Tag: Business (page 1 of 164)

“I Should Have Left Them In Jail” – Trump Slams UCLA Player’s Parents Indignation

A clearly frustrated President Trump raged over Twitter this afternoon at the father of a UCLA basketball player who downplayed Trump’s importance in getting his son released from shoplifting charges in China…

As a reminder, LaVar's son, LiAngelo, and two other players were arrested and accused of shoplifting from a Louis Vuitton store while the UCLA basketball team was on a trip to China for its season-opening game.

The players faced potential jail sentences for the charge, but Trump reportedly spoke to Chinese President Xi Jinping about resolving the situation. The players were released, and landed in the United States last week.

Trump took credit for their release, and questioned in a tweet whether the players would thank him.

The players subsequently held a press conference last week and apologized for the incident and thanked Trump.

However, as The Hill reports, ESPN on Friday asked LaVar Ball, the outspoken father of LiAngelo and Lakers rookie Lonzo Ball, about Trump’s role in bringing his son back to the United States.

"Who?" Ball responded.

 

"What was he over there for? Don't tell me nothing. Everybody wants to make it seem like he helped me out."

 

"As long as my boy's back here, I'm fine," LaVar Ball told ESPN.

 

"I'm happy with how things were handled. A lot of people like to say a lot of things that they thought happened over there. Like I told him, 'They try to make a big deal out of nothing sometimes.'

 

I'm from L.A. I've seen a lot worse things happen than a guy taking some glasses. My son has built up enough character that one bad decision doesn't define him."

http://WarMachines.com

Think Bitcoin Is A Bubble? Here’s Your Chance To Short It

Has the fact that the price of a single bitcoin has risen nearly eight-fold so far this year prompted you to turn bearish on the world's most valuable digital currency?

Well, here’s your chance to short it. 

A Swiss asset-management firm called Vontobel launched a new futures product on Friday that will make it easier for retail investors to short bitcoin.

Bitcoin of course recently bounced back to all-time highs after a more-than $1,000 drop last week. Traders who were short made a killing on their positions. But cashing in on the drop would’ve been far easier with new futures products designed to let customers bet against the bitcoin price.

The contracts, which will trade on the SIX Exchange, will enable investors to profit even if the currency – which has proven vulnerable to vicious selloffs – falls in value. According to Reuters, the company will release two mini futures, a type of derivatives instrument that represents a fraction of the value of standard futures, making it easier for retail traders to access the market.

According to Eric Blattmann, head of public distribution of financial products at Vontobel, the news comes at a time when traditional traders are simply looking for more options when it comes to trading cryptocurrencies.

Swiss investment solutions provider Leonteq Securities AG also announced the launch of a separate product. Leonteq’s product has a two-month maturity, while Vontobel’s is longer, but investors can of course exit their positions early since each product will trade on an exchange.

He said in statements:

"We have seen big demand for our long tracker certificate from investors interested in playing the upside potential of bitcoin and now they have also the possibility to hedge their position or go short."

Manuel Durr, head of public solutions at Leonteq, said clients appreciate being able to open long or short positions in bitcoin.

“The initial feedback has been extremely positive,” said Manuel Dürr, head of public solutions at Leonteq. “Clients do very much appreciate the possibility of choosing between a long or a short investment in bitcoin.”

The move comes after US derivatives exchange CME Group announced it would start trading bitcoin derivatives next month.

Already, New York-based startup LedgerX is offering live cryptocurrency futures trading, with $1 million traded in its first week.

While some exchanges have allowed customers to open short positions on margin, the Vontobel contract has become the easiest way for retail traders to short the digital currency. We wonder: Could this help inject more two-way volatility and slow, or perhaps even reverse, bitcoin's meteoric rise?

But if you’re looking to short the world’s most valuable digital currency, The Vontobel mini-futures are probably your best bet.

http://WarMachines.com

The Stage Has Been Set For The Next Financial Crisis

Authored by Constantin Gurdgiev via CaymanFinancialReview.com,

Last month, the Japanese government auctioned off some US$4 billion worth of new two-year bonds at a new record low yield of negative 0.149 percent. The country’s five-year debt is currently yielding minus 0.135 percent per annum, and its 10-year bonds are trading at -0.001 percent. Strange as it may sound, the safe haven status of Japanese bonds means that there is an ample demand among private investors, especially foreign buyers, for giving away free money to the Japanese government: the bid-to-cover ratio in the latest auction was at a hefty US$19.9 billion or 4.97 times the targeted volume. The average bid-to-cover ratio in the past 12 auctions was similar at 4.75 times. Japan’s status as the world’s most indebted advanced economy is not a deterrent to the foreign investors, banking primarily on the expectation that continued strengthening of the yen against the U.S. dollar, the U.K. pound sterling and, to a lesser extent, the euro, will stay on track into the foreseeable future. See chart 1

In a way, the bet on Japanese bonds is the bet that the massive tsunami of monetary easing that hit the global economy since 2008 is not going to recede anytime soon, no matter what the central bankers say in their dovishly-hawkish or hawkishly-dovish public statements. And this expectation is not only contributing to the continued inflation of a massive asset bubble, but also widens the financial sustainability gap within the insurance and pensions sectors. The stage has been set, cleaned and lit for the next global financial crisis.

Worldwide, current stock of government debt trading at negative yields is at or above the US$9 trillion mark, with more than two-thirds of this the debt of the highly leveraged advanced economies. Just under 85 percent of all government bonds outstanding and traded worldwide are carrying yields below the global inflation rate. In simple terms, fixed income investments can only stay in the positive real returns territory if speculative bets made by investors on the direction of the global exchange rates play out.

We are in a multidimensional and fully internationalized carry trade game, folks, which means there is a very serious and tangible risk pool sitting just below the surface across world’s largest insurance companies, pensions funds and banks, the so-called “mandated” undertakings. This pool is the deep uncertainty about the quality of their investment allocations. Regulatory requirements mandate that these financial intermediaries hold a large proportion of their investments in “safe” or “high quality” instruments, a class of assets that draws heavily on higher rated sovereign debt, primarily that of the advanced economies.

The first part of the problem is that with negative or ultra-low yields, this debt delivers poor income streams on the current portfolio. Earlier this year, Stanford’s Hoover Institution research showed that “in aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion.” This accounts for roughly 97 percent of all public pension funds in the U.S. Taking into the account the pension funds’ penchant for manipulating (in their favor) the discount rates, the unfunded public sector pensions liabilities rise to $4.738 trillion. Key culprit: the U.S. pension funds require 7.5-8 percent average annual returns on their assets to break even on their future expected liabilities. In 2013-2016 they achieved an average return of below 3 percent. This year, things are looking even worse. Last year, Milliman research showed that on average, over 2012-2016, U.S. pension funds held 27-30 percent of their assets in cash (3-4 percent) and bonds (23-27 percent), generating total median returns over the same period of around 1.31 percent per annum.

Not surprisingly, over the recent years, traditionally conservative investment portfolios of the insurance companies and pensions funds have shifted dramatically toward higher risk and more exotic (or in simple parlance, more complex) assets. BlackRock Inc recently looked at the portfolio allocations, as disclosed in regulatory filings, of more than 500 insurance companies. The analysts found that their asset books – investments that sustain insurance companies’ solvency – can be expected to suffer an 11 percent drop in values, on average, in the case of another financial crisis. In other words, half of all the large insurance companies trading in the U.S. markets are currently carrying greater risks on their balance sheets than prior to 2007. Milliman 2016 report showed that among pension funds, share of assets allocated to private equity and real estate rose from 19 percent in 2012 to 24 percent in 2016.

