The EU: Beggining Of The End Or End Of The Beginning?

Where to EU?  What started as a lofty and noble idea to establish an enduring  peace in the continent most guilty of global blood letting is turning into a low, cheap and acrimonious scuffle about Polish plumbers and Italian bravado.

Cheap it may be, but the current fight amongst member states is, nevertheless, dangerous.  And the reason is not what the fight is about, but because of what is missing at the very foundation of the EU. To wit, a common fiscal policy mechanism and a common defense structure.

What are the two most important elements of an empire?  A strong global currency and a strong military with global reach.  The EU seemingly has the first, but in the absence of a common fiscal policy structure it actually doesn't, and has zero common military.

Therefore, if the EU is to survive and even thrive it urgently Continue reading "The EU: Beggining Of The End Or End Of The Beginning?"

Barrels, Boats, Bitcoins, Brexit, and Other Bubbles

This blog is founded on the premise that ALL bubbles burst, sooner or later.  The rule of thumb is pretty simple: to paraphrase the old Crazy Eddie TV ad, if prices are INSAAAAAANE then the bubble is to pop sooner rather than later.

And there is always some form of loony "fundamental" hype which pops up as "analysis" to goose things along and provide that last HURRAH that produces forced short position liquidation.

Cases in point:
  •  Peak Oil!,  the theory that global oil production was about to peak and head inexorably down.  A large number of innocents were caught up in this, even publishing thousands of articles in The Oil Drum, a site which propagated the scientific version of the hype.  Oil zoomed to $145 per barrel and then melted down to $35.
 Image result for crude oil prices chart

Merkel To Retire

Following yesterday's abysmal results for Merkel's CDU in the regional Hesse elections (down 11% from previous polls) she is said to have declared her decision not to seek re-election as her party's leader in its upcoming congress.

Austerity and fiscal propriety are eroding fast, the Greens and AfD are big winners.

Europe is changing fast.

and PS Bolsonaro won in Brazil.  Reactionary Populism is gaining all over the world... (sigh).

Italy – The Rise Of (Fiscal) Populism

Bond and equity markets do not react well to overt signs of fiscal populism.  Case in point: Italy.


Italian 10 Year Government Bonds

The Italian government submitted its 2019 budget plan to the EU calling for a large deficit, unacceptable to the Commission.  A spat has ensued, causing bond yields to rise sharply.

Unlike the Greek "tragedy" of the last 10 (!) years, Italy is a very, very large economy and cannot the pushed aside and/or be blackmailed into submission.  A dogfight will eventually lead to tearing apart the entire EU structure, so an easing of the "German" fiscal probity model is likely in the cards, also given that Mrs. Merkel is now weaker than ever politically.

China Has To Grow Up

China has become the world’s second largest economy based largely on the ability to churn out cheap consumer goods in vast numbers. It could do so because of a) very low wages, b) cheap land and c) nearly zero regulatory costs (i.e. pollution and labor safety regs).  Couple that with an artificially low foreign exchange peg, and it’s no wonder that  low and medium value-added industries moved there en masse.

However, China is now very keen to move up towards more sophisticated, tech heavy industries like autos, aerospace and high end electronics, heretofore the domain of Western companies and institutions that have created a huge pool of proprietary R&D and the mechanisms to transform it into high-end products.

The problem of safeguarding such Intellectual Property has been around since at least the early 1990s and has never been addressed properly.  As the US economy moves more and more towards Continue reading "China Has To Grow Up"

Trade War Over Steel? Gimme A Break…

So Trump throws up this firecracker about import duties on steel (25%) and aluminum (10%).  It’s a non-issue folks, despite hot air from Brussels about retaliation via Levi’s, Harleys and Jack Daniels. (Notice that the Chinese haven’t said a word - and rightly so).

Fact is, the US hardly imports any steel from the EU or China, as you can see from the graphic below.

Now, if Mr. Trump starts talking about consumer electronics, that would be an issue.  But in an economy completely dominated by the likes of Apple, Google, Microsoft and Amazon imposing duties on their products would be plain suicide and it won’t happen.




