The Wall Street Examiner http://wallstreetexaminer.com Busting the myths Wed, 27 Jul 2016 16:16:43 +0000 en-US hourly 1 Athas Shrugged: The Return of Subprime (Nonprime) Residential Lending [Athas Capital] http://wallstreetexaminer.com/2016/07/athas-shrugged-return-subprime-nonprime-residential-lending-athas-capital/ http://wallstreetexaminer.com/2016/07/athas-shrugged-return-subprime-nonprime-residential-lending-athas-capital/#respond Wed, 27 Jul 2016 15:28:52 +0000 http://anthonybsanders.wordpress.com/?p=1150 I spoke at one of Washington DC’s larger economic think tanks several years ago where people were cheering the creation of the Consumer Financial Protection Bureau (CFPB) and the end of subprime lending. My remark was: “As soon as we forget the credit crisis and a new generation of Wall Street investment bankers takes hold, […]

The post Athas Shrugged: The Return of Subprime (Nonprime) Residential Lending [Athas Capital] was originally published at The Wall Street Examiner. Follow the money!

]]>
This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

I spoke at one of Washington DC’s larger economic think tanks several years ago where people were cheering the creation of the Consumer Financial Protection Bureau (CFPB) and the end of subprime lending. My remark was: “As soon as we forget the credit crisis and a new generation of Wall Street investment bankers takes hold, we will see subprime lending again. There are thousands who will want credit and are shut out. The subprime lenders will rise again.” My remarks were not well received by those who believe that the Federal government should control all aspects of financial markets.

Fast forward to today. The private markets have found a way to provide credit for home purchases for borrowers with poor credit. How do these lenders bypass the vaunted Qualified Mortgage (QM) rules decreed by the CFPB? Simple.

Firms such as Athas Capital offer consumers residential mortgage credit that are not available from QM-compliant lenders like Bank of America and Wells Fargo.  Athas Capital (which is NOT a depository institution), funds their lending with private capital (not deposits).

As you would imagine, lenders like Athas Capital offer mortgage rates that are higher than loans originated and sold to Fannie Mae and Freddie Mac or insured by the FHA). And to mitigate risk, Athas Capital requires higher down payments (or lower loan-to-value ratios) than the government guarantee entities.

Here is the Athas Capital rate sheet:

athassheet

Athas Capital even offers loans to “C” and “D” quality borrowers at rates approaching 10% and LTVs of 60%.

athasc

So, firms like Athas Capital are providing credit to those households who have been boxed out by Federal government programs. And again, bear in mind that most large US banks are retreating from the residential mortgage market.

Lenders like Athas Capital understand the risk of subprime (or nonprime) borrowers and attempt to price the risk accordingly. Large down payments mitigate the risk of default/foreclosure since the lender/investor can move to foreclosure after 90+ days of missed payments and usually have sufficient equity remaining after legal fees, etc.

Of course, this strategy is the polar opposite of the FHA where 3% down payment loans to high risk borrowers is their bread and butter (or stale bread and margarine).

This is a classic example of capitalism at work.

rand-Atlas-Shrugged-Cover

I was going to use “The Subprime Lenders Strike Back!!” but I am so sick of Star Wars.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post Athas Shrugged: The Return of Subprime (Nonprime) Residential Lending [Athas Capital] was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/athas-shrugged-return-subprime-nonprime-residential-lending-athas-capital/feed/ 0
Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come http://wallstreetexaminer.com/2016/07/brexit-hiking-uk-power-prices-worst-yet-come/ http://wallstreetexaminer.com/2016/07/brexit-hiking-uk-power-prices-worst-yet-come/#respond Wed, 27 Jul 2016 15:11:08 +0000 http://moneymorning.com/?p=233255 Post-Brexit, the pound has fallen to 30-year lows.

And this dramatic decline has prompted a major change in the UK energy sector that will have dire consequences for British consumers..

The post Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come was originally published at The Wall Street Examiner. Follow the money!

]]>
This is a syndicated repost courtesy of Money Morning. To view original, click here. Reposted with permission.

 

History tells us that the winter of 1946-1947 was one of the worst experienced by the UK in a century – and the coldest in three.

Coming so soon after the end of World War II, an already crippled economy felt the full impact of freezing weather that killed both livestock and crops while jamming roads and railways with snow.

It got so bad that at one point, Winston Churchill observed that he couldn’t even get his favorite cigars.

But the main concern was the provision of electricity. Not a single power-generating station in all of England had escaped wartime destruction, and a return to “normalcy” in the power sector was still years away.

Read More: The Next European Brexit Crisis Is in Energy

So during the cold winter of 1946-1947, the entire British population had to hunker down.

Now, the current situation is hardly as dire. But ever since the UK voted to separate from the EU (the so-called “Brexit” referendum) on June 23, I’ve been waiting for the initial signals that this divorce will have consequences in the energy sector.

Now we have one, with dire consequences for British consumers…

Brits Should Expect (Much) Higher Power Prices

natural gas

The signal shows a coming double whammy for Britishnatural gas users, as a result of the post-Brexit decline of the British pound sterling to more than 30-year lows against the dollar.

This decline has prompted two energy moves in very different directions. Unfortunately, neither is good for anyone living in the UK as winter approaches and temperatures decline…

First, the descent of the pound sterling has prompted UK retail natural gas distributors to forego discounts moving forward. This is, of course, based on the same reasoning that will certainly result in another round of appreciable electricity price hikes by the major national utilities later in the year.

