Debt

Media worth consuming – a recap of December 2020

My good mate Jonathan Rochford of Narrow Road Capital has compiled a brilliant summary of the recent madness in markets, politics and economics. One could be forgiven for thinking it is a lot like satire. Link here.

Can someone point to which department will head climate change policy?

We are getting confused. It seems that a growing number of government agencies are pushing a climate change agenda, an extension of a remit that is well outside its scope of expertise.

Never mind. The US Federal Reserve is the latest group to announce it is throwing its hat in the ring on climate policy. Perhaps the board of governors felt left out that former Fed chair Janet Yellen was promising to stem the climate emergency via the Treasury. Best keep up.

Never mind that 35% of all M1 money supply has been printed in the last 10 months. It would be one thing if the Fed had a track record to boast about. Sadly, it has such poor predictive powers that getting the core business right maybe a more prudent strategy. God help us if inflation ever hits us. Read Jonathan Rochford’s piece on too much cash here.

The problem with central banks is that they continue to use the only tool they possess – a hammer – which would be great if every problem they encountered was actually a nail.

We aren’t alone. The Reserve Bank of Australia has also joined this climate alarmist bandwagon. Even worse the speech based its assertions on the prophecies of the IPCC and BOM, two of many organizations which have been caught red handed manipulating climate data.

Instead of coordinating monetary policy which has fed a housing bubble of almost 1980s Japan levels in terms of price:income with banks 50% more levered to mortgages on average than Japan’s financial institutions were at the point of collapse.

APRA and ASIC have also told us they plan to get stricter on climate change reporting by corporates even though their own data over the last decade shows the opposite. In order to get the results they want, they plan to legislate to enforce it. That should tell us much.

Forgive us for being cynical, but we all know that government agencies must submit their budgets each year. What better way to get a healthy shot in the arm than add a climate change agenda to it in order to squeeze $10s or $100s of millions in extra funding. Forget if the agency has absolutely zero relation to climate change like the DOJ. Just tick that box and then hire a bunch of activists to write puff pieces warning us of the grave dangers of a future crime wave if we don’t stop rising sea levels as opposed to defunding the police.

What an absolute farce. What tends to happen is that extra funding often finds its way to line the pockets of those who work within these agencies, especially at the senior levels. Note what happened to our own fire services in Australia who rarely spoke about climate change but got masses of funding which didn’t go to replenishing equipment but salary increases.

We guess the 2020 annual reports will be ALL about the impacts of climate change when it was hardly ever mentioned over the previous decade when it should have mattered.

Just watch department and agency around the world line up one after another at the climate change teat. That tells all we need to know. A bunch of amateurs doing what they do best – behaving as professional politicians.

It’s for our own good, you know! Shut up already.

Cuomo to Rich New Yorkers – “Please come back”

The wealthiest 1% of NYS’ population contributes roughly 50% of the state’s coffers. Gov. Andrew Cuomo took to begging the rich to return to NYC from their second homes so they can pay taxes to fill the dwindling reserves. He said,

I literally talk to people all day long who are now in their Hamptons house who also lived here, or in their Hudson Valley house, or in their Connecticut weekend house, and I say, ‘You got to come back! We’ll go to dinner! I’ll buy you a drink! Come over, I’ll cook!’…They’re not coming back right now. And you know what else they’re thinking? ‘If I stay there, I’ll pay a lower income tax,’ because they don’t pay the New York City surcharge…

At the very least, Cuomo was smart enough to tell his largely Democrat-controlled legislature that raising taxes further on the rich probably wasn’t a wise idea.

If you pass a piece of legislation that requires New York to raise taxes, raise a millionaires’ tax in this environment in New York City, where we’re struggling … We used to be worried [with a] millionaires’ tax, people might leave…We’re going to make progress helping the homeless. We’re going to clean up the graffiti. We’re going to fix crime. On top of that, you’re going to say, ‘And by the way, when you come back, you get a big tax increase.’

Who knew? We are not sure of the culinary talent of the NY governor but if it is anything like his political acumen, it could well end up being a deterrent.

Why hasn’t this violence been reported by the media??

An innocent 15yo girl was set upon by 8 thugs at Southern Cross Station in Melbourne at midday. They were so proud of their violent actions they then uploaded it to Snapchat.

Where were people stepping into save the poor girl from what was going on? How could anyone witness this and not intervene? Why hasn’t the media televised it? If this was 8 whites on a minority it would be televised for weeks.

Of course, in the People’s Republic of Victoria, the Police say they haven’t got enough evidence to follow.

The girl has broken ribs, lacerations and severe trauma. She worries about reporting them because she fears that nothing will happen to them and they’ll finish off the job. She knows at least one of the perpetrators.

