Monday, November 28, 2016

The Upcoming European Elections Threaten To Shake The House Of Cards

Quick summary of the important upcoming votes in Europe from John Rubino...

"No rest for the wicked. With the shockwaves from Brexit and President Trump still reverberating around the world, the established order is bracing for more bad news. Next up is a December 4 Italian constitutional referendum that might end the reign of centrist prime minister Matteo Renzi and replace him with a bunch of anti-euro iconoclasts from the Brexit/Trump part of the spectrum.

And not long after Italy takes its shot at the status quo, France will go to the polls for a run-off presidential vote pitting far-right Fran├žois Fillon against extreme-right Marine Le Pen.

It’s hard to overstate the threat posed by these two votes to the EU — the world’s largest economic entity — and by implication to the rest of the global financial system. Italy is the third biggest country in the EU, and France is the second. Let either pull out and the result might be dissolution and the end of the euro. Trillions of dollars of euro-denominated bonds would suddenly be converted to lira or francs, forcing the holders of those bonds to take big losses and impairing bank capital across the continent, leading in turn to derivatives blowing up pretty much everywhere, and so on until the whole house of cards is threatened. 

So what does a fiat currency/fractional reserve banking Establishment do when confronted with such a looming catastrophe? What it always does of course: Cut interest rates and ramp up money creation in order to devalue the currency."

Thursday, November 10, 2016

How Investing Is Different Than Picking A Car



I'll take this one step further and say that fundamentals aside, past winners are often the most likely to be future losers in the investing landscape (and vice versa). Winners become more expensive as the trade becomes more crowded while losers become less expensive and sentiment collapses as investors leave. This major psychological discrepancy makes investing different than almost everything else you encounter on a day to day basis.

To provide a real world example, investors often look at the last 3 or 5 year performance when selecting a mutual fund for their 401k. Ironically, picking the recent winners is more likely to lead to near term losses.

Monday, November 7, 2016

Asset Prices Will Collapse...But Not Because Of Trump Or Hillary

We're one day before the Presidential election in the United States, and I'm sure you know I will not be providing some provocative forecast on who will win the Presidency.

In terms of the big picture economic direction for the global economy and financial markets, it does not mater who wins. That statement is made with the understanding Donald Trump is the first candidate I have seen in my lifetime that is not a true politician. Normally I view candidates as the same exact person during election time. Trump has definitely changed that.

The person who wins this election will have the opportunity to captain the Titanic after it has hit the iceberg. The pain that is coming for our economy and financial markets has already been baked into the cake. You cannot spend 7 long years drinking alcohol and taking heroin (borrowing and printing money), and then expect to just move on with your life with no consequences based on a new President. The only question now is how long it will take for the Titanic to sink and how it will submerge into the ocean.


There is something important about this election, however. It represents another case of an underlying trend toward voting against the establishment forces. Brexit and Trump both represent similar ideas. People can feel something is terrible wrong, even if they don't understand how they are being screwed.

Brexit and Trump (should he win) will provide little long term meaningful impact on the direction of the global economy and financial markets. Obviously we know Hillary is just 8 more years of exactly what we have now, so there is little to discuss there. The markets may crash if Trumps wins, but the crash would be based on coincidence, not real world economic causation. The global economic and financial snowbank has already been set for an avalanche; it is just waiting for the a single flake to trigger the decline. The last major financial crisis officially started in February 2007 when two Bear Stearns hedge funds collapsed, but we know now that it was a decade of reckless borrowing and low interest rates that caused the avalanche; not that one snowflake.

The underlying trend or social mood against the establishment will soon reach the voting polls in Europe. Unlike Brexit and America's Presidency, those elections actually provide real world economic causation toward the financial markets. Why? If voters in Spain, Italy or France decided to "Brexit" out of the European Union, it will create major dislocations in the interconnected global banking system. You would see both a banking crisis and central bank response similar to Lehman Brothers.

Is that the snowflake that will trigger the avalanche? Is it China's ridiculous debt binge and real estate bubble? Is it just a long overdue asset price decline in stocks, bonds and real estate globally? Is it Trump? Is it a terrorist attack? Is it Japan's bond market and currency imploding?

It is less important to try and figure out what snowflake will trigger the avalanche and when it will happen. Why? Because no one can determine that. Even the smartest minds on the planet who were shorting subprime bonds back in 2006 had no idea when the decline would begin and what news event would finally trigger the avalanche. They were not focused on the snowflakes, they were focused on the instability of the snowbank. 

For more see: Brexit Is A Bear Stearns Moment, Not A Lehman Moment

Tuesday, October 25, 2016

The Echo Bubble In U.S. Home Prices Reaches Previous Peak

The Case-Shiller Home Price Index reached the previous high set back in 2006 with the data set released this morning.


Is this echo bubble the same as the last? It some ways it's worse. Real income is lower today than it was at the peak of the previous bubble. See the blue line in the chart below. Real income is important because it factors in inflation. If the rest of your bills are higher (inflation), it leaves you less money to make your mortgage payment every month.


At the peak of the last bubble mortgage rates were hovering around 6.75%. At the peak of the current bubble interest rates are hovering around 3.75%.


When interest rates move upward it will be more painful from this lower level. If rates just move back to where they were in 2006 mortgage payments will almost double. That means new buyers for homes will have 50% less purchasing power and will need to pay 50% less for a home in order to qualify.

How low can mortgage rates go and home prices rise? We'll have to wait and see. The further this goes on, the more painful it will be when the adjustment process finally arrives.

Tuesday, October 11, 2016

Which Event Will Mark The Peak Of The Bond Bubble?

The most recent example of the bond bubble's speculative euphoria are the 50 year government bond sales in Europe. Martin Armstrong wonders if this insanity finally signals the top;

"If there was ever any question that this is a bond bubble with a 5,000-year low in interest rates, the final bit of insanity just took place. Italy managed to sell its first 50-year bond last week as investors were betting that the European Central Bank might soon add ultra-long debt to its asset-purchase stimulus scheme. Draghi has said he would do whatever it takes to stimulate inflation. Hence, speculators are betting they can sell these 50-year Italian bonds to the ECB for a profit.
The speculation was so great that about 16.5 billion euros in orders were received for a bond issue that was about 20% of that amount. They are not considering the risk that the upcoming referendum might overthrow Italy’s prime minister. This is speculation gone completely mad. These insane speculators have already bought 50-year bonds from Belgium, France, and Spain as well. Many of these same speculators have also signed up for Ireland’s 100-year bond in March."