Maintaining profit margins will be impossible at current levels, given the forex pressure on the bottom line. Most observers also believe that increased taxes are now inevitable, as the unexpected currency (effective) devaluation has made revenue an important factor.

Even before Brexit, this was shaping up to be a hard fall and winter in the UK, placing additional pressure yet again on an already strained power sector.

Now, the new government, headed by Prime Minister Theresa May, is still Conservative. And while she will delay substantive Brexit negotiations with the EU, the party’s policies of cutting subsidies will remain intact.

That means some difficult times lie ahead, both for end users and domestic power distributors, with problems – some Brexit-related, some not – hitting all British energy sources…

The UK Is Cutting Its Winter Gas Reserves – Just in Time for Winter

These include renewed concerns about the profitability of North Sea production, a decimation of renewable alternatives (for example, over a third of all jobs in UK solar have vanished), and rising indication that French EDF SA (OTCMKTS ADR: ECIFY) may be having second thoughts about moving forward with a major nuclear power plant at Hinkley Point.

This last one is no surprise, as the project is way over budget and certain to be hit hard by currency fluctuations moving forward.

Don’t Miss: The Easiest Way to Profit from Range-Bound Oil

The British end user, however, is going to feel the pinch in an additional way…

You see, on July 15, utility giant Centrica Plc. (OTCMKTS ADR:CPYYY) announced it will not inject any additional gas into the offshore Rough field until spring of 2017. Rough accounts for about 70% of all British natural gas storage capacity.

Immediately, the news caused a spike of over 10% in winter-monthnatural gas futures prices, as everyone is now concerned that there might not be enough natural gas in storage to cover the increased demand for heating come winter.

But it gets worse…

Come Winter, Brits Will Have to Make Do with Just One-Third of Gas Reserves

Even the capacity issue at Rough doesn’t show how serious the situation is for British consumers. The field’s capacity is rated at 150 billion cubic feet of natural gas, but the present volume stored there is only 50 billion.

Unless Centrica Storage revises its plans – and there are no indications that’s likely to happen – that 50 billion cubic feet is now the maximum that will be available from Rough this winter.

And that’s creating a knock-on effect.

You see, in the summer, UK demand for natural gas comes primarily from gas being pumped into storage for winter heating. But Centrica has decided to shut Rough “for tests” at least into November.

And that has introduced the second major post-Brexit energy move…

British Gas Is Being Exported – Only to Be Reimported Again at a Premium

The dramatic change in cross-currency valuations has resulted in the UK exporting more natural gas to Belgium (and onward to the broader continental market) than at any point in more than two years.

The “spare fuel” being exported is actually coming primarily from volume that would have gone to Rough for storage…

Except that the weaker pound means that it’s now more profitable to instead send the gas along the east-west North Sea Interconnector pipeline to the terminal center at Zeebrugge on the Belgian coast.

Last week, Trevor Sikorski – the head of natural gas, coal, and carbon at Energy Aspects Ltd. in London – told Reuters as much. He thinks the spike in exports comprised gas “that would otherwise be going to Rough, now being incentivized to go and get injected into European storage.”

However, just about all analysts agree that the rising exports from Britain to Europe are more a result of the collapse in currency value than of any outage at Rough. A Brexit-induced “pounding of the pound” has provided some nice profits for European importers… and Centrica has obliged.

But for the average Brit back home, hoping to heat their house come winter, the short-term future may require a traditional British stiff upper lip. Given the decision to close injections of gas into Rough, Sikorski adds that he expects “higher UK imports of gas then to occur in the winter.”

Thanks to a much weaker currency, those imports will be far more expensive than drawing domestic gas from storage in Rough would’ve been (and has been in the past).

In other words, we’re looking at a nasty cycle: Today’s rising exports of British gas will go to European storage, with some of that returning as higher-priced imports when the weather gets colder.

Of course, this may attend to profit considerations along the Interconnector pipeline.

But it’s bad news for people living in Britain.

 

To get full access to all Money Morning content, click here

About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.

Disclaimer: © 2016 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201.

 

The post Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come appeared first on Money Morning – We Make Investing Profitable.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/brexit-hiking-uk-power-prices-worst-yet-come/feed/ 0
Sink The Bismarck! Deutsche Banks Suffers A -73% Earnings Surprise http://wallstreetexaminer.com/2016/07/sink-bismarck-deutsche-banks-suffers-73-earnings-surprise/ http://wallstreetexaminer.com/2016/07/sink-bismarck-deutsche-banks-suffers-73-earnings-surprise/#respond Wed, 27 Jul 2016 13:55:28 +0000 http://anthonybsanders.wordpress.com/?p=1141 Perhaps Deutsche Banks should adopt the German Battleship “Bismarck” as its corporate logo.

The post Sink The Bismarck! Deutsche Banks Suffers A -73% Earnings Surprise was originally published at The Wall Street Examiner. Follow the money!

]]>
This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

Perhaps Deutsche Banks should adopt the German Battleship “Bismarck” as its corporate logo.

Deutsche Bank released their Q2 earnings and generated a -73% earnings surprise.

dbes

At least it was better than the -200% earnings surprise in Q4 2015.

