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| JAPAN - DEBT DEFLATION |
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JAPAN - Funding Games
Japan’s economy is down but not yet out. The world’s third largest economy won’t go quietly. Both these statements are merely my opinion, but if you believe there’s a risk that I’m right, you may want to pay attention to what the implications may be.
In determining whether a country is willing and able to pay its bills, three key dimensions to consider are:
1 Can the government pay the interest on outstanding debt?
2 Can the government roll over maturing debt?
3 Can the government balance its books before servicing its debt
PRIMARY BUDGET BALANCE - Self Sustaining Without Debt (#3)
SURPLUS - GREECE
Let’s the take last item first: when you have lots of debt, do you want to beg for another loan or should you default? The reason Greece agreed to harsh terms imposed by the International Monetary Fund (IMF) was that they couldn’t self-fund themselves. The budget before servicing debt is referred to as the primary budget balance. A country considering a default needs to be aware that the day after they default it might be difficult to get a fresh loan at palatable terms. As such, a country with a primary budget deficit has an incentive to service its debt because it will need further loans. In contrast, a highly indebted country with a primary budget surplus has an incentive to default on its debt. In Greece’s case, they now have a primary surplus; Greece is in the driver’s seat when it comes to negotiating terms on its debt loans, as they could walk away. One caveat to this is that domestic banks might collapse if they hold lots of debt of their own government.
DEFICIT - JAPAN
Japan has a primary budget deficit, i.e. needs to pile on to its debt burden no matter what interest rates are. A goal set last year to eliminate the primary deficit by 2020 appears elusive now. To balance its budget before paying interest expense, Japan – quite simply – needs to either raise revenue or cut expenses. In April, Japan’s value added tax (VAT) rose from 5% to 8%; whether another rise to 10% scheduled for October 2015 will be implemented is an open question. As Europeans have learned, VAT is a powerful way to raise revenue. Except that the higher rates have also caused significant headwinds on consumption. As long as Japan has a primary deficit, it may be at the mercy of the markets.
INTEREST PAYMENTS (#1)
This ‘mercy’ can be expressed in the interest rate a government has to pay. Japan’s 10-year bonds (JGBs) currently yield 0.4% per annum. Differently said, the market does not appear to be concerned about Japan’s ability to meet its future obligations – at least not according to this measure. But even as we consider dire scenarios, the biggest threat Japan may be facing is that Prime Minister Abe’s policies actually work. That’s because should growth materialize, odds are that JGB’s would sell off, increasing the cost of borrowing. That’s not a problem immediately, as not all debt matures at once. However, should much of the debt burden have to be financed at a higher rate, it may make it all but impossible to finance the deficit.
ROLLING OVER MATURING DEBT (#2)
In practice, as the European debt crisis has shown, it’s not about the average cost of borrowing, but the rolling of debt. Spain, with an average maturity of about seven years for government debt, was considered very prudent in its debt management. However, during the peak of the Eurozone debt crisis, there were concerns that Spain might face trouble refinancing its debt. It didn’t matter that only a comparatively small portion of Spain’s debt needed to be refinanced. Governments – just like corporations or individuals – can face a cash squeeze.
But fear not, because Japan has a few tricks up its sleeve. The best known one is the Bank of Japan (BoJ). While the BoJ denies it is financing government deficits, it’s gobbling up an enormous number of JGBs, thereby keeping yields low. It does have the side effect that this formerly highly liquid market is experiencing a drought. But why bother, what could possibly go wrong?
The other trick Japan has up its sleeve is its $1.2 trillion Japanese government pension fund. The fund announced it would lower its allocation of domestic bonds from 60% to 35%, while doubling its domestic and international equity investments:
In the aftermath of the announcement, the yen fell sharply, while both domestic and international equity markets jumped higher. Japan wants to boost the returns on its pension fund, but may achieve quite the opposite. In the short-term, yes, both domestic and international equity prices soared. But the new allocation has only been announced, not implemented. As such, the pension fund will buy assets at elevated prices. And because Japan’s population is ageing, odds are that they will be net sellers rather than buyers over time. During the roaring markets in the U.S. in the 1990s, prevailing cooler heads cautioned that the government investing in the stock market makes little sense, as while it may boost short-term returns, future returns would likely be lower. There is no free lunch.
WANTS TO MOVE PENSIONS OFFSHORE AS IT PREPARES FOR DEFAULT
We consider Japan’s recent moves deeply troubling acts of desperation: In our assessment, Japan signals it wants to move its pension assets offshore as it prepares for a default:
• Japan’s pension fund dramatically lowers its allocation to government bonds. The markets don’t panic because the BoJ simultaneously steps in to buy about $60 billion worth of bonds each month (keep in mind that the U.S. economy is about 3 ½ time larger than the U.S. economy)
• By buying foreign assets, Japan is ready to debase the value of the yen further, while trying to preserve the purchasing power of those assets.
• In the run-up to Zimbabwe’s default, the country’s stock market soared; simultaneously the value of the now defunct Zimbabwe dollar imploded. It appears only logical that Japan would invest its nest egg in stocks, with an emphasis on foreign stocks. It’s logical if and only if Japan intends to debase the value of its debt.
There’s more than one way to default. The honest way is to restructure debt. The painful way is through inflation. Pundits may wonder what inflation can there possibly be when JGBs don't show inflation? We would counter with questioning what good an inflation indicator JGBs can possibly be given the Bank of Japan owns an ever-increasing amount. Something has to give. What is an investor to do? With the caveat that the following is not investment advice:
• Some opt to short JGBs. Critics have labeled this the widow-maker trade, as JGB’s have held up; indeed, when shorting bonds, one has to constantly pay (rather than receive) interest. There are some that short bonds using options. When properly executed, that strategy may yield steady losses, then possibly a major gain at some point. We don’t pursue this strategy and caution anyone to be aware of numerous risks this strategy entails, ranging from the fact that one is fighting a central bank through the use of derivatives.
• Short the yen. As we have indicated in the past, we don’t see how the yen can survive this. But be aware that foreign exchange analysts are rather frustrated with our take on this. That’s because a price target of ‘infinity’ (an infinite number of yen per dollar) is difficult to fit into any model or short- to medium- term forecasts. And clearly, the yen’s demise is unlikely to happen in a straight line. In fact, whenever the yen rallies, I get lambasted by so-called experts that the yen is still a ‘safe haven’ currency. My take is that the yen’s ability to benefit from a “flight to safety” has been directly correlated to the market’s perception of how effective Abenomics is. As policy makers double down on Mr. Abe’s policies, the yen’s safe haven characteristics may well erode further.
• Buy Japanese stocks. Printing money to buy stocks has been a boon for the Japanese market. And as Zimbabwe’s experience has shown, stocks can perform well in this environment. But Zimbabwe’s experience didn’t end well. Neither do I believe will Japan’s. Given the much higher volatility of stocks versus the currency (assuming no leverage is employed), it’s a much higher risk way of protecting from government failure. Also keep in mind that should a default become reality, it may have profound implications for Japan’s banking system, as well as Japan’s economy as a whole. No country in history has managed to keep its citizens wealthy while defaulting on its debt.
