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."

Tuesday, September 13, 2016

The Farmland Bubble Has Burst

It was amazing to watch farmland prices skyrocket as residential real estate was falling from 2008 to 2012. Now that the market has hit a peak, it will be interesting to watch how far prices falls back to earth.


Monday, September 12, 2016

Donald Trump On Interest Rates, Deficits & Infrastructure Spending

An Easier Way For Corporations To Make A Profit: Just Borrow At Negative Yields

By: Peter Schiff Of Euro Pacific Capital

For years I have argued that ultra-low interest rates act more as an economic sedative than a stimulant. This idea has elicited laughter from the economic establishment. But it is becoming clearer that rates set by central banks that are far below the levels that free markets would have otherwise determined have dragged the world into the economic mud. The simple proof is currently arising in Europe where negative interest rates are now transforming companies from agents of growth, production, and employment into financial sloths that exist solely to borrow money.
 
In a September 7 front page article, the Wall Street Journal reported that as of September 5, €706 billion worth of investment-grade European corporate debt, or roughly 30% of the market, according to trading platform Tradeweb, was trading at negative yields, an increase from just 5% in January. These negative yields were the result of intense activism on the part of the European Central Bank (ECB). 
 
For years the ECB had been trying to stimulate growth by buying trillions of euros’ worth of sovereign debt. But as these programs proved ineffective to wake up the EU economy from its long economic slumber, this year they began moving into the corporate market. Most of this buying has occurred on the secondary market, for bonds that had previously been issued at positive rates. The central bank buying raised prices of these bonds sufficiently to push yields into negative territory. It also has drawn in speculators who have bought low yielding bonds not because they are good investments but because they are convinced that the ECB will one day buy them out at a premium.
 
But the real news of that Journal article was that for the first time, major European firms like German manufacturer Henkel AG and French drugmaker Sanofi SA had issued corporate bonds at negative rates in the primary market. This means that if they are held to maturity, the bonds are guaranteed money losers…in essence, the companies are being paid to borrow. This is a stunning development that alters the fundamental principles of corporate strategy.
 
As this process of ECB corporate bond buying continues, more and more companies will follow suit and issue bonds at negative yields. Why wouldn’t they? It’s nice work if you can get it. To seek profits, why go through the laborious and uncertain process of developing new products and seeking new customers when all you have to do instead is simply borrow money from lenders and pay them back less? It’s fool proof, requires no messy union labor contracts, no R&D, and is infinitely scalable…as long as the central bank keeps buying. All indications are that they will. With such an easy path to profits, it should come as no surprise that this August was the busiest on record in terms of European corporate debt issuance, according to Dealogic.
 
But what are the companies doing with the newly raised cash? They aren't using it to hire more workers. Another story in the same Journal edition detailed how European corporate investment spending stalled at 0% growth in the second quarter (Eurostat data). Rather than investing the money, companies are using the brisk bond issuance to retire older debt, pay dividends, or buyback shares on the open market. While these activities are great for shareholders, they provide very little benefit for workers and consumers. Welcome to the new economy.
 
Normally, if a company borrows cash at a positive rate of interest, it must put that money to some productive use in order to repay lenders both principal and interest, plus generate a profit for its efforts. But now that hurdle has been eliminated. Companies don’t need to create any value with the money they borrow. They just need to borrow. The loans themselves produce the profit. It’s not too difficult to see how the corporate sector will evolve if the “ECB buying at negative rates” trend continues, or picks up steam. Corporations will focus less on business operations and more on ways to increase debt issuance. Fewer engineers and more accountants is never a good recipe for economic growth.
 
Japan has been going down this road even longer than the Europeans, and the results are equally poor. Although it hasn’t been buying corporate debt, the Bank of Japan (BoJ) is on pace to buy more than $786 billion worth of Japanese Government bonds this year, more than double what the government will actually issue. Currently the BoJ owns more than a third of outstanding government bonds and, at the current pace, it could own 60% by the end of 2018. (WSJ, R.Rosenthal & S.Bhattacharya, 9/9/16)
 
But it doesn’t stop there. The BoJ has also become the principle buyer of the Japanese stock market and now owns more than 60% of Japanese ETFs. Clearly, those stock purchases are not motivated by the same market-focused rationale that would compel private investors. Such “investments” are not spurring the Japanese companies to make bolder investments into organic growth. Instead, they are more likely to sit back and let the money roll in. It’s corporate welfare at its worst, guaranteed to produce nothing but short-term profits.
 
