Tag: Economy (page 1 of 106)

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.

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

We’re Living In The Age Of Capital Consumption

Authored by Ronald-Peter Stöferle via The Mises Institute,

When capital is mentioned in the present-day political debate, the term is usually subject to a rather one-dimensional interpretation: Whether capital saved by citizens, the question of capital reserves held by pension funds, the start-up capital of young entrepreneurs or capital gains taxes on investments are discussed – in all these cases capital is equivalent to “money.” Yet capital is distinct from money, it is a largely irreversible, definite structure, composed of heterogeneous elements which can be (loosely) described as goods, knowledge, context, human beings, talents and experience. Money is “only” the simplifying aid that enables us to record the incredibly complex heterogeneous capital structure in a uniform manner. It serves as a basis for assessing the value of these diverse forms of capital.

Modern economics textbooks usually refer to capital with the letter “C”. This conceptual approach blurs the important fact that capital is not merely a single magnitude, an economic variable representing a magically self-replicating homogenous blob but a heterogeneous structure. Among the various economic schools of thought it is first and foremost the Austrian School of Economics, which stresses the heterogeneity of capital. Furthermore, Austrians have correctly recognized, that capital does not automatically grow or perpetuate itself. Capital must be actively created and maintained, through production, saving, and sensible investment.

Moreover, Austrians emphasize that one has to differentiate between two types of goods in the production process: consumer goods and capital goods. Consumer goods are used in immediate consumption – such as food. Consumer goods are a means to achieve an end directly. Thus, food helps to directly achieve the end of satisfying the basic need for nutrition. Capital goods differ from consumer goods in that they are way-stations toward the production of consumer goods which can be used to achieve ultimate ends. Capital goods therefore are means to achieve ends indirectly. A commercial oven (used for commercial purposes) is a capital good, which enables the baker to produce bread for consumers. 

Through capital formation, one creates the potential means to boost productivity. The logical precondition for this is that the production of consumer goods must be temporarily decreased or even stopped, as scarce resources are redeployed toward the production of capital goods. If current production processes generate only fewer or no consumer goods, it follows that consumption will have to be reduced by the quantity of consumer goods no longer produced. Every deepening of the production structure therefore involves taking detours.

Capital formation is therefore always an attempt to generate larger returns in the long term by adopting more roundabout methods of production. Such higher returns are by no means guaranteed though, as the roundabout methods chosen may turn out to be misguided. In the best case only those roundabout methods will ultimately be continued, which do result in greater productivity. It is therefore fair to assume that a more capital-intensive production structure will generate more output than a less capital-intensive one. The more prosperous an economic region, the more capital-intensive its production structure is. The fact that the generations currently living in our society are able to enjoy such a high standard of living is the result of decades or even centuries of both cultural and economic capital accumulation by our forebears.

Once a stock of capital has been accumulated, it is not destined to be eternal. Capital is thoroughly transitory, it wears out, it is used up in the production process, or becomes entirely obsolete. Existing capital requires regularly recurring reinvestment, which can usually be funded directly out of the return capital generates. If reinvestment is neglected because the entire output or more is consumed, the result is capital consumption.

It is not only the dwindling understanding of the nature of capital that leads us to consume it without being aware of it. It is also the framework of the real economy which unwittingly drives us to do so. In 1971 money was finally cut loose entirely from the gold anchor and we entered the “paper money era.” In retrospect, it has to be stated that cutting the last tie to gold was a fatal mistake. Among other things, it has triggered unprecedented instability in interest rates. While interest rates displayed relatively little volatility as long as money was still tied to gold, they surged dramatically after 1971, reaching a peak of approximately 16 percent in 1981 (10-year treasury yield), before beginning a nosedive that continues until today. This massive decline in interest rates over the past 35 years has gradually eroded the capital stock.

An immediately obvious effect is the decline in so-called “yield purchasing power”. The concept describes what the income from savings, or more precisely the interest return on savings, will purchase in terms of goods. The opportunity to generate interest income from savings has of course decreased quite drastically. Once zero or even negative interest rate territory is reached, the return on saved capital is obviously no longer large enough to enable one to live from it, let alone finance a reasonable standard of living. Consequently, saved capital has to be consumed in order to secure one's survival. Capital consumption is glaringly obvious in this case.

It is beyond question that massive capital consumption is taking place nowadays, yet not all people are affected by it to the same extent. On the one hand, the policy of artificially reducing the interest as orchestrated by the central banks does negatively influence the entrepreneurs’ tasks. Investments, especially capital-intensive investments seem to be more profitable as compared to a realistic, i. e. non-interventionist level, profits are thus higher and reserves lower. These and other inflation-induced errors promote capital consumption.

On the other hand, counteracting capital consumption are technological progress and the rapid expansion of our areas of economic activity into Eastern Europe and Asia in recent decades, due to the collapse of communism and the fact that many countries belatedly caught up with the monetary and industrial revolution in its wake. Without this catching-up process it would have been necessary to restrict consumption in Western countries a long time ago already.