• Gold. Ironically, in the hours after the announcement of the recent initiatives by the Bank of Japan to increase its quantitative easing, as well as the change in Japan’s pension fund strategy, gold fell – not just in U.S. dollars, but also when priced in yen. A little later, gold was priced higher in yen, but still down when priced in U.S. dollar. Gold has not fared very well of late, but it may serve as a good diversifier as Japan’s economic gamble plays out.
As we have a dire view on Japan, we should add that we don’t think Japan’s problems are all that unique. There is too much debt in the U.S. and Europe.
The one country where citizens are fed up with deploying central banks to cure all problems is Switzerland. We will have an in-depth discussion of Switzerland’s vote to force the Swiss National Bank to hold a minimum of 20% of its reserves in gold in an upcoming Merk Insight.
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11-06-14 |
JAPAN |
2 - Japan Debt Deflation Spiral |
GLOBAL RISK - World Economic Forum
Who Will Suffer From A Leveraged Credit Shakeout? 10-31-14 Charlie Hennemann via CFA Institute blog, via ZH
Of all the noteworthy moments from the 2014 CFA Institute Fixed-Income Management Conference, the bombshell may have been the default call from Martin S. Fridson, CFA.
Fridson, CIO at Lehmann Livian Fridson Advisors, has been a leading figure in the high-yield bond market since it was known as the “junk bond” market — and he sees as much as $1.6 trillion in high-yield defaults coming in a surge he expects to begin soon.
“And this is not based on an apocalyptic forecast,” he assured the audience.
High-yield bonds, typically issued with credit ratings at the bottom of the scale, tend to suffer default surges during troughs in the credit cycle. The first high-yield default surge occurred from 1989 to 1992, and encompassed thecollapse of Drexel Burnham Lambert. The second surge ran from 1999 to 2003, following the bursting of the dot-com bubble, and the third happened in the midst of the global financial crisis, from 2008 to 2009.
Fridson suggests the next default surge will be larger than the last three combined. Each surge saw an average annual high-yield default rate above 7% (which, if extended over a multi-year period, can add up to real money).
Fridson currently projects that 1,155 issuers will default in the next wave. Over a four-year period that easily surpasses the 644 defaults in 1999–2003, the largest of the three prior default surges.
For context, Fridson points to the last default surge of 2008–2009: It lasted only two years, and the market swung from a record number of defaults in 2008 to a below-average number in 2009, something Fridson “would have said was impossible.” The reason, of course, was that interventionist policies did as intended in the wake of the financial crisis, cutting the credit cycle short and giving new life to many issuers that were staring default in the face. In the absence of a strong cyclical recovery, this may only have delayed the inevitable.
Fridson noted that since 2010, the high-yield market has seen deterioration in the credit-ratings mix even as it has grown at a compound annual growth rate exceeding 10%, fueled in part by European issuers accessing the high-yield markets in lieu of bank credit, which has been harder to get thanks to more conservative bank capital requirements.
One key assumption behind Fridson’s forecast is that the Fed ends its program of quantitative easing (QE) and allows interest rates to rise. QE may have ended, but Fed guidance calls for interest rates to remain low for a “considerable time.” Fridson was asked about QE and the persistence of low rates during Q&A after his presentation, and the answer left the audience murmuring.
“If we’re in this Fed rescue mode [in 2016–2019], then I think we’re in a lot of trouble. Very serious trouble.”
The final presentation at the Fixed-Income Management Conference was from Paul Travers, a manager of bank loans and collateralized loan obligations (CLOs) at Onex Credit Partners. Travers was quick to offer his thoughts about Fridson’s forecast, which would have a profound impact on the bank loan market if it comes to pass.
“I hope he’s wrong,” Travers exclaimed, noting that high-yield issuers are often also issuers of syndicated loans. “I don’t know if I can live through another four-year default wave.”
In a typical default situation, the holders of senior-secured bank debt would be expected to have much better recoveries than holders of the same issuer’s high-yield bonds, because bank loans have higher priority in the company’s capital structure. But investors in loans may not do as well in the next credit trough as they have in the past, as leverage multiples in the loan market have steadily climbed since 2011.
Unlike fixed-rate high-yield bonds, leveraged loans typically offer floating rates indexed off of Libor, usually resetting monthly, which provides some protection for investors against the prospect of a rising interest rate environment. Travers considers the current credit environment “relatively benign,” and said the current low-rate, low-growth environment is the “sweet spot” for the leveraged loan market — positive growth that isn’t rapid enough to threaten a rate increase. Under these conditions, the S&P/LSTA Leveraged Loan Index par amount outstanding increased to $768 billion in July of this year, adding $76 billion in the first half of 2014.
During his presentation, Travers noted that “Covenant Lite” loans now exceed 50% of the S&P/LSTA Leveraged Loan Index. According to Travers, fewer loan covenants wouldn’t necessarily lead to a higher incidence of defaults, since loan holders in most instances would be inclined to waive covenants rather than force an issuer into default. But over time, the lack of tight covenants could allow cash to flow out of the company, resulting in lower loan recoveries for investors in the event of default.
Of more immediate concern to Travers was the impact of retail fund flows on the leveraged loan market, which had seen 14 consecutive weeks of negative flows at the time of the conference after a long period of inflows. A fairly recent phenomenon in the leveraged-credit market, these retail flows from large loan managers — forced to buy and sell large blocks of loans to put cash to work or meet fund redemptions — contribute to volatility.
In addition to the underlying loan market’s volatility, Travers suggested the CLO market was experiencing volatility itself as a result of just-announced risk retention provisions under section 941 of Dodd–Frank, which would require managers of CLOs to own at least 5% of the risk in their portfolios. Anticipation of this rule was a contributing factor in the rush of CLO issuance in 2014, which equaled 187 deals at the time of the conference.
While the risk-retention requirement isn’t expected to kick in immediately, Travers suggested that going forward, investors should determine whether CLO managers have the capital to comply with this new requirement as part of their due diligence process.
Fridson and Travers approached the leveraged credit market from different perspectives, but their talks suggested that the placid environment encouraged by low interest rates and accommodative credit won’t persist. The next credit cycle will pose some serious challenges for leveraged-credit investors, regardless of their place in the capital structure.
Under the circumstances, the retail component of leveraged credit investments — absent from prior default surges — is probably not a positive development. |
11-04-14 |
STUDY
CREDIT CYCLE |
17 - Credit Contraction II |
| TO TOP |
| MACRO News Items of Importance - This Week |
US ECONOMIC REPORTS & ANALYSIS |
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US PUBLIC POLICY - Mid-Term-Election Turns Control of Senate to GOP
What The Election Means For the Markets 11-05-14 Graham Summers Phoenix Capital Research
The GOP took the Senate yesterday. This will mark the first time the GOP controlled both bodies of Congress since 2007.
The question now for investors is how this will impact the Federal Reserve going forward.
The current Fed is run by the very liberal Janet Yellen, who believes firmly in wealth redistribution. Yellen proudly considers herself and her policies to be liberal and states as much in interviews and speeches.