But despite all of this, the politicians, central bankers, and economists insist that bolder and more creative techniques of money printing and financial stimulus will unlock the economic puzzle and return the global economy to 3% or 4% growth. I think there is little doubt that the Federal Reserve will ultimately follow the ECB and the BoJ into this bizarre world of negative yields and unlimited financial asset purchases.
 
But as we go down this road, no one in power seems to consider the possibility that “stimulus” does more harm than good. If central banks weren’t buying bonds, interest rates would surely rise, and risks for business and governments would return. But the real world can produce real results. It has worked that way for millennia. Without guaranteed government money, companies would need to attract real investors. To do that they would need to create real businesses, a process that takes investment, innovation, and efficiency. These are the essential elements that create productivity growth that is the single biggest factor in raising living standards. It’s no accident that productivity growth has all but disappeared in the current age of central bank activism.
 
So we have a choice, either we continue down the road of negative rates to Fantasy Land, where central banks own all the stocks and bonds and asset prices always rise, but real wages and average living standards always fall, or we take our chances on a different path that leads to reality, however unpleasant the transition may be. I for one would choose the latter, but it looks like I won’t have much company.

Wednesday, August 24, 2016

The Coming Financial Market Meltdown - How To Be Ready When It Arrives

I'm sorry I've been away the past few weeks. My full time job has me working early in the morning through late at night. My free time has been spent putting in the hours trying to keep pace with everything happening in the global financial markets. The additional hours needed to formulate my thoughts into words here on the site have not been available. More free time will be coming, and there is a lot to discuss in the coming weeks.

Fortunately, not that much has changed in terms of my outlook on the world. While my view has changed little, I can feel the collective psychology of almost everyone around me (business associates, the media, friends, etc.) changing rapidly. This is the power of a bull market in financial assets, and the current mania is fascinating to watch unfold.

Almost everyone has forgotten what occurred back in 2008. Much more importantly, if they do remember, they seem to have forgotten what caused the great crash (debt growth and loose monetary policy). Some people still remember snapshots of that period (I sometimes hear people reference the movie "The Big Short"), but people in general are far more confident their financial assets (stocks, bonds and real estate) are much safer today than they were in March 2009.

I feel another event, similar in magnitude to 2008, is approaching. I do not have an algorithm or mathematical series of models to tell me this is the case. I'm just using common sense. We know with a quick study of financial history that excessive debt and loose monetary policy have been the underlying cause of every great financial crisis over the last 100 years. Over the past 8 years we have experienced the largest combination of excessive debt growth and loose monetary policy in history. If it did not lead to a massive crash it would be the first time in history. It would be similar to a meth addict taking an enormous steady dosage over an eight year period and experiencing no long term negative effects on their body. The only question we have to ask is "when will the negative effects of the drugs finally reveal themselves?"

Based on the belief a large scale "risk off" event is approaching, my life has been dedicated toward preparing for its arrival. I'm not talking about buying guns, water and growing food in the basement, I'm talking about learning the skills and making the contacts needed to become a large scale buyer of assets when fear returns to markets.

My field of study has centered around the commercial real estate market for two main reasons:

1. Leverage - Unlike stocks, bonds and commodities, real estate allows buyers to finance 60% to 100% of the purchase with borrowed money. The deeper your understanding of how commercial deals are financed, acquired and managed, the more leverage you can acquire through partnerships and lending relations.

2. Tax Advantages - The government needs to provide housing, particularly lower income and middle class housing, in order to keep up with a growing population. The tax laws in place exist to incentivize investors to use their capital to make this housing available. This will make the apartment sector an attractive asset class after prices plunge back to earth.