The reason for this is that the insurance companies, just as the pension funds, re-insurers and other longer-term “mandated” investment vehicles have spent the last eight years loading up on highly risky assets, such as illiquid private equity, hedge funds and real estate. All in the name of chasing the yield: while mainstream low-risk assets-generated income (as opposed to capital gains) returned around zero percent per annum, higher risk assets were turning up double-digit yields through 2014 and high single digits since then. At the end of 2Q 2017, U.S. insurance companies’ holdings of private equity stood at the highest levels in history, and their exposures to direct real estate assets were almost at the levels comparable to 2007. Ditto for the pension funds. And, appetite for both of these high risk asset classes is still there.

The second reason to worry about the current assets mix in insurance and pension funds portfolios relates to monetary policy cycle timing. The prospect of serious monetary tightening is looming on the horizon in the U.S., U.K., Australia, Canada and the eurozone; meanwhile, the risk of the slower rate of bonds monetization in Japan is also quite real. This means that the capital values of the low-risk assets are unlikely to post significant capital gains going forward, which spells trouble for capital buffers and trading income for the mandated intermediaries.

Thirdly, the Central Banks continue to hold large volumes of top-rated debt. As of Aug. 1, 2017, the Fed, Bank of Japan and the ECB held combined US$13.8 trillion worth of assets, with both Bank of Japan (US$4.55 trillion) and the ECB (US$5.1 trillion) now exceeding the Fed holdings (US$4.3 trillion) for the third month in a row.

Debt maturity profiles are exacerbating the risks of contagion from the monetary policy tightening to insurance and pension funds balance sheets. In the case of the U.S., based on data from Pimco, the maturity cliff for the Federal Reserve holdings of the Treasury bonds, Agency debt and TIPS, as well as MBS is falling on 1Q 2018 – 3Q 2020. Per Bloomberg data, the maturity cliff for the U.S. insurers and pensions funds debt assets is closer to 2020-2022. If the Fed simply stops replacing maturing debt – the most likely scenario for unwinding its QE legacy – there will be little market support for prices of assets that dominate capital base of large financial institutions. Prices will fall, values of assets will decline, marking these to markets will trigger the need for new capital. The picture is similar in the U.K. and Canada, but the risks are even more pronounced in the euro area, where the QE started later (2Q 2015 as opposed to the U.S. 1Q 2013) and, as of today, involves more significant interventions in the sovereign bonds markets than at the peak of the Fed interventions.

How distorted the EU markets for sovereign debt have become? At the end of August, Cyprus – a country that suffered a structural banking crisis, requiring bail-in of depositors and complete restructuring of the banking sector in March 2013 – has joined the club of euro area sovereigns with negative yields on two-year government debt. All in, 18 EU member states have negative yields on their two-year paper. All, save Greece, have negative real yields.

The problem is monetary in nature. Just as the entire set of quantitative easing (QE) policies aimed to do, the long period of extremely low interest rates and aggressive asset purchasing programs have created an indirect tax on savers, including the net savings institutions, such as pensions funds and insurers. However, contrary to the QE architects’ other objectives, the policies failed to drive up general inflation, pushing costs (and values) of only financial assets and real estate. This delayed and extended the QE beyond anyone’s expectations and drove unprecedented bubbles in financial capital. Even after the immediate crisis rescinded, growth returned, unemployment fell and the household debt dramatically ticked up, the world’s largest Central Banks continue buying some US$200 billion worth of sovereign and corporate debt per month.

Much of this debt buying produced no meaningfully productive investment in infrastructure or public services, having gone primarily to cover systemic inefficiencies already evident in the state programs. The result, in addition to unprecedented bubbles in property and financial markets, is low productivity growth and anemic private investment. (See chart 2.) As recently warned by the Bank for International Settlements, the global debt pile has reached 325 percent of the world’s GDP, just as the labor and total factor productivity growth measures collapsed.

The only two ways in which these financial and monetary excesses can be unwound involves pain.

The first path – currently favored by the status quo policy elites – is through another transfer of funds from the general population to the financial institutions that are holding the assets caught in the QE net. These transfers will likely start with tax increases, but will inevitably morph into another financial crisis and internal devaluation (inflation and currencies devaluations, coupled with a deep recession).

The alternative is also painful, but offers at least a ray of hope in the end: put a stop to debt accumulation through fiscal and tax reforms, reducing both government spending across the board (and, yes, in the U.S. case this involves cutting back on the coercive institutions and military, among other things) and flattening out personal income tax rates (to achieve tax savings in middle and upper-middle class cohorts, and to increase effective tax rates – via closure of loopholes – for highest earners). As a part of spending reforms, public investment and state pensions provisions should be shifted to private sector providers, while existent public sector pension funds should be forced to raise their members contributions to solvency-consistent levels.

Beyond this, we need serious rethink of the monetary policy institutions going forward. Historically, taxpayers and middle class and professionals have paid for both, the bailouts of the insolvent financial institutions and for the creation of conditions that lead to this insolvency. In other words, the real economy has consistently been charged with paying for utopian, unrealistic and state-subsidizing pricing of risks by the Central Banks. In the future, this pattern of the rounds upon rounds of financial repression policies must be broken.

Whether we like it or not, since the beginning of the Clinton economic bubble in the mid-1990s, the West has lived in a series of carry trade games that transferred real economic resources from the economy to the state. Today, we are broke. If we do not change our course, the next financial crisis will take out our insurers and pensions providers, and with them, the last remaining lifeline to future financial security.

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ECB Proposes End To Deposit Protection

Submitted by GoldCore

It is the 'opinion of the European Central Bank' that the deposit protection scheme is no longer necessary:

'covered deposits and claims under investor compensation schemes should be replaced by limited discretionary exemptions to be granted by the competent authority in order to retain a degree of flexibility.'

To translate the legalese jargon of the ECB bureaucrats this could mean that the current €100,000 (£85,000) deposit level currently protected in the event of a bail-in may soon be no more. But worry not fellow savers, as the ECB is fully aware of the uproar this may cause so they have been kind enough to propose that:

"…during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request."

So that's a relief, you'll only need to wait five days for some 'competent authority' to deem what is an 'appropriate amount' of your own money for you to have access to in order eat, pay bills and get to work.

The above has been taken from an ECB paper published on 8 November 2017 entitled 'on revisions to the Union crisis management framework'.

It's 58 pages long, the majority of which are proposed amendments to the Union crisis management framework and the current text of the Capital Requirements Directive (CRD).

It's pretty boring reading but there are some key snippets which should be raising a few alarms. It is evidence that once again a central bank can keep manipulating situations well beyond the likes of monetary policy. It is also a lesson for savers to diversify their assets in order to reduce their exposure to counterparty risks.

Bail-ins, who are they for?

According to the May 2016 Financial Stability Review, the EU bail-in tool is 'welcome' as it:

 
 

…contributes to reducing the burden on taxpayers when resolving large, systemic financial institutions and mitigates some of the moral hazard incentives associated with too-big-to-fail institutions.

As we have discussed in the past, we're confused by the apparent separation between 'taxpayer' and those who have put their hard-earned cash into the bank. After all, are they not taxpayers? This doesn't matter, believes Matthew C.Klein in the FT who recently argued that "Bail-ins are theoretically preferable because they preserve market discipline without causing undue harm to innocent people."

 

Ultimately bail-ins are so central banks can keep their merry game of easy money and irresponsibility going. They have been sanctioned because rather than fix and learn from the mess of the bailouts nearly a decade ago, they have just decided to find an even bigger band-aid to patch up the system.

 
 

'Bailouts, by contrast, are unfair and inefficient. Governments tend to do them, however, out of misplaced concern about “preserving the system”. This stokes (justified) resentment that elites care about protecting their friends more than they care about helping regular people.' – Matthew C. Klein

But what about the regular people who have placed their money in the bank, believing they're safe from another financial crisis? Are they not 'innocent' and deserving of protection?

When Klein wrote his latest on bail-ins, it was just over a week before the release of this latest ECB paper. With fairness to Klein at the time of his writing depositors with less than €100,000 in the bank were protected under the terms of the ECB covered deposit rules.

