Drinking the UnKool-Aid

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It appears President Trump has been bullying the US Federal Reserve to drop rates by 1% and get them to reopen the spigots on QE. What he is failing to grasp is that businesses invest because they see a cycle, not because interest rates fall.

Trump tweeted,

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

This is a frightening proposal. Rates are at 2.25~2.50%. Although it masks a more important reality. Can Trump avoid a market calamity ahead of the next election? The real engine of the economy is slowing.

Despite the headline US GDP print of 3.2%, consumer spending and business investment slumped to the lowest levels under his presidency. Business investment spending was dominated by “intellectual capital” (soft) which is a pretty hard metric to put a reliable number next to. Equipment and structures (hard) contribution to business investment was near as makes no difference zero. Personal consumption of durable goods slumped to their lowest reading since 2011. Wholesale inventories (ex-autos/petroleum) surged ahead of sales.

Trump might argue China is adding stimulus. He is right. China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 Trillion annualised (a Japanese GDP)). This was 55% above estimates and a full 80% ahead of March 2018. This pump priming added 8% to the Chinese stock indices but since then the market has been rolling off.

The world does not need more debt to be inflated away to get us out of the current mess we are in. A recession is inevitable. To put it into context, the world, since GFC, has added $140 trillion in debt for a grand total of $20 trillion in global GDP growth. That is right. $7 of debt only got us $1 of GDP. So if the Fed acquiesces President Trump he will probably get even worse metrics.

Then again perhaps we can take the words of a venture capitalist, Chamath Palihapitiya, who said on CNBC that “central banks have created an environment where major downturns and expansions are almost impossible.” It is statements like this that almost guarantee that central banks have lost control. Central banks have one role – ensure that markets maintain “confidence”. Powell’s latest move to cut rates after such a shallow peak tells us that “confidence” is waning. 

This can’t wait


John Mauldin has written an informative piece entitled “this can’t wait” which sums up a lot of pieces I’ve written on the sickening state of public pension unfunded liabilities and the debt super cycle that is facing us. While Mauldin is trying to sell his investment services on the back of this, I wasn’t when I wrote mine. Public service announcement? Maybe but the stats of the black holes we face in pensions and central bank QE which has failed to boost money velocity will bite. Hard. There will be no “I told you so” glory because almost everyone will lose big.

Even if people want to criticize me for being a perma-bear there is no harm in being aware of what is likely coming.

How the other half is doing in America


A few years back the US Federal Reserve did a survey which revealed 47% of Americans couldn’t raise $400 cash in an emergency without selling something. Do you recall Marco Rubio in the GOP primaries harping about knowing families who live “paycheck to paycheck”  Well the bad news keeps rolling in.  Northwestern Mutual has pointed out that 45% of Americans spend up to half of their monthly take home pay on (mostly credit card) debt service alone….which, again, excludes mortgage debt.

The study went on to show that 40% of that credit card debt was frivolous discretionary spending (which they claimed was the biggest source of their problems) but only 20% were able to make minimum monthly payments.  In short don’t be surprised to see defaults, bankruptcies and moral hazard rear its ugly head. Now we see a run on a Canadian mortgage lender. Does the poverty rate of 25% across EU vs 20% pre Lehman collapse raise red flags? Does sharply growing public sector employment across the majority of OECD  countries since GFC not strike you as failed economic policy? Does 1/3rd of Aussies saying 3mths of continuous unemployment would lead to an inability to repay their debts? How the 65yo+ demographic is the largest prisoner cohort in Japan because poverty levels are climbing. Yes pensioners are breaking Into jail.

If anyone thinks record high asset prices is a reflection on our collective wealth think again. The worst thing about this bubble is that it is the accumulation of three massive bubbles that never cleared. Sadly this one will pop like one of those game shows with a balloon full of  stinky slime.

Intriguing quote in Deutsche Bank’s funding sheet. What if all of a sudden there is a run?


By now most people know that Germany’s once gargantuan Deutsche Bank is trading at all time lows. Over the weekend Angela Merkel said the German government saw no grounds to bail it out although I’m sure if it comes to it Germany will be under so much international pressure to save it because of the systemic risks that a failure would pose to global financial markets. Europe’s fashionable bail-in concept means the ultimate victims are those that have lent to it – whether individual depositors or wholesale lenders. Is it any wonder Italian PM Renzi is ignoring the EU rules and likely to bail out the world’s oldest bank?

