Reckless

Let shareholders burn

We buy shares because we expect to gain a return. We all know there are risks attached. As we wrote yesterday on Boeing, it has embarked on reckless buybacks which have compromised the balance sheet. The company has drawn down all of its $13.8bn in credit lines from banks overnight. It is panic stations. It was completely avoidable.

How ironic that companies which are among those that splurged $4.5 trillion on share buybacks just to chase short term management incentives will be the first lining up for taxpayer support to save them from negligent governance.

We say shareholders should suffer the downside of that investment choice. They had the power to remove officers from the companies they entrusted management to. If a company goes belly up, let other players in the market pick up the spoils for fire sale prices.

The Wolf Street correctly noted,

The Trump administration is putting together a rumored $850-billion stimulus package that will include taxpayer funded bailouts of Corporate America, according to leaks cited widely by the media. Trump in the press conference today singled out $50 billion in bailout funds for US airlines alone. A bailout of this type is designed to bail out shareholders and unsecured creditors. That’s all it is. The alternative would be a US chapter 11 bankruptcy procedure which would allow the company to operate, while it is being handed to the creditors, with shareholders getting wiped out.”

All this Trump package will do is encourage the same bad behaviour. We think this is nothing more than trebling down on the problems that hit us in 2008. But hey, it’s an election year!! Reckless.

As usual, the SEC has been asleep at the wheel. Same as in the lead up to 2008. This is what happens when regulators hire clueless lawyers who don’t have a clue about how markets operate. Therefore they miss crucial events.

As for shareholders – you earned it.

The only upside to this market volatility is that no one has talked about climate change for weeks! Probably because when people are about to lose their livelihoods, all of a sudden virtue signaling is worthless. That goes for diversity and inclusion too. Every cloud has a silver lining.

NSW to lose State of Origin 4 (Adani)

Who’d a thunk? The Queensland Labor Government is fighting for its life. If it means trading principle for expediency, they have chosen the latter path. Even throwing on last-minute ‘infrastructure taxes’ couldn’t halt progress. Adani has been approved.

Labor has spent 8 years obstructing Adani Carmichael from going ahead. After the unlosable election result handed to its federal colleagues, Premier Annastacia Palaszczuk saw the light. Political suicide was at stake. It won’t stop the inevitable, especially post QLD Treasurer Jackie Trad’s deeper deficits announced this week.

What Greens Senator DiNatale fails to understand (despite saying every election hereon will be a #ClimateElection) is that Queenslanders couldn’t give a hoot for Victorians complaining about their wish to have jobs. The reality is that Adani Carmichael will likely be open for decades to come. It will employ those working at the mines and the local economies that support them.

What evidence has DiNatale got for thousands of jobs being destroyed? It is that level of economic comprehension that means they will remain such a joke as a credible party. Not least helped by the eloquence of NSW MLC Cate Faehrmann who thinks encouraging a blockade in a neighbouring state seems fair game.

There are only supposed to be three games in the State of Origin.  Faehrmann is guaranteed to lose her suggested matchup, much like former Senator Bob Brown’s convoy pre-election warm-up game concluded. Queensland will run rings around the NSW attack, as always!

Cate Faehrmann.png

You vs Train: The Facts

As much as these Extinction Rebellion (XR) protestors think they’re so smart for jumping on the trains at Canary Wharf to rally against climate change, this is an interesting campaign by the train lobby in the UK showing just how stupid playing on trains can be. Could it be the extinction will turn out to be self inflicted by the very source of energy powered by fossil fuels?

1) 25,000 Volts

The power running through overhead railway lines is 100 times stronger than your supply at home. Electricity is easily the most dangerous factor in stepping on the track – it’s always switched on and nine out of ten people die when they’re struck by it.

Others are left with life-changing injuries, including burns and amputations; and that’s not to mention the emotional scars that will be left behind. Electricity is easily underestimated. People don’t realise it can jump – so you don’t even need to touch a cable to be seriously injured.

