Monday, August 1, 2016

How Much Growth Does It Take To Cover Interest On Global Debt?

Great piece this morning in the Financial Times by Satyajit Das, who wrote my favorite book of the year (so far); "The Age Of Stagnation."

Policymakers have chosen to ignore the central issue of debt as they try to resuscitate activity. Since 2008, total public and private debt in major economies has increased by over $60tn to more than $200tn, about 300 per cent of global gross domestic product (“GDP”), an increase of more than 20 percentage points.

Over the past eight years, total debt growth has slowed but remains well above the corresponding rate of economic growth. Higher public borrowing to support demand and the financial system has offset modest debt reductions by businesses and households.

"If the average interest rate is 2 per cent, then a 300 per cent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest."

For the full article click here.

The Rise & Fall Of Yahoo

Saturday, July 30, 2016

Jeffrey Gundlach: "Sell Everything"

Jeffrey Gundlach, who now oversees more than $100 billion in capital, spoke with Reuters over the phone on Friday and provided his thoughts on global asset prices. I could not agree more:

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that many asset classes look frothy and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks. Noting the recent run-up in the benchmark Standard & Poor's 500 index while economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a “world of uber complacency.”
“The artist Christopher Wool has a word painting, 'Sell the house, sell the car, sell the kids.' That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview. "The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong."
"The yield on the 10-year yield may reverse and go lower again but I am not interested. You don't make any money. The risk-reward is horrific," Gundlach said. "There is no upside" in Treasury prices. Gundlach reiterated that gold and gold miners are the best alternative to Treasuries.
Overall, Gundlach said the Bank of Japan's decision on Friday to stick with its minus 0.1 percent benchmark rate - and refrain from deeper cuts - reflects the limitations of monetary policy. "You can't save your economy by destroying your financial system," he said.

Jeffrey Gundlach, founder of DoubleLine Capital, speaks at the Sohn Investment Conference in New York City, U.S. May 4, 2016.  REUTERS/Brendan McDermid

Wednesday, July 27, 2016

Total Global QE Continues To Grow In Size

Money flows across borders much easier than goods or people. The financial markets are an interconnected system, and a hedge fund manager in London can purchase financial assets in Hong Kong with just a few easy key strokes. Investors solely focused on what is happening within their own borders will be blindsided by the impact of the surrounding world.

The following chart provides an excellent visual of the monthly dosage of QE provided by the "Big 4" central banks; the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE) and the Bank of Japan (BoJ).

You can see they are now printing more money monthly ($180 billion) than at any time since the financial crisis began in the summer of 2007. While the Fed (blue) carried the load for the world from 2009 to late 2014, the baton was passed to the ECB (black) and the Bank of Japan (red) to continue to prime the liquidity gusher. This chart does not include China where credit and money growth has taken on Biblical proportions.

What happens when money is printed and pumped like a fire hydrant into the financial system? It sloshes around the world violently. This is why you see liquidity flooding into the real estate markets of major cities in Australia, Canada and the United States. You see liquidity flooding into stocks, bonds, commercial real estate and fine art. The high end car market is booming. The world is completely drunk on free money, low interest rates and unlimited debt growth. 

The hangover and consequences, when the music finally stops, will be catastrophic. The real global economy had a heart attack in the fall of 2008, was never given an opportunity to heal and has been living on life support since. At some point artificial asset prices will peak, turn lower and then collapse back to the level the real economy can support. Until then, we'll see how creative the central banks can get in order to keep everyone at the party drinking as much as possible.

Monday, July 25, 2016

John Hussman On Foreign QE & U.S. Stock Valuations

From his weekly commentary:

On Quantitative Easing and Helicopter Money:

As for the enticing concept of “helicopter money,” my impression is that many observers are using the term with no understanding of what they are talking about. Despite the uninhibited imagery it evokes, “helicopter money” is nothing but a legislatively-approved fiscal stimulus package, financed by issuing bonds that are purchased by the central bank. Every country already does it, but the size is limited to the willingness of a legislature to pursue deficit spending. Central banks, on their own, can’t “do” helicopter money without a spending package approved by the legislature. Well, at least the Federal Reserve can’t under current law.

