zaterdag 23 juni 2018

Simon Black; The Latest Casualty In The Global Pension Catastrophe Is....

In the year 6 AD, the Roman emperor Augustus set up a special trust fund known as the aerarium militare, or military treasury, to fund retirement pensions for Rome’s legionnaires. Now, these military pensions had already existed for several centuries in Rome. But the money to pay them had always been mixed together in the government’s general treasury. So for hundreds of years, mischievous senators could easily grab money that was earmarked for military pensions and redirect it elsewhere. Augustus wanted to end this practice by setting up a special fund specifically for military pensions. And to make sure there would be no meddling from any government officials, Augustus established a Board of Trustees, consisting of former military commanders, to oversee the fund’s operations. Augustus really wanted this pension fund to last for the ages. And to keep a steady inflow of revenue, he established a 5% inheritance tax in Rome that would go directly to the aerarium militare. He even capitalized the fund with 170,000,000 sesterces of his own money, worth about half a billion dollars in today’s money. But as you can probably already guess, the money didn’t last. Few subsequent governments and emperors ever bothered themselves with balancing the fund’s long-term fiscal health. And several found creative ways to plunder it for their own purposes. Within a few centuries, the fund was gone.
# This is a common theme throughout history and still today: pension funds are almost invariably mismanaged to the point of catastrophe. We’ve written about this topic frequently in the past. It’s one of the biggest financial catastrophes of our time. Congress has even formed a committee that’s preparing for massive pension failures
# Here’s another, very recent example: the city of Wilkes-Barre, Pennsylvania is deep in the red with its police pension fund. According to the Pennsylvania state auditor, the pension was 65.7% funded in 2011, the fund had enough assets to pay about two-thirds of its long-term obligations. Now, that alone should have been enough to sound the alarm bells. But by 2013, two years later, the fund’s solvency rate had dropped to 49.7%. And by 2015, it was just 38.5%. Incredible. 38.5%. At that level, there’s simply no chance the city will ever be able to meet its obligations to retired police officers. A few years ago, city politicians took notice of this enormous funding gap and tried to take some small steps to patch it up. Specifically, the city proposed excluding an officer’s overtime in the calculation of his/her pension benefit. It was a small change and certainly wouldn’t solve the bigger problem. But it would at least buy the fund a few more years of solvency. So naturally the union sued. And earlier this month a Pennsylvania court ruled against the city, Wilkes-Barre must continue calculating pension benefits the old way. This helps no one; it only accelerates the demise of an already insolvent pension. Oh, and it’s not just their police pension either. Wilkes-Barre’s pension for firefighters is hardly better off, just 46.1% funded. Unfortunately, these pension problems aren’t unique to Wilkes-Barre. City and state pension funds across the country and the world are in similar dire straits. The city of San Diego has a $6.25 billion shortfall on obligations promised to current and retired employees at this moment. The State of New Jersey has $90 billion in unfunded pension liabilities. And of course, Social Security has unfunded liabilities totaling tens of trillions of dollars.
# The situation isn’t any different in Europe. Spain’s Social Security Reserve Fund has been heavily invested in Spanish government bonds for several years, bonds that had an average yield of NEGATIVE 0.19%. You read that correctly. Unsurprisingly, Spain’s pension fund is almost fully depleted. The United Kingdom has trillions of pounds worth of unfunded public pensions. Even conservative Switzerland has a public pension that’s only 69% funded, a seemingly fantastic number by today’s dismal standards. Last year, the Swiss government proposed a plan to save its pensions, asking to increase the retirement age for women by one year (from 64 to 65, the same as men), and increase VAT by 0.3%. But the plan was rejected by Swiss voters in a national referendum, the third time in 20 years that pension reform failed to pass. And that’s really the key issue here: pension plans are almost universally toast. Most of the time, politicians just ignore the problem and try to kick the can down the road to the next administration. But occasionally they try to do something to help. Yet whenever they do, voters reject the plan. Or the union sues. Or something else happens that prevents much-needed reforms from passing.
This merely accelerates the inevitable: these pensions are going bust. I’m not trying to be sensational, these are mathematical realities echoed by the officials who oversee these funds. For Wilkes-Barre’s police pension, it’s the Pennsylvania State Auditor who says the program is only 38.5% funded. With Social Security, it’s the United States Secretary of the Treasury who says the program’s trust funds will soon be depleted. Social Security even provides a date, like the expiration on a carton of milk, after which Social Security will go bad. These warnings are all publicly available information, not some wild conspiracy theory. And that’s really what they are: warnings. At this point, continuing to believe that these pensions will be solvent forever is completely ludicrous. The only rational option is to take matters into your own hands. For example:
Start saving more. You’d be shocked at what an enormous difference it can make to save an extra $1,000 per year when compounded over several decades.
Learn to be a better investor. Averaging an additional 1% annual return for your retirement savings can add up to hundreds of thousands of dollars over the course of 20-30 years.
Consider a more robust retirement structure like a Solo 401(k) or self-directed SEP IRA that allows you a greater breadth of investment options, everything from real estate to crypto to private equity.
And it may even be possible to stash $50,000+ per year in self-employment “side” income, (selling products on Amazon, driving for Uber, etc.) into that retirement account.
# The signs are clear; anyone depending on social security or a pension for their retirement is in trouble. It’s time to take this issue into your own hands....

Weekend Reading: The Next Big Bubble

If you’re a frequent reader, you’ve noticed that we often find fault with the one-sided manner in which the mainstream media reports on economic topics and the asset markets. Of chief concern to us, the cheerleading for the markets and the economy fails to provide readers with the other side of the story. The fact is the economy and financial markets have been propelled higher since the financial crisis of 2008 by historically low interest rates, large fiscal deficits and a massive expansion of the Federal Reserve’s (Fed) balance sheet. We agree the monetary and fiscal policy prescriptions helped at the time, but we believe the ultimate consequences of these actions have yet to be felt. We have written volumes on this topic. We thought it appropriate to share an article published by the “mainstream” Washington Post. The Buyback Economy and the Next Big Bubble, by Steven Pearlstein, was published June 10, 2018. This “must-read” article focuses on many of our concerns such as stock buybacks, high debt levels, ETF’s and, importantly, Pearlstein’s assertion that: “Today’s economic boom is driven not by any great burst of innovation or growth in productivity.” To be honest, we could not have written it better ourselves, and we thank Mr. Pearlstein for providing the other side of the story. Following are a few important paragraphs from Mr. Pearlstein’s article. Beneath each of these are links to articles that elaborate on these points.
# Buybacks/Productivity; “And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble, this one in corporate stocks and bonds, that, when it bursts, will send the economy into another recession. Welcome to the Buyback Economy. Today’s economic boom is driven not by any great burst of innovation or growth in productivity. Rather, it is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption. And it redistributes even more of the nation’s wealth to corporate executives, wealthy investors and Wall Street financiers.”
- Short-Term Pain, Long-Term Gain
- The Death of a Virtuous Cycle
# Corporate Debt; “The most significant and troubling aspect of this buyback boom, however, is that despite record corporate profits and cash flow, at least a third of the shares are being repurchased with borrowed money, bringing the corporate debt to an all-time high, not only in an absolute sense but also in relation to profits, assets and the overall size of the economy.”
- The Coming Collision of Debt & Rates
- How Corporate Debt Confirms the Everything Bubble
# Debt; “For the bigger reality is that the global economy is now awash in debt, not just corporate debt but also record amounts of government debt, household debt and investor debt, at a time when interest rates are rising from historically low levels.”
 - The Lowest Common Denominator 
# Margin Debt and Valuations; “Finally, there is the debt that investors large and small take on to buy stocks, bonds, derivatives and other securities. That’s also at an all-time high.”
- Margin Debt and the Market
- The Risk Of Algo’s
- A Market Valuation that Defies Comparison
# ETFs; “It’s hard to say what will cause this giant credit bubble to finally pop. A Turkish lira crisis. Oil prices topping $100 a barrel. A default on a large BBB bond. A rush to the exits by panicked ETF investors. Trying to figure out which is a fool’s errand. Pretending it won’t happen is folly.”
- The Inconsistencies Lurking in ETFs, Judgement Awaits Part 2
# Summary/Animated Video; We end with a short animated video that explains how debt has replaced the virtuous economic cycle. While simple, it will help put Mr. Pearlstein’s article and our links into perspective.
# Economy & FED;
- Why Immigration Is Pure Gravy For Finances by Caroline Baum
- Is The Fed Rethinking It’s Balance Sheet Unwind by Mike Shedlock
- The Phony Labor Shortage by Jeffrey Snider
- America’s Debt Dependence Makes It An Easy Target by Brandon Smith
- If You Like The Economy, You’re Republican by Ben Casselman
- Economy Is NOT An Engine by IBD
- How Tariffs Could Sink The Market by Paul Whitfield
- Why Heads Are Exploding At The Fed by Peter Morici
- Unhappy With China, Trump Takes Anger Out On U.S. by John Tamny
- The Real Cost Of A Trade War by Mukhisa Kituyi
- Universal Basic Income, What’s The Plural Of Apocolypse by Wayne Crews
- Will A Trade War Derail The Economy? by James Picerno
- Will Re-Defaults Undermine Housing by Keith Jurow 
- Are We In A Corporate Debt Bubble? by Susan Lund 
- Don’t Rush To Take Social Security by Dan Caplinger