At the same time, the all-encompassing redistributive welfare state, which either directly through taxes or indirectly through the monetary system continually shifts and reallocates large amounts of capital, manages to paper over the effects of capital consumption to some extent. It remains to be seen how much longer this can continue. Once the stock of capital is depleted, the awakening will be rude. We are certain, that gold is an essential part of any portfolio in this stage of the economic cycle.

 

http://WarMachines.com

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.

http://WarMachines.com

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.

 

http://WarMachines.com

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.
 

http://WarMachines.com

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!

http://WarMachines.com

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

 

http://WarMachines.com

The Great Retirement Con

Authored by Adam Taggart via PeakProsperity.com,

Frankly put: retirement is now a myth for the majority…

 

The Origins Of The Retirement Plan

Back during the Revolutionary War, the Continental Congress promised a monthly lifetime income to soldiers who fought and survived the conflict. This guaranteed income stream, called a "pension", was again offered to soldiers in the Civil War and every American war since.

Since then, similar pension promises funded from public coffers expanded to cover retirees from other branches of government. States and cities followed suit — extending pensions to all sorts of municipal workers ranging from policemen to politicians, teachers to trash collectors.

A pension is what's referred to as a defined benefit plan. The payout promised a worker upon retirement is guaranteed up front according to a formula, typically dependent on salary size and years of employment.

Understandably, workers appreciated the security and dependability offered by pensions. So, as a means to attract skilled talent, the private sector started offering them, too. 

The first corporate pension was offered by the American Express Company in 1875. By the 1960s, half of all employees in the private sector were covered by a pension plan.

Off-loading Of Retirement Risk By Corporations

Once pensions had become commonplace, they were much less effective as an incentive to lure top talent. They started to feel like burdensome cost centers to companies.

As America's corporations grew and their veteran employees started hitting retirement age, the amount of funding required to meet current and future pension funding obligations became huge. And it kept growing. Remember, the Baby Boomer generation, the largest ever by far in US history, was just entering the workforce by the 1960s.

Companies were eager to get this expanding liability off of their backs. And the more poorly-capitalized firms started defaulting on their pensions, stiffing those who had loyally worked for them.

So, it's little surprise that the 1970s and '80s saw the introduction of personal retirement savings plans. The Individual Retirement Arrangement (IRA) was formed by the Employee Retirement Income Security Act (ERISA) in 1974. And the first 401k plan was created in 1980.

These savings vehicles are defined contribution plans. The future payout of the plan is variable (i.e., unknown today), and will be largely a function of how much of their income the worker directs into the fund over their career, as well as the market return on the fund's investments.

Touted as a revolutionary improvement for the worker, these plans promised to give the individual power over his/her own financial destiny. No longer would it be dictated by their employer.

Your company doesn't offer a pension? No worries: open an IRA and create your own personal pension fund.

Afraid your employer might mismanage your pension fund? A 401k removes that risk. You decide how your retirement money is invested.

Want to retire sooner? Just increase the percent of your annual income contributions.

All this sounded pretty good to workers. But it sounded GREAT to their employers.

Why? Because it transferred the burden of retirement funding away from the company and onto its employees. It allowed for the removal of a massive and fast-growing liability off of the corporate balance sheet, and materially improved the outlook for future earnings and cash flow.

As you would expect given this, corporate America moved swiftly over the next several decades to cap pension participation and transition to defined contribution plans.

The table below shows how vigorously pensions (green) have disappeared since the introduction of IRAs and 401ks (red):

(Source)

So, to recap: 40 years ago, a grand experiment was embarked upon. One that promised US workers: Using these new defined contribution vehicles, you'll be better off when you reach retirement age.

Which raises a simple but very important question: How have things worked out?

The Ugly Aftermath

America The Broke

Well, things haven't worked out too well.

Three decades later, what we're realizing is that this shift from dedicated-contribution pension plans to voluntary private savings was a grand experiment with no assurances. Corporations definitely benefited, as they could redeploy capital to expansion or bottom line profits. But employees? The data certainly seems to show that the experiment did not take human nature into account enough – specifically, the fact that just because people have the option to save money for later use doesn't mean that they actually will.

First off, not every American worker (by far) is offered a 401k or similar retirement plan through work. But of those that are, 21% choose not to participate (source).

As a result, 1 in 4 of those aged 45-64 and 22% of those 65+ have $0 in retirement savings (source). Forty-nine percent of American adults of all ages aren't saving anything for retirement.

In 2016, the Economic Policy Institute published an excellent chartbook titled The State Of American Retirement (for those inclined to review the full set of charts on their website, it's well worth the time). The EPI's main conclusion from their analysis is that the switchover of the US workforce from defined-benefit pension plans to self-directed retirement savings vehicles (e..g, 401Ks and IRAs) has resulted in a sizeable drop in retirement preparedness. Retirement wealth has not grown fast enough to keep pace with our aging population.