With the GOP now in control of both houses of Congress, the Yellen Fed will soon be facing increased scrutiny and oversight.
In July of 2014, two GOP Congressmen introduced a bill that would require the Federal Reserve to follow the Taylor Rule regarding interest rates. While the details of this rule are not worth delving into at this time, the key ideas are that:
1) Interest rate policy would no longer be subject to the whims of Fed officials.
2) The Fed and its policies would be regulated by Congress for the first time in history.
In September, just two months later, the GOP-controlled House passed an “Audit the Fed” bill.
The House on Wednesday passed legislation to audit the Federal Reserve System.
Passed 333-92, the bill would require the comptroller general to conduct an audit of the Federal Reserve's board of governors and banks within one year and submit a report to Congress on the findings. A total of 106 Democrats joined all but one Republican in support of the measure.
A version of the bill sponsored by then-Rep. Ron Paul (R-Texas) passed in 2012 by a vote of 327-98. Paul's son, Sen. Rand Paul (R-Ky.), has introduced companion legislation in the Senate.
Rep. Paul Broun (R-Ga.), who failed to advance in a Senate GOP primary earlier this year, said the measure would increase transparency at the Federal Reserve.
http://thehill.com/blogs/floor-action/house/218047-house-passes-bill-to-audit-the-federal-reserve
The political winds have begun to shift against the Fed. It is telling that the US Dollar began to rally soon after this legislation was introduced. A less active Fed means a stronger US Dollar. Between the end of QE, negative interest rates in Europe, and legislation that would rein in the Fed’s lack of accountability, the US Dollar has hit a four-year high.
A strong Dollar is VERY NEGATIVE for stocks. The stock market has yet to really catch on to this, but it will... and it won't be pretty.
Be prepared! |
11-06-14 |
PUBLIC POLICY |
US ECONOMY |
| CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES |
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| Market Analytics |
| TECHNICALS & MARKET ANALYTICS |
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| RISING MARKETS -WHY? |
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BUYBACKS - Take out Buybacks and Dividends (Financed by Corporate) Debt and Market is Nowhere!
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11-05-14 |
STUDIES
BUYBACKS |
ANALYTICS |
CENTRAL BANKS - Manipulation?
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11-05-14 |
STUDIES
CENTRAL BANK ACTIONS |
ANALYTICS |
PATTERNS - Equities No Longer Follow Earnings
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11-05-14 |
STUDIES
CENTRAL BANK ACTIONS |
ANALYTICS |
SENTIMENT - "Consistency Breeds Complacency"
"Consistency Breeds Complacency" 11-05-14 Zero Hedge
Stocks have risen so often in the last five years that many investors may take further gains for granted even after the latest slump, according to Wells Frago's Jim Paulsen. As Bloomberg reports, Paulsen's 'US stock market consistency indicator' (which tracks the ratio of monthly gains and losses for the preceding five years), reached 3 for the first time since April 1999 - less than a year before the end of a bull market driven by Internet stocks - a level not seen since the late 1920s. Of course, it's different this time, but as we noted earlier, the consensus bull case is unbreakable and as Paulsen notes "Consistency breeds complacency,” or a sense of comfort among investors that's at odds with potential losses.
As Bloomberg explains,
"Consistency breeds complacency," or a sense of contentment among investors that’s at odds with potential losses, Paulsen wrote.
“While the stock market did decline aggressively earlier this month, its quick and nearly full recovery, if anything, has probably boosted complacency.”
Complacency earlier this year reached levels seen in the 1990s, the 1950s and the 1920s, according to Paulsen, based in Minneapolis. His conclusion was derived from an indicator that combined the consistency gauge with a stock-volatility index, also tied to Shiller’s data.
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11-05-14 |
SENTIMENT |
ANALYTICS |
SENTIMENT - Historically Excessive Risk Taking
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11-06-14 |
SENTIMENT |
ANALYTICS |
| SOMETHING ISN'T RIGHT? |
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CURRENCIES - Dollars Effect on US Stocks
A RISING DOLLARS IS NORMALLY BAD FOR STOCKS??
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11-05-14 |
DRIVER$
USD |
ANALYTICS |
DRIVER$ - Commodities
A STRONG US$ IS CERTAINLY BAD FOR COMMODITIES!
Global Commodity Prices Are Collapsing At The Fastest Pace Since Lehman
Global Commodity Prices Are Collapsing At The Fastest Pace Since Lehman 11-05-14 Zero Hedge
We are sure it's nothing to worry about, and in now way indicative of any global aggregate economic weakness, but global commodity prices (that would be the 'stuff' that is used to make the 'stuff' we all buy every day) are collapsing at the fastest rate since Lehman...
Of course, it's all about over-supply, not under-demand... just like the Baltic Dry was not low because of shitty trade volumes but because of too many ships... but it's just the other side of an uncomfortably real mal-investment-driven fiasco...
Maybe it is the economy stupid and with US GDP expectations being ratcheted down after construction spending and trade deficit data, maybe the US is not decoupling after all.
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11-05-14 |
DRIVER$
USD |
ANALYTICS |
PATTERNS - NYAD Divergence
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11-05-14 |
PATTERNS |
ANALYTICS |
PATTERNS -Eerie 2007 SPX Comparisons
2014
This move is very reminiscent of the 2007 top. At that time we had a top, followed by a quick correction and then a final blow off to eke out new record highs:
2007
It is not merely the market that is mirroring the 2007 top.
1. Corporate debt is back to 2007 PEAK levels.
2. Stock buybacks are back to 2007 PEAK levels.
3. Investor bullishness is back to 2007 PEAK levels.
4. Margin debt (money borrowed to buy stocks) is at 2007 PEAK levels.
5. The leveraged loan market is flashing major warnings.
6. Corporate insiders are dumping shares at a pace not seen since the TECH BUBBLE TOP
7. Numerous investment legends have warned of a coming crash.
8. Investor complacency is at a record LOW.
9. The Fed has confirmed QE is ending this week, so the juice is cut off for now.
The Fed has succeeded in recreating the same environment that existed in 2007. Once again we have
- Rampant risk taking,
- Excessive leverage, and
- A stock market bubble.
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11-05-14 |
PATTERNS |
ANALYTICS |
PATTERNS -Megaphone Fractal at a Smaller Degree
SOURCE
The market looks like it’s topping out. We have a clear megaphone pattern in the S&P 500. We could always stage a final blow off top, but we’re at or near the top already. The next leg down should take us to the low 1800s. If things really begin to accelerate, we could easily go below 1700:
There is certainly no shortage of potential catalysts for this.
1) Mario Draghi’s “bazooka” in Europe is looking more and more like a water pistol. There may in fact be something of a mutiny going on at the ECB as more and more national central bank heads grow tired of Draghi’s secrecy and policies.
2) Japan’s economy is an absolute disaster. More importantly, the Japanese Bond market is heading towards an implosion. Risk is so mispriced by the Bank of Japan’s policies (QE efforts greater than 24% of Japan’s GDP) that even a general move to market rates could blow up the whole mess.
3) Based on un-massaged data, China is growing at HALF of the official rate. Given than half of all future global GDP growth is expected to come from China, this doesn’t bode well for the world.