To some extent, Europe and Japan can do it by purchasing low-quality bonds that subsequently default, but in that case, it’s a private bailout rather than an economic stimulus. See, those central banks have resorted to buying lower-tier assets like asset-backed securities and corporate debt. If any of that debt defaults, the central bank has given a de facto bailout, with public funds, to the bondholder who otherwise would have taken a loss. So almost by definition, low-tier asset purchases by the ECB and Bank of Japan act as publicly-funded subsidies for bondholders, rather than ordinary citizens. My sense is that if the European and Japanese public had a better sense of this, they would tear down both central banks brick-by-brick.

On U.S. Stock Valuations:

The current half-cycle market advance is remarkably long-in-the-tooth. There little basis for investment at these valuations - only speculation. Without a strong safety net, that speculation amounts to an attempt to gather pennies under a chainsaw. In recent weeks, we’ve heard some rather ignorant talk of an ongoing “secular bull market” that presumably has years to go. Unfortunately, these analysts don’t appear to recognize that secular bull markets have typically started from valuations literally one-quarter of their present level (see 1949 and 1982), and far below those observed at the 2009 low. With the exception of the 2000 extreme, every secular bull market has died before reaching even the current level of valuations. Moreover, even if this were a secular bull, one would still expect a cyclical bear from current extremes. 

By our estimates, investors can expect to scrape out scarcely more than 1% in nominal annual total returns in the S&P 500 Index over the coming 12-year period. We expect that all of this will be from dividends, and that investors will experience a steep roller-coaster of draw-downs and volatility in the interim. The index itself is likely to be below current levels 12 years from today. Even the lowly returns available from cash will likely serve investors better. Of course, we expect the discipline of investing in alignment with the market’s expected return/risk profile, as it changes over the course of the market cycle, to do far better still.

Wednesday, July 20, 2016

What Is Helicopter Money?

It seems as if we move every few weeks from a cliche topic that hums throughout the financial headlines to the next. A few weeks ago it was "Brexit," then it was the "Italian Banks," and now it's "helicopter money."

While the Italian banks are a real concern and something I will address again in detail in the future, I want to take a brief moment to walk through my thoughts on helicopter money.

First of all..what is it?

Ben Bernanke gave his now legendary speech in 2002 titled "Deflation: Making Sure "It" Doesn't Happen Here." It described how the United States would fight deflation should it enter a credit crisis like the one we entered in 2008. The speech has become the playbook the Federal Reserve has used since March of 2009; interest rates brought to zero in combination with quantitative easing (printing money to purchase mortgage and government bonds).

Other central banks have copied these strategies and are even pushing their boundaries further. The European Central Bank has taken rates negative, and the Bank of Japan has expanded on the types of assets they purchase with their QE program (stocks and corporate bonds).

The goal of all these strategies is to entice lenders to lend and borrowers to borrow. They want to make it very appealing for all borrowers (governments, banks, corporations and individuals) to take on new debt, which they believe will help juice or stimulate the economy.

The problem is very little of the money has found its way into the real economy. The Fed has purchased trillions of dollars of government bonds from banks and the banks have taken most of that money and parked it right back on the Fed's balance sheet.

Corporations have taken the opportunity to borrow money at extremely low rates, and instead of reinvesting the money into corporate growth (which would create new jobs and feed money into the real economy) they have used the funds in large part to repurchase their own shares and issue larger dividend payments. This serves to drive the price of stocks higher, which pads the bank accounts of corporate executives and those that already own stocks (the rich).

Money has been lent out to investors to purchase commercial real estate at extremely low interest rates and extremely high prices. This helps all investors that currently own commercial real estate. Low rates have made home ownership more attractive as well, pushing more renters into the market and creating the opportunity for hedge funds to purchase and rent out large swaths of single family homes. Both those factors put a floor on home prices in 2012 and have driven them back up to pre-bubble highs in many cities.