European Countries Are Refusing To Accept The Unchecked Influx Of Migrants

Much has been written about the unchecked influx of migrants into Europe recently. As the EU promotes the warm, fuzzy, “inclusive” policies that are overwhelming countries with immigrants, some of those countries are bluntly starting to say, “no more.” At the same time, other countries seem to be quietly preparing for something, without being quite so forthcoming about the event for which they are readying themselves. Millions of refugees and asylum seekers, primarily from Syria, Afghanistan, Iraq, Nigeria, Pakistan, and Somalia are flowing into Europe, largely unchecked. This is because of a welcoming “open door” policy promoted by German Chancellor Angela Merkel back in 2015. Despite the backlash from Europeans, Merkel says she has “no regrets.” But some overwhelmed countries have decided that enough is enough. They cite the refugees’ refusal to assimilate, increasing crime statistics (particularly against women), and no-go zones in which the migrants have banded together and created areas in which Europeans are not welcome. The European Union is so displeased about this that they’ve taken 3 of their member countries to court for refusing to “share the burden of hosting migrants.” I don’t have a crystal ball, but I wonder if we could see this disagreement becoming a catalyst for the dissolution of the European Union.
# Austria; Austria is currently conducting exercises at their borders in preparation for a wave of 80,000 migrants expected to attempt to cross through soon. Just a few weeks after the opening of a new “Balkan route” of travel through Albania, Montenegro, Bosnia and Croatia, Austrian forces will conduct border-security exercises on June 25 in the border town of Spielfeld in preparation for a wave of 80,000 migrants expected to travel through the route to Western and Central Europe, reports Kronen Zeitung, Austria’s most widely-circulated newspaper. Taking part in the exercise will be between 600 and 1,000 members of the riot police, “Puma” border squad and Federal Army will participate in the exercise. ”We must also be prepared for the case that in a sudden large migratory flow, the border protection measures in these friendly countries no longer help,” said Interior Minister Herbert Kickl, adding “We also show that we are serious. There will be no registration and wave-taking with us, but a real defensive attitude.” 
# Slovenia; Austria’s neighbor, Slovenia, has also taken steps to staunch the flow of migrants. Back in 2015, they began building a razor-wire fence along their border with Croatia after Hungary closed its borders and 180,000 migrants were redirected through the country of only 2 million people. Slovenia began erecting a razor-wire fence at its border with Croatia on Wednesday to stem the inflow of migrants, as winter closes in and countries to the north tighten their own border controls. A convoy of army trucks carrying barbed wire and construction equipment arrived in the border town of Veliki Obrez at dawn on Wednesday. Soldiers rolled out the wire along the Slovenian bank of the Sotla River, which forms part of the 400-mile border with Croatia. Though the new fence threatens to block the route again just as winter is approaching, migrants have largely been able to find their way around such obstacles.
# Hungary; Hungary has been adamant since the beginning that they would not be taking in refugees and migrants. Hungarian Prime Minister Viktor Orban has defended his country’s refusal. He said: The European Union’s migration policies threaten the “sovereignty and cultural identity” of Hungary, in an interview published Monday. “We don’t see these people as Muslim refugees. We see them as Muslim invaders,” he told the German daily Bild newspaper. Orban also rejected the idea that Hungary should be open to accepting people from majority-Muslim countries, saying his country “doesn’t want to be forced. We believe that a large number of Muslims inevitably leads to parallel societies, because Christian and Muslim society will never unite,” Orban told the paper. “Multiculturalism is only an illusion,” he added.
# Poland; Poland has also refused to take in migrants under the 2015 EU ruling, right alongside Hungary. “In agreeing to take in refugees, the previous government put a ticking bomb under us,” Interior Minister Mariusz Błaszczak told reporters in Brussels. “We’re defusing that bomb.” The reason given is that Muslim migrants could be a problem for Poland’s homogenous society. Kaczyński reiterated his antipathy toward refugees in an interview with the Gazeta Polska Codziennie newspaper published Monday, warning that Poland “would have to completely change our culture and radically lower the level of safety in our country.” He also said that Poland “would have to use some repression” to prevent “a wave of aggression, especially toward women” on the part of asylum seekers. Błaszczak warned that EU pressure on Poland to accept refugees “is a straight road to a social catastrophe, with the result that in a few years Warsaw could look like Brussels.” (source)
# Czech Republic; There’s strong anti-migrant sentiment in the Czech Republic. So strong, in fact, that a recent poll showed that 94% of Czechs wanted to deport ALL the refugees. According to an opinion poll, conducted by the Focus agency, 78 percent respondents demand that the guarding of Czech borders should be re-introduced, even if this means limiting the free movement of European citizens. 87 percent of respondents have said that the refugee crisis is a large problem for the Czech Republic. 94 percent of Czech respondents are convinced that the European Union should be deporting all refugees. Although they were given a quota of 1600 refugees that they were required to take in by the EU last year, they refused to accept more than 12.
# Italy and Malta; Italy recently made news when they turned away a ship carrying 629 refugees. Italy’s newly elected interior minister Matteo Salvini kept his campaign promises and denied permission for the humanitarian ship Aquarius to dock at an Italian port. Malta also refused to take in the ship, despite the fact that they had run out of food. The UN had called on Malta and Italy to immediately allow the boat to dock, describing the situation as “an urgent humanitarian imperative”. The EU and the bloc’s biggest member state Germany made similar pleas. “The priority of both the Italian and Maltese authorities should be ensuring these people receive the care they need,” European Commission spokesman Margaritis Schinas told reporters, calling for a “swift resolution”. But Salvini refused to back down. “Saving lives is a duty, turning Italy into a huge refugee camp is not. Italy is done bending over backwards and obeying, this time THERE IS SOMEONE WHO SAYS NO,” he wrote on Twitter followed by the hashtag #closethedoors. Spain agreed to accept the ship, and Malta provided them with food and water to make the journey, still holding fast that they could not dock.
# Denmark; While not flat-out refusing entrance to refugees, Denmark began publicly discouraging would-be immigrants in 2015. The Danish government responded to the growing humanitarian crisis with a barely veiled warning to migrants in Lebanon not to come to the prosperous Nordic country. Danish newspaper advertisements highlighted the stringent regulations and constraints that await migrants: It can take five years to attain permanent residency; there are tough requirements on learning Danish; those who are granted temporary residency permits will not have the right to bring over family members in the first year after they arrive; and recent changes in the country have slashed welfare benefits for them by 50 percent. (source) Their government website says: Denmark receives fewer asylum seekers per capita than our neighbour countries and other European countries that are comparable to Denmark, and we also grant asylum to fewer of them, if you compare each country of orgin separately. The fact that a country receives many asylum seekers is also linked to the country’s geographical location and how consistently the country takes fingerprints and registers arrivals (Italy, Greece, Malta and Hungary) and does not necessarily reflect where the asylum seekers wish to claim asylum.
# Greece; By nature of geography, Greece has ended up with an overwhelming number of asylum seekers. It was supposed to be a situation in which the migrants were accepted into Greece, processed, and then sent elsewhere across the EU based on “quotas.” But a lot of the migrants actually refused to leave, leading to hard feelings among Greeks who are still struggling after the economic collapse of their country. In case you’re wondering why they had hard feelings, here’s a glimpse into the workings of the mind of the mayor of the Greek city of Livadia, Giota Poulou: Citizens of Livadia and elsewhere in Greece were “living in the limits of poverty”. It was “inconceivable” for them to see that refugees would have heating in their houses, when some of them did not have heating themselves. “We told them we wanted to host the refugees based on solidarity and to offer them humane living conditions,” Poulou says. (source) But after 3 years of shouldering more than their fair share of the burden, Greece has finally stood up, refusing to take back refugees that Germany wanted to return to them.
# Slovakia; Slovak Prime Minister Robert Fico refused to accept the EU’s quotas back in 2015, stating that the refugees didn’t want to go there anyway. “Migrants arriving in Europe do not want to stay in Slovakia. They don’t have a base for their religion here, their relatives, they would run away anyway. Therefore I think the quotas are irrational,” he said. (source) And they’ve maintained their stance, backing Italy’s recent refusal to admit the boatload of asylum seekers.
# How is this going to end? I’m not completely unsympathetic to the plight of those who want to leave countries in the Middle East and North Africa that have been bombed and droned beyond recognition. NATO has been “freeing” the heck out of them for decades, and as viral photos show, there isn’t much left for people there. We have to accept the fact that interventionist foreign policies have had a large hand in creating this problem. This being said, it’s lunacy to accept an influx of migrants who have no intention of assimilating into the culture of their host countries. It’s sheer madness to call it “racist” to prosecute immigrants for raping the women of your country due to cultural differences. It is the height of stupidity to allow outsiders to take over “zones” of your home country in which your police cannot maintain order. This doesn’t mean asylum seekers should be abused and treated like animals. That leaves us at risk of losing our own humanity. But, it means that the world needs to employ some common sense and prevent this situation from worsening.
# France has a new zero-tolerance policy “for the illegal occupation of public space” and although they haven’t squelched migration, they certainly seem to be paying more attention after a barrage of terrorist attacks that have been largely the work of Islamic migrants. And while Sweden hasn’t outright said they’re putting a stop to things, recent events make me wonder if that’s what is coming. The sad thing is, like the Trojan war, they’ve reached the crisis point at which they’re going to be forced to defend their countries from the inside. That’s not multiculturalism. That’s suicide....

