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Why We’re Ungovernable, Part 17: In Latin America, Soaring Population + Soaring Debt = “Brutal Justice”

December 8, 2018

Why We’re Ungovernable, Part 17: In Latin America, Soaring Population + Soaring Debt = “Brutal Justice”

There are two ways of looking at the intersection of debt and population. One way says that if debt is rising population should also rise to allow future workers to pay for the retirement of today’s. More people thus make debt easier to manage.

The other point of view is that debt and population soaring simultaneously creates a negative feedback loop that eventually destroys a culture.

Today’s Latin America appears to validate the second thesis. Debt and population are both soaring, and big parts of the culture seem to be collapsing.

The following chart shows Latin America’s population more than tripling since 1950:

The next chart shows the government debt of Brazil, Latin America’s largest economy, spiking since the end of the Great Recession:

Brazilian Government Debt % of GDP

source: tradingeconomics.com

As for the culture collapsing, consider this (rather grisly) excerpt from today’s Wall Street Journal:

In Latin America, Awash in Crime, Citizens Impose Their Own Brutal Justice

The 16-year-old had spent a balmy Saturday afternoon in May with his high school friends at a funk music party in Brasília’s central park, not far from the country’s presidential palace.

As he headed home shortly after sundown, someone in the crowd grabbed his classmate Ágatha from behind and snatched her phone, witnesses told police. She spun around and saw Victor. Believing him to be the thief, she screamed out for help. Her friends knocked him to the ground and began to beat him.

Hearing Ágatha’s shrieks, another group of partygoers presumed he must be the same teen who had swiped a pair of sunglasses from them earlier. One of them jammed a broken bottle into Victor’s stomach.

…click on the above link to read the rest of the article…

Empty Words Are Failing. A Timeline For What Comes Next

December 5, 2018

Empty Words Are Failing. A Timeline For What Comes Next

A quick recap of the past couple of months:

Stocks plunge.

The politicians, bureaucrats and bankers who depend on artificially-elevated financial asset prices start to panic.

The Fed announces that maybe it won’t have to raise interest rates any more, and the president announces a temporary cease-fire in the trade war with China.

The markets bounce, leading some to conclude that the worst is over and it’s time to go back to buying the dip.

A larger number of people conclude that the changes in policy were really just empty words. No actual actions had taken place.

Stocks start falling again. You are here — as this is written on Tuesday Dec 4, the Dow is down about 300 points.

What happens next?
Think of the past few months as the first act in a play that is performed in virtually every business cycle, with later acts following a predictable script. Here’s how it’s likely to go this time:

Words give way to modest action (early 2019). When the markets figure out that empty promises don’t change the underlying reality of slowing growth, falling corporate profits and rising loan defaults, they return to panic mode. Governments are then forced to actually do things to try to stop the bleeding. In the current US case, that means the Fed will announce that it’s done raising rates and will soon start cutting. Trump, meanwhile, will cut a trade deal with China that accomplishes little but removes the future uncertainty.

This will be greeted with another few days of market euphoria, followed by the realization that, again, nothing substantive has changed. Stocks will resume their decline. Let’s call this “2008 revisited.”

…click on the above link to read the rest of the article…

Corporate Share Buybacks Looking Dumber By The Day

November 26, 2018

Corporate Share Buybacks Looking Dumber By The Day

A recent MarketWatch article notes that:

GE was one of Wall Street’s major share buyback operators between 2015 and 2017; it repurchased $40 billion of shares at prices between $20 and $32. The share price is now $8.60, so the company has liquidated between $23 billion and $29 billion of its shareholders’ money on this utterly futile activity alone. Since the highest net income recorded by the company during those years was $8.8 billion in 2016, with 2015 and 2017 recording a loss, it has managed to lose more on its share repurchases during those three years than it made in operations, by a substantial margin.

Even more important, GE has now left itself with minus $48 billion in tangible net worth at Sept. 30, with actual genuine tangible debt of close to $100 billion. As the new CEO Larry Culp told CNBC last Monday: “We have no higher priority right now than bringing those leverage levels down.” The following day, GE announced the sale of 15% of its oil services arm Baker Hughes, for a round $4 billion.

