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Serenely Grows the Debtberg

We mentioned in a recent post that we would soon return to the topic of credit spreads and exotic structured products. One reason for doing so are the many surprises investors faced in the 2008 crisis. Readers may e.g. remember auction rate securities. These bonds were often listed as “cash equivalents” on the balance sheets of assorted companies investing in them, but it turned out they were anything but. Shareholders of many small and mid-sized companies learned to their chagrin that quite a bit of this “cash” had for all practical purposes evaporated when the markets for these bonds suddenly froze.

Surprise and shock at the sudden emergence of exotic securities in unexpected places at an inconvenient moment.

We have regularly chronicled the growing insanity in bond markets over the past few years in these pages, since we feel quite certain that debt will once again prove to be the straw that breaks the bubble’s back, so to speak. The massive surge in “cov-lite” bond issuance in the corporate junk bond universe almost speaks for itself, as does the popularity of “frontier market” government bonds or bonds issued by parastatal entities in these markets (“frontier markets” are what the POTUS colorfully refers to as “shitholes”).

The same applies to the resurgence in CLO issuance. Investors in these products often employ up to 10:1 leverage; reportedly banks are eagerly supplying the funds, since back-testing clearly shows that nothing bad ever happened to these carefully over-collateralized cesspools of potential deadbeat debt – and as everybody knows, that means nothing bad will ever happen. Just as there was never supposed to be a nationwide collapse in home prices, this is basically the next doubleplus-certain thing, which means there is little choice but to slap an AAA rating on most of these securities.

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

Haunted by Ghosts of the Old Eastern Bloc

February 24, 2018

Haunted by Ghosts of the Old Eastern Bloc

Ridiculous Minutia

Jerome Powell, the new Chairman of the Federal Reserve, just completed his third week on the job. He’s hardly had enough time to learn how to operate the office coffee maker, let alone the all-in-one printer. He still doesn’t know what roach coach menu items induce a heinous gut bomb.

The perpetually slightly worried looking new Fed chairman Jerome Powell, here seen warily inspecting the Rose Garden at the White House. Everybody wants to know if he has a “better plan” – but there is no better plan, thus no-one has one. [PT]

Photo credit: A. Brandon / AP

Yet across the planet, folks high and low are already telling him exactly how he should do his job. What’s more, they’re passing advance judgment on things that may or may not happen. For example, the South China Morning Post recently offered the following opinion:

“President Donald Trump may have done Janet Yellen a favor by not giving her a second term as Chairwoman of the Federal Reserve. Her successor, Jerome Powell, may have inherited a poisoned chalice. The Fed will have to up the pace of U.S. rate hikes or risk accusations of being behind the curve as markets react to signs of rising inflation.”

When Powell showed up to work on February 5, for his first day on the job, the general consensus was that the Fed would raise the federal funds rate three times this year, at 25 basis points – or 0.25 percent – per increase. But now that consumer prices are rising at an annual rate of 2.1 percent, average hourly earnings are increasing at an annual rate of 2.9 percent, and Congress has passed a massive two year budget deal, twitchy economists are questioning if three rate hikes will be enough to keep inflation in check.

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

When Budget Deficits Will Really Go Vertical

February 17, 2018

When Budget Deficits Will Really Go Vertical

Mnuchin Gets It

United States Secretary of Treasury Steven Mnuchin has a sweet gig. He writes rubber checks to pay the nation’s bills. Yet, somehow, the rubber checks don’t bounce. Instead, like magic, they clear. How this all works, considering the nation’s technically insolvent, we don’t quite understand. But Mnuchin gets it. He knows exactly how full faith and credit works – and he knows plenty more.

Master of the Mint and economy wizard Steven Mnuchin and his wife at the annual ritual greenback burning festival. [PT]

In fact, Mnuchin’s wife, Louise Linton, says she admires him because “he understands the economy.” And Mnuchin, no doubt, admires Linton, a Scottish actress 18 years younger, because “she loves SoulCycle Snapchat filters that make people look like puppies and piglets.” Naturally, Mnuchin gets the importance of puppy and piglet filters and how this bizarre fad fits into the big picture of the economy.

Unlike Mnuchin, we find the economy, and its infinite and dynamic relationships, to be beyond comprehension. But that doesn’t deter us from attempting to make some sense of it each week. When it comes to Snapchat filters we know nothing – and we could care less. Still, who are we to question Snap Inc.’s $24 billion market capitalization?