And like the Bismarck, Deutsche Bank’s earning per share estimate keeps sinking.

dbepsdata

If Deutsche Bank is the Bismarck, then the Royal Bank of Scotland is the HMS Hood (sunk by the Bismarck). And the Italian banks are the Conte di Cavour (sunk by the British attack on the Italian fleet at Taranto).

dbrbs

Wow. the EU bank fleet seems to be sinking everywhere.

eurobanksssss

Cheers!

 

1296754136-sinkthebismarck

 

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post Sink The Bismarck! Deutsche Banks Suffers A -73% Earnings Surprise was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/sink-bismarck-deutsche-banks-suffers-73-earnings-surprise/feed/ 0
Behind The New Home Sales Data — A Darker Backdrop http://wallstreetexaminer.com/2016/07/behind-new-home-sales-data-darker-backdrop/ http://wallstreetexaminer.com/2016/07/behind-new-home-sales-data-darker-backdrop/#respond Wed, 27 Jul 2016 12:51:07 +0000 http://wallstreetexaminer.com/?p=302168 There’s so much great data in the Commerce Department’s monthly new home sales report. It’s always useful to parse it for all the tasty morsels that the mainstream media ignores. We’ll take a look at some of it here, with more to come in the days ahead. First let’s look at the usual positive spin…

The post Behind The New Home Sales Data — A Darker Backdrop was originally published at The Wall Street Examiner. Follow the money!

]]>
There’s so much great data in the Commerce Department’s monthly new home sales report. It’s always useful to parse it for all the tasty morsels that the mainstream media ignores. We’ll take a look at some of it here, with more to come in the days ahead.

First let’s look at the usual positive spin given the report in the mainstream media which is usually devoid of historical perspective whatsoever. It’s always about the short run. The Wall Street Journal’s headline said it all.

U.S. New-Home Sales Posted Solid Gain in First Half of 2016

Solid pace offers fresh evidence of healthy momentum in the U.S. housing market as home-buyers enjoy low interest rates

All of that is true, but it doesn’t tell the whole story. To his credit, the Journal’s Ben Leubsdorf noted in the body of the article that “the pace of home construction and purchases of new homes remain depressed compared with levels seen during past economic expansions” but he never addressed just how weak those sales are.

Here’s some perspective.

Sales have nearly doubled from the June 2010 and June 2011 lows of 28,000 to this June’s 54,000. But this is still down sharply from the June 2005 peak of 115,000 units. At the same time, it barely exceeds the low of 47,000 reached in June 1991 and 53,000 in June 1992 during that recession.

New Home Sales Long Term- Click to enlarge

Read the rest of this post at David Stockman’s Contra Corner, where first published.

The post Behind The New Home Sales Data — A Darker Backdrop was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/behind-new-home-sales-data-darker-backdrop/feed/ 0
Kyōki (Insanity) http://wallstreetexaminer.com/2016/07/kyoki-insanity/ http://wallstreetexaminer.com/2016/07/kyoki-insanity/#respond Wed, 27 Jul 2016 12:14:15 +0000 http://720global.wordpress.com/?p=328 Pondering the state of the global economy can elicit manic-depressive-obsessive-compulsive emotions.

The post Kyōki (Insanity) was originally published at The Wall Street Examiner. Follow the money!

]]>
This is a syndicated repost courtesy of 720 Global. To view original, click here. Reposted with permission.

Pondering the state of the global economy can elicit manic-depressive-obsessive-compulsive emotions.  The volatility of global markets – equities, bonds, commodities, currencies, etc. – are challenging enough without consideration of Brexit, the U.S. Presidential election, radical Islamic terrorism and so on.  Yet no discussion of economic and market environments is complete without giving hefty consideration to what may be a major shift in the way economic policy is conducted in Japan.

The Japanese economy has been the poster child for economic malaise and bad fortune for so long that even the most radical policy responses no longer garner much attention. In fact, recent policy actions intended to weaken the Yen have resulted in significant appreciation of the yen against the currencies of Japan’s major trade partners, further crippling economic activity. The frustration of an appreciating currency coupled with deflation and zero economic growth has produced signs that what Japan has in store for the world falls squarely in to the category of “you ain’t seen nothin’ yet.”  Assuming new fiscal and monetary policies will be similar to those enacted in the past is a big risk that should be contemplated by investors.

The Last 25 Years

The Japanese economy has been fighting weak growth and deflationary forces for over 25 years.  Japan’s equity market and real estate bubbles burst in the first week of 1990, presaging deflation and stagnant economic growth ever since.  Despite countless monetary and fiscal efforts to combat these economic ailments, nothing seems to work.

Any economist worth his salt has multiple reasons for the depth and breadth of these issues but very few get to the heart of the problem.  The typical analysis suggests that weak growth in Japan is primarily being caused by weak demand.  Over the last 25 years, insufficient demand, or a lack of consumption, has been addressed by increasingly incentivizing the population and the government to consume more by taking on additional debt.  That incentive is produced via lower interest rates.  If demand really is the problem, however, then some version of these policies should have worked, but to date they have not.

If the real problem, however, is too much debt, which at 255% of Japan’s GDP seems a reasonable assumption to us, then the misdiagnosis and resulting ill-designed policy response leads to even slower growth, more persistent deflationary pressures and exacerbates the original problem.  The graphs below shows that economic activity is currently at levels last seen in 1993, yet the level of debt has risen 360% since 1996.  The charts provide evidence that Japan’s crippling level of debt is not helping the economy recover and in fact is creating massive headwinds.