Of course, since that sale values Baker Hughes at $26 billion, and GE paid $32 billion for 62% of Baker Hughes as recently as last year, which looks to me like a valuation for the whole company of $52 billion, GE shareholders appears to have lost half the value of their investment in Baker Hughes in about 18 months.

But GE is just one of several hundred big companies with CEOs who now have to justify a massive, in some cases catastrophic waste of shareholder cash.

This most recent share buyback binge was dumb money on steroids, with artificially low interest rates leading corporations to borrow big and buy back their stock on the twin assumptions that 1) since the cost to borrow was less than their stock dividend, they were generating “free cash flow” and 2) buying their own stock forced up the price, which would make the CEO look smart.

…click on the above link to read the rest of the article…

New York City Joins The “Imminent Bankruptcy” Club

November 2, 2018

New York City Joins The “Imminent Bankruptcy” Club

The “public pension crisis” is the kind of subject that’s easy to over-analyze, in part because there are so many different examples of bad behavior out there and in part because the aggregate damage these entities will do when they start blowing up is immense.

But most people see pensions as essentially an accounting issue – and therefore boring – so it doesn’t pay to go back to this particular well too often. Still, New York City’s missing $100 billion can’t be ignored:

New York City Owes Over $100 Billion for Retiree Health Care

(Bloomberg) – New York City faces future health costs for its retired workers of $103.2 billion, an increase of $40 billion over a decade. It has about $5 billion set aside to pay the bill.

The so-called “other post-employment benefits” liability was disclosed in New York’s comprehensive annual financial report released by the city comptroller’s office Wednesday. The city’s $98 billion unfunded liability for retiree health care exceeds the city’s $93 billion of bond debt and $48 billion pension-fund shortfall.

“The numbers are huge,” said Maria Doulis, a vice president at the Citizens Budget Commission, a budget watchdog group funded by the business community. “If you’re looking at the big three liabilities, this is the one that’s problematic, because there’s nothing set aside to address this and there’s absolutely no strategy on the part of the city.”

New York, the most populous U.S. city, has almost 300,000 current employees and is responsible for more than 230,000 retirees and their beneficiaries. City employees with 10 years of service qualify for free retiree health care.

The city’s post-employment benefits include health insurance, Medicare Part B reimbursements, and welfare fund contributions. Medicare Part B covers doctors’ services that are received from a federally approved facility or a medical practice. Welfare funds are administered by unions and provide supplemental benefits such as prescription drug, vision and dental coverage.

…click on the above link to read the rest of the article…

Gold Is Becoming Cool Again

October 20, 2018

Gold Is Becoming Cool Again

The sentiment shift is still subtle, but it’s both real and widespread. After a few years of being ignored and/or dismissed as basically useless, gold is cool again, attracting positive press and increasing accumulation by big investors.

India, for instance, imported less gold than usual in the first part of this year but lately has ramped up its buying, with August imports more than double the year-earlier amount.

Hungary just did something even more dramatic:

Hungary Boosts Gold Reserves 10-Fold, Citing Safety Concerns

Hungary’s central bank increased its gold reserves 10-fold, citing the need to improve its holdings’ safety, joining regional peers with relatively high ownership in the European Union’s east.

Following a similar move by Poland, the central bank in Budapest now holds 31.5 tons of the metal, taking the share among total reserves to 4.4 percent, in line with the average in the region, according to a statement published on its website Tuesday.

Meanwhile, the long-dormant South African gold miners are seeing sudden interest:

Is the Canary in the Gold Mine Coming to Life Again?

Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal – and hence highly leveraged to the gold price – South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).

As we write these words, something is cooking in South African gold stocks, that much is absolutely certain. Here is a chart of the JSE Gold Index in ZAR (South African rand) terms:

While we cannot be sure why investors have suddenly become enamored with the precious metals sector, it is probably a good guess that gold stocks are by now so cheap that they are considered a worthwhile target for rotation purposes.