4) The US Dollar is rallying hard. We’re already at a four-year high. With the global dollar carry trade somewhere over $3 trillion, this has the potential to blow up a massive amount of investments (see the current commodity meltdown).
WATCH THE CURRENCY MARKETS FOR THE BIG MOVES
The financial world focuses far too much on stocks. The stock market, despite being at record highs (meaning record market capitalizations) remains one of the smallest, and least sophisticated markets on the planet.
Consider that stocks, even at current lofty levels, have a global market capitalization of slightly over $60 trillion.
In contrast, the global bond market is well over $100 trillion.
And the global currency market trades OVER $5.3 trillion per day.
It is currencies, not stocks, where the most significant moves occur. The currency markets are the largest, most liquid markets in the world. They are always first to move when things change.
And the US Dollar is moving up RAPIDLY. Will this blow up the financial system as it did in 2008? We’ll soon find out |
11-05-14 |
PATTERNS |
ANALYTICS |
| "SEISMIC CHANGES!" |
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CURRENCIES - Major Funding Currencies Nearing Multi-Decade Trend Violations
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11-05-14 |
DRIVERS
CURRENCIES |
ANALYTICS |
DRIVER$ - USD Index Breaks 30 YEar Trend Resistance
Dollar smashes through resistance as mega-rally gathers pace 11-0314 Ambrose Evans-Pritchard, Telegraph
HSBC says we are at the early stages of a dollar bull run that will change the world
The index - a mix of six major currencies – hit 87.4 rising above the key level of 87. This reflects the plunge in the Japanese yen since the Bank of Japan launched a fresh round of quantitative easing last week.
SEISMIC SHIFT - "20% OVER NEXT 12 MONTHS"
David Bloom, currency chief at HSBC: "STEALING INFLATION"
"A 'seismic change' is under way and may lead to a 20pc surge in the dollar over a 12-month span. The mega-rally of 1980 to 1985 as the Volcker Fed tightened the screws saw a 90pc rise before the leading powers intervened at the Plaza Accord to cap the rise. “We are only at the early stages of a dollar bull run. The current rally is unlike any we have seen before. The greatest danger for markets and forecasters is that they fail to adjust their behaviour to fully reflect a very different world,” he said. The stronger dollar buys time for other countries engaged in currency warfare to “steal inflation”, now a precious rarity that economies are fighting over. The great unknown is how long the US economy itself can withstand the deflationary impact of a stronger dollar. The rule of thumb is that each 10pc rise in the dollar cuts the inflation rate of 0.5pc a year later.
EM ECHO BOOM - "A BOOMERANGE
The dollar revival could prove painful for companies in Asia that have borrowed heavily in the US currency during the Fed’s QE phase, betting it would continue to fall.
Hans Redeker, from Morgan Stanley
"The dollar rally is almost unstoppable at this stage given the roaring US recovery, and the stark contrast between a hawkish Fed and the prospect of monetary stimulus for years to come in Europe.
“We think this will be a four to five-year bull-market in the dollar. The whole exchange system is seeking a new equilibrium,” he said. “We think the euro will reach $1.12 to the dollar by next year and will be even weaker than the yen in the race to the bottom.”
Mr Redeker said US pension funds and asset managers have invested huge sums in emerging markets without considering the currency risks. “They may be forced to start hedging their exposure, and that could catapult the dollar even higher in a self-fulfilling effect.”
UNHEDGED CARRY TRADE - GLOBAL USD "SHORT SQUEEZE"
Data from the Bank for International Settlements show that the dollar “carry-trade” from Hong Kong into China may have reached $1.2 trillion. Corporate debt in dollars across Asia has jumped from $300bn to $2.5 trillion since 2005.
More than two-thirds of the total $11 trillion of cross-border bank loans worldwide are denominated in dollars. A chunk is unhedged in currency terms and is therefore vulnerable to a dollar “short squeeze”.
The International Monetary Fund said $650bn of capital has flowed into emerging markets as a result of QE that would not otherwise have gone there. This is often fickle “low-quality” money that came late to the party.
Many of these countries have picked the low-hanging fruit of catch-up growth and are suffering from credit exhaustion. They have deep structural problems and a falling rate of return on investment. The worry is that a tsunami of money could rotate back out again as investors seek higher yields in the US, possibly through crowded exits. |
11-05-14 |
DRIVERS
CURRENCIES |
ANALYTICS |
| "THERE ARE RAMIFICATIONS !" |
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EARNINGS - Broken & Will Get Worse With a Stronger US$
The following chart should clarify just how bad the outlook for Q4 EPS is.
As Factset notes, "the decline in the bottom-up EPS estimate recorded during the course of the first month (October) of the fourth quarter was higher than the 1-year, 5-year, and 10-year averages." That is not a 'good' thing..
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11-05-14 |
FUND- MENTALS
EARNINGS |
ANALYTICS |
GOLD - Strong Dollar is Hurting Gold Price Denominated in US$ - Discouraging Investment
This chart provides some long-term perspective on the gold market since the turn of the century. The chart illustrates, gold's parabolic bull market came to an end in 2011 and has been trading within the confines of a downtrend channel ever since.
Over the past year and a half, however, gold found support at around the $1,200 per ounce level -- bouncing off this level on a total of three occasions.
That support has now come to an end as a result of economic weakness in both Europe and Asia coupled with relative economic strength in the US. All this encouraged global investors to allocate some of their funds into the relative safety of the US dollar thereby reducing the cost in dollars of commodities such as gold. The chart illustrates, there is now room (i.e. no nearby support) for gold to move lower.
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11-05-14 |
GOLD |
ANALYTICS |
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| THESIS |
| 2014 - GLOBALIZATION TRAP |
2014 |
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GLOBALIZATION - A Changing Landscape
 "Globalization Is Turning In On Itself And It Is Each Man For Himself" 11-02-14 Raoul Pal, author of the Global Macro Investor and creator Of RealVisionTV via ZH
At The Margin
A few things are also appearing on my radar screen – future visions if you like – that I want to share with you. These are not conclusive, but rather a stream of unfiltered thoughts, which will develop over time.
I virtually never use geopolitics to assess asset markets. I have learned the hard way over time that it is the way to the poor house. Economies run financial markets, not wars.
But I do note that at the margin, the world’s geopolitics is changing.
- Gone are the fluffy days of Putin shaking hands with George Bush agreeing to keep the world supplied with oil,
- Gone are the days of China helping US firms make profits using their cheap labour,
- Gone are open-for-business days of Europe,
- Gone is the Japanese military neutrality,
- Gone are the Saudis as an unshakeable ally,
- Gone is Israel also a steadfast ally, etc.
What is happening is something deeply concerning. Globalisation is turning in on itself and it is each man for himself.
This was always going to be the outcome of an imbalanced, debt-drowning world. Everyone wants a cheap currency and since that doesn’t work then everyone wants to find some way to get the upper hand on their own terms.
I have had recent conversations with a long-term strategy group within the Pentagon about economic threats to the US and the risk of global collapse, and the potential for it to turn into a military outcome. It seems that the Department of Defence’s deep thinkers are mulling over the kinds of issues we all are – is the inevitable outcome a military one? They don’t know either but they give it a probability and thus need to understand it and plan for it.