Canadian May Home Sales Plunge Most Since The Financial Crisis

- Rising rates? Check.
- Chinese capital controls and a slump in foreign buyers? Check.
- Trade war with the US? Check.
Things are not looking good for Canada’s national housing market, which as VCG reports, continued its sluggish performance in the month of May. Despite the warmer weather and usually busy spring selling season, buying activity has been awfully quiet. New mortgage regulations which are now in full swing have stymied fringe buyers, particularly millennials. According to new data from credit bureau TransUnion, new mortgage originations among millennials in Canada fell by 19.5% between the last quarter of 2017 and the first three months of 2018. That has also been showing up sales data. As shown in the chart below, national home sales in Canada plunged by 16% Y/Y for the month of May. This was the worst decline since the great financial crisis in 2008 when home sales dipped 17% that May. Furthermore, total home sales of 50,604 marked the lowest total since May 2011... 


Seasonally adjusted home sales edged 0.1% lower on a month over month basis, and 15% on a year over year basis. Or, as Steve Saretsky put it, "either way you slice it not a great month for one of the worlds most resilient housing markets." And as sales continue to slide inventory is beginning to build. For sale inventory crept up by 4% year over year, increasing for the first time in three years, and the highest May increase since 2010...


In light of the above, it is not surprising that the average sales price dipped 6% year over year in May, which however was not nearly as bad as April when year over year declines registered a head turning 11% decline. But more troubling is that when looking at the smoothed out index of the MLS HPI prices showed the smallest possible increase of just 1% year over year in May, the lowest since September 2009. Not only did this mark the 13th consecutive month of decelerating year over year gains per the Canadian Real Estate Association, but at the current rate of slowdown, next month Canada will record the first annual drop in home prices since the global financial crisis...


The silver lining: condos continue to hold up well as buyers tumble down the housing ladder; here prices posted a 13% increase from May 2017. CREA’s chief economist Gregory Klump shouldered much of the blame on tighter borrowing conditions, “This year’s new stress-test became even more restrictive in May, since the interest rate used to qualify mortgage applications rose early in the month. Movements in the stress test interest rate are beyond the control of policy makers. Further increases in the rate could weigh on home sales activity at a time when Canadian economic growth is facing headwinds from U.S. trade policy frictions.” Klump’s theory stacks up well with recent data which suggests fringe borrowers are being pushed towards the private lending space, particularly in Ontario. Mortgage originations at private lenders in the Q1 2018 rose to $2.09 billion in Ontario, a 2.95% increase from last year. The market share of private lending went from 5.71% of originations in Q1 2017, to 7.87% in Q1 2018, despite originations at other channels dropping. In other words, there is a surge in unregulated, non-bank lending, just as the housing bubble pops, precisely what happened the last time there was a full-blown financial crisis....

Chinese Investments In The US Plunge By 92%

Coming amid the escalating trade war between the US and China, many were quick to blame the collapse in Chinese investments in the US on tensions surrounding protectionism. And indeed, according to research firm Rhodium Group, China’s direct investments in the U.S. plunged in the first half of 2018 as Chinese companies completed acquisitions and greenfield investments worth only $1.8 billion, a 92% drop over the past year, and the lowest level in seven years. The reality, however, is that this has little to do with the Chinese trade spat, and everything to do with China's crackdown on outbound M&A and conglomerate "investments" which as we said back in 2015, were just a thinly veiled scheme to cover capital outflows...