This still seemed absurd to us who thought it questionable that anyone's money in the bank could suddenly be sanctioned for use to prop up an ailing institution. We have regularly pointed out that just because there is currently a protected level at which deposits will not be pilfered, this could change at any minute.

The latest proposed amendments suggest this is about to happen.

 

Why change the bail-in rules?

The ECB's 58-page amendment proposal is tough going but it is about halfway through when you come across the suggestion that 'covered deposits' no longer need to be protected. This is determined because the ECB is concerned about a run on the failing bank:

 
 

If the failure of a bank appears to be imminent, a substantial number of covered depositors might still withdraw their funds immediately in order to ensure uninterrupted access or because they have no faith in the guarantee scheme.

This could be particularly damning for big banks and cause a further crisis of confidence in the system:

 
 

Such a scenario is particularly likely for large banks, where the sheer amount of covered deposits might erode confidence in the capacity of the deposit guarantee scheme. In such a scenario, if the scope of the moratorium power does not include covered deposits, the moratorium might alert covered depositors of the strong possibility that the institution has a failing or likely to fail assessment.

Therefore, argue the ECB the current moratorium that protects deposits could be 'counterproductive'. (For the banks, obviously, not for the people whose money it really is:

 
 

The moratorium would therefore be counterproductive, causing a bank run instead of preventing it. Such an outcome could be detrimental to the bank’s orderly resolution, which could ultimately cause severe harm to creditors and significantly strain the deposit guarantee scheme. In addition, such an exemption could lead to a worse treatment for depositor funded banks, as the exemption needs to be factored in when determining the seriousness of the liquidity situation of the bank. Finally, any potential technical impediments may require further assessment.

The ECB instead proposes that 'certain safeguards' be put in place to allow restricted access to deposits…for no more than five working days. But let's see how long that lasts for.

 
 

Therefore, an exception for covered depositors from the application of the moratorium would cast serious doubts on the overall usefulness of the tool. Instead of mandating a general exemption, the BRRD should instead include certain safeguards to protect the rights of depositors, such as clear communication on when access will be regained and a restriction of the suspension to a maximum of five working days by avoiding a cumulative use by the competent authority and the resolution authority.

Even after a year of studying and reading bail-ins I am still horrified that something like this is deemed to be preferable and fairer to other solutions, namely fixing the banking system. The bureaucrats running the EU and ECB are still blind to the pain such proposals can cause and have caused.

Look to Italy for damage prevention

At the beginning of the month, we explained how the banking meltdown in Veneto Italy destroyed 200,000 savers and 40,000 businesses.

In that same article, we outlined how exposed Italians were to the banking system. Over €31 billion of sub-retail bonds have been sold to everyday savers, investors, and pensioners. It is these bonds that will be sucked into the sinkhole each time a bank goes under.

A 2015 IMF study found that the majority of Italy’s 15 largest banks a bank rescue would ‘imply bail-in of retail investors of subordinated debt’. Only two-thirds of potential bail-ins would affect senior bond-holders, i.e. those who are most likely to be institutional investors rather than pensioners with limited funds.

Why is this the case? As we have previously explained:

 
 

Bondholders are seen as creditors. The same type of creditor that EU rules state must take responsibility for a bank’s financial failure, rather than the taxpayer. This is a bail-in scenario.

 

In a bail-in scenario the type of junior bonds held by the retail investors in the street is the first to take the hit. When the world’s oldest bank Monte dei Paschi di Siena collapsed ordinary people (who also happen to be taxpayers) owned €5 billion ($5.5 billion) of subordinated debt. It vanished.

Despite the biggest bail-in in history occurring within the EU, few people have paid attention and protested against such measures. A bail-in is not unique to Italy, it is possible for all those living and banking within the EU.

Yet, so far there have been no protests. We're not talking about protesting on the streets, we're talking about protesting where it hurts – with your money.

As we have seen from the EU's response to Brexit and Catalonia, officials could not give two hoots about the grievances of its citizens. So when it comes to banking there is little point in expressing disgust in the same way. Instead, investors must take stock and assess the best way for them to protect their savings from the tyranny of central bank policy.

To refresh your memory, the ECB is proposing that in the event of a bail-in it will give you an allowance from your own savings. An allowance it will control:

"…during a transitional period, depositors should have access to an appropriate amount of their covered deposits to cover the cost of living within five working days of a request."

Savers should be looking for means in which they can keep their money within instant reach and their reach only. At this point physical, allocated and segregated gold and silver comes to mind. This gives you outright legal ownership. There are no counterparties who can claim it is legally theirs (unlike with cash in the bank) or legislation that rules they get first dibs on it. Gold and silver are the financial insurance against bail-ins, political mismanagement, and overreaching government bodies. As each year goes by it becomes more pertinent than ever to protect yourself from such risks.

 

http://WarMachines.com

“People Ask, Where’s The Leverage This Time?” – Eric Peters Answers

One of the Fed’s recurring arguments meant to explain why the financial system is more stable now than it was 10 years ago, and is therefore less prone to a Lehman or “Black monday”-type event, (which in turn is meant to justify the Fed’s blowing of a 31x Shiller PE bubble) is that there is generally less leverage in the system, and as a result a sudden, explosive leverage unwind is far less likely… or at least that’s what the Fed’s recently departed vice Chair, and top macroprudential regulator, Stanley Fischer has claimed.

But is Fischer right? Is systemic leverage truly lower? The answer is “of course not” as anyone who has observed the trends not only among vol trading products, where vega has never been higher, but also among corporate leverage, sovereign debt, and the record duration exposure can confirm. It’s just not where the Fed usually would look…

Which is why in the excerpt below, taken from the latest One River asset management weekend notes, CIO Eric Peters explains to US central bankers – and everyone else – not only why the Fed is yet again so precariously wrong, but also where all the record leverage is to be found this time around.

This Time, by Eric Peters

“People ask, ‘Where’s the leverage this time?’” said the investor. Last cycle it was housing, banks.

 

“People ask, ‘Where will we get a loss in value severe enough to sustain an asset price decline?’” he continued. Banks deleveraged, the economy is reasonably healthy.

 

“People say, ‘What’s good for the economy is good for the stock market,’” he said.

 

“People say, ‘I can see that there may be real market liquidity problems, but that’s a short-lived price shock, not a value shock,’” he explained.

 

“You see, people generally look for things they’ve seen before.”

 

“There’s less concentrated leverage in the economy than in 2008, but more leverage spread broadly across the economy this time,” said the same investor.

 

“The leverage is in risk parity strategies. There is greater duration and structural leverage.”

 

As volatility declines and Sharpe ratios rise, investors can expand leverage without the appearance of increasing risk.

 

“People move from senior-secured debt to unsecured. They buy 10yr Italian telecom debt instead of 5yr. This time, the rise in system-wide risk is not explicit leverage, it is implicit leverage.”

 

“Companies are leveraging themselves this cycle,” explained the same investor, marveling at the scale of bond issuance to fund stock buybacks.

 

“When people buy the stock of a company that is highly geared, they have more risk.” It is inescapable.

 

“It is not so much that a few sectors are insanely overvalued or explicitly overleveraged this time, it is that everything is overvalued and implicitly overleveraged,” he said.

 

“And what people struggle to see is that this time it will be a financial accident with economic consequences, not the other way around.”

http://WarMachines.com

The U.S. Is Crushing Its Clean Energy Forecasts

Paris, schmarish…

In a February 2007 report, the United States Department of Energy made thirty-year predictions for the country's energy usage and production. As Statista's infographic below shows, using data from the non-profit international environmental pressure group Natural Resources Defense Council, these forecasts have so far been smashed.

Infographic: The U.S. Is Smashing Its Clean Energy Forecasts | Statista

You will find more statistics at Statista

Martin Armstrong details that actual CO2 emissions in 2016 have undercut the 2006 predictions by 24 percent.

