Sunday, March 1, 2015

Size Of U.S. Army

The chart below may be surprising to some due to the gargantuan annual U.S. spending bill for defense (see The Obscene U.S. Defense Spending Continues). The size of the U.S. army is now the lowest since at least 1946 with 450,000 members.

Wednesday, February 25, 2015

Jim Grant On The Virus Of Monetary Policy

Need a little more context? The blue line in the chart below shows the wage growth for the bottom 90% of wage earners in the U.S. over the last century. You can see the steady growth until August 1971 when wages hit a ceiling and have been stagnating downward since. The event, of course, was the removal of the gold standard providing central banks and governments around the world the ability to print and borrow an unlimited amount of money without checks and balances.

This created the global asset boom which began in the mid 1980's and continues today. When asset prices boom it sends the income of the 1% through the roof (red line above) at the expense of the bottom 90%. History has shown these seismic class shifts begin with unease, then move to unrest, then escalate to chaos and end with revolution. I believe the next financial collapse will lead to a new monetary system which is already under construction.

Until then, when asked how she feels about the bottom 90% seeing their income steadily decline over the past 44 years due to reckless central bank monetary policy, Janet Yellen can sum up her feelings without words.

Tuesday, February 24, 2015

The Path Ahead For The Greece Negotiations

The path ahead should be bumpy at best....

Or an easier way to summarize their options moving forward:

My Thoughts On Government Surveillance

I wake up real early in the morning these days, usually between 3:00 AM to 4:00 AM, to spend a few hours taking care of my daughter. This gives my wife a few hours of sleep/rest before I have to begin my long work day. If my daughter ends up falling asleep in my arms I have been catching up on movies. This morning I watched Citizenfour which is a documentary about Edward Snowden and the government information he released in 2013.

I will not review the story behind the movie because unless you have been living under a rock for the last few years you know who Edward Snowden is and the details behind how much the U.S. government and other governments around the world use surveillance.

You probably notice I don't like to discuss specific political parties here on the site. There are multiple reasons for this but the two most important are that it can only create an emotional and illogical discussion between those engaging in the conversation (from both myself and any readers who choose to comment), and for the most part....I don't really care.

I look at both political parties in America as a complete disgrace to everything great the United States used to represent. So with that disclaimer in place, here are my thoughts surrounding surveillance.

I essentially view it the same way I view government spending, which any long time reader knows I generally hate. A certain portion of government spending is very important such as police, schools, firefighters, and military defense. Beyond the necessities government spending only creates malinvestments and hurts the overall economy in the long run. Let's not get me started, I could go on for a long time on this subject.

I feel the same way about surveillance. To say 100% of the surveillance is evil and wrong may be a bit too drastic. I'm sure 70% to 90% of what America is doing is too much, but we have no knowledge of terrorism acts that have been stopped before they had a chance to begin due to the surveillance programs in place. Now, you can argue people would not want to inflict acts of terror on the United States if we were not engaged in wars with every possible country on the planet. Or you can argue the U.S. military keeps larger wars from breaking out. It's not black and white for me but somewhere in between. However, in terms of the defense spending it is definitely black and white for me; the United States economy will experience significant economic pain in the future due to their exorbitant defense spending over the last 30 years.

The surveillance system the United States has created is the proverbial camel's nose under the tent. Once you start down this path it could lead to an invasion in privacy beyond anything we can imagine today. This can happen with lightening speed through the use of drones and robotics. What was designed as anti-terror tactics can quickly evolve into programs used to stop everyday domestic crimes before they happen.

So I'm somewhere in between. If the U.S. is a 10 right now with surveillance (and there is no question they are), I would prefer to see them somewhere closer to 3. I highly recommend you watch the movie because even if you already know everything about this story, it provides an incredible look at what was taking place behind the scenes the week the information was released to the public.

Monday, February 23, 2015

Lessons In Investing

How I feel when I hear analysts discussing the importance of technical analysis:

Sunday, February 22, 2015

Air Pockets Between Today's Asset Pricing & Reality: Waterfall Declines Ahead

One by one over the last 18 months confidence indices toward U.S. stocks have reached all-time record bullish highs. The secular bull market in confidence rests at historic highs, while bears (those believing the market will turn down) have gone into hibernation.

We know that following the stock market bubble bursting in 2000 investors were shaken, but certainly not scared. They put their trust into real estate as the global engine of growth for the global economy and the continuous surge needed to push global stocks and asset prices higher. We found out in 2007 that trust was misplaced as the real estate market collapsed along with the asset prices they were artificially supporting. 

Following the financial crisis investors were scared, but not broken. They have picked themselves back up and found a new savior for the global economy and asset markets; government spending combined with central bank money printing. As with real estate just a few years earlier, investors believe government debt will always provide the engine needed for global economic growth, which will continue to support higher asset prices. 

While the private sector hit the wall in 2007, governments picked up the baton and have been leveraging relentlessly since. Global debt to GDP ratios:

The more debt governments issue, the more investors want it. This process has been turbocharged by central banks which have artificially pushed interest rates lower with QE. 90 percent of the industrialized world economy is now anchored with zero rates. 

How large will the losses be when the government debt bubble finally begins to implode? That is impossible to know but we know it will make the 2000 tech bubble and 2008 housing bubble look tame in comparison. 

Central banks this year will purchase more than 100% of the sovereign debt issued by the developing world; Japan, UK, Europe and United States. 