Rhodium confirms as much: The rapid decline in Chinese FDI in the U.S. was driven by a “double policy punch”, Beijing cracking down on rapid outbound investment and the U.S. government increasing scrutiny on Chinese acquisitions through the Committee on Foreign Investment as well as taking a more confrontational stance toward economic engagement with China in general. The investment tracker is based on collection and aggregation of data on individual transactions, including acquisitions, greenfield projects, and expansions. Whatever the reason behind the sharp drop, however, it doesn't change the fact that there has been a recent collapse in recycled Chinese capital back into the US. And, while it may not have caused it, Trump's recent change in trade policy will certainly make future Chinese direct investment far more problematic.
# As Bloomberg notes, "lawmakers and the White House are planning fresh curbs on Chinese investment." Furthermore, as we reported earlier, a just released White House report claimed that China’s spectacular economic growth “has been achieved in significant part through aggressive acts, policies and practices that fall outside of global norms and rules." As Thilo Hanemann, a Rhodium direct said, "the more confrontational approach of the Trump administration toward economic relations with China has cast some doubt, in these companies' minds, about their position here." The first-half slump follows a 35% drop in 2017, and if the sale of assets is taken into account, as Chinese investors sold $9.6 billion of US assets in the first five months of 2018, mostly driven by deleveraging pressures from Beijing, the net investment flow is negative. And with former high-profile acquirers such as HNA Group Co., Anbang Insurance Group Co. and Dalian Wanda Group Co. putting their assets up for sale, it will be a long time before China's serves as a source of direct capital in the US again....

Earnings Estimates; The Fade Begins (And 'X' Marks The Accounting Magic Spot)

With roughly 98% of the S&P 500 having reported earnings, as of mid-June, we can take a closer look at the results through the 1st quarter of the year. During the most recent reported period, 12-month operating earnings per share rose from $33.85 per share in Q4-2017 to $36.43 which translates into a quarterly increase of 7.62%. While operating earnings are widely discussed by analysts and the general media; there are many problems with the way in which these earnings are derived due to one-time charges, inclusion/exclusion of material events, and outright manipulation to “beat earnings.” Therefore, from a historical valuation perspective, reported earnings are much more relevant in determining market over/undervaluation levels. It is from this perspective the news improved markedly as 12-month reported earnings per share rose from $26.96 in Q4-2017 to $32.81, or a whopping 21.7% in Q1. This jump, of course, is directly related to the reduction in corporate tax rates following the passage of the “tax reform” bill in December of 2017. However, as shown below, top-line revenue growth (sales) has also improved since the market bottom in early 2016. The issue is that while sales are indeed rising, the price investors are paying for each dollar of sales has grown exponentially since 2009. In other words, it is already well “priced in”...


Since the media focus on earnings per share (EPS), we see the same issue. Since the end of 2014, investors are paying twice the rate of earnings growth. No matter how you look at the data, the point remains the same. Investors are currently overpaying today for a stream of future sales and/or earnings which may, or may not, occur in the future. The risk, as always, is disappointment...


# Always Optimistic; But optimism is certainly one commodity that Wall Street always has in abundance. When it comes to earnings expectations, estimates are always higher regardless of the trends of economic data. The problem is that the difference between expectations and reality have been quite dramatic. “Despite a recent surge in market volatility, combined with the drop in equity prices, analysts have ‘sharpened their pencils’ and ratcheted UP their estimates for the end of 2018 and 2019. Earnings are NOW expected to grow at 26.7% annually over the next two years”...


“The chart below shows the changes a bit more clearly. It compares where estimates were on January 1st versus March and April. ‘Optimism’ is, well, ‘exceedingly optimistic’ for the end of 2019”...


That was so a month-and-a-half ago. Since then, analysts have gotten a bit of religion about the impact of higher rates, tighter monetary accommodation, and trade wars. The estimated reported earnings for the S&P 500 have already started to be revised lower (so we can play the “beat the estimate game”). For the end of 2019, forward reported estimates have declined by roughly $6.00 per share...


However, the onset of a “trade war” could reduce earnings growth by 11% which would effectively wipe out all of the benefits from the recent tax reform legislation. As you can see, the erosion of forward estimates is quite clear and has gained momentum in the last month...


There is no arguing corporate profitability improved in the last quarter as oil prices recovered. The recovery in oil prices specifically helped sectors tied to the commodity such as Energy, Basic Materials, and Industrials. However, such a recovery may be fleeting. There are signs currently that global economic growth is showing signs of weakening. As noted by Adem Tumerkan: “Taking the contrarian route – it’s not hard to see the market isn’t pricing in any potential global earnings issues. And this is troublesome because the risks keep adding up. The historically accurate South Korean Export Growth Indicator (SKEG) is signaling a looming global earnings recession”...


“And for the first time since the 2008 Great Recession, corporate bond yields have inverted”. This inversion signals trouble ahead for the stock market. It means that ‘the cost of capital for corporates is now higher than the return on capital.’ Corporate Bond investors are clearly expecting a recession and deflation ahead, which will cause the prime rate to plunge. This will spill into the stock market and negatively send prices tumbling”...


# Accounting Magic; Looking back it is interesting to see that much of the rise in “profitability” since the recessionary lows have come from a variety of cost-cutting measures and accounting gimmicks rather than actual increases in top line revenue. As shown in the chart below, there has been a stunning surge in corporate profitability despite a lack of revenue growth. Since 2009, the reported earnings per share of corporations has increased by a total of 336%. This is the sharpest post-recession rise in reported EPS in history. However, that sharp increase in earnings did not come from revenue which has only increased by a marginal 49% during the same period...


Of course, stock buybacks have been the “go to” method for boosting earnings. According to Greg Haendel from Wealth Management: “The largest beneficiary of repatriation spending has been the stockholder with the most utilized tool being corporate stock buybacks. Share buybacks increased during Q12018 to a record $178 billion, up from $135 billion a year ago. Further, the 24 U.S. companies with the largest foreign cash holdings accounted for two-thirds of the increase in share buybacks. There has already been $324 billion of buyback announcements year-to-date with an expected total buyback amount of $800 billion for the year”...


Furthermore, while the majority of buybacks have been done with “repatriated” cash, it just goes to show how much cash has been used to boost earnings rather than expanding production, making productive acquisitions or returning cash to shareholders. Ultimately, the problem with cost-cutting, wage suppression, labor hoarding and stock buybacks, along with a myriad of accounting gimmicks, is that there is a finite limit to their effectiveness. Eventually, you simply run out of people to fire, costs to cut and the ability to reduce labor costs. Recently, compensation costs have been rising as the labor market has indeed grown tighter. Of course, this is what is normally seen at the end of economic cycle as rising compensation triggers a profit contraction...


While it would seem that sharply rising employee compensation would be a “good thing,” you will notice that sharply rising employee compensation, which impacts earnings growth, has historically coincided with weaker economic outcomes as higher costs erode profitability. “It is worth noting that in both charts above, despite hopes of continued economic expansion, both employee compensation, and economic growth have continued to trend to lower since the 1980’s. This declining growth trend has been compensated for by soaring levels of debt to sustain the current standard of living”...


# Economics Matter; The last chart below compares economic growth to earnings growth. Wall Street has always extrapolated earnings growth indefinitely into the future without taking into account the effects of the normal economic and business cycles. This was the same in 2000 and in 2007. Unfortunately, the economy neither forgets nor forgives...


With analysts once again hoping for a continued surge in earnings in the months ahead, it is worth noting this has always been the case. Currently, there are few, if any, Wall Street analysts expecting a recession at any point in the future. Unfortunately, it is just a function of time until the recession occurs and earnings fall in tandem. The deterioration in earnings is something worth watching closely. While earnings have improved in the recent quarter, due to the benefit of tax cuts, it is likely transient given the late stage of the current economic cycle, continued strength in the dollar and potentially weaker commodity prices in the future. Wall Street is notorious for missing the major turning of the markets and leaving investors scrambling for the exits. This time will likely be no different. It is important to remember the bump in earnings growth will only last for one year at which point the analysis will return to more normalized year-over-year comparisons. While anything is certainly possible, the risk of disappointment is extremely high...