Japan GDP 1990-2015

 

 gdp 1
Data Courtesy: World Bank

 

Japan Government Debt to GDP ratio

 

 debt gdp 2
Data Courtesy: Japan Ministry of Finance (MoF)

 

What is so confounding about this situation is that after 25 years, one would expect Japanese leadership to eventually recognize that they are following Einstein’s definition of insanity – doing the same thing over and over again and expecting different results.  Equally insane, leaders in the rest of the developed world are following Japan over the same economic cliff.

Throughout this period of economic stagnation and deflation, Japan has increasingly emphasized its desire to generate inflation. The ulterior motive behind such a strategy is hidden in plain sight. If the value of a currency, in this case the Yen, is eroded by rising inflation debtors are able to pay back that debt with Yen that is worth less than it used to be.  For example, if Japan were somehow able to generate 4% inflation for 5 years, the compounded effect of that inflation would serve to devalue the currency by roughly 22%.  Therefore, debtors (the Japanese government) could repay outstanding debt in five years at what is a 22% discount to its current value. Said more bluntly, they can essentially default on 22% of their debt.

What we know about Japan is that their debt load has long since surpassed the country’s ability to repay it in conventional terms. Given that it would allow them to erase some percentage of the value of the debt outstanding, their desperation to generate inflation should not be underestimated. One way or another, this is the reality Japan hopes to achieve.

QE

Quantitative easing (QE) is one of the primary monetary policy approaches central banks have taken since the 2008 financial crisis.  With short term interest rates pegged at zero, and thus the traditional level of monetary policy at its effective limit, the U.S. Federal Reserve and many other central banks conjured new money from the printing presses and began buying sovereign debt and, in some cases mortgages, corporate bonds and even equities. This approach to increasing the money supply achieved central bank objectives of levitating stocks and other asset markets, in the hope that newly created “wealth” would trickle down.  The mission has yet to produce the promised “escape velocity” for economic growth or higher inflation. The wealthy, who own most of the world’s financial assets, have seen their wealth expand rapidly. However, for most of the working population, the outcome has been economic struggle, further widening of the wealth gap and a deepening sense of discontentment.

The Nuclear Option

In 2014, as the verdict on the efficacy of QE became increasingly clear, European and Japanese central bankers went back to the drawing board. They decided that if the wealth effect of boosting financial markets would not deliver the desired consumption to drive economic growth then surely negative interest rates would do the trick.  Unfortunately, the central bankers appear to have forgotten that there are both borrowers and lenders who are affected by the level of interest rates.  Not only have negative interest rates failed to advance economic growth, the strategy appears to have eroded public confidence in the institution of central banking and financially damaging the balance sheets of many banks.

In recent weeks, former Federal Reserve (Fed) chairman Ben Bernanke paid a visit to Tokyo and met with a variety of Japanese leaders including Bank of Japan chairman Haruhiko Kuroda. In those meetings, Bernanke supposedly offered counsel to the Japanese about how they might, once and for all, break the deflationary shackles that enslave their economy using “helicopter money” (the termed was coined by Milton Freidman and made popular in 2002 by Ben Bernanke).  What Bernanke proposes, is for Japan to effectively take one of the few remaining steps toward “all-in” or the economic policy equivalent of a “nuclear option”.

The Japanese government appears to be leading the charge in the next chapter of stranger than fiction economic policy through some form of “helicopter money”.  As opposed to the prior methods of QE, this new approach marries monetary policy with fiscal policy by putting printed currency into the hands of the Ministry of Finance (MOF or Japan’s Treasury department) for direct distribution through a fiscal policy program.  Such a program may be infrastructure spending or it may simply be a direct deposit into the bank accounts of public citizens.  Regardless of its use, the public debt would rise further.

According to the meeting notes shared with the media Bernanke recommended that the MoF issue “perpetual bonds”, or bonds which have no maturity date.  The Bank of Japan (BOJ or the Japan’s Central Bank) would essentially print Yen to buy the perpetual bonds and further expand their already bloated balance sheet. The new money for those bonds would go to the MoF for distribution in some form through a fiscal policy measure.  The BoJ receives the bonds, the MoF gets the newly printed money and the citizens of Japan would receive a stimulus package that will deliver inflation and a real economic recovery.  Sounds like a win-win, huh?

Temporarily, yes.  Economic activity will increase and inflation may rise.

Let us suppose that the decision is to distribute the newly printed currency from the sale of the perpetual bonds directly into the hands of the Japanese people.  Further let us suppose every dollar of that money is spent.  In such a circumstance, economic activity will pick up sharply.  However, eventually the money will run out, spending falters and economic stagnation and decline will resume.

At this point, Japan has the original accumulated debt plus the new debt created through perpetual bonds and an economy that did not respond organically to this new policy measure.  Naturally the familiar response from policymakers is likely to be “we just didn’t do enough”. It is then highly probable another round of helicopter money will be issued producing another short lived spurt of economic activity.  As with previous policy efforts, this pattern likely repeats over and over again.  Each time, however, the amount of money printed and perpetual bonds issued must be greater than the prior attempts. Otherwise, economic growth will not occur, it will, at best, only match that of the prior experience.

Eventually, due to the mountain of money going directly in to the economy, inflation will emerge.  However, the greater likelihood is not that inflation emerges, but that it actually explodes resulting in a complete annihilation of the currency and the Japanese economy.  In hypothetical terms as described here, the outcome would be devastating.  Unlike prior methods of QE which can be halted and even reversed, helicopter money demands ever increasing amounts to achieve the desired growth and inflation. Once started, it will be very difficult to stop as economic activity would stumble.