2) You vs Train traveling at 125mph

You can’t outrun a train. And even if you could, you wouldn’t hear it coming, as today’s trains almost silently reach speeds of 125mph. And they run 24 hours a day. So even if you think it’s a ‘quiet time’, you can be hit by thousand tonne freight trains that run all night.

Don’t think that keeping to one side of the track will keep you safe. Trains are all wider than the rails. You’re just as likely to trip over the train equipment and be dragged on to the track.

3) You vs the electrified 3rd rail

The third rail is probably the hardest danger to see. It looks just like an ordinary rail, but it carries 750 volts – easily enough to kill you.

It’s designed to send power to the train, but you are 70 per cent water and the perfect conductor for this electricity. If you touch the rail, you will “stick” to it. The DC current that flows through it will pull you in and not let go until the emergency services are able to switch the power off.

Nearly half of the UK rail network is now electrified – and more than 30 per cent uses a third rail to power the train. The only way to avoid stepping on this hidden danger is not to step on the track.

While they might argue there were no overhead power lines on this train their actions show a flagrant disregard for safety. The fine for rail trespass/disruption is £1,000. Let’s see how many actually get fined. Or do they get let off because of what they support?

Debunking Modern Monetary Theory (MMT)

Corp Profit

While the Dow & S&P500 indices grind back higher thanks to the US Fed chickening out on a rate rise in because the economy can’t handle it, many people still overlook the fact that core US profitability has tracked sideways since 2012. 6 years of next to nada. Sure one can boost profits by adding back unrealistic  “inventory adjustments” but the reality is plain and simple. If you search for inventory adjusted earnings they’re still marginally growing but there in lies the point. Real profits aren’t.

Record buybacks fueled by cheap debt is the cause for ‘flattered’ earnings. No growth in E  just falls in S.  EPS growth can look spectacular if you ignore 50% of US corporates have BBB credit ratings or worse.

The latest lexicon is “modern monetary theory” (MMT). The idea that the central banks just manipulate markets in perpetuity. Austerity is no longer needed. Central banks print money and extinguish debts the same way. Seriously why bother with taxation? The question is if it is meant to be a sure winner, why aren’t we all living in 5 bedroom mansions with a Mercedes Benz and a Porsche in the driveway? Why not a helicopter?

Logically if central banks can buy our way out of this debt ridden hellhole, why is growth so anemic? Why is European GDP being cut back? Why is German industrial production at its worst level since 2009? Why does Salvini want to jail the Italian central bankers? Why does the Yellow Vest movement in France carry on for its 15th consecutive week? If MMT works why would the EU care if the UK leaves with No Deal? MMT can solve everything for unelected bureaucrats in theory. Even £39bn can be printed

Last year the US Fed announced it had stopped reporting its balance sheet activity. In 2006 it stopped reporting M3 money supply. Curious timing when inside 2 years the world was flung into the worst recession since 1929. Transparency is now a danger for authorities.

The question boils down to one of basic sanity. All assets are priced relative to others. It’s why an identical house with a view in a nice neighborhood trades at a relatively higher price than one in a outer suburban back lot. The market attributes extra value even if the actual dwelling is a carbon copy. It is why currencies in banana republics trade by appointment and inflation remains astronomical. Investors don’t trust their ability to repay debts unless given extremely favorable terms. Market forces at work.

To put the shoe on the other foot, if all countries adopted MMT why bother buying bonds for retirement? The interest is merely backed by a printing press. Best consume 100% and save zero. The government has moved beyond moral hazard and hopes no one will notice

Take a look at Japan. It has $10 trillion in outstanding debt which is 2x its economy. The Bank of Japan owns 60% of that paper bought through a printing press. The market for JGBs is so manipulated that several Japanese mega banks have handed back their trading licenses because it has become worthless to be on that exchange. The BoJ thinks it can make whatever prices it chooses. The ultimate aim is to convert all of the outstanding debt into a zero coupon perpetual bond with a minor ‘administration’ fee in order to assign some value to it. To the layman, a zero coupon perpetual means you get no interest on the money you lend and the borrower is technically never required to pay the borrowed amount back. Such loans are made by parents to their children, not central banks to politicians (although one could be forgiven to think their behaviour is child like).