The stats illustrated by the EPI's charts are frightening on a mean, or average, level. For instance, for all workers 32-61, the average amount saved for retirement is less than $100,000. That's not much to live on in the last decades of your twilight years. And that average savings is actually lower than it was back in 2007, showing that households have still yet to fully recover the wealth lost during the Great Recession.

But mean numbers are skewed by the outliers. In this case, the multi-$million households are bringing up the average pretty dramatically, making things look better than they really are. It's when we look at the median figures that things get truly scary:

Nearly half of families have no retirement account savings at all. That makes median (50th percentile) values low for all age groups, ranging from $480 for families in their mid-30s to $17,000 for families approaching retirement in 2013. For most age groups, median account balances in 2013 were less than half their pre-recession peak and lower than at the start of the new millennium.

(Source)

The 50th percentile household aged 56-61 has only $17,000 to retire on. That's dangerously close to the Federal poverty level income for a family of two for just a single year.

Most planners advise saving enough before retirement to maintain annual living expenses at about 70-80% of what they were during one's income-earning years. Medicare out-of-pocket costs alone are expected to be between $240,000 and $430,000 over retirement for a 65-year-old couple retiring today.

The gap between retirement savings and living costs in one's later years is pretty staggering:

  • Nearly 83% of retired households have less saved than Medicare costs alone will consume.
  • One-third of retired households are entirely dependent on Social Security. On average, that's only $1,230 per month a hard income to live on. (source)
  • 34 percent of older Americans depend on credit cards to pay for basic living expenses such as mortgage payments, groceries, and utilities. (source

As for Medicare, the out-of-pocket costs could easily soar over retirement. The Wall Street Journal reports that the current estimate of Medicare's unfunded liability now tops $42 Trillion. Such a mind-boggling gap makes it highly likely that current retirees will not receive all of the entitlements they are being promised.

And the denial being shown by baby boomers entering retirement is frightening. Many simply plan to work longer before retiring, with a growing percentage saying they plan to work "forever". 

But the data shows that declining health gives older Americans no choice but to leave the work force eventually, whether they want to or not. Years of surveys by the Employment Benefit Research Institute show that fully half of current retirees had to leave the work force sooner than desired due to health problems, disability, or layoffs.

Add to this the nefarious impact of the Federal Reserve's prolonged 0% interest rate policy, which has made it extremely hard for retirees with fixed-income investments to generate a meaningful income from them.

The number of Americans aged 65 years and older is projected to more than double in the next 40 years:

Will the remaining body of active workers be able to support this tsunami of underfunded seniors? Don't bet on it.

Especially since their retirement savings prospects are even more dim. With long-stagnant real wages and punishing price inflation in the cost of living, Generation X and Millennials are hard-pressed to put money away for their twilight years:

(Source)

Public Pensions: Broken Promises

And for those "lucky" folks expecting to enjoy a public pension, there's a lot of uncertainty as to whether they're going to receive all they've been promised.

Due to underfunded contributions, years of portfolio under-performance due to the Federal Reserve's 0% interest rate policy, poor fund management, and other reasons, many of the federal and state pensions are woefully under-captialized. The below chart from former Dallas Fed advisor Danielle DiMartino-Booth shows how the total sum of unfunded public pension obligations exploded from $292 billion in 2007 to $1.9 trillion by the end of 2016:

(Source)

And the daily headlines of failing state and local pension funds (Illinois, Kentucky, New JerseyDallas, Providence — to name but a few) show that the problem is metastasizing across the nation at an accelerating rate.

Affording Your Future

The bottom line when it comes to retirement is that you're on your own. The vehicles and the promises you've been given are proving woefully insufficient to fund the "retirement" dream you've been sold your whole life.

That's the bad news.

But the good news is that the dream is still attainable. There are strategies and behaviors that, if adopted now, will make it much more likely for you to be able to afford to retire — and in a way you can enjoy.

In Part 2: Success Strategies For Retirement, we detail out these best practices for a solvent retirement, including providing 14 specific action steps you can start taking right now in your life that will materially improve your odds of enjoying your later years with grace. For far too many Americans, "retirement" will remain a perpetual myth. Don't let that happen to you. Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

 

http://WarMachines.com

The Economist Magazine Remains Confused On Zimbabwe Inflation

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Economist magazine remains confused. The November 4th issue of The Economist carried reportage on the ever-more acute economic disaster that grips Zimbabwe: “Surviving under Mugabe: Zimbabwe’s Deepening Crisis.” While the broad outlines of this reportage are correct, one reported “fact” in particular is simply wrong — a real howler that any good fact checker should have flagged as an error to be corrected. The Economist writes: “…hyperinflation that peaked at 500,000,000,000%.” Well, that’s a big number. But, it is way off – way too low. The actual peak of Zimbabwe’s hyperinflation episode generated an annual rate of inflation of 89,700,000,000,000,000,000,000%— a figure I and my team at Johns Hopkins estimated, and one that is widely recognized in the scholarly literature on hyperinflation. The Economist error, which they have repeated again and again, is huge: 89.7 sextillion percent is 179 billion times greater than the figure presented as a “fact” by The Economist