The US-China Trade War Summarized In One Chart

With the US and China now actively engaged in several rounds of tit-for-tat tariffs and retaliations, it is easy to lose track of a) where we currently are in the escalating trade standoff and b) what has actually been implemented.
As a handy guide, Goldman reminds us that in the latest overture by the US on June 18, the White House announced that it would impose 10% tariffs on an additional $400 billion of products from China if intellectual property policies and related issues are not addressed or if China retaliates; China vowed to retaliated immediately. Put in context, this would potentially involve tariffs on two successive rounds of $200 billion each. And since previously, President Trump had previously proposed a 25% tariff on a second round of $100bn in imports from China, this latest proposal amounts to a net $300bn increase in products affected. If implemented this would raise the total amount of tariffs the Trump administration has proposed from around $500bn to nearly $800bn, or about 4 times the cumulative amount that had been proposed as of a month ago, before President Trump proposed tariffs on global auto imports on national security grounds. All of this is summarized in the chart below, which perhaps more importantly also shows that up until now, the amount of US imports actually subject to implemented tariffs is virtually negligible compared to what has been proposed. However, that may change very soon as the first round of the trade war with China takes effect on July 6...


As a first bonus chart, Goldman shows how the first rounds of 25% tariffs would compare with hypothetical later rounds. It finds that in the first round of $34bn in imports, imports from China account for only 8% of total imports in the affected categories, and 23% of imports from low-cost countries. In subsequent rounds, these shares rise, and if the White House moved forward with the proposed tariffs on an additional $200bn in imports, imports from China would account for more than half of total imports from low-cost countries, leaving little room for substitution from other US trading partners...


Finally, here is Goldman's estimation of the potential composition of the next group of $200bn in imports that the White House might impose tariffs on. It is meant to reflect the basics of the USTR process, which aims tariffs at import categories where China represents a small share, ideally less than 1/3 of total imports. Columns 1 and 2 show US imports from China in each category of goods on which USTR has already proposed to apply a 25% tariff. The third and fourth columns, under “Potential Retaliation,” show value for each category we estimate as most likely to be subject to a 10% tariff should the US choose to impose tariffs on an additional $200bn of goods. In our view, the US is likely to respond first with tariffs on remaining goods that are relatively easy to substitute (column 3). A low share of imports from China (column 5), a higher share from low-wage countries excluding China (column 6), and a lower share of goods from high-wage countries (column 7) would suggest relatively easy substitutability and thus a higher likelihood of being subject to tariff in the next round...

David Rosenberg: "The Fed Is Responsible For 1,000 S&P Points"

Remember when David Rosenberg flipped from bear to bull, claiming that inflation - especially for wages, had finally arrived back in 2012 (spoiler: it hadn't)? That odd phase lasted a few years, but the former Merrill strategist is once again back to his bearish self. Permabearish that is, because in a presentation to Canada's Inside ETFs conference in Montreal, Rosenberg echoed Morgan Stanley's Michael Wilson in stating that January was the "peak of the bull market", and that the next recession will start in 12 months. “Cycles die, and you know how they die?” Rosenberg said, quoted by Bloomberg. “Because the Fed puts a bullet in its forehead.” Rosenberg's bearish case is familiar to those who follow him: the market is in a classic late cycle, wages are rising thanks to full employment, while commodities are cooling amid potential trade wars. What happens next? "The result will be higher inflation", he said, which is odd because the last time Rosie saw higher inflation it made him bullish.
In addition to timing the next recession, a decision which promptly led to some jeers among the fintwit echo chamber, Rosenberg also admitted that any bullish phase he may have had in the past was really just a simple oversight: "We are seeing a significant shift in the markets. The Fed was responsible for 1,000 rally points this cycle so we have to pay attention to what happens when the movie runs backwards." (Some of us still recall that Rosie made no mention of the Fed's contribution to the S&P during abovementioned bullish phase). In any case, the biggest catalyst for Rosenberg's current bearish phase is his repeating of what Albert Edwards said two weeks ago, namely that if one takes into account the Shadow Fed Funds rate, the Fed has already tightening 500bps: The Shadow Fed Funds rate hit negative 3% in mid-2014, but more importantly that a pronounced tightening cycle actually started through 2015, and by the end of that year the Shadow rate had converged back with the effective nominal Fed Funds rate (see charts below), although the six Fed Funds rate hikes since Dec 2015 amount to a total of 170 basis points (bp) of tightening, one can argue that if we add the 300bp (Shadow) rate hike to the current Fed Funds rate of 1.70%, the degree of monetary tightening in the current cycle stands at 470bp...


One can add another 25bps to the above numbers after the latest rate hike by the Fed. Edwards' conclusion: "it is therefore reasonable to argue that the US has already faced a "normal" tightening cycle and any additional rate hikes are taking us into territory not seen in recent times. This already may be enough for the Fed to have broken something." Fast forward to today when Rosenberg effectively carbon copied what Edwards said: If the Fed raises rates and shrinks the balance sheet as much as it says it will, the cumulative de facto tightening by the end of 2019 will have totaled 525 basis points. If you don't think this is enough to cause a recession, take note that the Fed tightened 425 bps from 2004 to 2006, by 350 basis points prior to the 2000 downturn, and by nearly 400 basis points in the lead up to the 1990 pullback
# David Rosenberg @EconguyRosie If the Fed raises rates and shrinks the balance sheet as much as it says it will, the cumulative de facto tightening by the end of 2019 will have totaled 525 basis points. 
<1> # David Rosenberg @EconguyRosie If you don't think this is enough to cause a recession, take note that the Fed tightened 425 bps from 2004 to 2006, by 350 basis points prior to the 2000 downturn, and by nearly 400 basis points in the lead up to the 1990 pullback. 
<1><2> He's right, but what he forgets is that the second stocks drop by the maximum permitted 20%, the Fed will immediately halt the tightening cycle, and proceed with rate cuts, NIRP, QE4 and so on, because in the current, final phase of the global asset ponzi, even a small loss of control means the entire financial system gets it.

Fed Finds "All 35 Banks Will Be Fine If Stocks Crash by 65%, VIX Hits 60"!

The Fed has released the results of its most recent Dodd-Frank Stress Tests. All US banks were expected to pass (and are likely to lift the amount of money they send to shareholders via dividends and buybacks) but as Bloomberg notes, eyes are on smaller banks, which may have better-than-anticipated results and capital plans. As a reminder, in the severely adverse scenario, asset prices drop sharply in this scenario. Equity prices fall 65 percent by early 2019, accompanied by a surge in equity market volatility. The U.S. market volatility index (VIX) moves above 60 percent in the first half of 2018. Real estate prices also experience large declines, with house prices and commercial realestate prices falling 30 percent and 40 percent, respectively, by the third quarter of 2019, but notably all of these adverse shifts revert back to normal after a few years...


And sure enough, all 35 banks reviewed cleared the first hurdle of the Fed's stress tests. The most severe hypothetical scenario projects $578 billion in total losses for the 35 participating bank holding companies during the nine quarters tested. The "severely adverse" scenario, the most stringent scenario yet used in the Board's stress tests, features a severe global recession with the U.S. unemployment rate rising by almost 6 percentage points to 10 percent, accompanied by a steepening Treasury yield curve. The firms' aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual level of 12.3 percent in the fourth quarter of 2017 to a minimum level of 7.9 percent in the hypothetical stress scenario. Since 2009, the 35 firms have added about $800 billion in common equity capital. "Despite a tough scenario and other factors that affected this year's test, the capital levels of the firms after the hypothetical severe global recession are higher than the actual capital levels of large banks in the years leading up to the most recent recession," Vice Chairman Randal K. Quarles said. In other words, according to the Fed's stress test, if stock prices drop 65% and VIX soars above 60, all 35 banks will be ok.
# GreekFire23 @GreekFire23 So after the financial crisis we learn that banks can now withstand any financial market collapse. Helpful.
Federal Reserve stress test results show Goldman Sachs had a minimum supplementary leverage ratio (SLR) of 3.1, just exceeding the required 3.0 minimum the Fed set for its annual capital plan review to be released next week. GS’s tested SLR was the lowest among participating banks; Morgan Stanley was next, at 3.3, followed by State Street at 3.7; those were the only banks below 4.0...