What we do understand is simple arithmetic. So, too, we care a great deal about the increasingly precarious predicament the 115th U.S. Congress is putting the American people in. As far as we can tell, the approaching disaster is much closer than Mnuchin will publicly recognize.

US public debtberg-to-GDP ratio – cruising for a bruising. The growth in public debt in recent years is unprecedented in peace time (arguably, the term “peace time” is not an accurate description of the current era). Lettuce not forget, this is just the debt they actually admit to, so to speak.

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

What Kind of Stock Market Purge Is This?

February 10, 2018

What Kind of Stock Market Purge Is This?

Actions and Reactions

Down markets, like up markets, are both dazzling and delightful. The shock and awe of near back-to-back 1,000 point Dow Jones Industrial Average (DJIA) free-falls is indeed spectacular. There are many reasons to revel in it. Today we shall share a few. To begin, losing money in a multi-day stock market dump is no fun at all. We’d rather get our teeth drilled by a dentist. Still, a rapid selloff has many positive qualities.

Memorable moments from the annals of dentistry [PT]

For example, the days following a market correction are full of restoration and redemption. Like the prayer of Saint Francis of Assisi, Tuesday’s 567 point DJIA bounce brought hope where there was despair, light where there was darkness, and joy where there was sadness. President Trump even acknowledged that his powers over the stock market are less than omnipotent.

From a practical standpoint, a market correction clarifies that we live in a world that is exacting and just, as opposed to a fabricated fantasy. A stock market purge demonstrates that the central planners haven’t entirely broken the markets just yet. Markets still go both up and down. This important detail is always forgotten at the worst possible time.

The stock market purge also clarifies that Fed actions provoke reactions. The Fed’s rate raising and quantitative tightening efforts are having an effect. After pumping stock and credit markets up for the last decade they are now, by design, deflating them. What a delicate and unnecessary game these central bankers play.

The tree month t-bill yield and total assets held by the Federal Reserve system – moving in opposite directions. Amazingly, many market participants seem to believe that when these data change direction, the stock market will remain unaffected. That is probably wishful thinking. [PT]

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

Why I Own Gold and Gold Mining Companies – An Interview With Jayant Bandari

February 9, 2018

Why I Own Gold and Gold Mining Companies – An Interview With Jayant Bandari

Opportunities in the Junior Mining Sector

Maurice Jackson of Proven and Probable has recently interviewed Jayant Bandari, the publisher of Capitalism and Morality and a frequent contributor to this site. The topics discussed include currencies, bitcoin, gold and above all junior gold stocks (i.e., small producers and explorers). Jayant shares some of his best ideas in the segment, including arbitrage opportunities currently offered by pending takeovers – which is an area that generally doesn’t receive much attention, but seems to harbor quite a bit of potential.

Jayant Bandari at the at the Sprott Natural Resource Symposium in Vancouver in 2017.

The interview dovetails nicely with something we are working on at the moment and plan to make available to our readers soon, namely a comprehensive list of gold and silver juniors (plus a few base metals juniors), which summarizes the most important background information on them and provides links to more in-depth data for further study. The list should serve as a useful starting point for anyone planning to create a broadly diversified portfolio focused on junior gold companies.

As far as we can tell, Jayant prefers to pursue a more concentrated approach, while our list is basically about obtaining exposure to the sector’s potentially large upside, while at the same time mitigating risk through diversification (this approach lowers risk but also caps upside potential to some extent, but will no doubt be quite useful for people who would like to invest in the sector but don’t have the time to analyze and follow it in depth. We should also mention that we do not believe that the currently available junior ETFs are good substitutes for a carefully chosen diversified portfolio focused on the sector).

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

“Strong Dollar”, “Weak Dollar” – What About a Gold-Backed Dollar?

February 8, 2018

“Strong Dollar”, “Weak Dollar” – What About a Gold-Backed Dollar?

Contradictory Palaver

The recent hullabaloo among President Trump’s top monetary officials about the Administration’s “dollar policy” is just the start of what will likely be the first of many contradictory pronouncements and reversals which will take place in the coming months and years as the world’s reserve currency continues to be compromised. So far, the Greenback has had its worst start since 1987, the year of a major stock market reset.

A modern-day reenactment of the famous “our currency, your problem” play that went over so extremely well in the 1970s… [PT]

The brief firestorm was set off by Treasury Secretary Steven Mnuchin who said in response to the dollar’s recent slide:

“Obviously, a weaker dollar is good for us, it’s good because it has to do with trade and opportunities.”*

Mnuchin backtracked a bit as international financial leaders criticized the apparent shift in policy while Administration officials sought to clarify the Secretary’s remarks. President Trump weighted in on the matter saying:

“Ultimately, I want to see a strong dollar” and added that Mnuchin’s comments were “taken out of context.”