I pointed this out most recently in my Forbes Column of November 14th. In “response,” The Economist had this to say about Zimbabwe’s hyperinflation: “Inflation reached 500 billion percent, according to the IMF, or 89.7 sextillion percent, according to Steve Hanke of Johns Hopkins University. (Measuring hyperinflation is hard.)”

The Economist should receive an “E” for effort, but remains confused and in error; the magazine is comparing apples to oranges. The 500 billion percent figure from the IMF is for the end of September. My 89.7 sextillion percent figure is for the peak, which occurred on November 14th. This November date is a month-and-a-half later than the September date, on which the IMF made its estimate. 

The Economist claims that the IMF estimate and mine are comparable numbers. What nonsense — a simple oranges vs. apples problem. Moreover, The Economist’s claim that “measuring hyperinflation is hard,” is unfounded. After suitable study and preparation, measuring hyperinflation accurately is actually rather straightforward. At present, my team at Johns Hopkins calculates Venezuela’s and Zimbabwe’s annual inflation rates each morning. 

http://WarMachines.com

Stockman Slams “The Awesome Recovery” Narrative

Authored by David Stockman via Contra Corner blog,

One of the great philosophers of recent times was surely Sgt. Easterhaus of "Hill Street Blues". As he assigned his men to their daily rounds in the crime infested streets of the Big Apple he always ended the precinct's morning call with his signature admonition:

"Let's be carful out there."

That wisdom has been long lost on both ends of the Acela Corridor. In the face of blatant dangers and even existential threats, their denizens whistle past the graveyard with alacrity. So doing, they turn a blind eye on virtually all that contradicts the awesome recovery narrative, the indispensable nation conceit and the Washington can Make America Great Again (MAGA) delusion, among countless other fantasies.

For example, the GOP should be literally petrified by an horrid fiscal scenario for the coming decade that entails Social Security going bust, another $12 trillion of current policy deficits and a prospective $33 trillion public debt by 2027. And even that presupposes a macro-economic miracle in the interim: Namely, a 207 month stretch from 2009 to 2027 without a recession—–a feat which is twice the longest expansion in recorded history

Image result for images of three monkeys of see no evil, hear no evil, speak no evil

Instead, they have passed a FY 2018 budget resolution which implicitly embraces all of the above fiscal mayhem, and then adds upwards of $2 trillion (so far and counting interest) of incremental deficits to fund an ill-designed tax cut that is inherently an economic dud and political time bomb.

As to the former, the GOP is lost in ritual incantation and foggy Reagan-era nostalgia. Unlike the giant Reagan tax cut of 1981, the pending bills do not cut marginal tax rates measurably—or even the individual income tax burden in any meaningful sense.

In fact, if you set aside the so-called pass-thru rate for unincorporated businesses (see below), the entire 10-year tax cut on the individual side amounts to just $480 billion. In the scheme of things, that's a tiny number; it represents only 2.2% of the $22 trillion CBO baseline for individual income tax collections over the next decade; and it also is equal to just 0.2% of the projected nominal GDP over the period.

By way of comparison, the Reagan tax cut amounted to 6.2% of GDP when fully effective; and the net cut for individuals taxpayers alone averaged 2.7% of GDP over a decade. In today's economy, that would amount to a tax cut of $6.5 trillion during 2018-2027 or 14X more than the $450 billion net figure estimated by the Joint Committee on Taxation.

To be sure, the abused citizens of America are more than entitled to even this tiny tax cut and much more. That is, if their elected representatives were willing to cut spending by an equal amount or even raise alternative, more benign sources of revenue (i.e. a VAT on consumers vs. the current levy on producer and worker incomes). But unless a rapidly aging society wishes to bury itself in unsupportable public debt, it simply can't afford deficit-financed tax cuts for either the principle or the politics of the thing.

Moreover, to pretend that the tax concoction fashioned by Congressman Brady—- with a pack of Gucci Gulch jackals nipping at his heels— will actually generate enough growth and jobs to largely pay for itself is to make a mockery of Sgt. Easterhaus' admonition. Rather than an exercise in fiscal carefulness, it is the height of recklessness to assume that much enhanced domestic growth, employment and Treasury receipts will result from any part of the $2.8 trillion cut for the rich and corporations that is at the heart of the GOP tax bill.