CHAZ fights racism with more racism

Some woke white liberals must be questioning their own personal economic consequences for remaining in CHAZ. A CHAZ leader demanded that whites pay people of colour $10 before they leave. Will that be a one-off fee? A daily charge? Will a proof or receipt be required?

The leader says he “remembers” their faces so they better be sure to check their privilege before leaving. So much for equality.

Defeat racism with more racism.

Minneapolis votes to disband the Police Dept

It appears that 9 out of 13 Minneapolis City councillors have voted in favour of disbanding the Minneapolis Police Department (MPD) and shift its funding towards a “community-oriented, nonviolent public safety and outreach capacity.

Perhaps they need to watch The Untouchables where Al Capone infamously said, “I grew up in a tough neighbourhood and quickly learnt you could get much further with a kind word and a gun than just a kind word.”

Soft-touch all looks pretty on paper. However, we question how violent crime will be curtailed? We doubt that criminals will see this as anything other than an invite to turn Minneapolis into a crime hub to coordinate it with no police present.

Minneapolis has a crime rate twice the national city average and 4x the state of Minnesota. According to Neighborhood Scout, only 4% of cities in America are more crime-infested than Minneapolis. 50 crimes are committed per 1,000 residents annually split 8/1,000 for violent crimes and 42/1,000 for robbery. Do facts matter to the council? Will crime drop off if community groups hold hands and sing kumbaya to home-owners as felons loot their abodes?

The outcome? We would imagine that those who may have relied on the police to help them with incidences of burglary, robbery or assault may just have to pack their bags and leave. Minneapolis has grown from around 368,000 inhabitants in 1990 to around 425,000 today.

For whatever faults the MPD may have had, isn’t it worth reflecting on 59 years of continuous Democratic stewardship which led to the failures that caused the problem in the first place?

This isn’t a lesser of two evils argument but a perfect time to clean house within the police department and union. For the Mayor to sack the police chief and install someone to change MPD’s behaviors rather than just through the keys into the burnt-out police station. It is not as if the MPD had a lot of choices after Floyd’s death to stand their ground. With it the majority of good cops will be on the street.

We wouldn’t be surprised if businesses pack up and leave too, like they did in Detroit. Investment will fall because who would want to pour money into an abandoning ship? Insurance companies will see no point signing up policies in a city that doesn’t have proper law enforcement to lower the risk profile.

Who ends up losing? Residents, forced into more crime-infested poverty. Democrat policy at its finest. Utterly clueless.

While being woke might appear optically pleasing to the mob while emotions are high, this supposed proven public safety initiative adopted in places such as Eugene, Oregon; Austin, Texas; and Denver, Colorado still rely on their city police forces to marshall the tougher stuff. Minneapolis wants to go all in.

One can only imagine that the services of a Wyatt Earp will be required when it all goes completely pear-shaped. You can’t make this stuff up. Even the mayor, as whipped as he is knows a police force is still a necessary evil. How can he not resign?

We pray the Gov’t makes more $60bn mistakes!

Can the media and shadow politicians get a grip? Since when should taxpayers complain when the government makes a huge error in our favour? We can pretty much stake our lives on the fact that 99% of government programs end up way more expensive than initially budgeted for. French Submarines anyone? NBN? We should be looking at the JobKeeper revision as a massive positive.

The federal government estimated that the JobKeeper program would initially cost $130 billion. Now it appears they overestimated it by $60 billion. That was driven by the idiosyncrasies of who would be eligible at the employer end – from the self-employed to big business and everything in between.

Given the limited time window, forgive the Treasury and Tax Office for not landing estimates on target. It is ridiculous to expect they could estimate such a fluid piece of legislation.

The unwelcome arrival of COVID19 and the sudden stay-at-home orders that ensued hardly gave a generous window of opportunity to apply Japanese level precision engineering to the process.

Our only criticism lies with the drip feed approach to restarting the hibernating economy. As we mentioned yesterday with respect to the 50 US states, so many appear to be copying each other rather than making bold data driven decisions based on facts not consensus.

The reality is that the Treasury will need to make many more multi billion dollar mistakes in the spirit of JobKeeper to help mitigate the damage caused by the looking trillion dollar deficits.

Perhaps the $60 billion saving can be redeployed to building a bullet train from Sydney to Melbourne. A 20-yr project that is just the type of infrastructure spending which ticks so many boxes – relieving pressure on the state capitol cities, housing, assist a growing population and provide lots of jobs.

A tale: Today vs 600BC

dollar bomb

As a lover of ancient history, this story in ZeroHedge is an interesting parallel on the dangers of debt forgiveness today using the tale of releasing the commoners from debt slavery by Solon in 600BC. In short, everyone ends up paying the price.

We think the sensible solution is to let individual landlords negotiate their own deals. Let them live and die with the consequences of their actions. Undoubtedly every landlord has a unique position where a one-size-fits-all strategy won’t work.