My issue has been for a long time that the true threat to the world is not the Muslim nations we so like to beat as a scapegoat (gotta have an enemy, right?) but China.
The Pentagon’s think-tank also agrees.
If China has an economic collapse, which again is a high probability event, then what are the odds of massive civil unrest? And would a military conflict put the people back on the side of the government (i.e. how the Nazis came to power)?
I agree. I think this is the risk somewhere down the road.
I also, along with this defence strategy group, think that there is a risk that the Western powers meddling in the time of bad economic crisis will form strong alliances between let’s say Russia and China.
In direct opposition to the government, many people inside the Pentagon are saying, “Please don’t fuck with Russia, they are not threatening us militarily but securing their own borders, we cannot control the outcomes, and most of them are bad, probably not militarily but economically, and economic instability causes outcomes we can’t forecast – even seizing the assets of powerful Russians has unintended consequences”.
Here, here. The law of unintended circumstances is a bitch.
Everyone is also looking carefully at the risk of Catalonia now having a referendum that is deemed to be unconstitutional, and then trying to enforce it in the streets.
Europe is trying to hold itself together yet the member states themselves are in danger of splitting up. How does that manifest itself? What are the risks? We just don’t know.
I think the trend of each nation for itself, a move away from globalisation either in terms of global trade, or in terms of global finance and a move towards military build-ups, is well under way. I don’t know how far it will go but I do know that I am uncomfortable with it, and that it poses some considerable risk to the stable economic system that so many have enjoyed since the late 1980s.
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For some further observations on the role of globalization and what its unwind would mean..
... Gordon T. Long's take on the "Globalization Trap" is a worthwhile read. |
11-04-14 |
THESIS |
GLOBAL-
IZATION
TRAP
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2013 - STATISM |
2013-1H
2013-2H |
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2012 - FINANCIAL REPRESSION |
2012
2013
2014 |
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It Begins: German Bank 'Charging' Negative Interest To Its Retail Customers
It Begins: German Bank 'Charging' Negative Interest To Its Retail Customers 11-04-14 Simon Black via Sovereign Man blog,
Don Quixote is easily one of the most entertaining books of the Renaissance, if not all-time. And almost everyone’s heard of it, even if they haven’t read it.
You know the basic plot line- Alonso Quixano becomes fixated with the idea of chivalry and sets out to single-handedly resurrect knighthood.
His wanderings take him far across the land where he gets involved in comic adventures that are terribly inconvenient for the other characters.
He famously assaults a group of windmills, believing that they are cruel giants. He attacks a group of clergy, believing that they are holding an innocent woman captive.
All of this is based on Don Quixote’s completely delusional view of the world. And everyone else pays the price for it.
Miguel de Cervantes’ novel is brilliantly entertaining. But the modern-day monetary equivalent is not so much.
Central bankers today have an equally delusional view of the world. Just three months ago, Mario Draghi (President of the European Central Bank) embarked on his own Quixotic folly by taking certain interest rates into NEGATIVE territory.
Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote, everyone else has had to pay the price for his delusions.
On November 1st, the first European bank has passed along these negative interest rates to its retail customers.
So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.
We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.
And large investors are paying European governments negative interest on certain bonds.
Now we’re seeing this effect bleed over into retail banking.
It’s starting with higher net worth individuals (the average guy doesn’t have half a million euros laying around in the bank). But the trend here is pretty clear– financial repression is coming soon to a bank near you.
It almost seems like an episode from the Twilight Zone… or some bizarre parallel universe. That’s the investment environment we’re in now.
Bottom line: if you’re responsible with your money and set some aside for the future, you will be penalized. If you blow your savings and go into debt, you will be rewarded.
If we ask the question “cui bono”, the answer is pretty obvious: heavily indebted governments benefit substantially from zero (or negative) rates.
Case in point: the British government just announced that they would pay down some of their debt that they racked up nine decades ago.
In 1927, then Chancellor of the Exchequer Winston Churchill issued a series of bonds to consolidate and refinance much of the debt that Britain had racked up from World War I and before.
This debt is still outstanding to this day. And the British government is just starting to pay it down– about $350 million worth.
Think about it– $350 million was a lot of money in 1927. Thanks to decades of inflation, it’s practically a rounding error on government balance sheets today.
This is why they’re all so desperate to create inflation… and why they’ll stop at nothing to make it happen. (It remains to be seen whether they’ll be successful, but they are willing to go down swinging…)
What’s even more extraordinary is how they’re trying to convince everyone why inflation is necessary… and why negative rates are a good thing.
On the ECB’s own website, they say that negative interest rates will “benefit savers in the end because they support growth and thus create a climate in which interest rates can gradually return to higher levels.”
I’m not sure a more intellectually dishonest statement could be made; they’re essentially telling people that the path to prosperity is paved in debt and consumption, as opposed to savings and production.
These people either have no idea how economies grow and prosper, they’re outright liars, or they’re completely delusional.
I’m betting on the latter. Either way, this assault on windmills has only just begun.
As Don Quixote himself said, “Thou hast seen nothing yet.” |
11-06-14 |
THEMES |
FINANCIAL REPRESSION
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GOVERNMENT PAPER REFERS TO FINANCIAL REPRESSION AS THE
"LIQUIDATION TAX"
(NBER #16893 - Page 35)
"THE LIQUIDATION OF GOVERNMENT DEBT"
"The saving (or “revenue”) to the government or the “liquidation effect” or the “financial repression tax” is the real (negative) interest rate times the “tax base,” which is the stock of domestic government debt outstanding."
Working Paper 16893, National Science Foundation Grant No. 0849224
ESTIMATE 3-4% of US GDP Y-o-Y
"Such annual deficit reduction quickly accumulates (even without any compounding) to a 30-40 percent of GDP debt reduction in the course of a decade"
"Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes:
- Directed lending to government by captive domestic audiences (such as pension funds),
- Explicit or implicit caps on interest rates,
- Regulation of cross-border capital movements, and (generally)
- A tighter connection between government and banks.
In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year."
Peterson Institute for International Economics
1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
MORE READING
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11-03-14 |
THESIS |
FINANCIAL REPRESSION
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2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS |
2011
2012
2013
2014 |
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2010 - EXTEND & PRETEND |
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| THEMES |
| FLOWS -FRIDAY FLOWS |
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THEME |
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FLOWS - Bank of Japan opens the floodgates
Bank of Japan opens the floodgates 11-02-14 Gavyn Davies, FT
Amid all the obituary notices for quantitative easing that were published when the Federal Reserve stopped buying bonds last Wednesday, it was temporarily forgotten that there are other central banks in the world moving in precisely the opposite direction.
The Bank of Japan immediately stepped up to the plate with an announcement of first order global importance on Friday. It shocked the markets with a gigantic increase in its QE activities, ensuring that the total central bank injection of liquidity into the global economy in 2015 will be much larger than it has been in the last year.