Actually, it's the heart and then some. With recent modifications (including dropping of the $150 billion corporate excise tax intended to prevent companies from hiding domestic profits via over-invoicing of imports from their own affiliates), the net revenue loss of the Brady bill is calculated at about $1.7 trillion.

That means, of course, that fully 165% of the net tax cut goes to: (1) 5,500 dead rich people's heirs per year ($172 billion for estate tax repeal); (2) 4.3 million very wealthy loophole users ($700 billion for the minimum tax repeal); and (3) the top 1% and 10% of households who own 60% and 85% of business equities, respectively, who will get most of the $1.95 trillion of business rate cuts.

In this context, we cannot stress more insistently that Art Laffer's famous napkin does not apply to business tax cuts in today's world of globalized trade and labor rates and artificially cheap central bank enabled debt and capital.

That's because the business income taxes are born by owners, not workers. The wage rates and incomes of the latter are determined in a saturated global labor market where the China Price for Goods and the India Price for internet based services sets wages on the margin.

At the same time, owners are not deterred from making investments by the proverbial "high after-tax cost of capital". That's because it isn't.

Even at the current statutory 35% tax rate (which few pay), the absolute cost of equity and debt capital is cheaper than ever before in modern history.

In fact, the after-tax cost of equity to scorched earth investment juggernauts like Amazon is virtually zero, while the cheap debt-fueled boom in conventional plant, equipment, mining, shipping and distribution assets over the last two decades has stocked the planet with sufficient capacity for decades to come.

In short, if you lower the business tax rates to 20% and 25% for corporations and pass-thrus, respectively, you will get more dividends, more stock buybacks and other returns to shareholders. Those distributions, in turn, will go to the very wealthy and to pension funds/non-profits. The latter will pay no taxes on these distributions while the former will pay 15%-20% at current law rates of o%, 15% and 20% on capital gains and dividends, which the Brady bill does not change.

In short, maybe the $2.8 trillion of tax cuts for business and the wealthy will generate a few hundred billion of reflows over the decade. And even that will not be attributable to the "incentive effect" of the Laffer Curve at all; it's just tax collection mechanics at work as between the personal and business taxing systems.

By the same token, the Sgt. Easterhaus principle is also being ash-canned by the GOP on the politics side of the tax bill, as well. In fact, Republicans have been chanting the "tax cut" incantation for so many decades that they apparently can't see the obvious. Namely, that among the middle quintile of households (about 30 million filers between $55,000 and $93,000 of AGI) the ballyhooed "tax cut" will actually be a crap shoot.

When fully effective, roughly two-thirds of filers (20 million units) would realize a $1,070 per year tax cut, while another 31% (roughly 9.5 million filers) would experience a $1,150 tax increase!

That's a whole lot of rolling dice—-depending upon family size, sources of income and previous use of itemized deductions. Yet for the heart of the middle class as a whole—-30 million filers in the aforementioned income brackets—the statistical average tax cut would amount to $6.15 per week.

That's right. Two Starbucks cappuccinos and a banana!

So we'd call the GOP's noisy advertising of a big tax cut for the middle class reckless, not careful. Indeed, the Dems will spend hundreds of millions during the 2018 election season on testimonials and tax tables which prove the GOP's claim is a pure con job.

They will also prove the opposite— that the overwhelming share of this unaffordable tax cut is going to the top of the economic ladder. After all, the income tax has morphed into a Rich Man's Levy over the last three decades. So if you cut income taxes—-the benefits inherently and mechanically go to the few who actually pay.

Thus, in the most recent year (2015), 150.5 million Americans filed for income taxes, but just 6.8 million filers (4.5% of the total) accounted for 35% of all AGI ($3.6 trillion) and 59% of taxes paid ($858 billion).

By contrast, the bottom 64 million filers reported only $928 billion of AGI, and paid just 2.2%  ($20 billion) in taxes. That is, owing to the standard deduction, personal exemptions and various credits the bottom 44% of taxpayers accounted for only 1.4% of personal income tax collections.

Even when you widen the bracket to the bottom 123 million tax filers (82%), you get $4.3 trillion of AGI and just $284 billion of taxes paid. In other words, the bottom four-fifths of filers pay only 6.6% of their AGI in tribute to Uncle Sam. They may not be getting their money's worth from the Washington puzzle palaces, but you can't get blood from a turnip, either.

In short, Flyover America desperately needs tax relief for the 160 million workers who actually do pay up to 15.5% of their wages in employer/employee payroll tax deductions. Yet by ignoring the $1.1 trillion per year payroll tax entirely and recklessly and risibly claiming that its income and corporate tax cut bill materially aids the middle class, the GOP is only setting itself up for a thundering political backlash.

Nothing makes this clearer than some recent (accurate) calculations by a left-wing outfit called the Institute for Policy Studies that boil down to the proposition that "It Takes A Baseball Team".

That is, the top 25 US persons (like the full MLB roster) on the Forbes 400 list now report about $1 trillion in collective net worth. That happens to match the net worth of the bottom 180 million (56%) Americans.