As central banks engage in currency wars, the relentless flood of printed money has created massive mismatches between the prices investors are willing to pay for assets vs. their real world values (see junk bonds, commercial real estate, art, stocks, etc.) When the euphoria is removed from the markets there will be air pockets that exist between current pricing and real world asset values.

For more see: Averaging Valuations Show U.S. Stocks More Dangerous Than 1929 Peak

Investment Tips & Diversification

Saturday, February 21, 2015

Subprime Is Back

Great infographic from the Wall Street Journal showing the return of subprime loans in America. 40% of loans issued for autos, credit cards and personal borrowing went to subprime borrowers in the first 11 months of 2014. At its previous peak in 2007, 41% of non-mortgage lending was subprime so we have essentially round tripped right back to peak insanity.

This data does not include the newest member of the subprime universe that has taken the credit market by storm since 2007; student loans. The default rate for student loans surged past credit cards in 2012, and the next major recession will push this default rate through the roof.

Below you can see the staggering size of this market that shows no signs of slowing growth:

At $1.2 trillion in size, U.S. student loan debt has already surpassed the size of the Australian economy and is closing in on Canada.

Yes, mortgages have been issued more responsibly than they were in 2006. However, home buyers have found new ways to obtain 0% to 3% down loans, and the credit/income spectrum borrowers are working with continues to move us back closer toward pre-crisis underwriting.

Making people more comfortable today is that behind the scenes the U.S. government now explicitly backs mortgages, student loans and auto loans. This will make people less comfortable when the global government debt bubble implodes.

Friday, February 20, 2015

The Death Of Inflation

Part of the reason why bond investors are paying astronomical prices (buying bonds with zero to negative return) is the built in assumption inflation will stay low forever. Bonds are pricing in a stagnating economy which will keep inflation low.

In the meantime, global stocks are closing in on all time record highs. Stocks are pricing in a surge in global economic growth. 

One of these markets will ultimately be wrong (stocks or bonds). The black swan event no one anticipates is that both markets are wrong and mis-priced. In that world, the one I believe we live in today, cash and safety are king. 

Thursday, February 19, 2015

Apple's Valuation Moves Further Into Uncharted Territory

I'm not a technology guy so as I mentioned this morning discussing Snapchat you have to take my views with a grain of salt. I'm a real estate guy that can provide you with a full underwriting package for a $100 million commercial building and put a management team in place to run the day to day operations. However, when it comes to a company like Apple I struggle to explain how it can be worth $700 billion and only offer essentially two products (iPhone and iPad).

I understand the revenue from the iPad and iPhone are large enough to equal the size of other large companies combined. iPhone:


What Apple is doing today with their sales is unquestionably remarkable. I also see their growth potential on paper with new markets in Asia and around the world.

My problem is that another company can enter the market in the blink of an eye and provide an equal or better phone or tablet at a lower cost. They do not have control of these markets the way Microsoft had with Windows in the 1990's. When my phone contract runs up every year or two I go to the store and look at my options. I have never purchased an Apple product so that either means I do not understand the value or I am not blinded with emotional bias.

If the overall U.S. market continues its path further into valuation absurdity, it's certainly possible Apple could reach $1 trillion in value and make me look stupid for taking the time to pen this post. But I don't want any part of it. I'm not brave enough to short the stock, but you will not find it in my portfolio any time soon.

Here are a few updated charts on Apple's staggering valuation from Bianco Research. First up, Apple's market valuation vs. the next largest companies around the world. Apple is in a world all to themselves:

Next up is the ongoing race for size dominance between Apple and Exxon. With the most recent energy collapse, Exxon appears to be down and out once again. However, if these two stocks were my only investment options I would open a pair trade long Exxon and short Apple with the expectation these lines will cross one day again in the future.

Apple also just reached another milestone. It crossed the inflation adjusted market value high for NTT (Nippon Telegraph and Telephone) from way back in May 1987. NTT was the highest valued company on earth that month at $348 billion, which dwarfed IBM, the next closest competitor. NTT was the darling tech company during Japan's incredible stock market run in the 1980's.

Just as with Apple today, the shares delighted investors but worried some analysts.

People think it would be impossible for Apple to ever experience a fall from its current dominance, but I see it as an inevitability based on the barriers to entry I just discussed.

h/t Wall Street Journal, Quartz, Bianco Research, Slate

Snapchat Valued At $19 Billion: No Profits, No Problem

Here we go again. Another tirade from some old geezer on why social media companies are overvalued. As a warning, I don't use Facebook, I don't use Twitter, and I don't use Snapchat. I get my information through a program called Feedly (which organizes articles from sites I want to read every day), and when I want to communicate with friends I usually pick up the phone to call them or go visit them in person. 

I know, I know. I have no understanding of how the world works today. 

With that disclaimer in place, let's look at this week's valuation bombshell; Snapchat. They just completed their most recent round of venture funding which valued the company at $19 billion. Snapchat is a program that allows you to send pictures to friends, which then disappear after 10 seconds. 

The company just recently began their advertising program, which will generate some revenue for the company. As with most tech start-ups, the profits will come later, hopefully. Here is the $19 billion valuation crowd Snapchat finds itself in today. You can see that around them are Mosaic, Omincom and Consolidated Energy, which bring in over $1 billion in net profits annually. 

Being the old geezer I am, I think in a few years Snapchat is going to be worth less than $19 billion. Much, much less.  

h/t Quartz