The global bond market bubble is the engine fueling asset bubbles almost everywhere. This has become known as "the reach for yield." As yield has disappeared from global bond markets (bond rates continue to move down or below zero as bond prices rise), investors have sought out other asset classes to find a return. Unlike technology, home builders, or financial stocks in previous stock manias, dividend payers (stocks with yield) have been the darling of the most recent ascent. Assets that have no yield (commodities, cars, fine art, land, etc.) become more attractive when alternative assets yield nothing as well.

The same applies to the commercial real estate markets where the rush for yield has felt like a tidal wave. The ability to borrow money increases a buyers "cash on cash return." This return is measured by the annual cash flow you receive relative to the amount of actual cash it took you to purchase the property.

There are two scenarios that could occur which would prick the current global financial asset bubble:

1. A risk off event where deflation takes control. This would likely lead to a final surge lower in bond yields while stocks, real estate and commodities sell off simultaneously.

2. The 35 year bond bull market ends. Yields finally bottom and begin a multi-year rise. Asset prices that have been rising with the tide of lower yields will now be fighting the current as rates rise.

I should note that even if we move through phase one first, bonds will ultimately bottom following that period and we will begin phase two. At some point, yields will reach their mania bottom and it will signal the beginning of a very painful period for all related asset classes.

The goal during this coming period will involve two major steps:

1. Asset preservation. Cash will be king, with the potential for precious metals outperforming everything. The precious metals out-performance is certainly not a certainty, so cash should always be the primary (largest) holding.

2. Asset accumulation. Just as every man woman and child on the planet wants to own as much real estate, bonds and stocks as they possibly can today, the absolute opposite will occur at the bottom. People will be saying how important cash is to a portfolio and how "saving money" and not "speculating" is the key to financial success. People won't believe they were unable to see the "obvious" disaster coming and promise themselves they will only invest a very limited amount of money in the "dangerous" financial markets moving forward.

This will be a once in a lifetime opportunity to purchase assets. Stocks, bonds and real estate will be available at bargain basement pricing.

Some of the people I work with on a day to day basis can see the potential trouble in the commercial real estate sector, but you have to close your eyes and immerse yourself into what that future world will look like in order to understand the full ramifications.

Investors have oceans of capital lining up at their doors to purchase property today. Some of these investors believe if things slow down then their $5 million credit line will fall to $4 million, but that's not the way things work. The money to invest or refinance in new commercial real estate projects will disappear overnight and move from $5 million to zero. Things do not occur in a calm, linear, fashion on the downside. They occur in a panicked hysteria. The bullish irrationality that exists today is just a small taste of the bearish irrationality that will exist during the coming decline in prices.

The human mind works to make things simple to understand so we can move back to more important things as soon as possible (like food, survival or pleasure). For this reason, investors always tend to extrapolate the future forward based on how the markets have performed in recent years. At tops, it feels as if markets will move up forever, and at bottoms it feels like they will never stop falling.

I've spent the last 8 years working in three main fields of commercial real estate (management, finance and acquisition). I've been fortunate to gain a strong understanding, from the inside, of how these three crucial components work toward building a successful portfolio. I have always taken positions that were geared toward preparing myself for the next major reset in financial markets, and I am fortunate to do consulting work today with some of the brightest minds in this field.

Try to close your eyes and imagine how everything will be occurring in your world on the backdrop of financial panic. If you can put yourself in that world mentally today, when it eventually arrives it will provide you with the confidence to take action. Hopefully, it will also keep you from getting swept away in the current mania as we approach the crest of the tidal wave.

Something truly terrible is coming, and we should all be excited for its arrival. I look forward to the day when this site will be focused on accumulation, instead of preservation. Stay tuned.....

Fore more see: What Is Helicopter Money?

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?

Wednesday, July 6, 2016

The British Pound's 100 Year Of Debasement

The chart below provides a long term view of the British pound against the US dollar. It is remarkable it traded at 5 to 1 in the earlier part of the 20th century, and perhaps even more remarkable how far it has declined over the last 100 years.