Needless to say, that egregious disproportion does not represent free market capitalism at work; it's the deformed fruit of Bubble Finance and the vast inflation of financial assets that the Fed and other central banks have enabled over the past three decades.

In terms of the Sgt. Easterhaus metaphor, monetary central planning has planted some exceedingly dangerous political time bombs in the precincts, neighborhoods, towns and cities of Flyover America. Accordingly, if the GOP succeeds in passing some version of its current tax bill, it may be what finally brings the Dems back into power on an out-and-out platform of socialist healthcare (single payor) and tax redistributionism with malice aforethought.

Even as the GOP recklessly plunges forward with gag rules and its sight unseen legislative steamroller (echoes of ObamaCare in 2010), it will never be able to hide what is buried in the bill's tax tables. Namely, an average tax cut for the top 1%—even after accounting for elimination of upwards of $1.3 trillion of itemized deductions—-that would amount to $1,000 per week.

Moreover, for the top o.1% (150,000 filers), the Dem campaign ads will show a cut of $5,300 per week; and for a subset of 100,000 of the top 0.1% filers, the GOP's tax cut would amount to $11,300 per week .

That's right. Each and every one of the very ultra rich would get a tax break equivalent to that which would accrue to every 2,000 middle bracket filers under the Brady bill.

As Sgt. Easterhaus might have said: They have been warned!

Meanwhile, at the other end of the Acela Corridor, the good precinct sergeant gets no respect, either. Indeed, gambling in today's hideously over-valued and unstable casino is exactly the opposite of being careful; it's certain to lead to severe—even fatal—financial injuries on the beat.

In this context, we have been saying right along that the essential evil of monetary central planning is that it systematically falsifies asset prices and corrupts all financial information. That includes what passes for analysis by the Cool Aid drinkers in the casino.

But when we ran across this gem from one Steve Chiavarone yesterday we had to double check because we thought perhaps we were inadvertently reading The Onion.

But, no, he's actually a paid in full (and then some) portfolio manager at the $360 billion Federated Investors group who appeared on CNBC, and then got reported by Dow-Jones' MarketWatch just in case you had the sound turned off during his appearance on bubblevision.

So here's how the bull market will remain "alive for another decade." According to Chiavarone, millenials who don't have two nickels to rub together will make it happen. No sweat.

“Millennials are entering the workforce, but their wages are going to be under pressure their whole career,” he explained to CNBC’s “Trading Nation” on Friday. “They won’t make enough money to pay down their debt, fund their life and fund retirement where there is no pension. So, they’re going to need equities.”

Then again, aspiration and capability are not exactly the same thing. In fact, the frequent yawning difference between the two puts us in mind of the Donald's characterization of his primary opponent as Little Marco Rubio. The latter never stops talking about himself as the very embodiment of the American Dream come true—-so for all we know perhaps Marco did aspire to be an NBA star.

But when he famously couldn't reach his water bottle from atop a stool during his nationwide TV rebuttal of an Obama SOTU speech a few years back, it was evident that NBA stardom wasn't ever meant to be.

Nor during the coming decade of stagnant wages and rising interest rates is it any more obvious how millennials will beg, borrow or steal their way to massive purchases of equities. That is, how they will finance what will actually be an avalanche of stock sales by 80 million fading baby boomers who will need the proceeds to pay their nursing home bills.

But never mind. MarketWatch caught the full measure of  what shines on the inside of Mr. Chiavarone's financial beer goggles:

 The risk is not being in this market,” says Chiavarone, who helps run the Federated Global Allocation Fund. The firm’s current price target is for 2,750 on the S&P by the end of next year and 3,000 for 2019.

 

“We are probably frankly low on both of them,” he said. “Tax reform could push up the markets.” That’s not to say there won’t be some pain along the way, specifically the potential for a recession in 2020 and 2021, according to Chiavarone.

 

What’s an investor to do in that case? “Buy the recession,” he said.

Indeed, it doesn't come any stupider than the market blather that is constantly published on MarketWatch. Today it also informs us that not only have US earnings been galloping forward in recent quarters, but its actually a global trend:

However, this is hardly a U.S.-only story. Corporate earnings have been improving globally, and some of the fastest growth has come from international companies, as seen in the following chart from BlackRock, which looks at U.S. growth against the globe, excluding the U.S.

The chart below is supposed to be the evidence, but we are still scratching our heads looking for the point. It seems that global corporate earnings ex-US based companies have surged…..all the way back to where they were in 2011!

You can't make this stuff up. Did these geniuses notice that China just went full retard in credit expansion to insure that the coronation of Mr. Xi was the greatest since, apparently, the Ming Dynasty invited the civilized world (not Europe) to the coronation of its fourth emperor in 1424?

