Tag: news

What do an old German bank note, a current $100 bill, and an apple all have in common? The answer, according to ConvergEx's Nick Colas, is that these simple objects can tell us much about the current investment scene, ranging from Europe’s economic challenges to the U.S. Federal Reserve’s attempts to reduce unemployment. Colas takes an “object-ive” approach to analyzing the current investment landscape by describing 10 common items and how they shape our perceptions of reality. The other objects on our list: a hazmat suit, a house in Orlando, a barrel of oil, a Rolex watch, a butterfly, a heating radiator in Berlin, and a smartphone.

 

Via ConvergEx's Nick Colas,

Imagine a radio program about the 100 most significant pieces in the British Museum. At first blush, this would seem to be a stupendously bad idea. Art is visual, after all, and radio is about the least visual medium out there. Still, the BBC did such a series a few years ago and the overwhelming success of the program led to a book titled, predictably enough “The History of the World in 100 Objects” that went on to be a New York Times bestseller.
 
The idea works, even in radio format, because it simplifies large swaths of human history into identifiable works created by real people down through time. You might know very little about the situation in China 1000 years ago, but a statue or painting from the period allows you to relate to a community of actual human beings who lived, loved, worshipped and died there. Not just the world, but history itself, gets smaller and more approachable when viewed through this lens.
 
We can do the same with the world of investing and economic analysis, distilling many complex topics to their essential core.  For the sake of brevity, let’s take 10 – rather than the 100 from the BBC series and book – and see how far we get.  Here’s our take on a list:

1.       A Hazmat suit. Certainly the object-du-jour with worries over Ebola, Personal Protective Equipment (PPEs in the health care trade) is actually several layers of gear designed to eliminate the chance of disease transmission.  They are hot to work in and require extensive training to use properly. The suits need to be donned in a certain way and fully decontaminated afterwards. Any slip up in the process means potential exposure.

 

To investors and anyone else watching the news, the appearance of an individual in a hazmat suite symbolizes risk and fear of the unknown. The fact that healthcare workers in Dallas contracted Ebola despite their use also highlights the failings of the U.S. health care system in addressing the disease.   Reporting on Ebola in the last few days has become more reassuring about the small chances of a large scale epidemic, but the fear remains. 

 

2.      A House in Orlando. There have been boom-bust cycles in Florida residential real estate since the 1920s, but the housing bubble of the mid 2000s certainly touched the greatest number of people. In July 2006, the average house in the Florida city went for $236,000, according to Zillow. By December 2010, that number was $95,000. Anyone who had put the standard 20% down at the peak was in the hole by over $100,000 on their equity. Values have now risen to $134,000 for the typical Orlando house, but are obviously well below their peak and not even back to the $154,000 average from 2004. 

 

The U.S. housing bubble of the mid 2000s casts a number of shadows beyond consumer spending in America. First, it made investors and regulators acutely aware than such speculative excess can be obvious – and avoidable – even when it is still in full force.  Whether they learn anything from that is another matter. It also made investors keenly aware of “Bubbles” as a construct and there is an active cottage industry in calling them out wherever they may (or may not) exist.  Lastly, the U.S. housing bubble was just the latest proof that even in a technology-enabled 21st century world, human nature hasn’t changed a drop since tulip bulbs were the next “Big Thing”.

 

3.      An apple. The Fall of 1930 in America brought two things: a full dose of the Great Depression and a bumper crop of Washington State apples. Those two features of the landscape joined forces in New York City, where unemployed men sold cheap surplus apples at 5 cents apiece as a means of making ends meet.  The image is one of the most durable symbols of the hardships of the age. 

 

This period in American history has cast a long shadow on economic policy.  You can trace the Federal Reserve’s extraordinary bond buying programs directly to the humble apple through Ben Bernanke’s acknowledgement – in 2002 – that the Federal Reserve had been wrong to contract the supply of money during the Great Depression. That observation assured that when the time came, the Fed would go in the other direction with ultra-low interest rates and quantitative easing. 