…click on the above link to read the rest of the article…

The Fed’s In A Box And People Are Starting To Notice

September 26, 2018

The Fed’s In A Box And People Are Starting To Notice

It’s long been an article of faith in the sound money community that the Fed, by bailing out every dysfunctional financial entity in sight, would eventually be forced to choose between the deflationary collapse of a mountain of bad debt and the inflationary chaos of a plunging currency.

That generation-defining crossroad is finally in sight.

On one hand, a tight labor market is pushing inflation to levels that normally call for higher interest rates:

source: tradingeconomics.com

Today’s Fed-heads are old enough to remember the 1970s, when failure to get inflation under control produced a decade-long monetary crisis that was only resolved with (not exaggerating here) interest rates approaching 20%.

On the other hand, the yield curve – the difference between long-term and short-term interest rates – is trending towards zero and will, if it keeps falling, invert, meaning that short rates will exceed long. When this has happened in the past a recession has ensued.

With a system this highly leveraged it’s completely possible that the next recession will threaten the whole fiat currency/globalization/fractional reserve banking world. No one at the Fed wants to preside over that, leading some to view rising inflation as the lesser of two evils. See Atlanta Fed Chief Pledges to Oppose Hike Inverting Yield Curve.

A lot of people seem to be aware of the Fed’s dilemma. Here’s an excerpt from a recent Reuters article on the subject:

Fed’s Powell between a rock and hard place: Ignore the yield curve or tight job market?

Unemployment near a 20-year low screams at the U.S. Federal Reserve to raise interest rates or risk a too-hot economy. The bond market, not far from a state that typically precedes a recession, says not so fast.

…click on the above link to read the rest of the article…

Here’s How “External Dollar Debt” Produces An “Emerging Market Crisis”

August 18, 2018

Here’s How “External Dollar Debt” Produces An “Emerging Market Crisis”

Emerging market currencies are collapsing pretty much everywhere these days. But it’s safe to assume that most people don’t understand exactly what’s causing this outbreak, why it’s happening now, or what “external dollar debt” has to do with it. So here’s a quick primer followed by the obligatory apocalyptic prediction:

Prelude: cheap dollar financing
Pretend for a second that you’re Brazil. Your economy is in pretty good shape and your currency – the real – is getting stronger. Because of this, people are willing to lend you money.

Your internal interest rates – that is, what you’d have to pay to borrow real – are around 6%.

But when you look overseas you notice that US dollars – which have been trending down for a while – can be borrowed for around 2%. So you run some numbers and conclude that if you borrow dollars and assume that the real continues to rise against the dollar, you’ll make out two ways, on the spread between what you pay for those dollars and what you earn by investing them, and when you pay back the loans with depreciated dollars. So you borrow dollars, not just a little but a lot because with a lot you make a fortune.

So far so good. For a while the dollar keeps falling versus the real and you earn a nice spread. You feel smart, like you’ve figured out international finance and henceforth will will have a seat at the big table.

The turn
But then the unexpected (for you at least) happens. The dollar stops falling and starts rising.

And suddenly the spread you’re making on your external dollar debt no longer offsets the cost of paying back those ever-more-expensive dollars.

…click on the above link to read the rest of the article…

Global Housing Bubble Is Popping. Here Comes The “Reverse Wealth Effect”

August 4, 2018

Global Housing Bubble Is Popping. Here Comes The “Reverse Wealth Effect”

Just a few months ago, real estate was on fire. Prices were blowing past records set during the previous decade’s housing bubble as desperate buyers bought whatever was available at above the asking price while homeowners, confident that prices would keep rising, held out for the next big pop to sell. Notice on the following chart how the ascent steepens at the beginning of this year.