The BoJ will now increase its balance sheet by 15 percent of GDP per annum, and will extend the average duration of its bond purchases from 7 years to 10 years. This is an open ended programme of bond purchases that in dollar terms is about 70 percent as large as the peak rate of bond purchases under QE3 in the US.
In a parallel announcement, the government pension fund (GPIF) said it would reduce its domestic bond holdings from 60 percent of its portfolio to 35 percent, while increasing its overall equity holdings from 24 per cent to 50 percent.
Some of this has happened already, but this change will increase the purchase of Japanese equities by a further $90 billion, and the purchase of non Japanese equities by $110 billion, all effectively financed by sales of $240 billion of bonds to the BoJ, and therefore ultimately financed by central bank creation of reserves. Although Governor Kuroda said that these decisions are not directly connected, the combined effect is to introduce a new type of QE on an enormous scale.
The Japanese injection, relative to the size of the economy, is far larger than anything attempted by the other major central banks.
It is also large enough to ensure that the overall supply of central bank liquidity to the world markets will rise by 1.3 percent of global GDP next year, compared to a rise of only 0.3 percent this year. Reports of the death of QE have, it appears been greatly exaggerated.
Clearly, BoJ Governor Kuroda has now doubled down on the QE bet he made jointly with Prime Minister Abe almost two years ago. Faced with a slowing economy after the sales tax increase in April, and falling oil price inflation, the choice was either to abandon Abenomics, with no very obvious alternative to put in its place, or to prescribe a much larger dose of the same medicine.
Politically, there was no real alternative for Mr Abe, but the attitude of the BoJ was on a knife edge. Governor Kuroda managed to persuade his policy board at the central bank to back the plan only by a 5-4 majority.
Japan is now conducting a laboratory experiment in whether monetary policy can break an economy free of a severe deflationary trap with interest rates stuck at the zero lower bound. Governor Kuroda’s monetary experiment has in effect morphed into a strategy involving devaluation plus financial repression.
The yen is 32 percent lower than it was three years ago. And real bond yields have been depressed well into negative territory. If this does not work in stimulating nominal demand, then nothing the central bank can do on its own will work. “Helicopter money” would be the last throw of the dice, but that involves monetizing a budgetary easing, so it is probably more correctly viewed as a fiscal measure.
So will this rather desperate second phase of Abenomics “work” for Japan? Success would involve a restoration of inflation and inflation expectations permanently to 2 per cent, while holding bond yields at close to zero. The devaluation and monetary easing would compensate for the second leg of the sales tax increase from 8 to 10 per cent due next autumn, so nominal GDP would grow at least at a 3 per cent rate and the public debt to GDP ratio would start to decline.
This is a tall order, but it is not impossible. A sufficiently determined central bank ought to be able to restore inflation to an economy, and that is the key ingredient of what is needed. But there are huge risks. If inflation expectations were unexpectedly to rise too rapidly, the strategy could end in uncomfortably high inflation. However unlikely that looks today, it presumably worried four members of the policy board sufficiently to vote against the strategy on Friday.
Markets and policy makers will now watch the Japanese experiment even more carefully than before. If it fails to restore inflation to Japan, this will be taken as a sign that monetary policy everywhere is powerless in the face of the deflationary forces that appear to be gathering momentum in the world economy.
The lessons will of course be particularly salient for the euro area. In many ways, Japanese thinking on monetary policy has now become the inverse of the ECB’s.
Under Mr Kuroda, the BoJ has deliberately sought to take the markets by surprise, maximizing the announcement effects of QE by shocking the markets. The ECB, in contrast, seems always to raise market expectations ahead of each of its monthly meeting, only to disappoint consistently when the decisions are finally reached.
The BoJ has also relied deliberately on buying sovereign debt, while the ECB has eschewed this (though its parallel actions on the regulation of pension funds does mean that the BoJ will effectively be financing the purchase of private assets as well). On top of all this, the BoJ has forced the yen down by a third against the euro, which will add to deflationary pressures in the euro area.
If this shows any signs of succeeding in Japan, surely there will be irresistible pressure on the ECB to follow suit. If however the BoJ experiment fails, markets may become very sceptical whether there is any escape route from deflation in the euro area.
One final point will be of interest in global markets. If QE works at all, it seems to work mainly by changing expectations about asset prices in the financial markets. In the past, the Fed has always been assumed to be the dominant actor in changing market expectations. Now, the Fed is contemplating tightening policy while other central banks are stepping up QE.
The bullish response of global markets to the opposing Fed/BoJ announcements last week suggests that investors are no longer just slavishly following the Fed.
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11-07-14 |
LIQUIDITY
FLOWS
MACRO MONETARY JAPAN |
FLOWS
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EU - European Central Bank united on €1tn Liquidity Injection
Mario Draghi secured unanimous support from the European Central Bank’s governing council for his plan to inject €1tn to rescue the eurozone economy from stagnation, as he sought to dispel concerns over growing divisions within the central bank. All 23 policy makers backed the president’s idea to bring back the ECB’s balance sheet to levels last seen in 2012, a pledge that Mr Draghi first floated two months ago but subsequently softened. A harmonious council could pave the way for more aggressive action, including large-scale government bond-buying, should the threat of Japanese-style deflation continue.
The euro fell 0.6 per cent to $1.239, its lowest since late 2012, on the back of the unanimous policy statement. Equities indices rose, with Frankfurt’s Xetra Dax 30 up 1 per cent and the FTSE Eurofirst 300 up 0.6 per cent.
The ECB president insisted the council remained unanimous in its commitment to use further unconventional tools, including quantitative easing, should conditions deteriorate. He also revealed ECB staff had stepped up their work on additional ways to expand the central bank’s balance sheet, beyond the announced purchases of covered bonds and asset-backed securities.
Analysts have voiced concern that the markets for these assets are far too small to swell the ECB’s balance sheet from its current level of about €2tn to the heights reached in March 2012, when it peaked just above €3tn.
Mr Draghi said in September that private-sector asset purchases and a scheme of cheap four-year loans to eurozone lenders would increase the size of the ECB’s balance sheet to levels last seen in early 2012.
He appeared to backtrack on this claim after last month’s policy meeting in Naples, before strengthening the message on Thursday that the balance sheet will keep expanding “under all universes”.
Policy makers will hope that message is strong enough to convince the public they are united in their commitment to raise inflation from 0.4 per cent to the ECB’s target of just below 2 per cent.
Concerns over divisions within the ECB’s top body had emerged following reports that some of the governors of national central bank’s were prepared to challenge the president over a leadership style that was less collegial than that of his predecessor, Jean-Claude Trichet.
The showdown, set for Wednesday evening’s pre-meeting dinner, never happened, it seems, with Mr Draghi declaring the dinner a success.
“It was a very rich and interesting discussion, and very candid. But these concerns [over my leadership style] were not raised as far as I know,” the ECB president said.
Policy makers have been irked over Mr Draghi’s tactic of making off-the-cuff remarks without telling them first. The most recent instance of the ECB president deciding to go it alone was in September, when the balance sheet goal was revealed without the consent of other council members.
Mr Draghi played down the discord, saying it was “fairly normal to disagree about things.”