While President Trump sought to allay jittery currency markets that monetary policy had not changed, candidate Trump supported the Federal Reserve’s suppression of interest rates and did not want to see a rising dollar:

“I must be honest, I’m a low interest rate person. If we raise rates and if the dollar starts getting too strong, we’re going to have some very major problems”.**

Of course, the entire uproar about a strong dollar versus weak dollar is a sham. When the dollar (and for that matter all other national currencies) cannot be redeemed for either gold or silver, it is inherently “weak” and ultimately worthless.

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

Several Simple Suppositions and Suspicions for 2018

December 31, 2017

Several Simple Suppositions and Suspicions for 2018

A New Year of Symbiotic Disharmony

The New Year is nearly here. The slate’s been wiped clean. New hopes, new dreams, and new fantasies, are all within reach. Today is the day to make a double-fisted grab for them. Without question, 2018 will be the year in which everything happens exactly as it should. Some things you will be able to control, others will be well beyond your control.

How new years generally work… [PT]

Certainly, your ability to stop your neighbor’s cat from relieving itself in your side yard is limited, barring extreme measures. What we mean is each day shall unfold before you – both good and bad – in symbiotic disharmony. You can count on it.

But what are the specifics and particulars for the year ahead? What about stocks, the 10-Year Treasury note, gold, bitcoin, and everything else? Are we fated for World War III? Will this be the year Hillary Clinton finally croaks?

Today we endeavor to answer these questions – and more – with hesitation and humility. Obviously, predicting the future is more art than science. But so is Fed monetary policy, or a charted wave pattern that extends resistance and support lines out into the future.

Predictive Methodology and Disclaimer

“Past performance is no guarantee of future results,” counsels your broker. Thus, we eschew common forecasting techniques for a conjectural approach. We look to connect seemingly unrelated big picture nodes with the illogical grace of an Irish joke.

To be clear, our methodology is as unscientific as your street corner palm reader’s. First, we engage all matters of fact, fiction, fakery, and fraud. Then, through induction, deduction, biased interpolation, and metaphysical reduction, we arrive at precise, unequivocal answers.

But before we get to it, a brief disclaimer’s in order. This proviso from King Solomon should suffice:

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

Gold and Gold Stocks – Patterns, Cycles and Insider Activity, Part 1

December 29, 2017

Gold and Gold Stocks – Patterns, Cycles and Insider Activity, Part 1

Repeating Patterns and Positioning

A noteworthy confluence of patterns in gold and gold stocks is in evidence this year. At the close of trading on December 26, the HUI Index has given a (tentative) buy signal by completing a unique chart pattern, which is why we decided to briefly discuss the situation. As usual, things are not as straightforward and simple as they would ideally be, but there is always an element of uncertainty – one has to accept that as a given. Let us look at a chart illustrating one of said patterns:

This chart shows the gold price, the weekly net hedger position in gold futures (the inverse of the net speculative position), with the Fed’s December rate hikes in 2015, 2016 and 2017 highlighted by red vertical lines. Keep in mind that the December 2015 hike was the start of the current rate hike campaign. In the weeks leading up to it, the gold market was in the grip of a bearish hysteria, just as it approached a major lateral support level. Nearly every day Bloomberg, Reuters and other mainstream financial media published articles by “experts” no-one had ever heard of before (or since!), along with reports from analysts working for various well-known investment banks, all of whom stridently insisted that the beginning rate hike cycle was going to be the most bearish thing that could possibly befall the gold market, and that a further collapse in prices was nearly certain to coincide with it. Not surprisingly, the exact opposite has happened. You were definitely not surprised if you were reading this blog at the time – see for instance “Gold and the Federal Funds Rate”.

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

How the Asset Bubble Could End – Part 2

December 20, 2017

How the Asset Bubble Could End – Part 2

Contradictory Signals

Special antennae that help traders catch upcoming opportunities. Available from the same outfit that sells the soup-cooling spoon (Acme Inc).

There is just one more positioning indicator we want to mention: after surging by around $126 billion since March of 2016, NYSE margin debt has reached a new all time high of more than $561 billion. The important point about this is that margin debt normally peaks well before the market does. Based on this indicator, one should not expect major upheaval anytime soon. There are exceptions to the rule though – see the caption below the chart.