In fact, the 19th Party Congress is now over, and the Red Suzerains of Beijing are back to the impossible task of reining in the massive malinvestment, housing, debt and construction bubbles which have turned China's economy into a $40 trillion powder keg. So right on cue it reported a sharp cooling of its red hot pre-coronation economy last night.

Thus, value-added industrial output, a rough proxy for GDP, expanded by just 6.2% in October compared to double digit increases a few months back.

Likewise, fixed-asset investment climbed 7.3% in the January-October period from a year earlier. Notably, that's way down from high double digit rates during most of the century, and, in fact, is the slowest pace since December 1999.

Needless to say, the latter data point amounts to a clanging clarion. At the end of the day, the ballyhooed Chinese growth miracle is really a story of construction and debt-fueled asset investment gone wild. And that party is now over.

So whatever Sgt. Easterhaus actually meant during the seven seasons of "Hill Street Blues" which always started with his famous admonition, we are quite sure that today it would not have meant buying the dips in a casino that is rife with unprecedented danger.

Finally, when it comes to real danger we think the most precarious spot along the Acela Corridor is about one mile from Union Station. We are speaking, of course, of the Oval Office and the Donald's questionable tenure therein.

Even as he meandered around Asia double-talking about trade and basking in the royal reception put on by his duplicitous hosts in Tokyo, Seoul and most especially Beijing, the Donald did manage to hit a fantastic bull-eye stateside.

Indeed, his takedown of the three stooges—Brennan, Clapper and Comey—–of the Deep State's spy apparatus will be one for the ages. Not since Jimmy Carter has a president even vaguely admonished the intelligence agencies, but as it his wont, the Donald held nothing back—naming names and drop-kicking backsides good and hard:

“And then you hear it’s 17 agencies. Well, it’s three. And one is Brennan and one is whatever. I mean, give me a break. They’re political hacks. So you look at it — I mean, you have Brennan, you have Clapper, and you have Comey. Comey is proven now to be a liar and he’s proven to be a leaker,” Trump told the reporters on Air Force One…..   

Yes, the next day he backed away in what appeared to be a pro forma nod to be his own courage-challenged appointees.

We don't think so, however.

Image result for picture of brennan, comey and clapper in prison uniforms

The truth is, the Deep State is already in the precinct house. And Sgt. Easterhaus is talking to the wall.

 

http://WarMachines.com

Moody’s Boosts Modi: India Gets First Sovereign Credit Upgrade Since 2004

Moody’s upgrade to India’s credit rating comes as a much-needed boost for India’s Prime Minister, Narendra Modi, who has been criticised for the fallout from the goods and services tax (GST) and demonetisation reforms. Indeed, Moody’s argued that Modi’s reforms will help to stabilize India’s rising debt levels. According to Reuters.

Moody's Investors Service upgraded its ratings on India's sovereign bonds for the first time in nearly 14 years on Friday, saying continued progress on economic and institutional reform will boost the country's growth potential. The agency said it was lifting India's rating to Baa2 from Baa3 and changed its rating outlook to stable from positive as risks to India's credit profile were broadly balanced. Moody's upgrade, its first since January 2004, moves India's rating to the second lowest level of investment grade. The upgrade is a shot in the arm for Prime Minister Narendra Modi's government and the reforms it has pushed through, and it comes just weeks after the World Bank moved India up 30 places in its annual ease of doing business rankings.

Moody's believes that Modi’s reforms have reduced the risk of a sharp increase in India’s debt, even in potential negative scenarios. On the GST reform, which converted India's 29 states into a single customs union, the rating agency expects it to boost productivity by removing barriers to inter-state trade. In addition, the recent $32 billion recapitalisation of state banks and the reform of the bankruptcy code are beginning to address India’s sovereign credit profile.

"While the capital injection will modestly increase the government's debt burden in the near term, it should enable banks to move forward with the resolution of NPLs."

Following the upgrade, India’s S&P BSE Sensex Index rose 1.1%, with metals, property and banks the strongest performers. The Sensex has risen 25% so far in 2017, while the banks sector is 42% higher. Retail investors have piled into financial assets and the banking system has been awash with funds since Modi unexpectedly banned high denomination bank notes last November.

As Reuters notes, the Indian government had been unsuccessful at persuading Moody’s to upgrade the rating in 2016.

Last year, India lobbied hard with Moody's for an upgrade, but failed. The agency raised doubts about the country's debt levels and fragile banks, and declined to budge despite the government's criticism of their rating methodology. The government cheered the upgrade on Friday with Economic Affairs Secretary S. Garg telling reporters the rating upgrade was a recognition of economic reforms undertaken over three years.

The Rupee and Indian bonds also rallied on the Moody’s announcement – although some debt traders expressed scepticism that the rally was sustainable.

"It seems like Santa Claus has already opened his bag of goodies," said Lakshmi Iyer, head of fixed income at Kotak Mutual Fund said. "The move is overall positive for bonds which were caught in a negative spiral. This is a structural positive which would lead to easing in yields across tenors," she said. 