Harley’s horrible huffing contains plenty of puffing

HDQ1US

When companies won’t give guidance, we must find ways to see where we were relative to history to get a picture of the future. Harley-Davidson (HOG) makes a good case study. Coronavirus may be one factor but the company has already produced results that have undercut the worst levels experienced during the GFC. We have long criticised HOG for fuzzy maths under the disastrous leadership of the recently ousted CEO Matt Levatich.

While there are strictly no direct apples for apples comparisons on the timing of coronavirus and the GFC (the latter requiring no lockdown), we note the weakness in Q1 2020 unit sales in the chart above.

This is what the trend of Q2 looks like.

HDUSQ2

If we assumed a similar slowdown for April and May then theoretically the company would comfortably breach the Q2 2009 unit sales level of 58,179 which is only 18.6% below the Q2 2019 level. Q1 2020 global sales fell by 17.7%, even though the company made a very misleading statement which we’ll get to in a moment.

One thing that struck us was the steadily rising value of quarterly inventory as a percentage of quarterly non-finance revenues since Q1 2014. While the former value is a balance sheet item and the latter P&L, Q1 is generally a period where new models are rolled out ahead of the busiest Q2 & Q3 seasons to ensure the distribution network can move metal.

HDQ1Inv

Shipments reflect this. The inventory metric drops off into Q2 although exhibits a similar type of trend to Q1. Given Q2 2009 was the beginning of the tough times post-GFC, will we see the high watermark breached or will the slowdown in production offset it? How badly are revenues affected such even flat inventories lead to a deterioration of this measure?

In Q4 2019, inventories to motorcycle revenues surged to 69.1%.

We note that Q1 2020 shipments equated to an inventory of 12,534 units (+29.0%YoY).

HDq2Inv

Here is where it gets interesting. By HOG’s own admission in the quarterly investor presentation pack (p.7), it noted that Q1 2020 US retail sales were on target to be one of ‘the strongest quarters in the last 6 years through to mid-March‘, until COVID. 6 years ago US Q1 unit sales hit 35,730 units. US sales in Q1 2020 ended up at 23,732.

By deduction,

In Q1 2014, over 90 days HOG shifted on average 397 bikes per day. (35,730/90 = 397)

In Q1 2020, over the 74 days to mid-March, HOG was moving on average 321 bikes per day. (23,732/74 = 320.7027).

If we assumed that HOG was to hit that magic target over the 16 days stolen by COVID19, it would have had to punch out 750 bikes a day. (11,998/16 = 749.875).

We would love to see the order book for these magical beasts that were waiting for a home…it would seem the sales and marketing department cherry-picked one strong day and multiplied it over the quarter to create such a questionable statement.

Here is a chart of motorcycle related revenue for Q1 since 2008. No wonder the shares have underperformed since 2014, even with a small fortune squandered on share buybacks.

HSQ1rev

The Q2 revenue book doesn’t look too flash either if April is wiped out. At present 50% of dealers are shut since late March. Is the market prepared for a sub Q2 2009 print? The share price has rebounded strongly after the Q1 results even though there is no guidance to speak of.

HDq2Rev

But it gets worse. So poor has the Q3 season become for HOG that its unit sales have missed the Q3 2009 post-GFC low for seven out of the last 10 years. Are we to believe if the world is out of lockdown by Q3 that there will be a miraculous surge in new bike sales when unemployment is likely to remain at troubling levels potentially above that of GFC?

HDq3US

HOG is a great example of a divine franchise. It wasted far too much money on share buybacks (now suspended) and sits with a credit rating just two notches above junk.

The annualised Q1 2020 loss experience for the finance business sit at 10-year highs even before it has been thumped by the coming turndown. People buy HOGs as a hobby, not transport. A purely discretionary purchase. We imagine that restoring household balance sheets will take precedence to stumping up serious coin for a Harley cruiser.

Sadly Levatich and his 2027 vision have not been consigned to the dustbin of history which is the only logical filing cabinet for it. Completely unrealistic, devoid of reality and totally in denial of the shifting sands in the global motorbike market.

The new “Rewire Plan” (p.5) while sketchy on detail (as it would with an interim CEO) is a reheat of Levatich’s plan. Sad.

In our view, the entire motorcycle industry needs a strong HOG. New management is a good start but it won’t help if they intend to convince investors that they were on course to shoot Q1 to its best level in 6 years with questionable math. How quickly can inventory be pared? What models will revive its fortunes?

HOG needs to get in touch with its core customer base the way Willie Davidson did after the dark days of AMF ownership. It needs to build products which hark back to its former glory rather answer questions in segments that no one is asking it to fill.