In terms of the energy mix, power generated from coal was 45 percent beneath the forecast while clean(er) alternatives natural gas and wind/solar power saw overshoots of 79 and 383 percent, respectively.

Renewable energy infrastructure is also expanding at a much faster rate than was thought ten years ago. 2006's prediction for installed solar was a massive 4,813 percent shy of the 2016 reality. The U.S now also has installed wind capacity of 82 gigawatts, 361 percent more than had been hoped for.

In fact, energy consumption in total was also 17 percent lower than expectedwhich is odd and perhaps a better indication of the recovery-less recovery's reality?

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Who’s Next? Venezuela’s Collapse Puts These Nations At Risk

"It's a wake-up call for a lot of people who will say ‘Look, the stuff I own is actually very risky'…" warns Ray Jian, who oversees about $6 billion at Pioneer Investment Management Ltd. in London. "People have been ignoring risks in places like Lebanon for a long time," and the official default of Venezuela this week has emerging-market money managers are looking to identify countries that might run into trouble down the road.

While Bloomberg reports that while none are nearly as badly off as Venezuelawhere a combination of low oil prices, economic mismanagement and U.S. sanctions did the country in –  traders are scouting for credit risk, from Lebanon, where Prime Minister Saad Hariri’s sudden resignation has once again thrust the nation into a Saudi-Iran proxy war, to Ecuador, where recently elected President Lenin Moreno continues to expand the debt load in a country with a history as a serial defaulter.

1. Lebanon:

One of the world’s most indebted countries, Lebanon may hit a debt-to-gross domestic product ratio of 152 percent this year, according to International Monetary Fund forecasts. That’s coming at a time when political tension is rising. Hariri’s abrupt resignation, announced from Riyadh on Nov. 4, triggered about $800 million of withdrawals from the country as investors speculated that the nation would be in the crosshairs of a regional feud between the Saudis and Iranians. While the central bank says the worst may be over, credit-default swaps have hit a nine-year high.

2. Ecuador:

After a borrowing spree, the Andean nation’s external debt obligations over the next 12 months ballooned to a nine-year high relative to the size of its GDP. Ecuador probably has the highest default risk after Venezuela, according to Robert Koenigsberger, the chief investment officer of Gramercy Funds Management. The country will be vulnerable “when the liquidity environment changes and they can no longer go to the market to get $2.5 billion to plug the hole," he said. Finance Minister Carlos de la Torre told Bloomberg in an email on Thursday that there is "no default risk" for any of Ecuador’s debt commitments and the nation’s indebtedness is nowhere near "critical" levels.

3. Ukraine:

While the Eastern European nation’s credit-default swaps have declined from their 2015 highs, persistent economic struggles are giving traders reason for caution. GDP expansion has slowed for three consecutive quarters and the World Bank warns that the economy is at risk of falling into a low-growth trap. Ukraine’s parliament approved next year’s budget on Tuesday as it eyes a $17.5 billion international bailout.

4. Egypt:

Egypt’s credit-default swaps are hovering near the highest since September. The cost for protection surged in June as regional tensions heated up amid a push by the Saudis to isolate Qatar. While Egypt has been able to boost foreign-currency reserves and is on course to repay $14 billion in principal and interest in 2018, its foreign debt has climbed to $79 billion from $55.8 billion a year earlier.

5. Pakistan:

Pakistan’s credit-default swaps surged in late October and linger near their highest level since June. South Asia’s second-largest economy faces challenges as it struggles with dwindling foreign reserves, rising debt payments and a ballooning current account deficit. Pakistan is mulling a potential $2 billion debt sale later this year. Speaking at the Bloomberg Pakistan Economic Forum last week, central bank Deputy Governor Jameel Ahmad played down concerns over the country’s widening twin deficits.

6. Bahrain:

Bahrain’s spread rose dramatically in late October to the highest since January after it was said to ask Gulf allies for aid. The nation is seeking to replenish international reserves and avert a currency devaluation as oil prices batter the six Gulf Cooperation Council oil producers. Although its neighbors are likely to help, Bahrain could still be left with the highest budget deficit in the region, according to the IMF.

7. Turkey:

Despite high yields, investors are still reluctant to buy Turkish bonds. The nation has been caught up in a blur of political crises, driving spreads on credit-default swaps to their highest level since May. Turkey was the only holdover on S&P Global Ratings’s latest “Fragile Five” list of countries most vulnerable to normalization in global monetary conditions.

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The Coming Economic Downturn In Canada

Authored by Deb Shaw via MarketsNow.com,

  • Canadian GDP growth has outperformed this year, helping the Canadian dollar
  • As GDP growth slows and the Bank of Canada turns neutral, catalysts turning negative
  • Crude oil and real estate look set for a downturn, with negative implications for the currency

Given its natural resource-based economy, Canada is a boom and bust kind of place. This year, the country has enjoyed a significant boom. Thanks to a government stimulus program, rising corporate capital expenditures and consumer spending, Canada’s GDP growth has been nothing short of spectacular in 2017. According to Statistics Canada, the latest reading for year-over-year GDP growth is a healthy 3.5% (as of August 2017). While this is stronger than all major developed countries, growth is decelerating from its most recent peak in May 2017 (when GDP growth was an astounding 4.7%). A visual overview of historical GDP growth is shown below for reference:

Turning a corner: Canadian growth comes back down to earth

11-17-2017 CAD GDP growth

Source: Statistics Canada

Following the crude oil bust in the second quarter of 2014, Canadian growth rates cratered. While the country avoided a technical recession, the economic outlook was poor until early 2016. After crude oil returned to a bull market in the first quarter of 2016, the fortunes of the country turned. Given limited growth in 2015, the economy had no problem delivering 2%+ year-over-year growth rates in 2016. As a substantial stimulus program ramped up government spending in 2017, growth rates have continued to accelerate this year.

Storm clouds on the horizon: crude oil and real estate

While Canada has delivered exceptional growth in the last two years, the future outlook is much more challenging. Beyond the issue of base effects (mathematically, year-over-year GDP growth will be much tougher next year), key sectors including the oil & gas industry and Canadian real estate look ripe for a downturn.

Crude bull market intact today, but at risk in 2018

As WTI crude strengthens beyond $55, crude oil is clearly in a bull market today. Looking at figures from the International Energy Agency, global demand growth continues to run ahead of supply growth. Thus the ongoing bull market is supported by fundamentals. Thanks to the impact of hurricanes and infrastructure bottlenecks in 2017, US shale hasn’t entirely fulfilled its role as the global ‘swing producer’ this year. The dynamics of supply growth versus demand growth are shown below:

Who invited American shale? US supply ruins the crude oil party

10-13-2017 crude oil supply demand

Source: International Energy Agency, forward OPEC supply estimates via US EIA

Unfortunately, the status quo looks set to change as US supply returns with a vengeance. According to estimates from the IEA, supply growth will outstrip demand growth in the first quarter of 2018. Digging deeper into supply estimates, US shale is once again to blame. Our view is that this changing dynamic will lead to a new bear market in crude oil. Looking back at recent history, crude prices formed a long-term top in the second quarter of 2014 once supply growth overtook demand. Similarly, crude prices bottomed in the first quarter of 2016 once supply growth fell below demand in early 2016. Given Canada's dependence on crude oil exports, a bear market for the commodity is likely to result in a weaker currency.

As China enters its latest real estate downturn, Canada not far behind

While Canadian real estate has enjoyed a great year, the future outlook is much tougher. Similar to its peers in Australia and New Zealand, Canadian real estate prices tend to lag real estate prices in China. This is both because Canada’s economy is deeply intertwined with China, and because the country is a big destination for overseas investment from China. While overseas investors make up a relatively small portion of buyers (around 5% according to government estimates), they serve an important role by acting as the marginal buyer for prime property. A comparison of new house prices in China versus Canada is shown below for reference:

Canadian real estate boom set to run out of steam

11-17-2017 China Canada real estate

Source: Statistics Canada, China National Bureau of Statistics

As Chinese new house prices accelerated significantly in early 2015, Canadian real estate prices followed in 2016. As the Chinese market is now decelerating, negative growth appears to be on the horizon. In March 2015, Chinese house price growth bottomed at -6.1%. While the Canadian bull market continues for now (September new house prices registered at 3.8%), a downturn is likely over the next 6-12 months. As real estate makes up 13% of Canadian GDP, a significant decline in the fortunes of the industry are likely to spill over to the broader economy.