Where will the pound trade against the US dollar over the next five years? I have no idea, and I care little. Both developed countries suffer from a systemically dangerous and bloated banking system and overpriced real estate, stock and bond markets. Trying to figure out how the pound will trade against the dollar is like trying to figure out which broken and burning ship will sink into the sea faster.

Where do I believe the pound will trade against gold over the next five years? Much lower. That's where I'd rather focus my attention.


Tuesday, July 5, 2016

The Swiss 50 Year Bond Goes Negative & Thoughts On Real Vs. Paper Wealth

The bond bubble continues to shatter records weekly. No additional commentary needed regarding the chart below, other than to say when this supernova finally implodes the impact on financial assets will be like a meteor striking the earth.




Some commentary worth noting from John Hussman's weekend article "Head of the Snake":

Following the British referendum to exit the European Union, the paper value of global assets briefly fell by about $3 trillion. This decline in the market capitalization immediately garnered headlines, suggesting that some destruction of “value” had occurred. No. The value of a security is embodied in the future stream of cash flows that will actually be delivered into the hands of investors over time. What occurred here was a paper loss. While the recent one was both shallow and temporary, get used to such headlines. In the U.S. alone I fully expect that $10 trillion of paper wealth will be erased from U.S. equity market capitalization over the completion of the current market cycle.

While any given holder can sell their securities here, somebody else has to buy those same securities. The fact that valuations are obscene doesn't mean that the economy has created more wealth. It just means that existing holders of stocks and long-term bonds have a temporary opportunity to obtain a wealth transfer from some unfortunate buyer. Whoever ends up holding that bag will likely earn total returns close to zero on their investment over the coming 10-12 year horizon, with profound interim losses on the way to zero returns.

Understand that securities are not net economic wealth. They are a claim of one party in the economy - by virtue of past saving - on the future output produced by others. Fundamentally, it's the act of value-added production that ‘injects’ purchasing power into the economy (as well as the objects available to be purchased), because by that action the economy has goods and services that did not exist previously with the same value. True wealth is embodied in the capacity to produce (productive capital, stored resources, infrastructure, knowledge), and net income is created when that capacity is expressed in productive activity that adds value that didn't exist before.

New securities are created in the economy each time some amount of purchasing power is transferred to others, rather than consuming it. Once issued, all of these pieces of paper can vary in price later, so the saving that someone did in a prior period, embodied in the form of some paper security, may be worth more or less consumption in the current period than it was initially. That’s really the main effect QE has - to encourage yield-seeking speculation that drives up the prices of risky securities, but without having any material effect on the real economy or the underlying cash flows that those securities will deliver over time.


Monday, June 27, 2016

Brexit Is A Bear Stearns Moment, Not A Lehman Moment

The following comes from Ben Hunt at Epsilon Theory, providing the best summary I've found for Brexit. As I sat down to write over the weekend I had this exact summary in my mind, but Ben already wrote it (better) on Friday:
Brexit is a Bear Stearns moment, not a Lehman moment. That’s not to diminish what’s happening (markets felt like death in March, 2008), but this isn’t the event to make you run for the hills. Why not? Because it doesn’t directly crater the global currency system. It’s not too big of a shock for the central banks to control. It’s not a Humpty Dumpty event, where all the Fed’s horses and all the Fed’s men can’t glue the eggshell back together. But it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead.
There are two market risks associated with Brexit, just as there were two market risks associated with Bear Stearns.
In the short term, the risk is a liquidity shock, or what’s more commonly called a Flash Crash. That could happen today, or it could happen next week if some hedge fund or shadow banking counterparty got totally wrong-footed on this trade and — like Bear Stearns — is taken out into the street and shot in the head.
In the long term, the risk is an acceleration of a Eurozone break-up, which is indeed a Lehman moment (literally, as banks like Deutsche Bank will become both insolvent and illiquid). There are two paths for this. Either you get a bad election/referendum in France (a 2017 event) or you get a currency float in China (an anytime event). Brexit just increased the likelihood of these Humpty Dumpty events by a non-trivial degree.
What’s next? From a game theory perspective, the EU and ECB need to crush the UK. It’s like the Greek debt negotiations … it was never about Greece, it was always about sending a signal that dissent and departure will not be tolerated to the countries that matter to the survival of the Eurozone (France, Italy, maybe Spain). Now they (and by “they” I mean the status quo politicians throughout the EU, not just Germany) are going to send that same signal to the same countries by hurting the UK any way they can, creating a Narrative that it’s economic death to leave the EU, much less the Eurozone. It’s not spite. It’s purely rational. It’s the smart move.
What’s next? Every central bank in the world will step up their direct market interventions, particularly in the FX market, where it’s easiest for Plunge Protection Teams to get involved. Every central bank in the world will step up their jawboning and “communication policy” to support financial asset prices and squelch volatility. It wouldn’t surprise me a bit if the Fed started talking about a neutral stance, moving away from their avowed tightening bias. As I write this, Fed funds futures are now pricing in a 17% chance of a rate CUT in September. Yow!
What’s the result? I think it works for while, just like it worked in the aftermath of Bear Stearns. By May 2008, credit and equity markets had retraced almost the entire Bear-driven decline. I remember vividly how the Narrative of the day was “systemic risk is off the table.” Yeah, well … we saw how that turned out. Now to be fair, history only rhymes, it doesn’t repeat. Maybe this Bear Stearns event isn’t followed by a Lehman event. But that’s what we should be watching for. That’s what we should be preparing our portfolios for.

