced it would be unable to file its 10-K on time, which put the company in violation of its covenants since Wednesday, and also meant it is now in danger of defaulting on its $30 billion debt load. As a result, Reuters reports that the company’s lenders are “beginning to demand new terms that could further pressure the drugmaker’s business model, according to three people familiar with the matter.”

As Reuters adds, “the risk of default has offered creditors an opportunity to attempt to renegotiate core elements of their agreements with Valeant, potentially saddling the company with higher costs of debt and more restrictions on how it deploys capital, according to people familiar with the matter.”

Suddenly, what was until incomprehensible – a Valeant default – appears all too likely: under its loan agreements, Valeant has until March 30 to file audited financial reports. If it fails to do so, it then has 30 days before lenders can demand accelerated repayment. Needless to say, Valeant would be unable to fund such a loan acceleration without rapidly selling off key assets in a liquidation firesale, although there even exist limits on just how many assets Valeant can sell.

Reuters adds that Valeant said it would meet with banks next week and ask them for an extension on the deadline. On Tuesday, Chief Executive Michael Pearson said that his best estimate for filing the annual report was April, but that he could not guarantee it.

In anticipation of those meetings, owners of Valeant’s senior bank loans are reaching out to investment banks, including Barclays, who will help mediate the negotiations, the sources said. Barclays did not immediately respond for comment.

 

The informal discussions are in early stages and the demands could change, the sources said. The lenders’ demands include higher interest payments and a pledge to pay a larger amount of the bank loans from the proceeds of any Valeant asset sales, the sources said. They would not provide names of specific lenders.

 

Under Valeant’s covenants, the company can sell up to 4 percent of its total assets per fiscal year and use the proceeds to pay down bank debt, Justin Forlenza, an analyst at Covenant Review in New York, said in an interview. The company can also carry unused capacity over from one year to the next to increase the potential amount of assets sold to 8 percent, he said.

And once Valeant is done with the banks, it then has to deal with the unsecureds: “it is not clear when Valeant may approach its bondholders, who will not be able to force repayment of debt until slightly later than the loan owners. If the company did approach bondholders, they would likely have similar demands to the loan creditors, according to one person familiar with the matter. “

Not surprisingly, impartial onlookers are souring on the Valeant story with every passing day : “This very quickly dematerializes from a growth story into a company that’s really standing still, just looking to right its capital structure,” said Jim Sanford, portfolio manager for Sag Harbor Advisors, which does not hold Valeant shares. “There’s not a lot of equity and market cap to go to, to issue equities and convertible bonds against.”

Recall that as we explained simply yesterday, the Valeant magic only worked because the stock price was high and rising (providing a cheap currency for acquisitions), while the cost of debt was low and falling (allowing Valeant to issue ever more debt offset by the surging market cap). All that is now over, and nobody wants to admit that the next phase in the Valeant lifecycle almost certainly goes through some sort of restructuring.

Well not nobody: as the chart below shows, Valeant CDS has soared to all time high, as has the company’s implied default risk over the next 5 years which as of this moment was 55% and rising. We expect this number to jump in the coming weeks as the true severity of Valeant’s balance sheet problems is fully appreciated.

via Zero Hedge http://ift.tt/1R0JiL2 Tyler Durden

Submitted by Nadia Prupis via TheAntiMedia.org,

Dutch lawmakers have voted to ban weapons exports to Saudi Arabia over the kingdom’s violations of humanitarian law, making the Netherlands the first country in the European Union (EU) to follow through on a motion by the European Parliament in February.

The landmark resolution, approved on Tuesday, asks the Dutch government to impose a full arms embargo on Saudi Arabia, including dual-use exports that could be used to violate human rights. The bill cites United Nations figures that Saudi-led troops have killed nearly 6,000 people in Yemen—half of them civilians.

The bill also noted the Saudi government’s ongoing executions of its own citizens, many of them political dissidents.

The parliamentary vote puts additional pressure on other EU governments, such as Britain and France—Saudi Arabia’s core suppliers of weapons, in addition to the U.S.—to enact a similar ban. According to the Campaign Against Arms Trade (CAAT), the UK has sold about $9.4 billion (£6.7 billion) in weapons to the Saudi government under Prime Minister David Cameron’s administration.

“Saudi Arabia has a terrible human rights record and governments like the UK must stop supporting it,” Andrew Smith, CAAT spokesperson, told The Independent on Wednesday. “The bombardment of Yemen has lasted almost a year now and the humanitarian situation is desperate.”

“The Dutch parliament has set an important precedent and it’s time for other arms dealing governments to do the same,” Smith said. “The decision can’t just be temporary though, it must be permanent.”

Rosa Curling, from a legal firm representing CAAT, told Sputnik News on Wednesday,

“If there is a clear risk that arms exported from the UK might be used to violate international humanitarian law, the UK has a legal obligation not to grant licenses for the export of military equipment and arms…. We can see no reasonable basis upon which the government could conclude there is not such a risk in relation to exports to Saudi Arabia. The evidence is overwhelming.”

We are sure the US will be right behind Holland to kill this trade.. Oh wait…

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