The following paragraph came from “Part Deux – Shorting the Federal Reserve”. In the article we described how the French resorted to a helicopter money to help jump start a stagnant economy.

“With each new issue came increased trade and a stronger economy. The problem was the activity wasn’t based on anything but new money. As such, it had very little staying power and the positive benefits quickly eroded. Businesses were handcuffed. They found it hard to make any decisions in fear the currency would continue to drop in value. Prices continued to rise. Speculation and hoarding were becoming the primary drivers of the economy. “Commerce was dead; betting took its place”. With higher prices, employees were laid off as merchants struggled to cover increasing costs”.  

The French money printing exercise ultimately led to economic ruin and was a leading factor fueling the French revolution.

Summary

Is it possible that Bernanke’s helicopter money approach could work and finally help Japan escape deflation in conjunction with a healthy, organically growing economy?  It has a probability that is certainly greater than zero, but given the continual misdiagnosis of the core problem, namely too much debt, that probability is not much above zero.  There is a far greater likelihood of a multitude of other undesirable unintended consequences.

Of all the developed countries, Japan is in the worst condition economically.  Most others, including the United States, are following the same path to insanity though.  Unlike Japan, other countries may have time to implement policy changes that will allow them to avoid Japan’s desperate circumstances.

To gain a more complete understanding of 720 Global’s economic thesis and the policy changes required, we recommend our prior articles “The Death of the Virtuous Cycle” and “The Fifteenth of August”.

 

 

 

 

720 Global is an investment consultant, specializing in macroeconomic research, valuations, asset allocation, and risk management.  Our objective is to provide professional investment managers with unique and relevant information that can be incorporated into their investment process to enhance performance and marketing. We assist our clients in differentiating themselves from the crowd with a focus on value, performance and a clear, lucid assessment of global market and economic dynamics.

 

720 Global research is available for re-branding and customization for distribution to your clients.

 

For more information about our services please contact us at 301.466.1204 or email info@720global.com

 

©720 Global 2016 All Rights Reserved

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post Kyōki (Insanity) was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/kyoki-insanity/feed/ 0
A Psychiatric Diagnosis of the U.S. Market: Schizophrenic Disconnect From Reality, Bipolar Mania, Psychotic Delusions of Wealth http://wallstreetexaminer.com/2016/07/psychiatric-diagnosis-u-s-market-schizophrenic-disconnect-reality-bipolar-mania-psychotic-delusions-wealth/ http://wallstreetexaminer.com/2016/07/psychiatric-diagnosis-u-s-market-schizophrenic-disconnect-reality-bipolar-mania-psychotic-delusions-wealth/#respond Wed, 27 Jul 2016 05:46:00 +0000 http://wallstreetexaminer.com/?guid=311051534a390b1a12f3c72f0cb0e4e6 If you think a delusional market is healthy, it's time for a psychiatric exam.What diagnosis would an experienced psychiatrist offer when presented with the bizarre behavior of the U.S. stock market?

The post A Psychiatric Diagnosis of the U.S. Market: Schizophrenic Disconnect From Reality, Bipolar Mania, Psychotic Delusions of Wealth was originally published at The Wall Street Examiner. Follow the money!

]]>
This is a syndicated repost courtesy of oftwominds-Charles Hugh Smith. To view original, click here. Reposted with permission.

If you think a delusional market is healthy, it’s time for a psychiatric exam.
What diagnosis would an experienced psychiatrist offer when presented with the bizarre behavior of the U.S. stock market? We assume that the wild mood swings of greed and fear are “normal” for markets devoted to short-term profit and speculation, but the stock market’s disconnect from reality is far beyond mere mood swings.
The stock market thinks it’s solidly on pavement, but in reality it’s like a car flying off a cliff: the Wiley E. Coyote moment is just ahead. There’s nothing but air beneath the stock market.
Consider the reality of PE expansion from a price-earnings (PE) of 10 at the bottom in 2009 to 18+ today, while profits are stagnant. And what is driving this expansion other than a delusional belief that profits will magically reverse and log massive gains in the second half of 2016?
If we strip out “one-time expenses” and other accounting flim-flam, profits are plummeting. How else can we characterize this disconnect between stagnant sales (look at Apple, CAT, etc.) and “profits” that are one step away from outright fraud as anything other than delusional?
As global trade, U.S. rail traffic and other non-gameable measures of economic activity stagnate or decline, how can anyone connected to reality expect sales and profits to rise sharply?
The stock market is hitting new highs for what reason? The typical answer is: more central bank stimulus is on the way, the Fed/ BoJ /Bank of China/ European Central Bank have our back, etc. etc. etc.
But the reality is obvious to all: the returns on central bank stimulus have declined to near-zero. Trillions in additional stimulus are needed to just keep the delusional markets from experiencing gravity (see car photo above).
And how about the manic mood swings from panic in February (i.e. a whiff of reality) and the euphoria of new highs in summer? If this isn’t the acme of bipolar delusion, then what is?
Perhaps the greatest delusion is the confidence that this ephemeral bubble “wealth” is actual wealth that can be counted on to fund pensions and insurance claims in the future. Pity the deranged souls who actually believe that stock gains based on fraudulent claims of “profit” and delusional expectations of rising profits as the dollar strengthens and the global economy implodes are “wealth” that can be considered permanent.
The only possible diagnosis of this stock market behavior:
1. Patient (the U.S. stock market) is suffering a schizophrenic disconnect from reality.
2. Patient (the U.S. stock market) is suffering from bipolar mania that leads to delusional beliefs in delusional profits and delusional central bank omnipotence.
3. Patient is suffering from psychotic delusions of wealth, akin to the delusion that the patient is ruler of the world, galaxy, universe, central banks are all-powerful, etc.