Steel Duties, Seriously?

Imposing import duties on steel and aluminum is akin to protecting the horse buggy business when Ford set up his car production line... completely useless and meaningless.

The US economy is long past it’s heavy, metal-basing industrial era.  Trump is just playing up to his lowest common denominator electoral base, that’s all.

For proof, just look at the makeup of the DowJones Industrial Average in 1980 (even 2000) and today.  Unlike the past, the US economy today is all about Google, Amazon, Apple, Microsoft and a couple pharma companies.

Move on...

Yes, Virginia, There IS Volatility

What happened with US stocks?  Why did they tank so suddenly after months of steady gains?

No, there was no irrational exuberance, no massive leveraging, no pernicious balance sheet shenanigans at banks, no NINJA loans, no CDS/CMO/CDO (plain, squared or cubed) baloney. Valuations weren’t even that high, given forward P/Es around 18-16x.

There was, however, a sort of  “complacency bubble”, aka very, very low volatility. This in turn spawned a variety of listed and OTC trades that shorted volatility for profit.  It worked like a charm - until it didn’t.

The following chart makes things quite clear.  It’s the price of an ETF (exchange traded fund) that shorts VIX futures.  Yes, Virginia, there IS volatility!

In my opinion that’s all there was to it - the snap unwinding of short vol trades.




USA Margin Debt

Given the stock market plunge of the last few days, the following chart is interesting.  It is current to year-end 2017 (latest available), the data comes from FINRA.

Given that total market cap at the time was approx. $32 trillion, margin debt of $650 billion doesn't seem all that excessive.  In other words, selling due to system wide over-leveraging isn't the likely culprit of the sell-off.



Greek PMI Near Record

Manufacturing in Greece is staging a strong and rapid comeback.  The Purchasing Manager's Index for manufacturing is now at the highest level since 2007.  Increasing new orders is the biggest contributor to the rise, with new employee hiring also boosting the index.

The PMI is a diffusion index, with levels over 50 indicating expansion and under 50 indicating contraction. The light blue area is annual GDP change, left scale.
Manufacturing accounts for only 12-15% of Greek GDP, but the correlation between PMI and GDP is pretty solid.  Interestingly, the last time PMI was at current levels the Greek economy was growing over 5% per year.

USA Debt: Is It A Threat?

US federal government debt is now at 106% of GDP, the highest in decades.  It got there because it was forced to bail out the financial sector during the 2007-10 Great Meltdown, essentially having the Federal Reserve "print" money with its Quantitative Easing (a.k.a. Ben's helicopter).

 This debt load certainly looks formidable and perhaps threatening to the economy's health.  Is it so?  Well, yes.  And, no...

Yes, because a highly leveraged economy has, by definition, a lower capacity to overcome recessionary downturns without painful asset liquidations and capital losses, perhaps even social unrest.  Just ask the Germans and how scared they (still) are of the Weimar hyperinflation period which paved the way for Hitler.

And no, because it matters very much to WHOM the debt is owed.  Just ask the Japanese today, who owe their huge debt (250% of GDP) mostly
Continue reading "USA Debt: Is It A Threat?"

Disruption

Buffett, Bezos and Dimon announced they are going to massively disrupt US healthcare by designing and implementing an in-house system for their combined 1+ million employees on a not-for-profit basis, and potentially rolling it out to the rest of the country.

This is simply huge.

The US has arguably the world's most inefficient healthcare system, entangled in a mess of legal, insurance, pharmaceutical (need I mention Valeant?) and hospital concerns, all jockeying for legitimate and illegitimate profits.

The following chart says it all:  The US spends 17% of GDP on healthcare, far more than other countries. Even a 2% reduction means savings of almost $400 billion per year.

 If the trio manages to streamline the healthcare industry it will create a paradigm shift akin to Henry Ford's automobile assembly line.

There is another American "industry" that has also become very expensive when compared to the rest of the world:
Continue reading "Disruption"

A Funny Thing Happened On The Way To The Forum

The World Economic Forum at Davos is in the news these days, as it is every year at this time. The world’s leaders - political, business and financial - gather to rub shoulders and, very occasionally, achieve something more than self-congratulation.  Going back a quarter century, however, the WEF wasn't nearly as famous as it is today.  