 

4.      A German banknote from the early 1920s.  If the apple is a powerful symbol in America of the ravages of the Great Depression, then the German Papiermark – the nation’s currency from 1914 to 1924 – holds the same position for that country. Germany was saddled with essentially impossible reparations payments after World War I, and tried to print their way out of the problem in the early 1920s. This led to hyperinflation, economic collapse, and – at least tangentially – the rise of National Socialism. 

 

This national history with rampant inflation informs the German perspective on monetary policy to this day. In the decades before the adoption of the euro, the German Bundesbank was a famously tight-fisted operation, leading to a post-War economic revival unparalleled on the Continent.  Now, its history with hyperinflation (horrible) and cautious monetary policy (excellent) informs its approach to solving the threat of deflation in Europe. In short, it will be very hard to convince Germany that a U.S. – style large-scale bond buying program is a good idea.

 

5.      A barrel of oil. There are 42 gallons in a barrel of oil, a figure that originally dates back to 1860s America and the first wells in Pennsylvania. Producers took a standard 40 gallon whiskey barrel, a common container of the age and region, and added 2 gallons to inspire confidence in buyers that they were getting their money’s worth.  Fast forward to today, and according to the U.S. Energy Information Administration the world currently consumes 92 million barrels per day.

 

Prices for crude oil have been falling precipitously, from $104 in late May to $83 on Friday. Market watchers view that decline with alarm for two reasons.  The first is that oil demand is a good proxy for global economic growth, given the commodity’s ubiquity in both energy, chemical and plastics production.  The second is that the drop creates concerns over global deflation.  While lower energy prices may create a tailwind for consumers’ wallets going into the Holiday shopping season, their decline also stokes concerns over a recession in Europe, a cooling Chinese economy, and the durability of the recovery in America. Those old whiskey barrels mean a lot…

 

6.      A Rolex watch. A new Rolex Submariner, made famous by movie icon Steve McQueen, will set you back about $7,000. A Timex Ironman (Presidents Bush and Clinton wore them, for what its worth) will set you back about $35 on Amazon, and keep better time than the Rolex with far less maintenance.

 

Why would you spend more for a product that does less?  Because you can, and you want everyone to know that.  That makes the Rolex a convenient hook upon which to hang one of the decades most discussed topics: income inequality.  This is far from a fringe topic, as Fed Chair Janet Yellen’s Friday speech highlights.  How her perspective – sympathetic to the problem but troubled by what practical solutions exist – might inform Fed policy in coming years is hard to know, but it clearly weighs on her mind. 

 

7.       A butterfly. American mathematician and meteorologist Edward Lorenz once famous asked, “Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas?”  It was an elegant example of a basic notion: in an interconnected world, small changes can have outsized – and unpredictable – effects.

 

The Financial Crisis probably started with a late mortgage payment on a house in Phoenix or Las Vegas – the butterfly flapping its wings that eventually caused the tornado on Wall Street and beyond. We now live in the aftermath of that storm, and struggle to make the global financial system more robust.  Banks must have more reserve capital now. Money market funds now have liquidity fees and redemption gates for institutional shareholders. Financial institutions need “Living wills”. Does the butterfly care?  Probably not. 

 

8.      A U.S. $100 bill. Think the world is going exclusively online when it comes to payment systems? Think again. The U.S. Bureau of Engraving and Printing, part of the Treasury Department, launched a new $100 bill last October and it has been a runaway success.  To date in Fiscal 2014, the BEP has printed over 600 million notes, worth +$60 billion.  In the two prior fiscal years, Treasury printed over 7 billion $100 bills, worth +$700 billion.  According to the Federal Reserve, most of these bills circulate overseas. 