State Street was the closest to minimum on Equity Tier 1 Capital...


# Summing it all up: The next time the market crashes by 65%, the Fed's "stress test" will be Exhibit A why there will be no taxpayer bailouts: they can all survive on their own....

Water Wars: India Facing "Worst Crisis In Its History"

India is facing its worst-ever water crisis, with some 600 million people facing acute water shortage, a government think-tank says. The Niti Aayog report, which draws on data from 24 of India's 29 states, says the crisis is "only going to get worse" in the years ahead. Around 200,000 Indians die every year because they have no access to clean water, according to the report. And as The BBC reports, many end up relying on private water suppliers or tankers paid for the by the government. Winding queues of people waiting to collect water from tankers or public taps is a common sight in Indian slums. Indian cities and towns regularly run out water in the summer because they lack the infrastructure to deliver piped water to every home.
* 600 million people face high-to-extreme water stress.
* 75% of households do not have drinking water on premise.
* 84% rural households do not have piped water access.
* 70% of our water is contaminated; India is currently ranked 120 among 122 countries in the water quality index...


India faces more than one problem, all compounding the nation's crisis: Droughts are becoming more frequent, creating severe problems for India’s rain-dependent farmers (53% of agriculture in India is rainfed17). When water is available, it is likely to be contaminated (up to 70% of our water supply), resulting in nearly 200,000 deaths each year. Interstate disagreements are on the rise, with seven major disputes currently raging, pointing to the fact that limited frameworks and institutions are in place for national water governance. And that means massive problems lie ahead...


40% of the Indian population will have no access to drinking water by 2030 with 21 cities running out of groundwater by 2020, affecting 100 million people which will cut 6% from GDP by 2050. What remains alarming is that the states that are ranked the lowest, such as Uttar Pradesh and Haryana in the north or Bihar and Jharkhand in the east, are also home to nearly half of India's population as well the bulk of its agricultural produce. But, the report said, policymakers face a difficult situation because there is not enough data available on how households and industries use and manage water. While trade wars are grabbing all the headlines, the water wars are where the real pain lies....

Germany Has Made Over 3 Billion Profit From Greece's Crisis Since 2010

Germany has earned around 2.9 billion euros in profit from interest since the first bailout for Greece in 2010. As KeepTalkingGreece reports, this is the official response of the Federal Government to a request submitted by the Green party in Berlin. The profit was transmitted to the central Bundesbank and from there to the federal budget. The revenues came mainly due to purchases of Greek government bonds under the so-called Securities Markets Program (SMP) of the European Central Bank (ECB). Previous agreements between the government in Athens and the eurozone states foresaw that other states will pay out the profits from this program to Greece if Athens would meet all the austerity and reform requirements. However, according to Berlin’s response, only in 2013 and 2014 such funds have been transferred to the Greek State and the ESM. The money to the euro bailout landed on a segregated account...


As the Federal Government announced, the Bundesbank achieved by 2017 about 3.4 billion euros in interest gains from the SMP purchases. In 2013, approximately 527 million euros were transferred back to Greece and around 387 million to the ESM in 2014. Therefore, the overall profit is 2.5 billion euros. In addition, there are interest profits of 400 million euros from a loan from the state bank KfW. “Contrary to all right-wing myths, Germany has benefited massively from the crisis in Greece,” said Greens household expert Sven Christian Kindler said and demanded a debt relief for Greece. “It can not be that the federal government with billions of revenues from the Greek interest the German budget recapitalize,” Kindler criticized. “Greece has saved hard and kept its commitments, now the Eurogroup must keep its promise,” he stressed.

Crypto-Collapse Resumes After Japan's Largest Exchange Halts Account Creation

What started off as a hopeful week of broadening user adoption is ending on a sour note as Japan's chief regulator launched a probe of crypto-exchanges, prompting the largest to halt account creation sending the entire crypto space lower. As CNBC reports, the order from Japan's Financial Services Agency, led bitFlyer, the largest crypto exchange in Japan, to suspend the creation of new accounts while it makes improvements to its business, especially as it pertains to its money-laundering measures. "Our management and all employees are united in our understanding of how serious these issues are, as well as how serious we are in responding to them going forward," bitFlyer said in a statement on their website. "In order to maximize our efforts towards building a suitable service and improving on the issues identified, we have temporarily suspended account creation for new customers of our own volition," bitFlyer said. The agency gave the same order to five other other exchanges after finding weaknesses in their anti-money laundering controls.
# Bitcoin immediately responded with selling pressure which then extended as Europe woke up and US markets came to life - sending it back below $6500...


And Ethereum back below $500...


But the pain is widespread...


"In the long run this is good for the ecosystem," Brian Kelly, founder and CEO of BKCM said in an email to clients. "In the short run it reduces the flow of new capital, which is bad." However, on a brighter note for Bitcoin, it appears even The Supreme Court is comprehending the inevitability of this 'new money' (via Bitcoinist.com).
As part of the summary comments on the case Wisconsin Central Ltd. v. United States, a judge mentioned Bitcoin while discussing “what we view as money”, suggesting it could at least have a future in how employees receive wages. Justice Stephen Breyer wrote: A railroad employee cannot use her paycheck as a ‘medium of exchange.’ She cannot hand it over to a cashier at the grocery store; she must first deposit it. The same is true of stock, which must be converted into cash and deposited in the employee’s account before she can enjoy its monetary value. Moreover, what we view as money has changed over time. Cowrie shells once were such a medium but no longer are; our currency originally included gold coins and bullion, but, after 1934, gold could not be used as a medium of exchange; perhaps one day employees will be paid in Bitcoin or some other type of cryptocurrency.
# While Bitcoin achieves only a passing reference, reactions to Breyer were noticeably positive, with even mainstream media suggesting the Supreme Court could ultimately share a progressive stance on what Bitcoin is....

Trump Tweets Hope For "Substantial Increase" After OPEC Agrees To Hike Oil Production By 700kb/d

# Update 4: for those asking how long it would take Trump before he commented on the OPEC decision, the answer was about an hour, as moments ago Trump tweeted his third direct "message" to OPEC int he past 3 months, saying "Hope OPEC will increase output substantially. Need to keep prices down!" Keep a close eye on the SPR, which will likely be tapped next...


# Update 3: Here is the final OPEC communique...


# Javier Blas @JavierBlas2 The full #OPEC communique | #OOTT...
# Update 2: the deal is done and here are the headlines, which are as mostly reported previously, a 1 million "paper" production increase, which however will not be fully satisfied since many nations are already at their peak output, as OPEC nations comply with output quotas, with the exception of the "real" production increase, which according to the Nigeria energy minister will be 700kb/d while earlier reports had it at 600kb/d:
- SAUDI OIL MIN: `WE HAVE AN AGREEMENT,' DECIDED ON 1M B/D HIKE
- KACHIKWU SAYS OPEC SIDE TO ADD 700K B/D IN REAL BARRELS
- SAUDI WILL BOOST OIL OUTPUT, MINISTER SAYS
- OPEC COMMUNIQUE SAYS GROUP WILL STRIVE TO REACH 100% COMPLIANCE
- DRAFT OPEC COMMUNIQUE SEEN BY BLOOMBERG DOESN'T GIVE NUMBERS
- NIGERIA SAYS QUOTAS WERE NOT DISCUSSED IN OPEC MEETING
- SAUDI MIN: OUTPUT HIKE DEPENDS ON WHICH NATIONS HAVE CAPACITY
- SAUDI MINISTER: OUTPUT HIKE WILL BE `PROPORTIONAL' BY COUNTRY
And with the next full OPEC meeting scheduled for on Dec. 3, Bloomberg notes that ministers will hold a very important meeting of the Joint Ministerial Monitoring Committee in Algiers in September. That will be a chance to review the deal and make any adjustments.
# Update 1: It seems oil market traders suddenly woke up and spiked WTI back above $67, its highest since June 1st, which will likely prompt an angry response from President Trump...