And that's when yours truly comes into the story..


It was around 1992 when I saw an ad in The Economist for a position at the WEF.  They were looking for someone that combined knowledge in engineering/energy with finance. It fit my profile pretty nicely so I sent off a resume, mostly on a lark since I wasn't quite ready to move from the Big Apple to Geneva or some remote village in the Swiss Alps, no matter how glamorous. 

About a month later, however, I was surprised to
Continue reading "A Funny Thing Happened On The Way To The Forum"

Greece: Various Data

The situation in Greece continues to improve.  Latest data:
  
  • The 5-year CDS (credit default swap) dropped to 292.9, the lowest point since the crisis began.


    • S&P upgraded Greece one notch to B, with positive outlook.
    • The 2-year  government note now yields 1.25%, a multi-year low.
    • Building permits for  October 2017 were up 16.4% vs. Oct. 2016.  More importantly, the surface area represented in these permits was up 67% and the buildings' volume up 109%.  This means that large structures are involved, exactly in line with my predictions for major hotel building/renovation activity, right after the conclusion of the tourism season.
    • Electricity consumption for the whole year 2017 was up 3%, with the middle-power segment showing the largest increase at 5.84%.  That's demand coming from hotels, restaurants and other medium size businesses.

Greece, The IMF’s Sugar Daddy

Today, a look at the Greece-IMF relationship from the only perspective that really matters: money.

When Greece imploded back in 2010 it turned to the IMF for help.  The IMF agreed and as of Oct. 2017 Greece owes it 9.5 billion SDR (Special Drawing Rights, the IMF's in-house currency), equivalent to 11.3 billion euro.  The loan carries an interest rate around 3.5% per annum. 

So, Greece pays the IMF roughly 340 million SDR per year in interest (=396 million euro). 

So what, you ask?  Greece is the IMF's largest borrower by far and without the income generated from these loans the IMF would be hard pressed to make any profit at all.  

An excerpt from the IMF's quarterly statement ending Oct. 31, 2017 (I have annualized all amounts, in million SDR).

Operational Income:         1,658
Operational Expenses:    -1,344  (mostly Continue reading "Greece, The IMF’s Sugar Daddy"

Yadda, Yadda, Yadda And A Bottle Of Ouzo

Greece is highly indebted, bad loans swamp banks, the economy is in tatters... yadda, yadda, yadda.  Highly conventional wisdom, the one you get from the popular (and even specialist) media, is always last year's news and not only useless but potentially dangerous. 

Following up on my last post on the fast rise of Greek private sector debt during 1998-2008  (i.e. very much yesterday's news) and the resulting collapse, where does it stand now in comparison to other countries?

You may be surprised to know that the country's households and businesses are still very under-leveraged when compared to the rest of the world and the eurozone/EU in particular - just look at the chart below (Data: World Bank, 2016).

Furthermore, the same chart indicates that Greek banks' credit exposure to the private sector is likewise very modest.

 I'll let readers figure out what this means for the future Continue reading "Yadda, Yadda, Yadda And A Bottle Of Ouzo"

Leverage In Haste, Collapse At Leisure

"Sin in haste, repent at leisure" goes the well known sobriquet.  In the case of Greek businesses and households, they leveraged themselves so fast that the implosion was all but inevitable, particularly since state debt was also rising fast at the same time.  But, unlike other bubbles, the aftermath was not only painful but unnecessarily drawn out, too.

Going back to the beginning, we can see that private debt rose much faster than GDP between 1998-2008, going from 34% to 103% of GDP in just ten years. It was not so much a case of "too much" as "too fast", which created the real problem in Greek private sector debt and which left banks with a mass of non-performing loans. Unlike other western economies, Greeks were previously very under-leveraged and had no credit culture.  When the bubble economy collapsed many Greeks simply refused to pay their debts;
Continue reading "Leverage In Haste, Collapse At Leisure"