 

The humble “Benjamin” is a good touchstone for the concept of a “Reserve currency” – a globally accepted means of exchange. Since the end of World War II, that has been the U.S. dollar. If you wanted to buy gold or oil, you generally needed dollars. This is changing now, as different countries try to reduce their dependence on the greenback. China is trading with EU countries directly, with newly established euro/yuan convertibility.  Russia sells oil and gas to China, taking yuan rather than dollars. How this will change global demand for U.S. Treasuries or the dollar itself, it is too early to tell. One point worth mentioning, however: the largest Chinese banknote is 100 yuan. Worth about $16. 

 

9.      A heating radiator in Berlin. According to a recent article in Deutsche Welle, Germany’s national media company, more than 70% of the country’s energy supply depends on imports.  Russia alone accounts for a quarter of the country’s coal, oil and gas imports.   

 

The key question is, of course, how will this shape Germany – and therefore Europe’s – response to the Ukraine crisis? While ISIS and Ebola have dominated the headlines in recent weeks, Russia’s involvement in the Ukrainian civil war is an important and unresolved issue. Winter is coming, and with the cold Russia’s political leverage increases exponentially. Germany is already teetering on recession without an energy crisis.  How this conflict shapes headlines in the coming months could do much to either roil – or calm – capital markets. 

 

10.   A smartphone. We will finish on an upbeat note – the role of technology in society.  Since the dawn of the Internet, users needed a personal computer to go online. Various efforts to bring low-cost PCs to the emerging market never really caught on, leaving most countries seriously behind the adoption curve. Now, Gartner Group expects 71% of all global phone shipments to be Internet-enabled smartphone. The affordable PC is finally here, and it makes phone calls too.

 

The implications for personal freedom, commerce and social advancement are profound. Communication is cheaper with free services like WhatsApp, the texting service recently acquired by Facebook. Online price discovery and shopping bring information and choice to billions of consumers and small businesses. Myriad chat services enable everything from social connection to political dissent. The smartphone is certainly the one object that will make the most difference over the next decade to the greatest number of the world’s population.

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

Stop us when the flashbacks to September 11, and its Patriot Act aftermath, become too close for comfort.

s Reuters reported moments ago, Canadian Prime Minister Stephen Harper said on Thursday the government will expedite plans to give more powers of detention and surveillance to security agencies in the wake of an attack on Parliament.

“They need to be much strengthened, and I assure you, Mr. Speaker, that work which is already under way will be expedited,” he told the House of Commons, one day after a gunman launched an attack on Parliament and was shot dead.

On the other hand, instead of giving the government even more authoritarian power to do with civilian liberties as it sees fit and appropriate, perhaps the government’s agencies could have simply done their work better under the existing laws and regulations, especially after the Sky News report that the Ottawa shooter, Canadian born Michael Zehaf-Bibeau, was already on a terror watch list.

The gunman who killed a soldier in Ottawa and stormed Canada’s parliament had been put on a terror watch list, it has emerged.

 

The attacker, identified as Michael Zehaf-Bibeau by Canadian media, was considered “high risk” and had seen his passport confiscated to stop him travelling abroad to join Islamic State terrorists in Iraq or Syria.

 

But the 32-year-old was able to strike at the heart of his home country’s capital, shooting dead Corporal Nathan Cirillo before he was himself gunned down by Sergeant-At-Arms Kevin Vickers as he launched his assault on parliament.

 

US sources said the killer was a convert to Islam from Quebec who grew up in Laval and Montreal and was called Michael Joseph Hall before he changed his name.

But while most have stretched to make a link between Zehaf-Bibeau and Muslim in general (or ISIS in particular), a very distubring direction where this may be headed is revealed in the following:

Family friend Dave Bathurst told the CBC Zehaf-Bibeau did not appear to have extremist views, but had at times shown a disturbing side.

 

He said: “We were having a conversation in a kitchen, and I don’t know how he worded it – he said the devil is after him.”

 

Mr Bathurst said his friend frequently talked about the presence of Shaytan in the world – an Arabic term for devils and demons, adding: “I think he must have been mentally ill.”