Deutsche’s most recent funding blurb says the following:

“Diversification of our funding profile in terms of investor types, regions, products and instruments is an important element of our liquidity risk management framework. Our most stable funding sources come from capital markets and equity, retail, and transaction banking clients. Other customer deposits and secured funding and shorts are additional sources of funding. Unsecured wholesale funding represents unsecured wholesale liabilities sourced primarily by our Treasury Pool division. Given the relatively short-term nature of these liabilities, they are primarily used to fund cash and liquid trading assets…

…Credit markets in 2015 were affected by continued political uncertainties in the euro zone, the ongoing low interest rate environment as well as the implementation in a number of jurisdictions, including Germany, of measures intended to reduce the levels of implicit sovereign support for banks, with a consequential impact on bank senior ratings. Our 5 year CDS traded within a range of 61 to 110 bps [trading at 247bps today], peaking in July. Since then, the spread has slightly declined and as of year-end was trading at the higher end of the range for the year…

…In 2016, our base case funding plan is up to € 35 billion which we plan to cover by accessing the above sources, without being overly dependent on any one source. We also plan to raise a portion of this funding in U.S. dollar and may enter into cross currency swaps to manage any residual requirements. We have total capital markets maturities, excluding legally exercisable calls of approximately € 22.4 billion in 2016.”

Naturally it presents an interesting question. If you are lending to DB how much faith do you put in the government to bail it out? Even if you weight the chances as high on a “too big to fail” argument (which is becoming somewhat hard to justify on grounds of market cap) premiums have to go up to compensate which at the ridiculous rates we are at has a far greater relative impact on profitability. I’m not sure how much of the € 22.4 billion in 2016 has been funded already but I’m sure those with money due in 2017 will have to take a longer look.

But we shouldn’t worry. Deutsche’s CEO is on record as saying “funding is not on the agenda”. I always love the way banks talk about their risks. Who could forget former Goldman Sachs CEO and Treasury Secretary Hank Paulson in March 2008 before GFC:

“We’ve got strong financial institutions . . . Our markets are the envy of the world. They’re resilient, they’re…innovative, they’re flexible.”

Of course banks always push the denial line when in trouble. They have no choice. No doubt the internal emails at DB have a”message” to staff – where what is written doesn’t resemble anything like the reality faced everyday by the minions. That is the folly of working in an investment bank – the internal politics get ever nastier until there are no more lifeboat passes left and no life jackets to give.

Throw in a good Trump performance tonight and global markets will be even more skittish – then again it might be they are finally waking up to the reality of the disaster central banks have put the world into.

Korea’s largest shipping company declares bankruptcy but many others sinking too


Korea’s largest container transporter Hanjin Shipping has declared bankruptcy. Given the backdrop it isn’t surprising. Normally we should expect lending companies to play a supporting role to prevent excess boats “flooding” (no pun intended) the market and driving beaten prices down on loans to others even further. However even the Korean banks weren’t satisfied with the restructuring plan  of Hanjin. This could well be first blood but I wonder if the Korean government steps in and potentially nationalises it or encourages some zombie lending to save face.

The difficulty here is the state of banks, many German, who lend to shipping companies are on their last sea legs limiting wiggle room. 

3 months I wrote the following piece on that “Sinking feeling” regards to the shipping industry

Clarksons is the world authority on shipping. These are the latest prices in 2016 vs the 5 year average by type. New LNG, grain and oil carriers etc are holding up but the used market is being slaughtered. Ships are generally bought with a 25-yr service span at the very least. Global seaborne trade growth has shrunk from 6%+ growth in 2011 to less than 2% now.

Ship Prixces

Clarksons is the world authority on shipping. These are the latest prices in 2016 vs the 5 year average by type. New LNG, grain and oil carriers etc are holding up but the used market is being slaughtered. Ships are generally bought with a 25-yr service span at the very least. Global seaborne trade growth has shrunk from 6%+ growth in 2011 to less than 2% now.

daily px shi;s

Daily rates are naturally falling fast. 1yr Capesize ships used in the transport of raw materials are now 52% lower than the 5 year average and down 30%YoY vs 2015.

daily px shi;s


Now one could have wishful thinking and view this as bottoming out but even with all the liquidity being pumped into world markets, trade is suffering from all that deflation in the system.

None of this is surprising  but it shows how slow our over capacity world is growing. If such news ends up causing some bankruptcies among lenders then this will really start highlighting this financial crisis we keep denying

You won’t win a prize lawn competition using a flame thrower

Just completed reading an article on Bloomberg titled, “Fed Officials Challenge Decades of Accepted Wisdom on Inflation.”  When people say they enjoyed a book so much they couldn’t put it down, I was getting so annoyed by this article I couldn’t wait for it to finish. That Fed Officials apparently think they know what they are doing when it is so obvious they are clueless. So perhaps my title might be more apt. This group-think led reckless rate setting by central banks is now supposedly being sold to the rest of we stupid folk as a victory in so far as “run away inflation risk is slight.” Inflation is so far away from target setting even if central banks halved their aspirations they’d still be a country mile away.

Lesson #1- Businesses invest in cycles not because interest rates are low

OK so while central banks have been dousing the lawn in hi-octane fuel, the clogged filter of business confidence is the missing link. Businesses and people invest because “THEY CAN SEE A CYCLE” not because “INTEREST RATES ARE LOW.” So until these supposed 180 IQ people realise that the confidence filter is clogged no amount of fuel mix and turbo charging will influence outcomes much. Why can’t they realise this?

