I am optimistic about 2017. Not because of who got elected president, or because I think that the economy is about to heat up. Rather, it is about business prospects that I have been mining for several years which I think will finally evolve and mature to my satisfaction. Having lacked such optimism for a while, it’s a nice change.
Apropos of that sentiment, the notion that interest rates should rise will facilitate the ideas that I want to take action on. And, courtesy of 720 Global, I think the following summary explains why such a reality is likely:
“While the increasing interest rate risk and price sensitivity coupled with a decreasing margin of safety (lower coupon payments) of outstanding debt is alarming, the story is incomplete. To fully appreciate the magnitude of this issue, one must overlay those risks with the amount of debt outstanding. Since 1982, the duration (price risk) of nominal U.S. Treasury securities has risen 70% while the average coupon, or margin of safety, has dropped 85%. Meanwhile, the total amount of U.S. public federal debt has exploded higher by 1,600% and total U.S. credit market debt, as last reported by the Federal Reserve in 2015, has increased over 1,000% standing at $63.4 trillion. When contrasted with nominal GDP ($18.6 trillion), one begins to gain a sense for how radically out of balance the accumulation of debt has been relative to the size of the economy required to support and service that debt. In other words, were it not for the steady long-term decline in interest rates, this arrangement likely would have collapsed under its own weight long ago.”
To all, I wish a happy and healthy new year. I look forward to bigger and better things.
Friday, December 30, 2016
Thursday, December 8, 2016
Trade Wars
Courtesy of Geopolitical Futures:
“The U.S. and China are dependent on each other in different ways, but the oft-repeated assertion that the economies are too interconnected for the U.S. to increase protectionism does not hold up to scrutiny because the dependencies are not equivalent. Trump will be compelled to do what he claims to do best: negotiate a better deal for American workers. As he does this, he will be able to deploy three main arguments in his negotiations with the Chinese. The first is that U.S. dependence on Chinese goods is a matter of convenience, not of China possessing critical commodities the U.S. can’t obtain anywhere else. The second argument is that although the manufacturing sector of the U.S. economy has been hurting for years and is significantly degraded, a great deal of unused U.S. capacity remains; in the event of a serious economic conflict with China, this unused capacity could be relied upon to pick up much of the slack. The third argument is that U.S. protectionist measures raised against Chinese goods will hurt China far more than any of China’s potential retaliatory responses will hurt the U.S.”
“The U.S. and China are dependent on each other in different ways, but the oft-repeated assertion that the economies are too interconnected for the U.S. to increase protectionism does not hold up to scrutiny because the dependencies are not equivalent. Trump will be compelled to do what he claims to do best: negotiate a better deal for American workers. As he does this, he will be able to deploy three main arguments in his negotiations with the Chinese. The first is that U.S. dependence on Chinese goods is a matter of convenience, not of China possessing critical commodities the U.S. can’t obtain anywhere else. The second argument is that although the manufacturing sector of the U.S. economy has been hurting for years and is significantly degraded, a great deal of unused U.S. capacity remains; in the event of a serious economic conflict with China, this unused capacity could be relied upon to pick up much of the slack. The third argument is that U.S. protectionist measures raised against Chinese goods will hurt China far more than any of China’s potential retaliatory responses will hurt the U.S.”
Tuesday, December 6, 2016
China
From Bloomberg:
All of which raises a simple question: Why is Beijing working so hard to prop up the yuan and crack down on outward capital flows?
The common answer is that it fears the trade consequences of a declining yuan. But that's not it. Since the government devalued the yuan on Aug. 11, the combined value of imports and exports has fallen by only 8 percent, even as the value of the yuan has fallen 8 percent against the U.S. dollar. Any coming decline in the currency won't make much difference, given the weak global economy and the product mix China is buying and selling.
The real reason is that the government is concerned about the implications of further liberalizing. China's rickety banks, with delinquency rates of 30 percent, are receiving regular liquidity injections from the People's Bank of China. Money market rates have been rising, from under 2 percent this summer to above 2.3 percent in Shanghai today. Allowing international capital mobility could easily trigger larger withdrawals -- and hence liquidity crunches for banks already feeling the pinch of bad loans.
In other words, China is caught between trying to prop up a currency facing long-term decline and letting capital leave at will, risking a bank crisis.