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

Wednesday, June 22, 2016

Richard Duncan - How China's Hard Landing Will Impact The World

The following video provides a deep dive into what it happening with the Chinese economy and how it will impact the rest of the world. Richard Duncan is one of my favorite economists. His books transformed the way I think about the global economy and financial system.

If you want to fast forward, things get going about 4:50 into the video:





For more see: Bubbles Bloom Everywhere As The Systemic Crisis Builds Under The Surface


Tuesday, June 21, 2016

The Stock Market "Always" Bounces Back, Right?

A financial advisor makes their living by keeping as much of their client's money in the financial markets, at all times. They charge fees to manage clients money, manage mutual funds which charge fees, or both (they charge a fee to pick specific mutual funds their company owns which also charge a fee). 

If a company makes 1% on their AUM (assets under management), then their bottom line looks much better if their clients have $100,000,000 invested vs $50,000,000 invested. Therefore, it is the responsibility of the financial industry to (1) create narratives that explain why investors should always have money invested and (2) create a reason why they should use their company to invest the funds. 

One of the more popular stories you hear is; "do not worry, if you invest in the stock market, even if it at a peak in the market cycle, the market will always return to new highs and you will collect dividends along the way" (as long as you do not panic during the decline, pull your money, and stop the 1% gravy train of investment fees flowing to my company). The part in parenthesis is usually left out.  

Another fact usually not mentioned is markets can take a very, very long time to return back to their previous peak. In some cases they may never return again in the investor's lifetime. 

The DOW peaked in 1929, fell 89% and then took "only" 25 years to recover the losses. It should also be noted the DOW shifts the companies in the index. Some of the stocks in a market index can go bankrupt, which means they can never return to their previous highs. 



The Japanese market peaked in 1989 and is still well below the peak 27 years later. Some Japanese investors who purchased or held stocks during the late 1980's may not see their capital returned whole in their lifetime. 




Make sure you know how someone makes their living before you put 100% of your faith in their investment advice. For example, if a company makes 0.0% on the funds you hold in cash, precious metals, and residential real estate, how will that impact their investment advice? There is a reason advisors suggest holding a portfolio structured as some form of X% bonds and X% stocks; they make money on 100% of the portfolio. 

The same applies for other markets as well. If you ask a real estate broker if you should use $60,000 as a down payment to purchase a home or put it in the stock market, how are they likely to respond? How about a company that sells precious metals?

As you can probably tell, I do not work in the financial services industry. I work in the commercial real estate industry, and writing here is a hobby, not a job or a way to sell investment products to a client. Unfortunately, most of the financial market information you find online is presented by companies that have a vested interest in keeping a bullish undertone (there are very few weird people like me who write just because they enjoy it).  