Lesson #2 – Poverty is growing and growing

While interest rates have been at ZIRP, NIRP or near as makes no difference those that have had financial assets have benefitted while those without have fared worse, widening the gap between rich and poor. This is why we’re seeing so much disruption amongst voters – Brexit and the rise of characters like Trump confirm it. Poverty is on the rise.

Lesson #3 – Real wages aren’t growing

Look at the hard data central banks – it is pretty telling! Growth is slowing down in US, EU, China, Australia etc etc, over capacity clogs the system and real wages aren’t going up! If consumers aren’t feeling warm and fuzzy with their pocket books they will not feel like going out and shopping til they drop.

Lesson #4 – Corporate credit is worsening

In the last decade, rating agencies have seen a marked shift from corporates with top rated credit toward non-investment grade creditAll the while $15 trillion in sovereign debt has negative yields. Most pensioners aren’t buying for capital growth but the income stream. Now they are forced to buy riskier assets with paltry (but better than nothing) yields which could see them wiped out.

Lesson #5 – time to admit you need to have central banks cooperate with governments

Milton Friedman said he didn’t believe in central bank independence. Too many governments are ceding decisions to the central banks. Turning a blind eye to the clear and present danger of over indebtedness on all levels – private, corporate and government- can’t continue. Over reliance on central banks patrolling the swell is madness. Governments are clueless. Most think raising taxes is the only way to cut debt. Burying tapped out consumers in higher taxes is absolutely guaranteed to knock the much needed confidence to get us out of this mess. Control must be put back into the hands of the consumer. It won’t happen because there is too much group think and populist governments won’t inflict pain on the people to save their own hides. Such short termism will have an even more negative impact on the global economy than the rates that are set.

Whether we like it or not we have no choice but to rely on governments to set policy and central banks to set rates. It might require a radical shift and changes at the top but if they don’t do it proactively let me assure you the markets will force the change on them.

Bodybuilders booted out of STOXX Euro 50 Index for being too puny


In all my career in finance, never once was a behemoth financial out of the headline index of any country. Banks and insurance companies have always been like the muscular body-builders posing to girls on Venice Beach yet Deutsche and Credit Suisse have become the trodden on puny weaklings who are getting sand kicked in their face. Yes, these two former giants of the finance world have been relegated because their market caps have fallen under #75 for two months consistently.

It really paints a telling picture of how desperate things are becoming. Don’t give me this disrupter “fintech” malarkey. Markets, for as much as they are manipulated by government hands, are still barometers of trust and confidence. To that end the majority of pundits don’t trust these banks. The European stress tests were a forgone conclusion. I’d written what a basket case Italian banks already were. The bigger problem is the message. When the sector that greases the wheels of the economy is severely limping it is time to ask how bad the real economy is. I wrote a while back that some Chinese machinery companies have accounts receivable equivalent to 5 years of revenue. They AREN’T getting paid by customers.

Let’s  look at how “non performing loans” in Europe have grown since 2008 and whether you’d agree outer central banks have it under control

Greece +15x, NPLs now 38% of all loans

Italy +3x, now 18% of all loans

Portugal +8x, now 19% of all loans

Spain +2x, now 7% of all loans

France +1.4x, now 4.2% of loans

Germany +1.8x, now 3.2% of all loans

Total EU non performing debt has essentially trebled to over €1 trillion.

Sure banks can fiddle around with assumptions to suppress the true state of NPLs because triggering the bailiffs creates a whole new can of worms. If the resulting asset fire sales cause a bank to mark-to-market other outstanding loans  the torpedo to the balance sheet would sink them. Let’s not forget a chart I posted looking at the sharp rise in inferior rated companies on the US S&P500 over the last decade. On the far left we have AAA credit going all the way to the credit rated one notch above at the far right.


Now Australia has cut rates again I wonder at the personal debt edifice being run up and the state of banks with an overreliance on wholesale funding markets. At the moment it seems benign but if we get financial contagion in Italy markets will deprive debt. Central banks have done an admirable (not credible) smoke and mirrors job but we are coming to a dead zone where market forces, as weakened as they are, can still surprise. In a world drowning in debt, the authorities are ill prepared for the car crash that’s coming. The amount of complacency shown by markets to date is disturbing and that only means once the apple cart is tipped it will be multiple times worse, making GFC look a walk in the park.

As my mate Stu joked this morning, “Our kids are going to see some big changes to the Economics 101 textbooks by the time they get to study.” Never a truer word than that said in jest.

The wisest investment is to ignore the professionals


The sell-side is littered with highly paid experts that present us with rational explanations for their bullishness. However it is actually their lack of bearishness that is the problem. Looking over history the ratio of their sell recommendations on company research is highly inversely correlated with market movement. In the chart above we can see how far off the mark brokers are. When sell recommendations decline to all time lows, the market  tanks. Think back to 2008. We are now seeing the same ratio of low sell recommendations  we did just before Lehman went bust. The market is set to tank again. Maybe Brexit becomes a catalyst but it is not the cause.

Goes to show you that the brokers are worth keeping. It is only in that they stay consistently wrong that we can invest wisely. Keep up the good work.