Implications for the Canadian dollar

At the beginning of the year, the Canadian dollar enjoyed a wide number of bullish catalysts including accelerating GDP growth, rising rate hike expectations, a relatively strong crude oil market and speculator sentiment that was at a bearish extreme. These catalysts, and the Bank of Canada’s actions in particular, helped the currency strengthen until late September.

Today, almost every factor that drives the Canadian dollar is working against it. Future GDP growth rates are set to keep decelerating. Looking at the Bank of Canada, its outlook for future rate hikes is now “cautious”. This is a big change from its hawkish tilt earlier this year. While speculator sentiment is no longer at bullish extremes, waning interest in the Canadian dollar is weighing on the currency. The ongoing NAFTA negotiations are another source of potential political risk. Finally, an impending downturn for both crude oil and Canadian real estate further worsen the picture. Thus, our longer term outlook on the Canadian dollar is bearish.

 

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Apple Diversity Chief Forced Out After Saying White Men Can Also Be ‘Diverse’

Silicon Valley's disdain for its mostly white, mostly male tech workforce has reached absurd new heights.

The New York Post is reporting that, after just six months on the job, Apple Diversity Chief Denise Young Smith, who was named vice president of diversity and inclusion in May, has resigned her post after making a “controversial” comment last month during a summit in Bogota, Colombia.

What was Young’s crime? She insinuated that “diversity” can still exist among a group of white men because of their different life experiences.

“There can be 12 white, blue-eyed, blond men in a room and they’re going to be diverse too because they’re going to bring a different life experience and life perspective to the conversation,” the inaugural diversity chief said.

“Diversity is the human experience,” she said, according to Quartz. “I get a little bit frustrated when diversity or the term diversity is tagged to the people of color, or the women, or the LGBT."

That’s right: Young, who is – for the record – a black woman, has been forced out of Apple because her views on diversity were too inclusive.

As the Post pointed out, Young’s comments appeared to defend Apple’s overwhelmingly white and male leadership at a time when the company’s makeup is markedly uneven. This begs the question: What, exactly, was she defending them from?

Young, a 20-year Apple veteran who previously served as the company’s head of worldwide human resources (a senior level position), was later forced to apologize for her remarks, telling Apple staff that her comments “were not representative of how I think about diversity or how Apple sees it."

“For that, I’m sorry,” she said in an email. “More importantly, I want to assure you Apple’s view and our dedication to diversity has not changed."

“We deeply believe that diversity drives innovation,” an Apple spokesman told TechCrunch in a statement. “We’re thrilled to welcome an accomplished leader like Christie Smith to help us continue the progress we’ve made toward a more diverse workplace."

In 2017, only 3 percent of Apple’s leaders were black, and women held just 23 percent of tech jobs, according to Fortune. Female leadership stood at 29 percent, Apple said.

“Meaningful change takes time,” the company said in its diversity report. “We’re proud of our accomplishments, but we have much more work to do."

Smith will leave the company at the end of the year. Taking over as VP of inclusion and diversity will be Christie Smith, who spent 17 years as a principal at Deloitte.

She is also a white woman.
 

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Golden Catalysts

Authored by James Rickards via The Daily Reckoning,

The physical fundamentals are stronger than ever for gold.

Russia and China continue to be huge buyers. China bans export of its 450 tons per year of physical production.

Gold refiners are working around the clock and cannot meet demand.

Gold refiners are also having difficulty finding gold to refine as mining output, official bullion sales and scrap inflows all remain weak.

Private bullion continues to migrate from bank vaults at UBS and Credit Suisse into nonbank vaults at Brinks and Loomis, thus reducing the floating supply available for bank unallocated gold sales.

In other words, the physical supply situation has been tight as a drum.

The problem, of course, is unlimited selling in “paper” gold markets such as the Comex gold futures and similar instruments.

One of the flash crashes this year was precipitated by the instantaneous sale of gold futures contracts equal in underlying amount to 60 tons of physical gold. The largest bullion banks in the world could not source 60 tons of physical gold if they had months to do it.

There’s just not that much gold available. But in the paper gold market, there’s no limit on size, so anything goes.

There’s no sense complaining about this situation. It is what it is, and it won’t be broken up anytime soon. The main source of comfort is knowing that fundamentals always win in the long run even if there are temporary reversals. What you need to do is be patient, stay the course and buy strategically when the drawdowns emerge.

Where do we go from here?

There are many compelling reasons why gold should outperform over the coming months.

Deteriorating relations between the U.S. and Russia will only accelerate Russia’s efforts to diversify its reserves away from dollar assets (which can be frozen by the U.S. on a moment’s notice) to gold assets, which are immune to asset freezes and seizures.

The countdown to war with North Korea is underway, as I’ve explained repeatedly in these pages. A U.S. attack on the North Korean nuclear and missile weapons programs is likely by mid-2018.

Finally, we have to deal with our friends at the Fed. Good jobs numbers have given life to the view that the Fed will raise interest rates next month. The standard answer is that rate hikes make the dollar stronger and are a head wind for the dollar price of gold.

But I remain skeptical about a December hike. As I explained above, the market is looking in the wrong places for clues to Fed policy. Jobs reports are irrelevant; that was “mission accomplished” for the Fed years ago.

The key data are disinflation numbers. That’s what has the Fed concerned, and that’s why the Fed might pause again in December as it did last September.

We’ll have a better idea when PCE core inflation comes out Nov. 30.

Of course, the Fed’s main inflation metric has been moving in the wrong direction since January. The readings on the core PCE deflator year over year (the Fed’s preferred metric) were:

January 1.9%

February 1.9%

March 1.6%

April 1.6%

May 1.5%

June 1.5%

July 2017: 1.4%

August 2017: 1.3%

September 2017: 1.3%

Again, the October data will not be available until Nov. 30.

The Fed’s target rate for this metric is 2%. It will take a sustained increase over several months for the Fed to conclude that inflation is back on track to meet the Fed’s goal.

There’s obviously no chance of this happening before the Fed’s December meeting.

A weak dollar is the Fed’s only chance for more inflation. The way to get a weak dollar is to delay rate hikes indefinitely, and that’s what I believe the Fed will do.

And a weak dollar means a higher dollar price for gold.

Current levels look like the last stop before $1,300 per ounce. After that, a price surge is likely as buyers jump on the bandwagon, and then it’s up, up and away.

Why do I say that?

There’s an old saying that “a picture is worth a thousand words.” This chart is a good example of why that’s true:

Gold Breakout Chart

Gold analyst Eddie Van Der Walt produced this 10-year chart for the dollar price of gold showing that gold prices have been converging into a narrow tunnel between two price trends – one trending higher and one lower – for the past six years.

This pattern has been especially pronounced since 2015. You can see gold has traded up and down in a range between $1,050 and $1,380 per ounce. The upper trend line and the lower trend line converge into a funnel.

Since gold will not remain in that funnel much longer (because it converges to a fixed price) gold will likely “break out” to the upside or downside, typically with a huge move that disrupts the pattern.

At the extreme, this could imply a gold price on its way to $1,800 or $800 per ounce. Which will it be?

The evidence overwhelmingly supports the thesis that gold will break out to the upside. Central banks are determined to get more inflation and will flip to easing policies if that’s what it takes.

Geopolitical risks are piling up from North Korea, to Saudi Arabia, to the South China Sea and beyond.