Then, as if someone flipped a switch, the trend shifted into reverse. Not just in the US but nearly everywhere. This list of recent headlines tells the tale:

Housing demand sees biggest drop in more than 2 years

Hamptons property sales slow as caution spreads to the wealthy

Home Prices Are Falling in One of America’s Richest Suburbs

First Time Ever, More Chinese sellers than buyers

Vancouver Suffers Its Worst July for Home Sales Since 2000

Record Drop in Foreigners Buying U.S. Homes

Australian home prices take biggest dip since 2011

The End of the Global Housing Boom

Manhattan Real Estate: Prices Plummet, Sales Tank

What’s happening and why is it happening now?
Several things came together pretty much simultaneously to turn houses from must-have-at-any-price necessities into completely optional and maybe not even desirable: First, prices rose beyond the reach of all but the seriously affluent. The gap between the price of the average home and the size of the mortgage the average local buyer can afford has been rising for years, but recently in the hottest markets it has become a chasm. Meanwhile, mortgage rates have started to rise, increasing the monthly payment on a given house dramatically.

If you live in San Francisco or Sydney or Vancouver, chances are you can’t afford to buy a decent house – not even close. And if you can’t you don’t.

…click on the above link to read the rest of the article…

Emerging Market Crisis Spreads To The Core, Central Banks Face Catch-22

July 2, 2018

Emerging Market Crisis Spreads To The Core, Central Banks Face Catch-22

One of the things giving “data-driven” central banks wiggle room on their pledge to tighten monetary policy is the fact that there are several definitions of inflation. In the US the thing most people think of as inflation is the consumer price index, or CPI, which is now running comfortably above the Fed’s target. But the Fed prefers the personal consumption expenditures (PCE) price index, which tends to paint a less inflationary picture. And within the PCE universe, core PCE, which strips out energy and food, is the data series that actually motivates Fed action.

And that, at long last, is now above the 2% target, having risen 2.3% in the past year.
On the following chart, the core PCE is the blue line. Note the steepening slope towards mid-year. This is clearly a trend with some momentum which, if it continues, will take this index from slightly above target to substantially above.

A more surprising above-target reading just came from Germany, which didn’t used to have inflation of any kind. But now it does:

(Reuters) – German inflation surpassed the target set by the European Central Bank for the euro zone in June, the second month in a row it has done so, lending support to the ECB’s decision to close its bond purchase scheme at the end of the year.

Data published by the Federal Statistics Office on Thursday showed that EU-harmonised German consumer prices rose 2.1 percent year-on-year. The same measure had increased by 2.2 percent in May. The yearly figure matched a Reuters forecast.

Again, note the pop over the last couple of months. If this is sustained, the European Central Bank will have to speed up its leisurely tightening pace. Right now it’s scaling back its bond-buying but not signaling higher rates – which will definitely have to be on the menu if German inflation stays above 2%.

…click on the above link to read the rest of the article…

Paper Gold Market Normalizing, Silver Getting Even More Extreme

May 7, 2018

Paper Gold Market Normalizing, Silver Getting Even More Extreme

The past few months have seen some unusual, maybe even unique, developments in the gold and silver futures markets, with gold becoming extremely bearish and silver almost ridiculously bullish.

Neither imbalance has amounted to much in terms of price action, so it’s not clear whether the most recent changes matter. Still, the action in both gold and silver futures remains unusual enough to bear watching.

Beginning with gold, large speculators have lately been hyper-bullish and commercials extremely bearish. Since the former tend to be wrong at the extremes and the latter right, that was disturbing for anyone who didn’t like the idea of gold tanking in the short term.

Gold did fall a bit lately, to the low $1,300s, and that seems to have been enough to cause futures players to start unwinding their extreme positions. Speculators cut their net long bets by about 30,000 contracts and commercials cut their net shorts by a similar amount, which in the scheme of things is a big change. Another few weeks like this and both speculators and commercials will be close to neutral, which is positive for gold’s price going forward.

But silver has been and remains the really interesting case. Speculators – who are almost never net-short – spent a few weeks in that state before briefly reverting to slightly net long. But last week they jumped back to net-short in a big way (the bottom row shows the change in each position).

Here’s the action presented in graphical form, with the gray bars representing large speculators. Note how in the previous couple of cycles (early and late 2017) the speculators’ net positions got close to zero but then bounced back quickly to the more normal net-long. But in the current cycle they’ve been net-short for most of the past two months.