Bonds have entered a realm all to themselves. As the main target purchases for central bank QE programs, bonds have become a true speculative mania worldwide.

In essence, the central bank policies have created asset bubbles in everything. Unfortunately, while the price of financial assets are all simultaneously sitting at record highs the the real underlying economy to support those prices has not come along for the ride. Growth and real wages have been stagnant and in some cases declining in many parts of the world since 2008.

So why is a "helicopter money" program different from the programs that we've already tried? It combines government spending with QE progams. In effect, it pumps money directly into the economy by:

- cutting taxes
- infrastructure projects
- boosting military spending
- increasing welfare spending
- etc. etc.

Programs like these put money directly into the hands of everyday citizens. They do not have to borrow the money to receive the benefit. These programs would then be "paid for" by central banks who will print the money and purchase the bonds the government must issue to finance the spending.

For example, the U.S. federal government could announce it would be creating a $1 trillion stimulus program in 2017. The Fed would make a simultaneous announcement that it will be purchasing $1 trillion in government bonds in 2017. That is helicopter money because it is essentially being dropped from the sky by central banks directly into the real economy.

While the markets have become very excited by the idea of a coordinated helicopter drop around the world there is one major problem they are forgetting. Central banks can act immediately, create new programs and essentially do whatever they want with no supervision or need to ask for permission. Government spending does not work that way. Stimulus programs must be voted on by elected officials in order for them to be put into effect. What do you need for that support? The public to want them to do it.

Everyday Americans have trouble understanding what central banks are doing and what the long term consequences are on the economy and financial system. They do not realize how they have pushed asset prices into dangerous bubble territory, and many can't connect the dots to see how low interest rates steal from savers and retirees. It is a confusing and multi-layered process and central banks like it that way. 

On the other hand, it is very easy for everyday Americans to understand government spending. They see a $19 trillion deficit in America and they immediately realize (through common sense) that additional borrowing which cannot be paid back will ultimately cause a problem. Therefore, there is natural discomfort that builds when new spending programs are announced.

So what do you need to overcome this anger? Pain. When the government announced they would be borrowing $800 billion in the fall of 2008 to bail out the large banks there was outrage, but people were looking around and watching the value of their homes fall, their stock portfolios drop and many were losing their jobs. While most did not fully understand what was happening, they knew "something had to be done" in order to try and stimulate or save the economy.

The same type of pain will be needed for helicopter drops to be put into effect. This is why a market crash will likely need to come first, before the public is okay with the action or even begs for it. 

There will likely be a lag period from when the helicopter money discussions begin and when they are actually implemented. That lag period will likely not be a good time to own risk assets. 

For those that have been patiently waiting for real consumer price inflation to arrive (we've only had asset price inflation so far), helicopter money will deliver. When prices rise and interest rates on bonds must compensate for rising inflation (rising interest rates rise), we will see the arrival of the real financial crisis. Ironically, the inflation central banks want so desperately to create will ultimately be what pops the global bond bubble and creates an unstoppable financial Armageddon.

Friday, July 15, 2016

The Echo Bubble In U.S. Home Prices

Is it different this time? Yes. We're starting from lower mortgage rates while real income levels have fallen and/or stagnated since 2007. When rates bottom and move upward from these insanely low levels it will be even more painful for buyers that purchased at the new peak.

Rising rates will not impact current homeower's monthly fixed mortgage payments, it will impact the monthly mortgage payments for new buyers who want to purchase a home. Buyers will have to offer lower prices in order to afford the monthly payments with higher rates. Home prices will adjust downward.

While bubble home prices were the main event during the last credit crisis, this time they will be just a blip on the radar during the coming global credit market collapse. The new credit bubble has infected the entire global bond market, which is hundreds of trillions of dollars in size (U.S subprime mortgages topped out at $1 trillion). The global bond market bubble has simultaneously and artificially pushed up asset prices for stocks and commercial real estate.

While many people will lose home equity during the next downturn, it will likely be the least of our worries as credit markets implode around the world.

Chart above from Mark Hanson.

For more see: The Stock Market "Always" Bounces Back Right?