The failure of the Trump agenda has put the stock market on edge and a substantial market correction may be in the cards. Acute shortages of physical gold have also set the stage for a delivery failure or a short squeeze.

Any one of these developments is enough to send gold soaring in response to a panic or as part of a flight to quality. The only force that could take gold lower is deflation, and that is the one thing central banks will never allow. The above chart is one of the most powerful bullish indicators I’ve ever seen.

Get ready for an explosion to the ups ide in the dollar price of gold. Make sure you have your physical gold and gold mining shares before the breakout begins.

http://WarMachines.com

The ‘Junkie’ Market Is Back

Via Dana Lyons' Tumblr,

The past few days have seen a reversal from substantial net New lows to substantial net New highs – a condition that has preceded poor performance in the past.

We’ve posted several pieces in the past regarding what we’ve termed “Junkie Markets” – junctures characterized by a substantial number of both New 52-Week Highs and New 52-Week Lows.

Such conditions represent a key component of various and notorious market warning signals, such as the Hindenburg Omen and others. As the ominous sounding names would imply, the historical stock market performance following such signals has been poor. We have found the same to be true with respect to our “Junkie Markets”. Today’s Chart Of The Day deals with a new variation of the Junkie Market.

Specifically, we have seen an unusual development over the past 2 days. On Wednesday, the number of net New Lows on the NYSE, i.e., New Lows minus New Highs, exceeded 2% of all exchange issues, a fairly large amount. The very next day, yesterday, conditions completely reversed as we saw net New NYSE Highs, i.e. New Highs minus New Lows, actually account for more than 2% of all issues. If you think that sounds strange, you’re correct. It is just the 15th such occurrence since the start of our data in 1970.

image

Here are the dates of these reversals:

3/25/1970
4/14/1972
7/11/1974
10/20/1977
1/2/2001
4/22/2004
5/11/2004
4/18/2006
6/28/2007
7/19/2007
9/19/2008
5/30/2013
10/10/2013
1/15/2015
11/16/2017

What would cause such a phenomenon? Well, the only thing we can offer is that a Junkie Market, i.e., one with lots of New Highs and Lows, is really the only type of market in which such a reversal is even possible. Thus, it should not be surprising that the S&P 500’s aggregate performance going forward following these precedents has been less than stellar (incidentally, aggregate performance is similar following the 19 occasions of the opposite reversals, i.e., >2% Net New Highs to >2% Net New Lows).

image

With median returns negative from 1 week to 6 months, this appears to be another version of the Junkie Market that, for whatever reason, has not been kind to stocks going forward. Obviously, the presence of signals near cyclical peaks in the early 1970’s as well as 2001 and 2007-2008 do not help the aggregate returns (average returns are even worse than median).

Now, not all signals have occurred at the beginning of cyclical bear markets. However, as the chart shows, one interesting observation is that all of the occurrences have occurred during secular bear markets (that is, of course, if one accepts that we are still within the confines of the post-2000 secular bear market, as is our view – that is a topic for another time, though). The point is that, if true, the ramifications may reinforce the negative tendencies associated with Junkie Markets.

The bottom line for now is that, while it is certainly possible that stocks can continue higher in the interim, this condition of elevated New Highs and New Lows is a potential unhealthy headwind in the longer-term.

*  *  *

If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

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Hunting Angels: What The World’s Most Bearish Hedge Fund Will Short Next

It's not easy being "the world's most bearish hedge fund", a description we first conceived nearly three years ago, and one look at Horseman Capital's returns over the past three years confirms it: after generating market-beating returns for much of its existence, things went bad in 2015, and much worse in 2016…

… when the Fund had a record net short equity position of over -100%, just as the market ripped higher after the Trump election.

That said, 2017 has been much better for Horseman and its CIO Russell Clark, who correctly timed the year's two big short trades so far: the mall REIT and the shale shorts.

Unfortunately, his other positions stood in the way, and as of the end of October (a good month with 2.04% in P&L), the fund is just 0.25% up on the year. Worse, after a period of calm, steady, upward grinding monthly performance for much of the previous several years, Horseman's sharpe ratio has cratered, as the monthly return variance surged, with a -6% month following two +7% months as a result of gross leverage that has never been higher, even if the net equity position – while still largely short – is far more manageable than it was in 2016.

Still, having been well ahead of the pack on the two big shorts of 2017, most money managers are always curious what if anything Clark – and Horseman – are shorting next. Well, they are in luck, because in his latest letter, he unveils the answer: according to Clark, the next major source of alpha will be shorting fallen angel bonds.

In his November letter to clients, Clark explains why he is hunting for soon to be "fallen angels", and where he got the idea from. And after more fund managers read the following excerpt, we have a feeling that the next big leg lower in not only junk, but also crossover credit, is imminent:

Mifid II will come into force soon, and a lot of research that used to be free, will need to be paid for. This has been a reason to ask ourselves some serious questions, namely what research do I read, and what has made me the most money. Strangely the research that has been most profitable for me, will remain free even post Mifid II as it is publicly available. The International Monetary Fund produces Global Financial Stability Reports. The stand out report for me was the April 2008 report that highlighted Eastern European banks vulnerability to wholesale funding. I shorted many of the banks named in the report. Most fell 70% to 90% subsequently.

 

What does the most recent issue of the Global Financial Stability Report have to say? It notes that BBB bonds now make up nearly 50% of the index of investment grade bonds, an all time high. BBB bonds are only one notch above high yield, and are at the greatest risk of becoming fallen angels, that is bonds that were investment grade when issued, but subsequently get downgraded to below investment grade, or what is known these days as high yield. It then points out that investors have never been more at risk of capital loss if yields were to rise. In addition, it notes volatility targeting investors will mechanically increase leverage as volatility drops, with variable annuities investors having little flexibility to deviate from target volatility. Another interesting point was that mutual fund share of the high yield market in the US have risen from 17% in 2008 to 30% today, and notes that investors outflows have become much more sensitive to losses than they used to be.

 

So my favourite research (love the price!) is telling me that US investment grade debt is very low quality, and could produce some large fallen angels. It then goes on to tell me that mutual funds are much larger in the high yield market than they used to be. It also tells me low rates means the capital losses are much higher than they used to be. And that investors in high yield mutual funds are much flightier than they used to be! Essentially the IMF are telling me that if you get a large enough fallen angel, the high yield market will freak out, and volatility will spike causing volatility targeting investors to dump leveraged positions. Sounds good to me – but with growth so good and the market so strong, how on earth would we get a fallen angel?

 

To find a potential fallen angel, I looked through the holdings of investment grade bond ETFs to find large BBB bond issuers. The biggest of the BBB issuers happened to be the large telecommunication companies. The sector has over USD300bn of BBB rated debt compared to a high-yield market of USD 1tn. I am not a debt specialist, but I have noticed that falling share prices tend to be good lead indicators on debt downgrades, and the US telecommunication sector has not been participating in the market rally this year. The story looks good to me, and it comes via my favourite research source. US debt markets look in trouble to me, whether that has any effect on broader equity markets remains to be seen.

Aside from this rather original idea, some other notable changes in Horseman's industry exposure are noted: while both the retail and E&P shorts are still there, they have been notably tamed, and of note are two other major shorts (both in the US): one in real estate (we assume this is a play on the adverse impact of rising rates on real estate valuations), and the healthcare sector, a short whose thesis is quite interesting and we will reveal tomorrow.

For those wondering, the top 10 positions by % of NAV are the following:

Needless to say, we wish Horseman much success with a prompt realization of his BBB-short, especially since it appears that his LPs are starting to get cold feet, and the fund's AUM has shrunk by half from $2.8 BN  one year ago…

… to less than half, or $1.2BN currently.