A new all-time high in NYSE margin debt: this is in line with the other indicators shown here, and normally margin debt tends to peak before the market does. This is generally true – but not always. We found two major market peaks – namely the 1937 and 1973 tops – when margin debt peaked after the market had topped out. In 1937 it happened just one month after the top, in 1973 it happened 8 months after the top. Note also that at the 1937 market peak, there was no warning from the NYSE advance-decline line either – it topped almost concurrently with prices – click to enlarge.

Since we discussed bubble blow-offs earlier this year (see: Speculative Blow-Offs in Stock Markets, Part 1 and Part 2), we have pointed out several times that an unusual number of diverging signals could be observed this year. And many signals we would normally expect to have appeared on the horizon by now are simply not in sight yet.

Consider for instance this chart from Moody’s, which we showed in one of our articles on credit spreads. It depicts debt as a percentage of internal company funds compared to actual and expected default rates. It is logical that these tend to be highly correlated, and yet, they are suddenly diverging rather noticeably.

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

The Rug Yank Phase of Fed Policy

December 16, 2017

The Rug Yank Phase of Fed Policy

Bogus Jobs Pay Big Bucks

The political differences of today’s two leading parties are not over ultimate questions of principle. Rather, they are over opposing answers to the question of how a goal can be achieved with the least sacrifice. For lawmakers, the goal is to promise the populace something for nothing, while pretending to make good on it.

The short and sweet definition of democratic elections by eminent American wordsmith and political philosopher H.L. Mencken [PT]

Take the latest tax bill, for instance. The GOP wants to tax less and spend more. The Democrat party wants to tax more and spend even more. We don’t recall seeing any proposals to tax less, spend less, and shrink the size of the state. And why would we?

When the government cuts back… [PT]

Today’s central planners and social engineers are enlightened and progressive. They know much more about anything and everything than the rest of us. In particular, they share a general sense that they know how to spend your money better than you.

At best, the central planners call your money to Washington so they can then distribute it back to your friends and neighbors. In reality, the lawmakers call your money to Washington where they distribute it to their friends and neighbors – not yours. This is not a matter of opinion. It’s a matter of fact.

Is it a coincidence that the top three wealthiest counties in the country are in the shadow of the Capitol in the D.C. suburbs? What exactly the residents of these counties do that is of tangible value is unclear. However, what is clear is that bogus government jobs in Loudoun County and Fairfax County, Virginia, pay big bucks. But that’s not all…

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

The Zealous Pursuit of State-Sponsored Collapse

December 9, 2017

The Zealous Pursuit of State-Sponsored Collapse

When Bakers Go Fishing

Government intervention into a nation’s economy is as foolish as attempting to control the sun’s rise and fall by law or force. But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions. The United States government is no exception.

From the “When the government helps the economy” collection: Breaking a few eggs while baking the bridge to nowhere omelet. [PT]

Over the years, layers and layers of interference by various federal, state, and local agencies have built up like grime on a kitchen window. The grease shines and smells of something fierce. The layers of government grime also drip and ooze into every crack and crevice of the economy.

These days, for example, it is impossible to carry out a simple private transaction with your barber or barista without some form of government interference. Has your barber obtained the required license and paid the obligatory fees to be able to legally taper your neck line? Has your barista’s espresso bean grinder passed city health inspection?

Is the hot Cup of Joe served in a paper cup of appropriate recycled material composition? Did the hot beverage exceed the legally accepted temperature standard? Did state and local governments receive their tax exaction upon payment?

The licensing racket – left panel: the basic definition of the racket; middle panel: how long it takes and what it costs to obtain licenses for assorted jobs in the US; right panel: the inexorable growth of rules and regulations. One shouldn’t be surprised that the pace of real economic growth has steadily declined since peaking in the late 19^th century (or if one wants to focus on the modern era, since it peaked not too long after WW2).

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

Inflation and Gold – Precious Metals Supply and Demand

November 21, 2017

Inflation and Gold – Precious Metals Supply and Demand

Reasons to Buy Gold

The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.

File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the communists couldn’t be stopped, they frantically tried exchange their government-issued paper money for gold. In preparation for its exodus to Taiwan, the Kuomintang regime had forced everyone to exchange their gold, silver and foreign exchange for a new paper currency, the Jingyuanquan in 1948 (“golden yuan”) – which it promptly inflated with gay abandon, belying its name. It then tried to combat rising prices with price controls – a strategy that has reliably failed since at least the times of the Roman Empire. It reversed the policy a few months later, as even its main supporters became thoroughly fed up. The people in the picture above were among those who had clearly waited too long to take advantage of this policy reversal. [PT]

But first, we want to clarify something in light of our ongoing commentary about the struggles of the debtors and the lack of drivers for rising consumer prices. Just because farmers and restaurateurs are frantically producing and selling like mad, which results in soft prices, does not mean that people cannot begin to buy gold in earnest again.