…click on the above link to read the rest of the article…

Why A Dollar Collapse Is Inevitable

April 7, 2018

Why A Dollar Collapse Is Inevitable

“Naturally, the smooth termination of the gold-exchange standard, the restoration of the gold standard, and supplemental and interim measures that might be called for, in particular with a view to organizing international credit on this new basis, will have to be deliberately agreed upon between countries, in particular those on which there devolves special responsibility by virtue of their economic and financial capabilities.”
-General Charles de Gaulle, February 1965

We have been here before – twice. The first time was in the late 1920s, which led to the dollar’s devaluation in 1934. And the second was 1966-68, which led to the collapse of the Bretton Woods System. Even though gold is now officially excluded from the monetary system, it does not save the dollar from a third collapse and will still be its yardstick.

This article explains why another collapse is due for the dollar. It describes the errors that led to the two previous episodes, and the lessons from them relevant to understanding the position today. And just because gold is no longer officially money, it will not stop the collapse of the dollar, measured in gold, again.

General de Gaulle made himself very unpopular with the international monetary establishment by holding the press conference from which the opening quote was taken. Yet, his prophecy, that the gold exchange standard of Bretton Woods would end in tears unless its shortcomings were addressed by a return to a gold standard, turned out to be correct shortly after. What the establishment did not like was the bald implication that it was wrong, and that the correct thing to do was to reinstate the gold standard. Plus ça change, as he might say if he was still with us.

…click on the above link to read the rest of the article…

Find The Sentence That Dooms Pension Funds (Don’t Worry, It’s Highlighted)

February 22, 2018

Find The Sentence That Dooms Pension Funds (Don’t Worry, It’s Highlighted)

The “pension crisis” is one of those things — like electric cars and nuclear fusion — that’s definitely coming but never seems to actually arrive. However, for pension funds the reason a crisis hasn’t yet happened is also the reason that it will happen, and soon:

The Risk Pension Funds Can’t Escape

(Wall Street Journal) – Public pension funds that lost hundreds of billions during the last financial crisis still face significant risk from one basic investment: stocks.That vulnerability came into focus earlier this month as markets descended into correction territory for the first time since February 2016. The California Public Employees’ Retirement System, the largest public pension fund in the U.S., lost $18.5 billion in value over a 10-day trading period ended Feb. 9, according to figures provided by the system.

The sudden drop represented 5% of total assets held by the pension fund, which had roughly half of its portfolio in equities as of late 2017. It gained back $8.1 billion through last Friday as markets recovered.

“It looks like 2018 is likely to be more turbulent than what we have experienced the last couple of years,” the fund’s chief investment officer, Ted Eliopoulos, told his board last Monday at a public meeting.

Retirement systems that manage money for firefighters, police officers, teachers and other public workers are increasingly reliant on stocks for returns as the bull market nears its ninth year. By the end of 2017, equities had surged to an average 53.6% of public pension portfolios from 50.3% one year earlier, according to figures released earlier this month by the Wilshire Trust Universe Comparison Service.

Those average holdings were the highest on a percentage basis since 2010, according to the Wilshire Trust Universe Comparison Service data, and near the 54.6% average these funds held at the end of 2007.

…click on the above link to read the rest of the article…

Finally, An Honest Inflation Index – Guess What It Shows

December 9, 2017

Finally, An Honest Inflation Index – Guess What It Shows

Central bankers keep lamenting the fact that record low interest rates and record high currency creation haven’t generated enough inflation (because remember, for these guys inflation is a good thing rather than a dangerous disease).

To which the sound money community keeps responding, “You’re looking in the wrong place! Include the prices of stocks, bonds and real estate in your models and you’ll see that inflation is high and rising.”

Well it appears that someone at the Fed has finally decided to see what would happen if the CPI included those assets, and surprise! the result is inflation of 3%, or half again as high as the Fed’s target rate.