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Amazon-opoly: Jeff Bezos May Be About To Control $53 Billion In Federal Government Spending

Authored by Brian McNicoll via The Daily Caller,

Jeff Bezos spends a lot of time directing the newspaper he owns, The Washington Post, to criticize President Donald Trump in every way imaginable. But for some reason, the federal government cannot stop giving Amazon — the retail empire Bezos also owns — a slew of taxpayer-subsidized subsidies. Now, Congress is considering a new federal purchasing plan that could result in Amazon’s most lucrative government handout yet.

The technology giant is no stranger to sweetheart deals that line its pockets at taxpayer expense. The U.S. Postal Service, for instance — which has lost $60 billion since 2007 — handles last-mile shipping for two-thirds of Amazon’s deliveries. This means overtime for workers and a good incoming revenue number on the USPS’s balance sheet, but it’s a financial bonanza for Amazon.

According to media reports, USPS delivers Amazon packages for $2 per package — even though it costs USPS $3.46 per package to make these deliveries. And that’s before you get into the $200 million three years ago for 270,000 handheld scanners to process the packages or the $5 billion or more to replace USPS vehicles with ones better suited to carry Amazon’s packages.

But even this cozy arrangement pales in comparison to the deal Amazon is now trying to push through Congress.

Buried deep in this year’s defense spending bill is a provision that would move Defense Department purchases of commercial off-the-shelf products to online marketplaces.

A summary of the proposal, which was inserted into the legislation by House Armed Services Committee Chairman Mac Thornberry, argues it is needed to save money over the burdensome and expensive current system.

It pointed to a report from the Inspector General of the Government Services Administration that found some IT equipment could be purchased more cheaply on the open market than through the GSA’s “schedules.”

In response, the plan calls for developing an online marketplace platform through which federal agencies can buy products such as paper clips, bottled water, computers, office furniture and more — just as any business would do.

But it also calls for this platform to be designed to “enable government-wide use of such marketplaces.” This means the government is looking only for a procurement and supply management firm big enough to offer multiple suppliers for the same product with constantly changing selection and prices and serve the entire U.S. government.

That leaves just one likely possibility  – Amazon Business – for basically monopoly control of $53 billion in federal purchasing, much of the supplies for which comes from no-bid contracts.

Amazon provides a platform for e-companies to sell through to their own customers. It receives 15 percent to 20 percent of the proceeds from such sales, which means a huge revenue stream for Amazon for doing basically nothing while vendors are forced to cough up as much as half their margin.

A government deal with Amazon sets up opportunities for abuse, not to mention control over suppliers. Amazon would get to collect an enormous amount of data on agencies, which could be used to identify top competitors and drive them out of the federal marketplace with increased fees or other rules changes.

And it means any discounts that can be negotiated for the bulk rates of purchasing the federal government does would flow not to the government and taxpayers — but instead into Amazon’s pocket.

Amazon Business, which only started in 2015, already has 1 million customers and $1 billion in sales, and its revenues grew 34 percent in the last year. Adding federal procurement would effectively drive out all competitors for its business service.

It already is moving into position to do this at the local level. In January, Amazon signed a contract with U.S. Communities, a coalition of 90,000 local governments, to provide them with an online marketplace for office supplies and other goods.

The fate of the proposal is unknown. It is in the House version of the defense spending bill but not that of the Senate. This will be resolved in a conference committee, and one solution is to try it as a pilot project before committing the entire government to it.

There certainly ought to be a breathing period before yet another government agency signs yet another deal to use tax dollars to further enrich one of the richest men on the planet.

It’s beginning to get suspicious.

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Is America In Terminal Decline?

Authored by Raul Ilargi Meijer via The Automatic Earth blog,

John Rubino recently posted a graph from Bob Prechter’s Elliot Wave that points to some ominous signs. It depicts the S&P 500, combined with consumer confidence and savings rate. As the accompanying video at Elliott Wave, What “Too Confident to Save” Means for Stocks, shows, when the gap between high confidence and low savings is at its widest, a market crash -often- follows.

In 2000, the subsequent crash was 39%, in 2007 it was 54%. We are now again witnessing just such a gap, with the S&P 500 at record levels. Here’s the graph, with John’s comments:

Consumers Are Both Confident And Broke

Elliott Wave International recently put together a chart that illustrates a recurring theme of financial bubbles: When good times have gone on for a sufficiently long time, people forget that it can be any other way and start behaving as if they’re bulletproof. They stop saving, for instance, because they’ll always have their job and their stocks will always go up. Then comes the inevitable bust. On the following chart, this delusion and its aftermath are represented by the gap between consumer confidence (our sense of how good the next year is likely to be) and the saving rate (the portion of each paycheck we keep for a rainy day). The bigger the gap the less realistic we are and the more likely to pay dearly for our hubris.

John is mostly right. But not entirely. Not that I don’t think he knows, he simply forgets to mention it. What I mean is his suggestion that people stop saving because they’re confident, bullish. To understand where and why he slightly misses, let’s turn to Lance Roberts. Before we get to the savings, Lance explains why the difference between the Producer Price Index (PPI) and Consumer Price Index (CPI) is important to note.

Summarized, producer prices are rising, but consumer prices are not.

You Have Been Warned

There is an important picture that is currently developing which, if it continues, will impact earnings and ultimately the stock market. Let’s take a look at some interesting economic numbers out this past week. On Tuesday, we saw the release of the Producer Price Index (PPI) which ROSE 0.4% for the month following a similar rise of 0.4% last month. This surge in prices was NOT surprising given the recent devastation from 3-hurricanes and massive wildfires in California which led to a temporary surge in demand for products and services.

 

Then on Wednesday, the Consumer Price Index (CPI) was released which showed only a small 0.1% increase falling sharply from the 0.5% increase last month.

 

Such differences have real life consequences. In Lance’s words:

This deflationary pressure further showed up on Thursday with a -0.3% decline in Export prices. (Exports make up about 40% of corporate profits) For all of you that continue to insist this is an “earnings-driven market,” you should pay very close attention to those three data points above. When companies have higher input costs in their production they have two choices: 1) “pass along” those price increase to their customers; or 2) absorb those costs internally.

 

If a company opts to “pass along” those costs then we should have seen CPI rise more strongly. Since that didn’t happen, it suggests companies are unable to “pass along” those costs which means a reduction in earnings. The other BIG report released on Wednesday tells you WHY companies have been unable to “pass along” those increased costs.

 

The “retail sales” report came in at just a 0.1% increase for the month. After a large jump in retail sales last month, as was expected following the hurricanes, there should have been some subsequent follow through last month. There simply wasn’t. More importantly, despite annual hopes by the National Retail Federation of surging holiday spending which is consistently over-estimated, the recent surge in consumer debt without a subsequent increase in consumer spending shows the financial distress faced by a vast majority of consumers.

That already hints at what I said above about savings. But it’s Lance’s next graph, versions of which he uses regularly, that makes it even more obvious. (NOTE: I think he means to say 2009, not 2000 below)

The first chart below shows a record gap between the standard cost of living and the debt required to finance that cost of living. Prior to 2000(?!), debt was able to support a rising standard of living, which is no longer the case currently.

The cut-off point is 2009, unless I miss something in Lance’s comment. Before that, borrowing could create the illusion of a rising standard of living. Those days are gone.

And it’s very hard to see, when you take a good look, what could make them come back.

Not only are savings not down because people are too confident to save, they are down because people simply don’t have anything left to save. The American consumer is sliding ever deeper into debt. And as for the Holiday Season, we can confidently -there’s that word again- predict that spending will be disappointing, and that much of what is still spent will add to increasing Consumer Credit Per Capita, as well as the Gap Between Real Disposable Income (DPI) And Cost Of Living.

The last graph, which shows Control Purchases, i.e. what people buy most, a large part of which will be basic needs, makes this even more clear.

With a current shortfall of $18,176 between the standard of living and real disposable incomes, debt is only able to cover about 2/3rds of the difference with a net shortfall of $6,605. This explains the reason why “control purchases” by individuals (those items individuals buy most often) is running at levels more normally consistent with recessions rather than economic expansions.