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

Business Cycles and Inflation, Part II

November 17, 2017

Business Cycles and Inflation, Part II

Early Warning Signals in a Fragile System

[ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning]

We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 – 24 months were quite large, even if their absolute levels remain historically low.

Sizable moves higher in short term interest rates were recorded over the past two years. 2 year note yields only started moving up in mid 2016, but the surge in t-bill discount rates has been in train since late 2015 already. The moves in short term rates come from extremely low levels, but they are nevertheless quite noteworthy – click to enlarge.

The first thing that comes to mind in connection with asset prices is that the cost of carry for leveraged positions is rising. Eventually this will have an effect on such positions, particularly in fixed-income instruments, which inter alia include structured products such as CLOs (collateralized loan obligations). Some market participants reportedly employ leverage of up to 1:10 in these in order to boost returns, which the banks are apparently happy to provide, as the risk is deemed to be low.

As we have discussed previously, CLOs are conceptually not different from the CMOs that created such heavy conniptions in 2007-2009, but CLOs ultimately turned out to be quite resilient at the time. The problem is of course that it is definitely not a given that they will be similarly resilient in the next crisis.

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

The Downright Sinister Rearrangement of Riches

October 27, 2017

The Downright Sinister Rearrangement of Riches

Simple Classifications

Let’s begin with facts. Cold hard unadorned facts. Water boils at 212 degrees Fahrenheit at standard atmospheric pressure. Squaring the circle using a compass and straightedge is impossible. The sun is a star.

The sun is not just a star, it is a benevolent star. Look, it is smiling… sort of. [PT]

Facts, of course, must not be confused with opinions, which are based upon observations. Barack Obama throws like a girl. The Federal Register is for idiots. Two slices of chocolate cake are one too many. Are these opinions right or wrong?

The answer depends on who you ask. What’s certain about opinions, however, is that like bellybuttons, everybody has one. Moreover, unlike free drugs from the government, everyone is in fact entitled to their own opinion.

Moving on from facts and opinions, the next classification we encounter is the wholly asinine. This broadly contains the absurd and ridiculous. Take most university teachers, barring natural science professors, for instance. They’re wholly asinine. The wholly asinine also extends to editors at the New York Times, Washington Post, circus hunchbacks, and the like.

Lastly, we want to mention the downright sinister. This includes sociopaths like Hillary Rodham Clinton, John McCain, nearly all of Congress, the Federal Reserve, fractional reserve banking, Washington lobbyists, a good part of Wall Street, and much, much more. Clearly, such people and professions don’t represent honest work. Rather, they epitomize less than honest work that’s performed by less than honest people.
Sinister mafia boss from Arkansas, possibly checking classified material on private phone… [PT] Photo credit: AP

Nixon Casts the Die

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

Falling Interest Rates

October 25, 2017

Falling Interest Rates

Amassing Unproductive Debt

Last week, we discussed the marginal productivity of debt. This is how much each newly-borrowed dollar adds to GDP. And ever since the interest rate began its falling trend in 1981, marginal productivity of debt has tightly correlated with interest. The lower the interest rate, the less productive additional borrowing has in fact become.

Left: the first IKEA store located in Älmhult in Sweden, near the residence of the company’s founder (nowadays the store is a museum); right: a Task Rabbit car. Given the valuations at which TaskRabbit was able to raise funds recently, it is a good bet IKEA paid a small fortune to take it over (waiting for the QE-induced bubble to burst may have been cheaper). [PT]

Let’s look at a recent event: the Ikea acquisition of TaskRabbit. You might wonder, why does a home goods company need to own a freelance labor company? Superficially, it seems to makes sense. Ikea products notoriously come in flat packs, but consumers don’t want to fuss with all the little parts. They just want finished furniture. Ikea has been using TaskRabbit to hire people to assemble it in their homes.

Isn’t this like that caricature of the billionaire who buys, say, the Planters Peanut company because he likes to eat salted nuts? Ikea could be a customer of TaskRabbit, hiring its temporary workers as needed, without owning the company. In fact, it had been doing that for years.

The acquisition price was not disclosed, however, we can guess that it was high. TaskRabbit was a Silicon Valley darling with a bright future. Its value proposition is right for this economy. It had raised $50 million, presumably at rich valuation multiples.

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

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