All of which raises a simple question: Why is Beijing working so hard to prop up the yuan and crack down on outward capital flows?
The common answer is that it fears the trade consequences of a declining yuan. But that's not it. Since the government devalued the yuan on Aug. 11, the combined value of imports and exports has fallen by only 8 percent, even as the value of the yuan has fallen 8 percent against the U.S. dollar. Any coming decline in the currency won't make much difference, given the weak global economy and the product mix China is buying and selling.
The real reason is that the government is concerned about the implications of further liberalizing. China's rickety banks, with delinquency rates of 30 percent, are receiving regular liquidity injections from the People's Bank of China. Money market rates have been rising, from under 2 percent this summer to above 2.3 percent in Shanghai today. Allowing international capital mobility could easily trigger larger withdrawals -- and hence liquidity crunches for banks already feeling the pinch of bad loans.
In other words, China is caught between trying to prop up a currency facing long-term decline and letting capital leave at will, risking a bank crisis.
Hope is not a strategy
Here is Bill Gross’ relatively tongue-in-cheek but mostly spot-on analysis of what the policymaker plan is to solve the global debt crisis:
1. As in Japan, the Eurozone, the U.S., and the UK, central banks bought/buy increasing amounts of government debt (QE), then rebate all interest to their Treasuries and eventually extend bond maturities. Someday they might even “forgive” the debt. Poof! It’s gone.
2. Keep interest rates artificially low to raise asset prices and bail out over-indebted zombie corporations and individuals. Extend and pretend.
3. Talk about “normalization” to maintain as steep a yield curve as possible to help financial institutions with long-term liabilities, but normalize very, very slowly using financial repression.
4. Liberalize accounting rules to make some potentially “bankrupt” insurance companies and pension funds appear solvent. Puerto Rico, anyone?
5. Downgrade or never mention the low interest rate burden on household savers. Suggest it is a problem that eventually will be resolved by the “market”.
6. Begin to emphasize “fiscal” as opposed to “monetary” policy, but never mention Keynes or significant increases in government deficit spending. Use the buzzwords of “infrastructure” spending and “lower taxes”. Everyone wants those potholes fixed, don’t they? Everyone wants lower taxes too
7. Promote capitalism – even though government controlled, near zero percent interest rates distort markets and ultimately corrupt capitalism as we once understood it. Reintroduce Laffer Curve logic to significantly lower corporate taxes. Foster hope. Discourage acknowledgement of abysmal productivity trends which are a critical test of an economic system’s effectiveness.
8. If you are a policymaker or politician, plan to eventually retire from the Fed/Congress/Executive Wing and claim it’ll be up to the Millennials now. If you are an active as opposed to passive investment manager, fight the developing trend of low fee ETFs and index funds. But expect to retire with a nest egg.
1. As in Japan, the Eurozone, the U.S., and the UK, central banks bought/buy increasing amounts of government debt (QE), then rebate all interest to their Treasuries and eventually extend bond maturities. Someday they might even “forgive” the debt. Poof! It’s gone.
2. Keep interest rates artificially low to raise asset prices and bail out over-indebted zombie corporations and individuals. Extend and pretend.
3. Talk about “normalization” to maintain as steep a yield curve as possible to help financial institutions with long-term liabilities, but normalize very, very slowly using financial repression.
4. Liberalize accounting rules to make some potentially “bankrupt” insurance companies and pension funds appear solvent. Puerto Rico, anyone?
5. Downgrade or never mention the low interest rate burden on household savers. Suggest it is a problem that eventually will be resolved by the “market”.
6. Begin to emphasize “fiscal” as opposed to “monetary” policy, but never mention Keynes or significant increases in government deficit spending. Use the buzzwords of “infrastructure” spending and “lower taxes”. Everyone wants those potholes fixed, don’t they? Everyone wants lower taxes too
7. Promote capitalism – even though government controlled, near zero percent interest rates distort markets and ultimately corrupt capitalism as we once understood it. Reintroduce Laffer Curve logic to significantly lower corporate taxes. Foster hope. Discourage acknowledgement of abysmal productivity trends which are a critical test of an economic system’s effectiveness.
8. If you are a policymaker or politician, plan to eventually retire from the Fed/Congress/Executive Wing and claim it’ll be up to the Millennials now. If you are an active as opposed to passive investment manager, fight the developing trend of low fee ETFs and index funds. But expect to retire with a nest egg.