If companies are unable to pass along rising production costs to consumers, export prices are falling and consumer demand remains weak, be warned of continued weakness in earnings reports in the months ahead. As I stated earlier this year, the recovery in earnings this year was solely a function of the recovering energy sector due to higher oil prices. With that tailwind now firmly behind us, the risk to earnings in the year ahead is dangerous to a market basing its current “overvaluation” on the “strong earnings” story.

“Prior to 2009, debt was able to support a rising standard of living..” Less than a decade later, it can’t even maintain the status quo. That’s what you call a breaking point.

To put that in numbers, there’s a current shortfall of $18,176 between the standard of living and real disposable incomes. In other words, no matter how much people are borrowing, their standard of living is in decline.

Something else we can glean from the graphs is that after the Great Recession (or GFC) of 2008-9, the economy never recovered. The S&P may have, and the banks are back to profitable ways and big bonuses, but that has nothing to do with real Americans in their own real economy. 2009 was a turning point and the crisis never looked back.

Are the American people actually paying for the so-called recovery? One might be inclined to say so. There is no recovery, there’s whatever the opposite of that is, terminal decline?!. It’s just, where does that consumer confidence level come from? Is that the media? Is The Conference Board pulling our leg? Is it that people think things cannot possibly get worse?

What is by now crystal clear is that Americans don’t choose to not save, they have nothing left to save. And that will have its own nasty consequences down the road. Let’s raise some rates, shall we? And see what happens?!

One consolation: Europe, Japan, China are in the same debt-driven decline that Americans are. We’re all going down together. Or rather, the question is who’s going to go first. That is the only hard call left. America’s a prime candidate.

http://WarMachines.com

Unbridled Exuberance…

Authored by James Stack via InvesTech.com,

From public confidence to bullish sentiment to the normally mundane employment data, the U.S. economy and stock market are reaching historic levels not seen in decades.  Last month, consumer confidence hit its highest level since December 2000.  The percentage of bullish investment advisors recently touched lofty levels that were last reached in January 1987.  And this month, the U.S. Department of Labor announced that job layoffs dropped to a 44-year low!

This might all sound like great news, and on the surface it obviously is.  But what is forgotten in today’s exuberant celebrations – and the above statistics – is that both the economy and stock market historically peak when skies are blue and no storm clouds are in sight: December 2000 was just 3 months before the start of the 2001 recession. January 1987 was 9 months before Black Monday struck. And 44 years ago (1973), the stock market was about to suffer its worst annual loss in 35 years! If the S&P 500 closes higher in November, it will have posted a positive total return for 13 consecutive months, surpassed only once in 90 years – 1959.  The next year (1960) the economy entered a recession.

We’re not sharing these insights because we have turned bearish in our market outlook.  We haven’t.  Most technical evidence and virtually all macroeconomic data still point to new bull market highs immediately ahead.  However, it is becoming increasingly important to remember that trees do not grow to the sky, and bull markets do not last forever.  And don’t forget that virtually every bear market except one (1956) has repossessed or taken back roughly one-half or more of the previous bull market’s gain. 

Today, that would equate to 8,500 DJIA points!

Unbridled Exuberance… While the Novice Make Merry, the Seasoned are Wary

One of the most apparent examples of investors’ increased appetite for risk lies in the “FANG” stocks.  These modern day “four horsemen” of technology and consumer stocks –Facebook, Amazon, Netflix, and Google– are considered leaders in the emergent areas of today’s economy.  Because of their outsized estimates for future growth, this narrow group of stocks has radically outperformed the S&P 500 since the beginning of 2015.

However, value-conscious investors have had difficulty justifying ownership of this speculative quartet due to valuation risk.

They trade at a combined P/E ratio of 48.5 based on trailing earnings – nearly twice that of the S&P 500.

Enthusiasm for the FANG stocks has reached such a feverish pitch that Wall Street is creating new products to tap into the public’s insatiable appetite for these exciting invest ments.  The four FANG stocks are joined by six other hot tech names to form the NYSE FANG+ Index.  Futures contracts on this Index began trading on the Intercontinental Exchange (ICE) last week.   Investors can now “Trade the Top of Tech” in the futures market to quickly increase or decrease their exposure to these speculative companies.

In past market tops of the late 1990s and 2007 we exposed the danger of investor and consumer exuberance along with the “boom” headlines that typically accompany a cyclical peak.  This is not an infallible relationship, however, so the appearance of the above headlines today does not necessarily mean the market top is in place.  Rather, it reinforces the need to maintain professional skepticism and an emphasis on risk management, which can be in short supply at this stage in the market cycle.

Nowhere is the bullish consensus more obvious than in the Advisors Sentiment Survey tracked by Investors Intelligence (graph below).  While the percentage of bears is typically considered a more reliable contrarian indicator at extreme readings, we find it interesting to note that the percentage of bullish advisors recently hit the highest level since January 1987 – only nine months before the 1987 Crash…

Valuation risk remains an overarching concern for today’s aging bull market.  Although the leading economic evidence remains overwhelmingly positive, U.S. stocks are not cheap by historical standards.  The current P/E ratio of the S&P 500 based on trailing earnings is 24.8, which is well above the 90-year average, as shown in the graph below. 

How expensive is the S&P 500 today?  The P/E for this popular Index has exceeded 24.0 just over 10% of the time since 1928, as shown by the dark blue bars on the graph at right.  The light blue bars eliminate the distortions from the Technology Bubble of the late 1990s and the Financial Crisis in 2008-09 when corporate earnings evaporated.  If we exclude those extreme periods, the S&P 500 P/E ratio has been in the rarified range above 24.0 less than 3% of the time. 

Lofty valuations do not cause bear markets, and stocks can remain overvalued for very long periods of time.  However, high valuations increase downside risk and diminish the margin of safety so essential to successful long-term investing.  Consequently, it is particularly important now to employ a safety-first strategy and avoid overvalued momentum stocks, as they will undoubtedly fall the hardest when a bear market does arrive. 

A Potential Warning in the Technical Evidence…

Sometimes it’s striking how quickly the technical picture can shift in an aging bull market.  Take the three graphs below, for instance.  When we last published this trio of charts in early October, all three were hitting new highs in unison.   Now both the Dow Jones Transportation Average (DJTA) and the small-cap Russell 2000 Index are starting to diverge substantially from the blue chip DJIA, which is sitting just below its recent all-time high.

Major peaks in the DJIA are usually preceded by a top in one or more of the economicallysensitive secondary indexes, but not every divergence necessarily signals trouble ahead.

When both the secondary indexes shown here diverge simultaneously, however, it’s a significant development, and time for heightened vigilance.

NLC:  Is Distribution Imminent?

Our Negative Leadership Composite (NLC) shown below remains steadfast on the surface with the bullish “Selling Vacuum” [*1] at +4 and no visible sign of “Distribution” [*2 – shaded region]…  yet! 

Even so, careful analysis of the underlying leadership data since mid-October shows a steady deterioration in the internal numbers.

Sometimes it’s striking how quickly the technical picture can shift in an aging bull market.  Take the three graphs at right, for instance.  When we last published this trio of charts in early October, all three were hitting new highs in unison.   Now both the Dow Jones Transportation Average (DJTA) and the small-cap Russell 2000 Index are starting to diverge substantially from the blue chip DJIA, which is sitting just below its recent all-time high.

Major peaks in the DJIA are usually preceded by a top in one or more of the economically-sensitive secondary indexes, but not every divergence necessarily signals trouble ahead. 

When both the secondary indexes shown here diverge simultaneously, however, it’s a significant development, and time for heightened vigilance.

Selling pressure is stealthily creeping upward, and it appears to be broad-based. If the current trend continues, we could start to see Distribution in our NLC by the time our December issue goes to press.  If Distribution appears and subsequently drops below -50, then bear market risk will become elevated and that could warrant a more defensive stance

 

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