If you think a delusional market is healthy, it’s time for a psychiatric exam.

My new book is #3 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post A Psychiatric Diagnosis of the U.S. Market: Schizophrenic Disconnect From Reality, Bipolar Mania, Psychotic Delusions of Wealth was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/psychiatric-diagnosis-u-s-market-schizophrenic-disconnect-reality-bipolar-mania-psychotic-delusions-wealth/feed/ 0
More Banking Mystifications http://wallstreetexaminer.com/2016/07/more-banking-mystifications/ http://wallstreetexaminer.com/2016/07/more-banking-mystifications/#respond Tue, 26 Jul 2016 20:45:14 +0000 http://baselinescenario.com/?p=12803 Apparently, both parties have platform planks calling for the reinstatement of the Glass-Steagall Act of 1933. Andrew Ross Sorkin made and unsubstantiated claim about why that would be a bad idea. His claim just wrong.

The post More Banking Mystifications was originally published at The Wall Street Examiner. Follow the money!

]]>
This is a syndicated repost courtesy of The Baseline Scenario. To view original, click here. Reposted with permission.

Apparently, both parties have platform planks calling for the reinstatement of the Glass-Steagall Act of 1933, the law that separated investment banking from commercial banking until it was finally repealed in 1999 (after being watered down by the Federal Reserve beginning in the late 1980s). Bringing back Glass-Steagall in some form would force megabanks like JPMorgan Chase, Citigroup, and Bank of America to split up; it would also force Goldman Sachs to get rid of the retail banking operations it started in a bid to get access to cheap deposits.

In his article discussing this possibility, Andrew Ross Sorkin of the Times slips in this:

“Whether reinstating the law is good idea or not, the short-term implications are decidedly negative: It would most likely mean a loss of jobs as part of a slowdown in lending from the biggest banks.”

I looked down to the next paragraph for the explanation, but he had already moved on to another unsubstantiated claim (that the U.S. banking industry would be at a competitive disadvantage). So, I thought, maybe it’s so obvious that Glass-Steagall would reduce lending that Sorkin didn’t think it was worth explaining. I thought about that for a while. I couldn’t see it.

In fact, basic intuitions about finance indicate that Glass-Steagall should have no effect on lending whatsoever. Banks should loan money to borrowers who are good risks: that is, those who pay an interest rate that more than compensates for the risk of default. (I’m simplifying a bit, but the details aren’t relevant.) Common sense tells you that whether the bank doing the lending is affiliated with an investment bank shouldn’t make a difference.

To dig a little deeper, banks should be making loans whose expected returns exceed the appropriate cost of capital. So, maybe Sorkin thinks that grafting an investment bank onto a commercial bank will lower its cost of capital. I can’t think of any obvious reason why this should be the case. Even if it does, however, we do NOT want the commercial bank to now start making more loans than it did before it was affiliated with the investment bank. Capital markets are supposed to direct funds to households and companies that can put them to their best use. Whether X (a house, a shopping mall, a factory, whatever) is a good use of capital does not depend whether some bank merged with some other bank. If a lower cost of capital causes banks to start making more loans, those are bad loans, not good ones.

Let’s look at this from another angle. Assume Commercial Bank has a cost of capital of 10% and Investment Bank has a cost of capital of 8%. (In practice it’s usually the other way around, but then the argument for a combination is even weaker.) Say they merge, and new Universal Bank has an overall cost of capital of 9%. This does not mean that the appropriate cost of capital for Commercial Bank (a subsidiary of Universal Bank) is now 9%. It’s still 10%. That’s because the cost of capital is based on the risk profile of a company’s business—and, once again, that business hasn’t changed. And, indeed, even after the merger, Commercial Bank and Investment Bank will continue to be run as two separate entities, with a few specific touchpoints (e.g., Commercial Bank will sell its loans to Investment Bank to be securitized, and Investment Bank will try to sell wealth management services to Commercial Bank’s customers). And in the executive suite, the CFO and treasurer will charge an internal cost of capital to each business, based on its intrinsic attributes.

Now, maybe Commercial Bank will want to issue more loans because Investment Bank wants to securitize them. (Does this story sound familiar?) But first, this shouldn’t happen. If demand from Investment Bank is causing Commercial Bank to increase its lending, then that should happen whether or not they happen to have the same parent (Universal Bank); Commercial Bank can already sell its loans to Investment Bank (or any of its competitors) without a merger. Second, even if it does happen—because, say, the CEO of Universal Bank orders Commercial Bank to increase its lending—those are loans we don’t want to exist. There is such a thing as too much credit, as we all should remember.

In sum, the idea that separating commercial and investment banking will result in fewer loans, and hence higher unemployment, seems like another of those industry talking points that, repeated often enough, become conventional wisdom. It’s one of those threats bankers like to make when politicians try to shrink their empires: Come after my bank, and look what happens to your economy. But in this case, it’s an empty threat.