New York Fed Inflation Gauge is Bad News for Bulls

(Bloomberg) – More than 20 years ago, former Fed Chairman Alan Greenspan asked an important question “what prices are important for the conduct of monetary policy?” The query was directly related to asset prices and whether their stability was essential for economic stability and good performance. No one has ever offered a coherent answer even though the recessions of 2001 and 2008-2009 were primarily due to a sharp correction in asset prices.A new underlying inflation gauge, or UIG, created by the staff of the New York Fed may finally provide the answer. Its broad-based measure of inflation includes consumer and producer prices, commodity prices and real and financial asset prices. The New York Fed staff concluded that the new inflation gauge detects cyclical turning points in underlying inflation and has a better track record than the consumer price series.

The latest reading shows inflation of almost 3 percent for the past 12 months, compared with 1.8 percent for the consumer price index and 1.8 percent for core consumer prices, which exclude food and energy. Since the broad-based UIG is advancing 100 basis points above CPI, it indicates that asset prices are large, persistent and reflect too easy monetary policy.

…click on the above link to read the rest of the article…

Suddenly, “De-Dollarization” Is A Thing

September 16, 2017

Suddenly, “De-Dollarization” Is A Thing

For what seems like decades, other countries have been tiptoeing away from their dependence on the US dollar. China, Russia, and India have cut deals in which they agree to accept each others’ currencies for bi-lateral trade while Europe, obviously, designed the euro to be a reserve asset and international medium of exchange.

These were challenges to the dollar’s dominance, but they weren’t mortal threats.

What’s happening lately, however, is a lot more serious. It even has an ominous-sounding name: de-dollarization. Here’s an excerpt from a much longer article by “strategic risk consultant” F. William Engdahl:

Gold, Oil and De-Dollarization? Russia and China’s Extensive Gold Reserves, China Yuan Oil Market

(Global Research) – China, increasingly backed by Russia—the two great Eurasian nations—are taking decisive steps to create a very viable alternative to the tyranny of the US dollar over world trade and finance. Wall Street and Washington are not amused, but they are powerless to stop it.So long as Washington dirty tricks and Wall Street machinations were able to create a crisis such as they did in the Eurozone in 2010 through Greece, world trading surplus countries like China, Japan and then Russia, had no practical alternative but to buy more US Government debt—Treasury securities—with the bulk of their surplus trade dollars. Washington and Wall Street could print endless volumes of dollars backed by nothing more valuable than F-16s and Abrams tanks. China, Russia and other dollar bond holders in truth financed the US wars that were aimed at them, by buying US debt. Then they had few viable alternative options.

Viable Alternative Emerges
Now, ironically, two of the foreign economies that allowed the dollar an artificial life extension beyond 1989—Russia and China—are carefully unveiling that most feared alternative, a viable, gold-backed international currency and potentially, several similar currencies that can displace the unjust hegemonic role of the dollar today.

…click on the above link to read the rest of the article…

Venezuela Has Officially Abandoned The Petrodollar – Does This Make War With Venezuela More Likely?

September 15, 2017

Venezuela Has Officially Abandoned The Petrodollar – Does This Make War With Venezuela More Likely?

Venezuela is the 11th largest oil producing country in the entire world, and it has just announced that it is going to stop using the petrodollar. Most Americans don’t even know what the petrodollar is, but for those of you that do understand what I am talking about, this should send a chill up your spine. The petrodollar is one of the key pillars of the global financial system, and it allows us to live a far higher standard of living than we actually deserve. The dominance of the petrodollar has been very jealously guarded by our government in the past, and that is why many are now concerned that this move by Venezuela could potentially lead us to war.

I don’t know why this isn’t headline news all over the country, but it should be. One of the few major media outlets that is reporting on this is the Wall Street Journal…

The government of this oil-rich but struggling country, looking for ways to circumvent U.S. sanctions, is telling oil traders that it will no longer receive or send payments in dollars, people familiar with the new policy have told The Wall Street Journal.

Before we go any further, we should discuss what we mean by the “petrodollar” for those that are not familiar with the concept. The following comes from an excellent article by Christopher Doran…

In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.

…click on the above link to read the rest of the article…

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