*) What was expected to be a drawn-out affair, with Iran potentially resisting and even leading to the collapse of the cartel, moments ago OPEC reached a deal in principle to raise oil production by 1 million b/d on paper, and in reality by 600 kb/d as many of the OPEC nations are already tapped out and unable to produce more.
# Vandana Hari @VandanaHari_SG 21h OPEC reaches deal in principle to raise 1 mil b/d "on paper": BBG. Brent up $1.30 on Thu's close, around $74.41/barrel...
# Vandana Hari @VandanaHari_SG "Real" increase of 600,000 b/d: BBG...
The deal is roughly what the committee had agreed to yesterday and is the plan pushed by Saudi Arabia all week. And while details haven’t yet been formally announced, the deal would mean a return to 100% compliance with output quotas. As Bloomberg notes, this is the deal traders have been waiting for: The fear was that, if the meeting broke up in disarray, Saudi Arabia would simply open the taps and other producers would follow suit, unleashing far more supply than the market needed. What this deal does is to bring some order to the process of easing supply restraint. Indeed, absent some last minute shock, Iran appears to have gone along with the majority and will comply with what is effectively A Saudi-Russian decision, prompted by Trump complaints for the cartel to produce more oil . 
As Bloomberg further adds, any distribution of output increases among OPEC and non-OPEC members "is going to create winners and losers." While the headline number is what will matter for oil prices, the relative gains and losses against their fellow members will also be important to the participants. That could mean ministers still have a way to go before they are finally done. But the fact that they have got as far as they have means that cohesion has, once again, proved paramount. Brent crude edged toward $75 a barrel on the headlines, but has pared back a bit, whereas WTI was trading in the upper $66 range, not a big move from the recent range, suggesting that the outcome is largely as priced in...

Manufacturing PMI Plunges To 7-Month Lows: Orders Tumble As Prices Soar

Following a slight bump in EU Composite PMI, US Composite PMI dipped in June (preliminary) data driven by a slump in manufacturing. While Services PMI slipped lower, Manufacturing plunged to its weakest since Nov 2017...


More worrisome is that Stagflation is here. New Orders tumbled to the lowest since September and inflation spiking with input costs at their highest since Sept 2013. US continues to outperform according to the soft data surveys...


# Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said: “Price pressures remain elevated, however, widely blamed on a mix of rising fuel prices and tariff-related price hikes, as well as supplier’s gaining pricing power as demand outstrips supply for many inputs. Risks are tilted to the downside for coming months. Business expectations about the year ahead have dropped to a five month low, led by the weakest degree of optimism for nearly one and a half years in manufacturing. Exports are back in decline, showing the worst performance for over two years, causing factory order book growth to slump sharply lower compared to earlier in the year. For the first time this year, factory output is growing faster than order books, suggesting production may be adjusted down in coming months. Inflows of new business into the service sector have meanwhile cooled to the weakest since January. Finally, although employment is still rising strongly, even here there are signs of weakness, with the latest rise in payrolls being the lowest for a year.”
# So surging prices are crushing orders and production is continuing to ignore it, for now. That won't end well....

Gold Joins The Global "Death Cross" Procession

While US mega-tech stocks support the belief that all is well for many Americans, a glance around the world and the shit is seriously hitting the fan. Downtrends are everywhere and 'death crosses' are popping up in asset classes from Chinese stocks to global Systemically-Important Banks and most recently gold. The crossing of the 50-day moving average below the 200-day moving average has been long used a signal of trend change and more euphemistically is known as the "death cross." 
# Gold is now suffering...


Silver was triggered a few months back (but has largely gone sideways since)...


But Chinese Stocks have slumped since being hit by the death cross...


And as China growth expectations fade amid global trade war tensions, Copper has given back its recent spike gains and formed a death cross...


And it's not just 'real' assets, virtual currencies have been hit with Bitcoin plunging after suffering its death cross...


Europe has not been spared with DAX suffering a death cross earlier in the year, rebounding, and now about to suffer another as Trump's tariff threats send it spiralling lower...


Emerging Market stocks, bonds, and FX are all 'death cross'-ing...


And finally, and perhaps most ominously, there are the Global Most Systemically Import Banks (G-SIBs), which just formed a death cross as they entered a bear market...


But then again, why worry, Nasdaq is at a record high...


Probably nothing to worry about, it's only the global economy that is slowing dramatically...

How Erdogan Plans To Steal Sunday's Election

As Turks prepare to head to the polls Sunday in a snap election called by incumbent President Recep Tayyip Erdogan, Foreign Policy has published what is essentially a summary blueprint outlining the ways Erdogan could steal the election, noting "Sunday's vote is one he can't afford to lose." As we previously commented, though the man who has dominated the nation's politics for almost two decades is not expected to lose, a consensus is emerging that the vote should be regarded as a referendum on his person and leadership. And now, a visible surge in popularity for the rival secularist Republican People's Party (CHP) candidate has pundits declaring the opposition actually has a chance.
Erdogan has often boasted that he has never lost an election and, as recent polls indicate, he is unlikely to lose this time either (but likely by a thin margin). Since 2002, he and his AKP (Justice and Development Party) have won five parliamentary elections, three local elections, three referendums and one presidential election. The president moved elections that weren't supposed to be held until 2019 forward by more than a year in hopes of smashing an unprepared opposition, but there's yet a possibility this could backfire. Ironically, the move could blow up in Erdogan's face as he called for the early elections at a moment when the economy appeared strong, but which in the interim began tanking, giving all but die-hard AKP supporters reason for serious pause as the opposition's message becomes louder. His legacy has already been established as ushering in Turkey’s transformation from a parliamentary to a presidential system, giving a disproportionate share of power to the president, and should he win he'll assume even greater executive powers after last year's referendum which narrowly approved major constitutional changes related to the presidency. But Erdogan's main opposition candidate, Muharrem Ince, is this week drawing immense crowds according to a variety of reports, and gaining support from a cross-section of Turks increasingly fed up with Erdogan's power-grabbing.
# Ece Toksabay @ecetoksabay opposition candidate Muharrem Ince at Ankara rally...

Ince, a former high school physics teacher widely seen has having much more charisma, has mirrored Erdogan's firebrand and combative rhetoric while taking direct aim at the Islamic conservative Justice and Development Party (AKP) leader's enabling corruption and nepotism, and his further overseeing an economy in tailspin with the lira having lost nearly 20% of its value since the year began, inflation at 12%, and interest rates at 18%. Muharrem Ince's simple yet pointed appeal goes something like this: "Erdogan is tired, he has no joy and he is arrogant," he told hundreds of thousands of supporters at an Izmir rally on Wednesday. CNN noted the rally presented "what looked like the largest crowd in the elections period yet." Muharrem Ince's Wednesday rally in Izmir as shown on Turkish television. Crowd size estimates ranged from 250,000 up to millions, depending on who was commenting...


# Hürriyet Daily News @HDNER CHP presidential candidate İnce vows change at giant rally in main opposition stronghold İzmir http://hry.yt/7YUQW...