Friday, December 2, 2016
More Sign Posts
Despite that 4.6% headline national unemployment rate, an interesting chart from VP Research which shows that now 40% of states have rising unemployment. Not a good trend.
More on that Economic Boom
Courtesy of the folks at Zero Hedge, we know that over the last three months, the U.S. has gained 638,000 part-time jobs and lost 99,000 full-time jobs. But, by all means, the stock market should be going gangbusters, and the media should be putting out articles like this...
Enough
I finished up David Stockman’s latest bible-sized rant, Trumped! A
Nation on the Brink of Ruin…And How to Bring It Back (2016). While
spending the first 50 pages hitting on the economic realities that enabled an
outsider like Trump to make his run at the Oval Office (the book ends after the
party conventions but before the election), the remaining 400+ pages are a re-visit
of the author’s very strong views on Keynesian central bank policies, beltway
war hawks, and fiscal waste in Washington – all topics that were examined in
his last book.
With that said, there were some data points that I thought useful for future dinner parties. To wit (one of Stockman’s favorite terms, by the way):
-Since 2000, there are 5 million more prime working Americans and not one has a job, and the number of households receiving means-tested benefits has doubled to 100 million.
-Total credit market borrowings by households was $14.2Tn in 2007 and stands at $14.3Tn now. Maybe Richard Koo is right.
-Since 2000, real capital consumption has increased by 53% while real net investment is down by 17%.
-Business debt has increased since the eve of financial crisis from $10Tn to $12.5Tn, but it's gone towards non-productive ends like stock buybacks, LBOs and financial engineering.
-In speaking to the financialization of the economy, since 1987 the value of debt and equity securities have moved from 2.4x to 5.4x GDP.
-We have $3Tn of imported goods and services and $10Tn of consumption. That seems like a good place to tax, rather than payroll and corporate income.
-Since 2010, there have been $360Bn in auto sales, but there has also been a surge in auto loans of $355Bn.
-The recent pronouncement that the social security trust fund is solvent until 2034 is premised on the entirely unrealistic assumption that the US economy will grow by 5.1% per year for the next 12 years. The pace of GDP growth since 2000 has been 3.8%, and it's been at a reduced 2.8% growth rate over the last seven years and 3.3% over the last four.
-80% of the highly-traveled bridges in need of repair sit in California, mostly in the greater Los Angeles area. Sounds like CA taxpayers should be responsible, not all Americans through some enormous infrastructure program.
-60% on new debt issuance in China in recent years has gone to pay interest.
As a closing thought, I don’t think that I need to read another one of his books. Over 1,200 pages later, I get the point.
With that said, there were some data points that I thought useful for future dinner parties. To wit (one of Stockman’s favorite terms, by the way):
-Since 2000, there are 5 million more prime working Americans and not one has a job, and the number of households receiving means-tested benefits has doubled to 100 million.
-Total credit market borrowings by households was $14.2Tn in 2007 and stands at $14.3Tn now. Maybe Richard Koo is right.
-Since 2000, real capital consumption has increased by 53% while real net investment is down by 17%.
-Business debt has increased since the eve of financial crisis from $10Tn to $12.5Tn, but it's gone towards non-productive ends like stock buybacks, LBOs and financial engineering.
-In speaking to the financialization of the economy, since 1987 the value of debt and equity securities have moved from 2.4x to 5.4x GDP.
-We have $3Tn of imported goods and services and $10Tn of consumption. That seems like a good place to tax, rather than payroll and corporate income.
-Since 2010, there have been $360Bn in auto sales, but there has also been a surge in auto loans of $355Bn.
-The recent pronouncement that the social security trust fund is solvent until 2034 is premised on the entirely unrealistic assumption that the US economy will grow by 5.1% per year for the next 12 years. The pace of GDP growth since 2000 has been 3.8%, and it's been at a reduced 2.8% growth rate over the last seven years and 3.3% over the last four.
-80% of the highly-traveled bridges in need of repair sit in California, mostly in the greater Los Angeles area. Sounds like CA taxpayers should be responsible, not all Americans through some enormous infrastructure program.
-60% on new debt issuance in China in recent years has gone to pay interest.
As a closing thought, I don’t think that I need to read another one of his books. Over 1,200 pages later, I get the point.
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