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post More Banking Mystifications was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/more-banking-mystifications/feed/ 0
Coming Soon: Trumped! (Part 4—-America’s Rolling LBO) http://wallstreetexaminer.com/2016/07/coming-soon-trumped-part-4-americas-rolling-lbo/ http://wallstreetexaminer.com/2016/07/coming-soon-trumped-part-4-americas-rolling-lbo/#respond Tue, 26 Jul 2016 19:16:04 +0000 http://davidstockmanscontracorner.com/?p=114285 In effect, America has undergone a rolling national LBO since the Gipper’s time in office. It is the result of the Washington/Wall Street policy consensus in favor of permanent deficit finance, stock market-centered “trickle-down” stimulus by the Fed and massive borrowing by the household and business sectors of the private economy.

The post Coming Soon: Trumped! (Part 4—-America’s Rolling LBO) was originally published at The Wall Street Examiner. Follow the money!

]]>
This is a syndicated repost courtesy of David Stockman's Contra Corner » Stockman’s Corner. To view original, click here. Reposted with permission.

TRUMPED!  A NATION ON THE BRINK OF RUIN…..AND HOW TO BRING IT BACK

                                             By David A. Stockman

America’s Rolling LBO

 

In effect, America has undergone a rolling national LBO since the Gipper’s time in office. It is the result of the Washington/Wall Street policy consensus in favor of permanent deficit finance, stock market-centered “trickle-down” stimulus by the Fed and massive borrowing by the household and business sectors of the private economy.

So the U.S. economy is now stuck in the ditch because it has leveraged itself to the hilt over the past three decades. The vast majority of Americans are no longer living the dream because Wall Street speculators and Washington politicians alike have led them into a debt-fueled fantasy world that is coming to a dead end.

Indeed, this deformation has been long in the making and reaches back nearly a half-century. To wit, once the Federal Reserve was liberated from the yoke of Bretton Woods and the redeemability of dollars for gold by Nixon’s folly at Camp David in August 1971, financial history broke into an altogether new channel.

As shown in the chart below, since 1971 total public and private debt outstanding soared from $1.6 trillion to $64 trillion or by 40X. By contrast, nominal GDP expanded by only 16X. The very visage of the chart tells you that the former is crushing the latter.

Debt vs. GDP - Click to enlarge

These debt numbers are elephantine in their own right, but the real surge began when Greenspan took office in August 1987. Shortly thereafter in response to the infamous 25% stock market crash of October 1987, the purported financial Maestro launched the nation’s central bank down the road of chronic easy money and massive monetary intrusion in the financial markets.

The fruit of that wrong-headed monetary path is straight forward. There was just $11 trillion of total credit market debt—–government, household, business and finance—–outstanding at the time Greenspan discovered the printing presses in the basement of the Eccles Building. That small mountain of debt has grown by a staggering $53 trillion during the years since then.

That five-fold debt gain in less than a generation represents a radical discontinuity from the past history of American capitalism. For more than a century after U.S. industrialization really took-off during the 1870s, in fact, the ratio of total public and private debt to national income held steady at about 150%. And that was true with only slight variations during periods of boom and bust, as well as war and peace.

That modest amount of economy-wide leverage might well be considered the Golden Mean. During the century ending in 1970, the US standard of living rose 20-fold and the nation’s economy grew like nothing before it in the history of the planet.

No longer. As shown in the chart below, the trend rate of real GDP growth has dropped by a stunning 70% since the national LBO gathered steam after 1980.

At the same time, the national leverage ratio went nearly parabolic during the years before the financial crisis and now stands at 350% of GDP. This means the US economy is currently lugging around two more full turns of debt relative to national income than it did historically.

Those extra turns amount to a staggering $35 trillion more debt today than would have been the case if the Golden Mean of 150% of national income had not been abandoned after the 1970s.

During the rising phase of this debt eruption, of course, the US economy had a quite a party. During the 1990s and for a time prior to 2007 these massive borrowings goosed consumption spending in the household sector and fixed asset investment in business.

But then the due bill of debt service costs arrived. Already during the Greenspan housing boom-and-bust cycle (2001-2008), real GDP growth had slowed sharply from 3.8% per annum during the heyday of 1953-1971 to just 2.4% per annum.

Since the great financial crisis, however, the toll has dramatically intensified. During the nine years since the last peak in December 2007, real national output has crawled forward at just 1.2% per annum. That is barely three-tenths of its growth rate recorded during 1953-1971.

Needless to say, the mainstream narrative amounts to a studied attempt to obfuscate the dramatic seven decade-long southward journey depicted in the gray bars of the chart below. That’s because the political, financial and media elites who shape the news and public dialogue are essentially anti-historical incrementalists.

They operate from headlines and short-term deltas. They boast about the gains from last month and last quarter, but never explain or take accountability for the periodic financial and economic collapses which have sharply lowered average or trend rates of economic growth and living standard gains since 1987.

Worse still, the elite narrative bamboozles the public with recency bias. You would never know that the startling uphill climb depicted in the red line of the chart even happened.

Nor do the talking heads of Wall Street or the spokesmen and apologists for the Fed ever acknowledge that the current 3.5X ratio of debt to income is an unprecedented and dangerous departure from the 1.5X historic norm. Yet the latter stalwart feature of the financial system was still firmly in place as recently as 1971.