 

The benchmark 10-year bond yield was down 10 basis points at 6.96 percent, the rupee was trading stronger at 64.76 per dollar versus the previous close of 65.3250. "We have been expecting it for a long time and this was long overdue and is very positive for the market. Looks like sentiments are going to become positive," said Sunil Sharma, chief investment officer with Sanctum Wealth Management. However, debt traders said the rally was unlikely to last beyond a few days as the coming heavy bond supply and hawkish inflation outlook were unlikely to change soon.

 

"Who has the guts to continue buying in this market?" said a bond trader at a private bank.

India has basked in its status as the world’s fastest growing major economy and Moody’s forecasts suggests that it will continue to outpace China’s roughly 6.5% growth, but only marginally. In the fiscal year to March 2018, Moody’s expects the Indian economy to grow at 6.7% versus last year’s 7.1%. From Reuters.

Moody's noted that while a number of key reforms remain at the design phase, it believes those already implemented will advance the government's objective of improving the business climate, enhancing productivity and stimulating investment. “Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," said Moody's.

Bloomberg published some initial reactions from portfolio managers and analysts.

Luke Spajic (head of portfolio management for emerging Asia at Pacific Asset Management Co. in Singapore)

  • “The upgrade came sooner than expected. India has undertaken some tough but necessary reforms like demonetization and the GST, the benefits of which are yet to be fully calculated”
  • “India is on the right long-term path with capital markets — in both debt and equity — pricing in potential improvements in investment quality”

Lin Jing Leong (investment manager, Asia fixed income, at Aberdeen Standard Investments in Singapore)

  • “The upgrade has been long time coming” given Modi’s reform ambitions. “This is not a surprise — we do believe all the rating agencies have been behind the curve somewhat”
  • Initial Indian market reaction is likely to be knee-jerk, but we still expect dollar-India credit spreads, onshore India bonds and the rupee to continue outperforming the broader Asia and emerging-market bloc.

Navneet Munot (chief investment officer at SBI Funds Management Pvt. in Mumbai)

  • This will boost global investors’ confidence in India, but factors like world monetary policy shifts and company earnings will also be key to foreign inflows.
  • Investors like us who have long positions on India always expected an upgrade.
  • The firm has been boosting equity holdings in Indian corporate lenders, industrial and telecommunications companies.

Nischal Maheshwari (head of institutional equities at Edelweiss Securities Ltd. in Mumbai)

  • Equity markets have already given a thumbs up to the news”.
  • It will lead to a reduction in borrowing costs, which is a major improvement.
  • “For foreign investors in equity, it doesn’t change much as their concerns around high stock valuations remain. However, their commitment to the country is in place and the upgrade will only help reiterate their position”.

Shameek Ray (head of debt capital markets at ICICI Securities Primary Dealership in Mumbai)

  • Foreign investors won’t be able to take full advantage of the positive sentiment from the upgrade as quotas for them to buy into rupee-denominated government and corporate debt are full, Ray says.
  • “Whenever these quotas open up there will be keen interest to take India exposure,” but in the meantime Indian companies will get more access to offshore markets.
  • “We could see them pricing dollar or Masala bonds at tighter levels”.

Ken Hu (chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong Ltd.)

  • The upgrade confirms Invesco’s positive view on India’s structural economic reforms.
  • “With more political capital, Modi and his party are able to launch more difficult but more impactful structural reforms. The positive feedback loop will continue to lead to more credit rating upgrades of India in future”.

Chakri Lokapriya (managing director at TCG Asset Management in Mumbai)

  • The upgrade is “very positive for banks, infrastructure and cyclical sectors”.
  • “Banks will benefit strongly as their credit costs come down leading to a reduction in interest costs for infrastructure and manufacturing companies”.

Ashley Perrott (head of pan-Asian fixed income at UBS Asset Management in Singapore)

  • The upgrade is a bit of a surprise, so the market is likely to see some initial bond-spread tightening.
  • “But raising one notch does not make much difference from a fundamental perspective”.

Avinash Thakur (managing director of debt capital markets at Barclays Plc in Hong Kong)

  • “The upgrade should help issuers from India as they are no longer on the cusp of investment grade”.
  • “It makes a big difference to investors and we will see more dollar bond supply from India”.

http://WarMachines.com

Weekend Reading: You Have Been Warned

Authored by Lance Roberts via RealInvestmentAdvice.com,

Investors aren’t paying attention.

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.

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. 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.

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.

Don’t say you weren’t warned.

In the meantime, here is your weekend reading list.


Trump, Economy & Fed


VIDEO – It’s A Turkey Market


Markets


Research / Interesting Reads


“The only function of economic forecasting is to make astrology look respectable.” – Sir John Templeton

http://WarMachines.com