Thursday, June 16, 2016

Swiss 30 Year Bonds Enter The Insane Asylum

Are you frustrated you can lend the German government your hard earned money, and pay them to hold it, for "only" 10 years? Does it bother you Japanese bonds are "only" negative out to 14 years? Have no fear! There is an investment alternative that has arrived which is even further out on the limb of absurdity. Enter the 30 year Switzerland government bond, which as of this morning has now moved negative.



You heard that correct. A simple investment today will provide you the opportunity to give the Swiss government your money and then pay them for 30 straight years. You can join all the other proud investors around the world currently holding bonds below the zero bound, a place I refer to as the insane asylum.


Meanwhile, the chart below made the rounds yesterday in the financial world, which shows a long term history of the 10 year government bond yield in Germany.



Investors may take comfort seeing yields also went to 0% back in 1922 - 1923, but a little context is important. What was happening in Germany during that time? Hyperinflation. The bond market was closed during that period so there was no yield. Every German government bond on the planet had a value of $0.0. Why? If the value of the paper currency in your hand was dropping by 10% or more per day, what would be the value of an I.O.U. of that paper 10 years into the future? Much, much less than used toilet paper.

Ironically, we will eventually shift back into that mindset at some point in the future. A tipping point will arrive when investors move from:

Greed: Yields will always continue to fall (even below zero) and we will receive capital gains on the value of the underlying bonds.

Concern: Yields bottom and investors realize the top may be in. At this point they will believe yields will only move up slightly, at a slow pace, and then remain at a permanently low trough.

Panic: The third phase will unfold in one of three ways:
 (A) Investors will collectively realize the governments they are lending their money are bankrupt and have no way to ever pay back the principal and interest with a currency of equal value in the future.
(B) Inflation picks up and investors demand a return (interest rate) high enough to compensate the natural loss of their purchasing power.
(C) Both A and B arrive simultaneously, as they did in Weimar Germany in 1922, and the worst case scenario becomes a reality for that country.

The question to ask yourself is; where will capital flow when it is flooding out of the bubble bond market? You want to position yourself today to be where capital will flow tomorrow, and do your best to not pay attention to the surrounding noise while you wait.

For more see: German 10 Year Bonds Enter The Insane Asylum

Wednesday, June 15, 2016

A Brief Thought On Guns In America

I don't own a gun and I've never fired one, so for me the charts below paint a picture of excess regarding Americans and gun ownership. However, I try to see things from other people's perspective before making comments on sensitive issues. I'm sure if someone had broken into my house in the past with the intention of causing my family harm, I would likely own a gun now and appreciate laws that allow me to do so.

From my perspective it seems as if we can find a middle ground; the right to bear arms should stay, but perhaps we should revisit the right to own mass killing weapons like assault rifles.






























Tuesday, June 14, 2016

German 10 Year Bonds Enter The Insane Asylum

Investors were provided the "opportunity" during today's early hours of trading to purchase 10 year German government bonds at a negative yield. While yields have been hovering close to zero all week, investors can finally lend the German government their hard earned money for 10 years and pay the government to hold it


The bond market bubble shows no signs of slowing. Although we know this story will end in complete disaster it is fascinating to watch how low investors will bid these yields before the market implodes. Wondering what the next "Big Short" will be? It has arrived.  





















Monday, June 13, 2016

Bubbles Bloom Everywhere As The Systemic Crisis Builds Under The Surface

Pension Partners put together the excellent visual below illustrating the point where government bonds move into negative territory on the duration scale. As a reminder, green does not mean good, it means slightly less insane because you are not actually paying the government to hold your money.



With the announcement this week the European Central Bank (ECB) will begin purchasing corporate bonds (in addition to the 800+ billion euros of government bonds it has bought since March 2015), traders have already begun to front-run the purchases, pushing corporate yields to the lowest in history. Corporate bonds in Japan have already moved into negative territory as the Bank of Japan began purchasing negative yielding corporate bonds back in January.