So while one can understand the stereotyping of fear under the guise of race, ethnicity or religion, what happens when the brand spanking new pre-crime unit of “Oceania” targets not just those who are externally different but pose a risk threat because they could be, according to the government, “mentally ill.” Good luck proving to a jury of peers after the fact of one’s arrest (by the Ministry of Peace of course) that one is, in fact, perfectly normal.

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

High-yield bond issuance has surged in recent days as 'wide' spreads have encouraged investors to take the dip once again (despite firms' record leverage and increasing desperation to roll the wall of maturing debt). However, it's not all guns blazing, as one manager noted, "while the market reopens, it reopens with issuers having to be a little more investor friendly." Despite Carl Icahn's warning that "the high-yield bond market is in a major bubble that's gonna burst," Bullard's "QE4" comments sparked Goldman to add US junk bonds and Aberdeen says selling EU and buying US corporate debt "is the trade that kind of screams at you right now." The dash-for-trash down-in-quality is back as CCC-demand surges and, as one trader notes the market's schizophrenia: "one day the market feels like it is shut down and you can’t sell anything and you wake up this morning and you can price any part of the curve."

There is nothing to fear but the lack of The Fed itself…

On the one hand…

Carl Icahn:

"The Fed is really holding the market up…. The Fed turned this market around here because it let it be known that the Fed funds rate isn't going to be raised in March. I am concerned about the high yield market, I think that's in a major bubble, but nobody knows when it's gonna burst…"

and on the other…

Goldman Sachs Asset Management:

GSAM dded to its U.S. junk bond holdings amid recent selloff, according to money manager’s head of Asia-Pacific fixed income Philip Moffitt, seeing U.S. as ‘Beacon’ amid the recent rout.

 

High-yield bonds more attractive than investment-grade debt, Moffitt says in interview in Sydney

 

Says underlying structure of U.S. growth is quite strong

 

GSAM is “reasonably constructive” on high-yield market in Asia

 

Says he’s “worried about China” and expects a higher risk premium on assets related to the country

Aberdeen Asset Management:

New issuance has been heavy but concessions generous: "There was a good 10 to 15 basis-point concession probably because the underwriters on both wanted to get the deals done, done properly, and have them trade well."

 

"We have been sort of on the margin selling a little bit of euro to buy dollar securities but it hasn’t been wholesale yet. But that is the trade that kind of screams at you right now."

 

"Defaults are going to remain quite benign and with yields approaching 6.5 percent for high yield, it is tough not be interested in talking about good double BB and single B companies,” he said from London. “I still think high yield’s good value, and it is a lot better now."

 

"We are using this as an opportunity to put money to work, we are reducing some of our loan exposure and buying high-yield bonds. Where we have the discretion to add high yield to our investment-grade accounts, we are using that as well.”

And then there's this from Citi's Matt King:
 

The following sums up the scizophrenia nicely:

“The market is very forgiving,” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. “One day the market feels like it is shut down and you can’t sell anything and you wake up this morning and you can price any part of the curve. The market is very open.”

As everyone jumps back on the down-in-quality, dash-for-trash trade:

57% of two-way flow in single-Bs has been client buying, followed by 53% in CCCs, Trace shows.

*  *  *
On a side note, the marked swings in Treasuries of the last 3 days suggest notable rate-locks as banks hedge (and unwind) rate risk from the expected issuance (hedge into issuance, unwind on post)

 

*  *  *

And remember, our dream-crushing discussion of the rise in cash on corporate balance sheets

US companies are carrying far more net debt than in 2007

 

Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.

 

In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.

via Zero Hedge http://ift.tt/1wmPvq7 Tyler Durden

One would think that Janet Lee Dupree, 72, a self-professed HIV-infected alcoholic, would be slowly putting aside material worries as she prepares to set the intangibles in her life in order for one last time. One would be wrong.

Janet Dupree has had her wages garnished

As she admits, “I am an alcoholic and I have HIV,” she tells the BBC. “That’s under control.” So what is the cause of most if not all consternation in the final days of Dupree’s life? “I was sick and I didn’t worry about paying back the debt.” As a result, Dupree defaulted on her loan, and since she turned 65 she has had money withheld from her Social Security benefits.