He added: “The best answer to this is given by the fact that the introductory statement, which contains some important news compared to the past, has been underwritten unanimously. When we differ in our views and our policies, there is no drawing line between north and south, there is no coalition. People are there in their personal capacity and they are independent.”
Jörg Krämer, chief economist at Commerzbank, said the display of unity over the balance sheet target showed Mr Draghi “is the boss”.
“Before today’s meeting, press agencies had been talking of a palace revolution against the allegedly autocratic leadership approach,” Mr Krämer said. “There was no sign of this at the press conference, however.”
Others thought trickier days could follow. “No doubt Draghi won the battle of the balance sheet target, whether he has won the war remains to be seen,” said Richard Barwell, of Royal Bank of Scotland.
“I doubt the hawks offered an unconditional surrender on sovereign purchases. And there is an important difference between a target you promise to hit and a target you expect to move towards,” he added.
- The ECB started to buy private-sector assets in late October and has since purchased €4.8bn-worth of covered bonds.
- It has also announced that four private-sector asset managers will begin buying asset-backed securities on its behalf starting this month.
- On Thursday Mr Draghi indicated national central banks will also be able to buy securities, a move which will appease some of the national central bank governors, including Christian Noyer, head of the Banque de France.
“We now try to see which central banks are going to be ready, in how long a time, and adapt the framework that we have today,” the ECB president said.
If the existing policy mix proved insufficient, or if the outlook for inflation worsened, the council would act.
“We know the risks are on the downside and we know we need to be prepared,” Mr Draghi said.
The governing council held its main refinancing rate at its record low of 0.05 per cent and continued to charge banks 0.2 per cent on a portion of their deposits parked with the central bank.
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11-07-14 |
FLOWS |
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EU - Mario Draghi's efforts to save EMU have hit the Berlin Wall
Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe's creditor bloc or the political assent of Germany.
The counter-attack is in full swing. The Frankfurter Allgemeine talks of a "palace coup", the German boulevard press of a "Putsch". I write before knowing the outcome of the ECB's pre-meeting dinner on Wednesday night, but a blizzard of leaks points to an ugly showdown between Mr Draghi and Bundesbank chief Jens Weidmann.
They are at daggers drawn. Mr Draghi is accused of withholding key documents from the ECB's two German members, lest they use them in their guerrilla campaign to head off quantitative easing. This includes Sabine Lautenschlager, Germany's enforcer on the six-man executive board, and an open foe of QE.
The chemistry is unrecognisable from July 2012, when Mr Draghi was working hand-in-glove with Ms Lautenschlager's predecessor, Jorg Asmussen, an Italian speaker and Left-leaning Social Democrat. Together they cooked up the "do-whatever-it-takes" rescue plan for Italy and Spain (OMT). That is why it worked.
We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB's balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this.
The governors of all northern and central EMU states - except Finland and Belgium - lean towards the Bundesbank view, foolishly in my view but that is irrelevant. The North-South split is out in the open, and it reflects the raw conflict of interest between the two halves.
The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland's from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc. Claims that Spain is safely out of the woods ignore this festering problem.
David Marsh, author of a book on the Bundesbank and now chairman of the Official Monetary and Financial Institutions Forum, says the Bundesbank has been quietly seeking legal advice on whether it can block full-scale QE. It is looking at Articles 10.3 and 32 of the ECB statutes, arguably relevant given the scale of liabilities.
The let-out clauses would make QE the sole decision of the 18 national governors - shutting out Mr Draghi - based on the shareholder weightings. Germany would have 26pc of the votes, easily enough to mount a one-third blocking minority. Mr Draghi would not even have a say.
Mr Marsh said this has echoes of the "Emminger Letter" invoked in September 1992 to justify the Bundesbank's refusal to uphold its obligation to defend the Italian lira in the Exchange Rate Mechanism. The lira crashed. The Italians were stunned. One of them was the director of the Italian Treasury, a young Mario Draghi.
Lena Komileva, from G+ Economics, says the ECB is heading for a crisis of legitimacy whatever happens. If the bank tries to press ahead with a QE-blitz, Mr Weidmann will resign. If it does not do so, the eurozone will remain stuck in a lowflation trap and the ECB will go the way of the Bank of Japan in the late 1990s, in which case Mr Draghi will resign.
Mr Draghi's balance sheet pledge was muddled and oversold from the start. Much of it was predicated on banks taking out super-cheap loans (TLTROs) from the ECB, but they have so far spurned it. You cannot make a horse drink. These loans are not the same as QE money creation in any case. They are an exchange for collateral.
The asset purchases are what matter and the package announced so far is modest, bordering on trivial. It is unlikely to exceed €10bn a month as currently designed. The "buyable" market for covered bonds and asset-backed securities is too small to move the macro-economic dial. If the ECB wanted to match the Bank of Japan in its latest effort to drive down the yen and export deflation, it would have to launch €130bn of asset purchases every month (1.4pc of GDP).
Hawks claim that QE would make no difference because interest rates are already near zero, and the German 10-year Bund is already the lowest in history. This is eyewash. Central banks can print money to buy gold, land, oil for strategic reserves (why not?) or Charollais cattle. Or they can print to build roads or windmills. They can hand the money out as cash envelopes. If they did this, even the dimmest wits would see that QE is a monetary device and can always defeat deflation as a mathematical principle. It does not have to work through interest rates, nor should it.
The ECB's North-South clash mirrors the political breakdown of monetary union after six years of depression and mass unemployment. France's Front National now has twice as many Euro-MPs as the ruling Socialists. Euro defenders invariably insist that the triumph of Marine Le Pen - currently leading presidential polls at 30pc - has nothing to do with her pledge to restore the franc and take back French economic sovereignty.
Whether or not this is true - and that smacks of presumption - she is snatching enough votes from the Socialists to threaten their survival as a political movement. If they let perma-slump drift on until 2017, they will meet the fate of Greece's PASOK, and deserve it.
Italy is also edging closer to an inflexion point. The Five Star movement of Beppe Grillo - which won a quarter of the vote in 2013 - has grasped the elemental point that zero inflation and falling nominal GDP is pushing Italy into a debt-compound trap. For a long time Mr Grillo wrestled with the EMU issue. There is no longer any doubt. "We must leave the euro as soon as possible,” he says.
Spain's insurgent Podemos party has come from nowhere to top the polls at 28pc. It is not anti-euro. Its wrath is directed against a corrupt "Casta". Yet the party's reflation drive and furious critique of Spain's "internal devaluation" is entirely at odds with EMU imperatives, as is its €145bn plan for a universal basic income, which would lift Spain's fiscal deficit to 20pc of GDP. Podemos reminds one of France's Front Populaire in 1936. Leon Blum did not perhaps intend to leave the Gold Standard, but he knew his policies would bring it about in short order.
Mr Draghi is of course right to force the issue. The ECB is missing its 2pc inflation target by a mile, with crippling effects on the crisis states. This itself is a violation of the ECB's legal mandate. The refusal of the German-led hawks to do anything serious about this is indefensible, and remarkably stupid unless their intention is to break up EMU, a possibility one can no longer exclude.