Bloomberg estimates the entire size of the European corporate bond market available to purchase under the ECB's guidelines is about 620 billion euros. This means they will quickly "become the market" for these bonds and liquidity will disappear (which has already occurred in Japan). Ironically, U.S. corporations that have foreign subsidiaries can participate in this insanity by issuing debt in European and Japanese markets. Look for corporations to flood the market with debt in the coming months even if they have no need for additional capital. They will likely use the money to repurchase their own shares in an attempt to drive stock prices even higher. Corporate executives are paid to make stock prices go higher every quarter, and central banks are telling corporations they will print money, give it to them, and then pay those companies for taking the free money (once rates go negative). Can you see how QE flooding the markets creates simultaneous asset bubbles through the spillover effects?

Meanwhile, with banks being penalized for holding cash with the European Central Banks (they are now charged .04% because rates are negative), one of Germany's largest lenders, Commerzbank, is considering putting physical cash in secure vaults. There are already plans in place to make this process more difficult for banks (they are reducing the availability of larger denominated notes). The central banks do not want anyone holding cash. They want all available capital flooding stock, bond and real estate markets to drive each bubble further and further away from prices that can be supported by the real underlying economy. 

The global bond bubble has now pushed rates to the lowest levels we've seen in 5,000 years.



Mario Draghi, the head of the European Central Bank, must surely be pleased with the distortions he is helping to create in the financial markets. Every day the global systemic crisis builds under the surface, but as long as bond yields keep falling and stocks and real estate keep moving higher, let the good times roll.

For more see: The Global Bond Market Bubble Moves Further Into Negative Territory




Thursday, June 9, 2016

Friday, June 3, 2016

The Global Bond Market Bubble Moves Further Into Negative Territory

While the financial media is focused on the U.S. jobs reports, a much more important data point was released today. Fitch Ratings reported global government debt with negative interest rates rose from $9.9 trillion in April to $10.4 trillion entering the month of June. The total was "only" $7 trillion back in February, meaning more and more bonds are entering negative territory at a breathtaking pace.

The biggest contributors to the total pie of negative bonds came from Japan and Italy. Germany has negative yields out to 9.5 years, and Japan stretches out 14. Why would someone ever buy a bond when the yields are negative? Greed. 

Bonds rise in value when interest rates fall, and they fall in value when interest rates rise. You can think of the process like a seesaw.

While the average yield on Japanese government debt is -0.06%, investors that purchased these bonds at the start of the year have made 5.2% on their holdings. Why? The yields are falling, and it doesn't matter if that is happening in positive or negative territory. For example; if you hypothetically bought a bond at -0.1% and the rates fell to -0.2% the underlying principal value of your bond has risen.

Here is the juicy part; Larger investors can leverage their positions in these markets by buying government debt with borrowed money. If you are buying $100,000 worth of Japanese bonds and you only used $10,000 of your own money (you borrowed the remaining $90,000), then your returns are supercharged.

Investors are purchasing bonds with the sole intention of flipping them to the next buyer and locking in on the capital gains. They are not "investing" for the long term because this would mean they are holding an asset that guarantees an annual loss (negative bonds mean you pay the government to hold them).

The same process occurred during the real estate boom in 2006-2007. Investors would purchase properties knowing if they rented them out they would have negative monthly cash flow. This was of no concern because they "knew" they could just flip the properties to the next buyer in just a few months and lock in on the capital gains.

The problem will arrive when bonds yields stop falling and begin to reverse course. At that moment investors will be holding bonds with a negative yield that are simultaneously losing principal value every month. In addition to this pricing dilemma it should be noted that the entity borrowing the money, the Japanese government, is bankrupt. At some point that "small problem" will become a big one that is priced into the bond and currency markets.

While I have no possible way of knowing when this insanity will stop and bond prices will peak, I can assure you when they begin to reverse course it will not be a calm and orderly walk to the exits.  Asset prices (stocks, bonds and real estate) which have experienced the benefit of lower and lower borrowing costs every year for the past 35 years during the secular bond bull market, will now begin fighting against the current as the bond bear markets begins.

......As a quick side note, based on the global bond market movement today following the jobs report it is likely the total number of negative yielding negative bonds is now significantly higher than $10.4 trillion.

For more see: Moving Closer To The Next Global Minsky Moment