GDP Growth Rate Vs. Leverage Ratio - Click to enlarge

Needless to say, even as the above chart captures the sweeping deterioration that has beset the nation’s economic fundamentals, that outcome is not due to some inherent flaw of capitalism. The above baleful development is the modern state at work; it’s the product of the elite consensus about money printing, financialization, perpetual Washington stimulus and bailouts and the cult of the stock market.

Not surprisingly, the same media and group think commentariat that was utterly surprised and shocked by the rise of Trump and Bernie has no clue either about the nation’s debilitating LBO and the reverse Robin Hood redistribution that it has foisted upon the American economy.

Much of the elites actually think that the Obama’s ballyhooed 78 straight months of jobs growth and high stock markets is evidence that the U.S. economy has been fixed, and that the chilling financial crisis of 2008 was just some aberrational bump in the road.

No it wasn’t. The meltdown of 2008 was just spring training for what comes next.

 The purpose of this book, therefore, is to debunk these establishment fairy-tales, and to thereby explain the deep economic predicate for the rise of Donald Trump in particular and the growing anti-establishment sentiments of the American public generally.

Equally importantly, it aims to document the extent and the causes of the financial and economic rot that has descended on the US economy, and to provide a fundamental roadmap for its amelioration.

As we indicated, the only real cure possible at this late hour is a drastic national U-turn back to free markets, fiscal rectitude, sound money, personal liberty and decentralization of a minimalist state. These are unlikely choices for a “strong leadership” insurgent like Donald Trump who often seems to believe that America’s crisis has been caused by bad deals rather than bad ideas.

Still, a nation responding to insurgents like Trump and Bernie Sanders has hope. The policies of the existing elites have irretrievably failed because they embody the conceit that societal progress and welfare depend on keeping their own purportedly gifted hands firmly on the machinery of the state.

So if Trump now reaches the White House, at least the architects of America’s ruinous policy-inflicted LBO will find themselves pounding the pavement in search of a new line of work.

 

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post Coming Soon: Trumped! (Part 4—-America’s Rolling LBO) was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/coming-soon-trumped-part-4-americas-rolling-lbo/feed/ 0
How Wall Street’s Party Keeps Going While They Keep The Public In The Dark http://wallstreetexaminer.com/2016/07/wall-streets-party-keeps-going-keep-public-dark/ http://wallstreetexaminer.com/2016/07/wall-streets-party-keeps-going-keep-public-dark/#respond Tue, 26 Jul 2016 12:28:30 +0000 http://wallstreetexaminer.com/?p=302064 House prices comprise the most important measure of inflation that is ignored by the Fed and mainstream economists. It’s not included in the CPI or PCE. Instead, the BLS and BEA use a ginned up measure called Owner’s Equivalent Rent (OER) which has substantially understated actual house price inflation, particularly in the past 4 years. Read the…

The post How Wall Street’s Party Keeps Going While They Keep The Public In The Dark was originally published at The Wall Street Examiner. Follow the money!

]]>
House prices comprise the most important measure of inflation that is ignored by the Fed and mainstream economists. It’s not included in the CPI or PCE. Instead, the BLS and BEA use a ginned up measure called Owner’s Equivalent Rent (OER) which has substantially understated actual house price inflation, particularly in the past 4 years.

Housing Inflation Vs. OER- Click to enlarge
Read the rest of this post at David Stockman’s Contra Corner, where originally published.

The post How Wall Street’s Party Keeps Going While They Keep The Public In The Dark was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/wall-streets-party-keeps-going-keep-public-dark/feed/ 0
Humpty Dumpty European Union Banks — Still Broken! http://wallstreetexaminer.com/2016/07/humpty-dumpty-european-union-banks-still-broken/ http://wallstreetexaminer.com/2016/07/humpty-dumpty-european-union-banks-still-broken/#respond Mon, 25 Jul 2016 20:01:06 +0000 http://anthonybsanders.wordpress.com/?p=1116 Instead of the children’s poem “Humpty Dumpty,” we can use European Union banks instead.

The post Humpty Dumpty European Union Banks — Still Broken! was originally published at The Wall Street Examiner. Follow the money!

]]>
This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

Instead of the children’s poem “Humpty Dumpty,” we can use European Union banks instead.

EU banks sat on a wall,
EU banks had a great fall.
Four-score Central Banks and Four-score more,

Could not make EU banks where they were before.

The wall, of course, was the global credit crisis and recession.

eurobanksssss

Here are the not-quite-4 score Central Banks.

1-key-negative-interest-rates-02192016-LG

And they can’t put the EU banks back to 2007 levels again … without taxpayer money.

Humpty dumpty falling of the wall with the sky and clouds behind

Humpty dumpty falling of the wall with the sky and clouds behind

Wall Street Examiner Disclaimer: The Wall Street Examiner reposts third party content with the permission of the publisher. I curate these posts on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. No promotional consideration has been offered or accepted. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler and no endorsement of the content so provided is either expressed or implied by our posting the content. Some of the content includes the original publisher's promotional messages. The Wall Street Examiner is not familiar with the services offered and makes no endorsement or recommendation regarding them. Do your own due diligence when considering the offerings of third party providers.

The post Humpty Dumpty European Union Banks — Still Broken! was originally published at The Wall Street Examiner. Follow the money!

]]>
http://wallstreetexaminer.com/2016/07/humpty-dumpty-european-union-banks-still-broken/feed/ 0