Sunday's election is being widely described the most important in recent Turkish political history, a crossing the Rubicon moment for Erdogan as he stands to inherit an unprecedented and likely irreversible level of sweeping executive authority. As Foreign Policy explains, he has carefully put the architecture in place for this moment, and the outlook remains bleak for the future of democracy in Turkey: The current Council of Ministers, all members of parliament, will cease to exist and the president will appoint advisors and deputies to run the country. Parliament, especially if it remains in the hands of Erdogan’s Justice and Development Party (AKP), will be nothing but a rubber stamp. Erdogan over the years has amassed an enormous amount of power by molding state institutions to his liking and by eliminating anyone from his entourage who can even minimally challenge him. Every single member of the party owes his or her position directly to Erdogan. This patronage system permeates all levels of the bureaucracy, which has lost its independence. So again, on June 24 losing is not an option for Erdogan.
# Here are ways Erdogan can steal the election, according to Foreign Policy:
1) He's already engineered electoral law for less oversight of ballots: He has engineered several changes to the electoral law, two of which could be game-changers. The first is the elimination of the requirement that all ballots be stamped by officials. This practice will open up the system to abuse in obvious ways, it was precisely such a last-minute change that allowed the government to claim victory in 2017 during the constitutional referendum.
2) Erdogan's own party cronies will manage and appoint officials for Sunday's election process: Erdogan’s second change to the electoral law concerns the ballot box overseers: Whereas in the past political parties nominated candidates who were chosen by a draw, under the new rules overseers are to be chosen among local officials whose jobs are ultimately determined by the government and the state.
3) Switching ballot locations especially in Kurdish areas: Suppressing the Kurdish vote is critical for the government, one can expect more shenanigans in Kurdish-majority areas, because Erdogan needs to push the Peoples’ Democratic Party below the 10 percent threshold to ensure that his party wins a majority of seats in parliament.
4) Erdogan now essentially owns the judicial system, the military and media, all of which will be leveraged: The Supreme Electoral Council, the judicial system, and the military, until recently Erdogan’s most dedicated nemesis, are all now under Erdogan’s control. The military was completely denuded of its higher ranks following the July 2016 failed coup attempt. The national press, meanwhile, is completely dominated by Erdogan’s acolytes. The results are unsurprising: In the last two weeks of May, a study demonstrated that the president and his party received far more coverage on three government-owned television stations, including a Kurdish-language one.
5) No detail has been left untouched, but last minute "shenanigans" will ensure victory if it's close: Erdogan, the consummate politician, is not leaving anything about this election to chance; no detail has been too small to escape his attention. Still, it is quite doubtful that he will allow anything but a total victory for himself, one should expect a great deal of shenanigans on the part of the ruling party in the final run-up to the June 24 vote....

The Junk-Credit Market Is Still Irrationally Exuberant

One of the biggest such deals ever, happening now: How investors allow a group of PE firms to extract $3.75 billion from a company after they’d already extracted billions. Junk-rated Asurion, which is based in Nashville, has 16,000 employees in the US and elsewhere, and sells insurance and extended warranties for smartphones, tablets, consumer electronics, and the like, is borrowing $3.75 billion via two “leveraged loans.” The proceeds along with some “cash on hand,” as Moody’s says, are to be funneled to the PE firms, Madison Dearborn, Berkshire Partners, Providence Equity Partners, and Welsh, Carson, Anderson & Stowe, that acquired the company in a leveraged buyout (LBO) during the LBO boom in 2007. “One of the largest credits of its kind,” is how LCD, of S&P Global Market Intelligence, described it. These loans are also “covenant-lite”, meaning they offer investors fewer than normal protections. This money is not used for anything productive, or to acquire another company, or to expand operations, or to increase revenues. It simply extracts cash from the company and in the process loads it up with debt.
These two loans will bring the company’s total term loans to $11.3 billion, according to Moody’s, which rates the company “B1,” four notches into junk. Moody’s considers the deal “credit negative” due to the increase in debt and the “large payment to shareholders.” The deal will increase Asurion’s debt-to-EBITDA ratio to 6.5x-7.0x, up from 5x before the deal, Moody’s estimates. EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure of operating cash flow that excludes interest expenses, but interest expenses are massive for a company with $11.3 billion in junk-rated loans outstanding, so it’s a good thing to exclude it. Among other “credit challenges,” according to Moody’s, is Asurion’s “practice of borrowing substantial sums from time to time to help fund payments to shareholders.” These transactions were used to allow the PE firms to cash out, and equity interest shifted to other investors, which include sovereign wealth funds and the Canadian Pension Plan Investment Board. By now, the PE firms’ stake has dropped to “less than 30%,” Moody’s said. The banks arranging the two leveraged loans are Bank of America Merrill Lynch, Morgan Stanley, Goldman Sachs, Barclays, Credit Suisse, and Deutsche Bank, according to LCD. Commitments are due by noon on Wednesday, June 27.
Leveraged loans – they’re called that because they’re extended to junk-rated and highly leveraged companies, such as Asurion – are too risky for the banks to keep on their books. So banks sell them to loan mutual funds, or slice-and-dice them into structured Collateralized Loan Obligations (CLOs) and sell them to institutional investors. The banks get the fees but slough off the risk to mutual fund investors, pension beneficiaries, and other sitting ducks. Given the still pandemic chase for yield, anything goes. Leveraged loans and CLOs have turned into a booming market. And issuance has soared. LCD explains:
- Dividend deals such as Asurion are seen as opportunistic issuance in the US leveraged loan market, meaning issuers, or their private equity owners, take advantage of investor demand to originate credits, the proceeds of which are returned to the owners. The U.S. leveraged loan market has been red hot of late as investors crowd the floating-rate asset class thanks to ongoing and expected interest rate hikes. 
The current price talk indicates a yield to maturity of around 5.5% for the $2.25-billion first-lien loan due November 2024 (rated Ba3); and about 9.5% for the $1.5-billion second-lien loan due August 2025 (rated B3). Lenders love it: They’re offered a “consent fee” of 50 basis points (half a percentage point) on the $2.25 billion first-lien loan and of 75 basis points on the $1.5 billion second-lien loan. After the transaction is complete, Asurion will have $11.3 billion in leveraged loans outstanding, not including its senior secured first-lien revolving line of credit of $230 million, according to Moody’s:
* $2.5 billion senior secured first-lien term loan, due August 2022.
* $3.2 billion senior secured first-lien term loan, due November 2023.
* $3.3 billion (includes the $1.5 billion increase of the current transaction) senior secured second-lien term loan due August 2025.
* $2.25 billion 6.5-year senior secured first-lien term loan.
This is the type of transaction that is typical for PE-firm-owned companies. Only this one is a much larger cash-out than most, and comes on top of Asurion’s prior massive cash-outs. It is this type of transaction that is heavily involved in the brick-and-mortar retail meltdown. Many of the retailers that had been acquired by PE firms during the LBO boom before the Financial Crisis, or in LBOs afterwards, are now filing for bankruptcy and some are being liquidated, such as Toys ‘R’ Us. This risky strategy is survivable for a flawlessly-run company in a booming industry when an irrationally exuberant junk-credit market will fund anything. But when credit tightens, or when there’s a hiccup at the company, or when there’s a structural change in the industry, in retail, it was the shift to e-commerce and the arrival of new competitors, or worse, if two or all three happen at the same time, as they often do, these companies that have to be totally focused on cost-cutting to deal with their debts, and that do not have the resources to adjust and move forward, get run over by events. And creditors are left to wail and gnash their teeth. So yes, the PE firms behind Asurion are smart cashing out at this point in the credit cycle. But it’s the kind of deal that should give the Fed the willies when it looks back at his easy-credit handiwork over the past nine years....