Yet the backdrop remains the same. Consumers are tapped out in many countries. Lulled by a low interest rates forever mentality, even minute rises to stem inflation (real is different to reported) hurt. My credit card company constantly sends emails to offer to transfer balances at 9% as opposed to the 20% they can charge if I don’t pay in full.

APRA recently relented on interest only mortgages after demanding it be tightened to prevent a housing bubble getting bigger. Now mortgage holders hope the RBA cuts rates to ease their pain.

Like most new fads, MMT can’t remove the ultimate dilemma that Milton Friedman told us half a century ago. Inflation is always and everywhere a monetary phenomenon. One can’t hope that putting money in the hands of everyone can be sustainable.

The one lesson that we should have learnt from GFC was that living at the expense of the future has rapidly diminishing returns. All we did was double down on that stupidity.

Do we think it normal that Sydney house prices  trade at levels the Japanese property bubble did in the late 1980s? Do we realize that we hold as much mortgage debt than Japanese banks did for a population 5x our size? Do we think that our banks are adequately stress tested? When an economy like ours has avoided recession for a quarter century, it builds complacency.

MMT is nothing more than a figment of the imagination. It preys on the idea that we won’t notice if we can’t see it. Unfortunately behind the scenes, the real economy can’t sustain the distortions. The French make the best modern day example of  a growing number of Main Streeters struggling  to make ends meet.

Central banks monkeying around with MMT smacks of all the same hubris of the past. It is experimental at best and reckless at worst. Markets can be manipulated for as long as confidence can be sustained. Lose the market’s trust and all of a sudden no amount of modern day jargon  can overcome what economists have known for millennia.

If you flood a global economy with cash at 5x the rate the economy can feasibly grow then it will ultimately require bigger and bigger hits to get the same bang before the jig is up. It’s a Ponzi scheme. Bernie Madoff got 120 years jail. Why not the central bankers?

So what is the best asset out there? Gold. It can’t be printed. It requires effort to discover it and dig it out of the ground. Of course the barbouros relic deserves to be consigned to the dustbin of history. If that were so Fort Knox might as well leave the gate open. The more it is hated only makes this contrarian investor want it more.

If Central Banks were top fuel dragster teams

TFDragstersWhile financial pundits often bang on about the independence of central banks around the world evidence suggests that they need a watchdog, much in the manner Nobel prize winner Milton Friedman suggested. As a monetarist, Friedman promoted the idea that sensible monetary expansion was the best policy for stable economic growth with a free market mentality to fairly allocate capital. He wasn’t joking when he said, “Nobody spends somebody else’s moneyas carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.”

What you are about to see is a relatively clear sign that central banks monetary policies are having increasingly less impact on velocity i.e. the impact of money circulating the economy to produce final GDP. Simply put, central bankers are pouring lower and lower grade lumps of coal into a top fuel dragster engine (aka the economy) designed to run on high octane but expecting to shatter record times in the quarter-mile. Sadly the only thing that is set to shatter is the internals of that engine. Declining velocity is what would be termed in the drag racing world ‘blowing the big end’. Trying to create more power from a tried engine in need of an overhaul simply can’t last. Blind Freddy should be able to work this out by looking at the below charts.

ecbm3

The ECB now requires four times as many euros in the system to create one euro of GDP. Even the Eurozone economic boom from 2000 onwards saw velocity decline. The UK on the other hand has slowed money supply growth which has steadied velocity.

UKm3

Australia’s economy is a lumpier affair but the direction no different. Velocity has bumped and ground its way lower (forecast worst in 30 years).

Ausm3

The US stopped reporting M3 in 2006 at the request of Greenspan so the public would be clueless on how much money would be printed behind the scenes. This is the result of using the same growth rates used post the tech bubble collapse to get…

usm3

So the US sits in at around the UK, below Australia and comfortably ahead of the EU. Japan is at around 0.4x M3 velocity.