“Just recently I received a notification that they are going to garnish my wages because I am still working,” says Dupree, who works 30 hours a week as a substance abuse counsellor.

The debt in question: Dupree owes $16,000 in student loans she acquired in 1971 and 1972.

Or make that “student loans” – debt which is crippling the last days of a person who hasn’t seen the inside of a classroom in four decades.

Dupree, who lives in Citra, Florida, admits she forgot for many years that she had borrowed the money – originally $3,000 – in order to complete her undergraduate studies in Spanish.

The stunning story of how the exponentially rising…

 

… notional amounts of (anything but) student debt is crushing millions of Americans as recounted by the BBC:

• Outstanding student loan debt in the US amounts to $1tr
• 3% of households headed by individuals 65 or over carry student debt (706,000 households)
• 24% of households headed by individuals 64 or under carry student debt (22 million households)
• The outstanding federal debt for older adults grew from $2.8bn in 2005 to $18.2bn in 2013
• 27% of federal student loans held by individuals aged 65 to 74 are in default, compared to 12% of loans to people between the ages of 25 and 49

In 2005, older adults owed $2.8bn (£1.61bn) in federal student debt. By 2013, that figure that had ballooned to $18.2bn, according to a report released last month by the Government Accountability Office (GAO).

These seniors account for 706,000 households in the United States – small compared to the 22 million households with non-seniors who hold student load debt, but a growing problem. People over 65 also defaulted on their student loan debt at a much higher rate than other segments of the population, says Charles Jeszeck, author of the GAO report.

Students in the US often take out loans, both privately funded and financed by the US Department of Education, to pay their school fees. While other loans, such as a home mortgage, can be forgiven if a borrower files for bankruptcy, student loans cannot.

According to the GAO study, the number of individuals whose Social Security benefits were offset to pay student loan debt increased from about 31,000 to 155,000 between 2002-13. Jeszeck tells the BBC that this situation can cause considerable problems for older adults who, like Dupree, may have to extend their working life well beyond retirement age.

“They face the potential of reduced social security benefits and a lower standard of living, possibly a poverty-level standard of living in retirement,” Jeszeck says.

Rosemary Anderson, 57, says she is fortunate not to have defaulted on her student loan, but she already knows she will grow old with a debt “hanging over her head”.

Between 1991-2000 she borrowed $64,000 in order to complete both her undergraduate and her graduate studies in organisational behaviour and development.

Soon after, though, she began what she calls a “steep decline into financial hell”.

She says she divorced her husband of 24 years, had health issues that prevented her from working full time, and had her salary reduced when the financial crisis hit.

Anderson, who works as a member of the emergency management team at the University of California, Santa Cruz, couldn’t afford her monthly loan payments, so she entered into a series of deferment options with the Department of Education.

Today, she owes $128,000 and is hoping to get additional help from the government in reducing that amount.

The vast majority of older borrowers took out their loans in order to pay for their own studies, although a small percentage used the loans for their spouses, children or grandchildren.

Many borrowed money to pay for mid- or late-career retraining, or may have acquired loans with a very long repayment term. Others defaulted at a younger age, were unable to dig themselves out of the problem and carried it through into retirement.

The Department of Education says it is “committed to working with older borrowers to help them understand and manage debt”, as William Leith, chief business officer for federal student aid, explained in a recent Senate hearing where different measures were discussed.

A department spokesperson told the BBC that there are “many repayment options available, including those based on income, as well as forgiveness programmes”.

Meanwhile, Rosemary Anderson is worried. She says never imagined that she would have this problem at her age.

She feels fortunate to have a job but recognises that she will have to continue working as long as she is physically able to.

“Retirement is not part of my vocabulary,” she says.

“I will never live long enough to pay off my loan.”

via Zero Hedge http://ift.tt/1oxYUv7 Tyler Durden