Indian, its rival of 100 years ago is killing it with the FTR1200. Indian’s parent company, Polaris Industries, posted a small single-digit increase for motorcycles in Q1 2020. Enough excuses HOG. You are running out of time and your retained earnings are 1/5th what they were 5 years ago!

Why is the market giving it the benefit of the doubt when the worst is still ahead?

HOG

Harley needs a crisis manager. Will the incoming CEO possess those skills?

Sheepishly downloading the COVIDSafe app is a warning for all of us

NSA raises significant concern to Government abattoir proposal ...

We have no problem with people individually choosing to sign up to the COVIDSafe application launched yesterday. After all, it is voluntary and we believe in personal freedom. However, we are perplexed why so many people feel compelled to post their newfound compliance on social media feeds. It is this blind obedience that worries us.

It is hard to see such self-promotion on social media as anything more than the same virtue-signalling mindset of those who drape their social media avatars with the flag of the country where innocent people were slain by terrorists. Comments such as “I’m doing my bit” reign supreme. Why do people so sheepishly comply to sign up to this when the data is seriously unconvincing to warrant its introduction? Should we report our friends who haven’t publicly declared their status? Admitting one has signed up to COVIDSafe is borderline accepting to become a slave.

The most important point people need to consider is that there is absolutely zero downside for the government during and after this crisis. Remember that number – ZERO. If the economy goes into a prolonged recession or depression, our politicians can simply play the “we did it to save lives” card and tell us it was all for our own good. They can claim they couldn’t have done anything else. Unfortunately, we bear all the risk no matter what the outcome. That is a bad equation in any language. Why would anyone willingly sign up to it?

Indeed, saving lives should be congratulated, not censured. Still, at what point will we realise that the draconian measures put in place are leaving a disproportionate drag on the economy? As we wrote yesterday, if we take the JobKeeper support package alone, it presently costs $1.5 billion per death. Or $19.5 million per infection. The $130bn JobKeeper program is almost as much as the annual federal expenditure on education, healthcare and defence spend combined, three of the four largest budget items. Is this sustainable? If we stay in lockdown beyond the date of the package, this universal income will undoubtedly be extended.

There is a snowball’s chance in hell that we will have a V-shaped recovery. Our central bank might send us comforting lies to maintain the illusion that they are competent but it simply won’t happen.

Our authorities have suggested that the domestic economy comprises 75% of GDP which will provide a great cushion but on what planet do they believe that a crushed export sector which employs so many can be airbrushed to give us a V? Double-digit unemployment, at levels double or treble the present figures will all but guarantee a slower recovery. With household debt exceeding 180% of GDP, any future spending will be directed at rebuilding the balance sheet, not consumption. We’ll be lucky to get an L!!

There will be no normality after COVID19 abates. So much of our domestic future will be driven by the rest of the world’s approach to their own economies. Our neighbours will undoubtedly pursue more nationalist policies which prioritise domestic production. They will also need to contend with the likely aggressive reset of their own relative risk weighting, currency and fiscal positions. For anyone to believe that the magic pixie dust sprinkled by Canberra will avoid any calamity is dangerously naive.

Australia faces a $1 trillion deficit. Await the raft of new taxes on housing, inheritance and income to pay for it. We will absolutely hate what is coming. The sad thing is that we could have taken the pain over a decade ago yet we put short term expediency ahead of rational principle and now await the consequences. We are reaping what we sowed.

Much of the reasoning given by Aussies to sign up has been this belief that it will accelerate the government’s ability to reopen the economy sooner. If the government requires this sort of overlaying safeguard on top of the 99.98% of Australians that don’t knowingly carry the coronavirus or the 99.9997% who haven’t died from it, we should worry about our lawmakers’ ability to manage risk. Seriously.

Why are governments using future hard dates to consider reopening the economy? If today is the best day to do so, why wait till May 30th? Our own experience is that people are broadly respecting the social distancing guidelines. Sure, some might hang out in a park to break the monotony of staying indoors, but we are falling for the taglines from the government to #StayHome a bit too literally. The government should be rebuilding confidence. It isn’t. This app is unlikely to do much given the law of already minuscule numbers. It is all a feel-good measure.

With more than one million COVIDSafe app downloads in the first hour, many have proven that we are willing to conform to guidelines at a moments notice without considering the underlying facts. We saw this during the bushfire season. People blindly donated millions to the rural fire services when we proved their administrative skills were so severely lacking that these monies would unlikely be spent wisely.

In closing, many citizens have sent a wonderful signal to the government that they can easily strip more freedoms away by using panic as a tool to achieve it. The longer the economy is left to rot, the easier it will be to drown obedient plebs in even more regulations and restrictions because we failed to stand up and question the methodology. We will continue to do so. After all, former US President Ronald Reagan once said,

“The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.”