The European Commission's Autumn forecast this week is a cri de coeur. It warns of a "snowball effect" as deflationary forces causes debt trajectories to accelerate upwards by mechanical effect.
Brussels admits that something has gone horribly wrong, obliquely blaming stagnation on the "policy response to the crisis". It halved the growth estimate for France to 0.7pc next year, and for Italy to 0.6pc, a ritual with each report.
It says the eurozone faces a "home-grown" malaise, left behind as the US and Britain pull away. "It is becoming harder to see the dent in recovery as the result of temporary factors only. Trend growth has fallen even lower due to low investment and higher structural unemployment," it said. Now they tell us.
The collapse of investment is not some form of witchcraft. It is entirely due to the folly of deep cuts in public investment - pushed by the Commission itself - at a time of private sector deleveraging, all made much worse by monetary paralysis. Italy's rate of investment fell by 7.4pc in 2012 and 5.4pc in 2013. Even Germany's fell 0.7pc in each year.
Tucked away in the report is a nugget that Britain alone accounted for almost all the EU's growth in 2013, half in 2014, and will still be the biggest contributor by far in 2015. This implies that the UK's net payments to the EU budget - already up fourfold since 2008 - will become ever more skewed. Or put another way, the more EMU makes a mess of its affairs, the more Britain must pay to prop it up.
Europe's leaders and officials have run monetary union into the ground. Mr Draghi has bravely tried to bring them to their senses and contain the damage. He seems to have hit the limits of European power politics.
There is another job waiting for him in Rome as Italian president, should he wish to take it. The offer must be tempting, if only for sweet revenge.
His departure would shatter market confidence in the euro overnight. He could then lead his country to recovery, with a correctly-valued lira, and inflict a massive trade shock on his tormentors in the North for good measure.
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11-07-14 |
FLOWS |
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RETAIL - Value In the Real Estate Assets?
When Eddie Lampert merged Sears and Kmart nine years ago, the move was heralded less for its retail prospects than as a shrewd real-estate play. Now, the hedge-fund manager has signaled he’s ready to make his move.
Sears Holdings Corp. on Friday said it was weighing whether to spin off up to 300 of its 712 company-owned stores into a separate entity in which Sears shareholders would be entitled to buy stakes. The move would raise much-needed cash for the struggling retailer, which warned it lost as much as $630 million in its most recent quarter.
It also would be a big step toward one possible endgame for the company: somehow tapping the value of its vast property holdings. Sears’s shares jumped 31% on the news to $42.81, as investors welcomed the idea of getting their hands on those assets.
“By playing the REIT card, Sears is using what the bulls on the stock have long argued is the real value in the company, its real estate,” Credit Suisse analyst Gary Balter wrote Friday in a note to clients.
Mr. Lampert, Sears’s chairman and chief executive, has been slowly dismantling the company over the past three years, spinning off business lines like Lands’ End and assets like a big stake in Sears Canada to the company’s shareholders. That has meant spinning much of the assets off to himself and his hedge fund, ESL Investments Inc. Mr. Lampert controls about 48.5% of Sears’s stock. Another 24% is controlled by investment manager Bruce Berkowitz.
Sears has long said it would look for ways to boost value for its shareholders as it works to turn around its retail operations. The company’s retail plans include a membership program called Shop Your Way and experiments like letting customers buy online and have their purchases brought out to them in their cars. A number of companies are splitting off business lines to better focus on their core operations.
Sears said Friday it expects its debt load to decline this year. The spinoffs, however, could reduce the margin of safety for creditors in an extreme, hypothetical event in which the company is liquidated to pay its debts.
Friday’s filing shows how tight things got for Sears in the quarter that ended Nov. 1 before a spate of financing moves that leaned heavily on Mr. Lampert’s hedge fund. Sears said it ended the quarter with $564 million in cash and available credit. That’s after having raised $568 million primarily from Mr. Lampert’s hedge fund in the same period, via a loan and the sale of some of the company’s stake in Sears Canada. The company also brought in another $90 million in cash during October by selling its full-line store in Cupertino, Calif.
Sears said it has as much as $212 million more coming in from the sale of its Sears Canada shares and is planning to raise another $625 million in a debt offering that will largely be covered by Mr. Lampert and his fund. All told, the company said it has moved to raise as much as $2.2 billion this year and has plenty of financial firepower and assets to cover its obligations to its creditors and vendors.
“We believe we have financial flexibility, particularly as we enter the holiday season, and we expect it will provide confidence to our vendors and other constituents that we can generate the liquidity needed to invest in our business,” spokesman Chris Brathwaite said.
Many of the assets Sears could use to raise cash are tied up in its real estate. In a securities filing Friday, the company said it is actively exploring a plan to sell 200 to 300 properties to a real-estate investment trust. Sears’s shareholders would have the right to buy stock in the REIT, giving them a direct stake in an asset that many analysts believe holds most of the company’s value.
Analysts at Credit Suisse said the company would likely put its best-performing stores into the REIT, which would need to be strong enough to stand on its own. Sears said it would lease the stores back from the REIT and continue to operate them.
Sears said the deal would produce a substantial infusion of cash. Analysts, however, are skeptical that the company can continue to raise the funds it needs unless its operations turn around. Fitch Ratings concluded in an analysis earlier this year that the company could likely only raise enough money to last through 2016 if it doesn’t stop bleeding cash.
So far, that isn’t happening. Sears said in the filing that its earnings before interest, taxes, depreciation and amortization—a rough proxy for its cash flow—would come in at a loss of at least $275 million for the quarter that just ended, better than a year earlier but still deep in the red. The company said its sales for the period, excluding newly opened or closed stores, were flat and that it would book a net loss of $590 million to $630 million.
The results would add to the $6.4 billion in red ink Sears has piled up since early 2011. The company reports earnings for the period on Dec. 4.
Sears has been working to reassure vendors that have been rattled by its financial performance ahead of the holidays, when retailers typically spend heavily securing inventory for the key selling season. Euler Hermès Group SA, which insures suppliers against nonpayment from retailers, told policyholders that it would cancel coverage on Sears last month, and vendor finance providers have tightened terms, vendors have said.
Sears’s real-estate portfolio has been a key asset for the company, which has sold stores over the years, including some of its most profitable. Sears has about 1,870 full-line and specialty stores in the U.S. operating under the Kmart and Sears names. The company said in its annual report filed in March that it owns 712 of its stores, excluding Sears Canada. Mr. Brathwaite, the spokesman, didn’t provide an updated figure.
The company said in October that it would lease space in seven stores to European fashion retailer Primark.
REITs were created by Congress decades ago as a way to let ordinary Americans buy shares in skyscrapers or shopping malls just as they could buy stock in a company or mutual fund. The basic rules are simple: REITs have to have most of their assets and income tied to real estate, and they pay no tax on income distributed to their shareholders as long as they pay out at least 90% as dividends.
KEY STATISITICS
- 1,870 full-line and specialty stores in the U.S. operating under the Kmart and Sears names,
- Owns 712 of its stores, excluding Sears Canada,
- Weighing whether to spin off up to 300 of its 712 company-owned stores into a separate entity,
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