Wednesday, January 30, 2019

Alibaba Q3 Earnings Call:

Well I just spent another hour of my life (that I'll never get back) listening to the just released recording of the Alibaba December 2018 Quarter Investor Call.   

I'll  make this brief.  Here are the Links:

Presentation:

Press Release:

Investor Call Recording:

SEC.GOV - 6-K

Here are the Bullet Points:

1.) Revenue grew 41% from Q3 2017.  MAUs and AACs (Customers) grew 20% over the same period.  They did not distinguish, (at least that I could see) the difference between "newly consolidated" or "new retail" revenue from organic growth.  Everything is still one big "blob".

2.) Cash and Cash "Equivalents" declined by $5.095 Billion USD from December 2017.  Remember, in China (Unlike under GAAP and IFRS Rules) Cash "Equivalents" include demand notes payable from insiders, party members, off shore Shell-Companies and executive family members, whether they have gambling/drinking problems or not.

3.) Property & Equipment, (net) purchases were US$1.456 Billion in the quarter.  (With No mention of what it might be comprised of)  That would make property acquisitions during the (3 month) quarter the rough equivalent of the cost to build the Burj Khalifa. (i.e. the tallest building in the world)  Impressive indeed, but if I were a BABA investor or analyst, I might like to have a bit of "color" describing what this gigantic, material increase was. 

3.) SBC (Share Based Compensation) continued on the unprecedented trajectory, US$1 Billion for the quarter (25% of income).  Management's benevolence with US Shareholder money to CCP members, insiders and their Off-Shore Shell Companies continues to have no bounds. (pg. 27 of the Press release)

4.) The only mention of Ant Financial's operations (Page 12 of the Press Release), the biggest elephant in the room, anywhere in the documents was:

"During the quarter, we did not recognize any royalty fees and software technology service fees under our profit sharing arrangement with Ant Financial. In the current quarter, Ant Financial continued its strategic investments to acquire new users and capture growth opportunities in the offline payment market. Currently, Alipay and its affiliates have over 1 billion annual active users globally. In the coming quarters, Ant Financial expects to continue investments aimed at capturing the strategic opportunities amid the digital transformation of China’s real economy."    

Perhaps an analyst asked a question about this and I may have missed it, I nodded off a couple of times during the recording.  If so, forgive me.  To my ears, Daniel Zhang's calm, serene, angelic voice sounds a bit like the ocean and it lulls me to sleep.....but I digress.

So Ant Financial, with Alipay's 1,000,000,000 active users is not making any money for all their effort..... and may indeed be losing money, perhaps boatloads of money if their loan underwriting is anything like Alibaba's accounting. 

It's rumored that the following Analyst Comment re: Ant Financial was made off-the-record shortly after the close of the Investor Call:



5.) Alibaba Management also managed to write up yet another US$2.4 Billion (about half of their current quarterly income) as a result of "Deemed Disposals & Revaluations" (pg. 27 of the Press Release).  By comparison, US$2.4 Billion is the rough Construction cost of eight (8) Trump Towers at US$300 Million apiece, built in just one quarter.  There is no description of the "write up" transactions or what the accounting treatment or source/citation might have been that requires or necessitates the write ups.  I would think it might be interesting, especially to savvy Alibaba investors, to know and understand what skyrocketing economic value might actually prompt write ups of this size.  (See UPDATE 1/31/19 below - Correcting my error/omission above.  This Write-Up was discussed peripherally in the Presser and 6-K)

6.) During the presentation, the Alibaba Crew again raved about the success of their "Luxury Pavilion".

"During the quarter, brands including Valentino, Ermenegildo Zegna, Stuart Weitzman and Sergio Rossi opened Tmall flagship stores and joined our Luxury Pavilion. Launched in August 2017, Tmall Luxury Pavilion now offers more than 80 brands. Products range from apparel and beauty items to watches and luxury cars."

When you search the TMall site you see thousands of these "luxury" items listed with pictures and prices.....along with "0" in the "monthly turnover" and maybe a meager (handful) number of views and few/no reviews.

When you pull the financial statements from these "luxury brands" you'll see that,  the maximum volume, at the most, that could possibly be derived from these sales, even if you credit Alibaba with the entire annual volume of "Asia" for the brands listed on TMall (For example: Yoox-Net-A-Porter aka Moschino http://www.ynap.com/ et al) you'd see that total sales can't be more than a few million dollars.  The "luxury pavilion" sales on the Alibaba platform probably dosn't even come close to being material or relevant.

Conversely, there was again no discussion of the rapidly expanding TMall/Taobao "Court Ordered Troubled Asset and Bad Loans" division.  I can't believe they once again left this high-growth arena off of the 6-K discussion.

So why would Alibaba waste valuable space on a 6-K and significant presentation time to even bother mentioning these goofy low volume "luxury pavilion" businesses and gloss over something like....Oh....I'don't know...acquiring $1.456 Billion in fixed assets (e.g. the Burj Khalifa) or describing a US$2.4 Billion accounting gain (Eight (8) Trump Towers) in the quarter?  I sure wish an analyst would ask about THAT!

7.) Operating Costs for this "New Retail" gambit are apparently out of control.  When we examine page 17 of the presentation, we can see expenses (Cost of Revenue, R&D and SG&A, all excluding Share Based Compensation) increased from 49.4% of revenue in the December 2017 quarter to 80.7% today.  Alibaba management seems to be willing to pay an ever increasing, perhaps limitless, price for the next dollar of revenue.

8.) Questionable Assets (Investment Securities, Investment in Investees, Intangibles & Goodwill) increased a whopping US$10 Billion in the quarter.  (That's 33 Trump Towers in just One Quarter folks!.....Yowzahh!!) Again, no real, rational explanation.  This crap-olla just keeps going up.  It's 58% of the balance sheet now....up from 0.0% in 2015.

9.) When we look at the Segment Income (Loss) we see that the only Segment making money is the "Core" Business. (Page 20 of the Press Release)  The rest of the business segments (Cloud Computing, Digital Media and Entertainment, Innovation Initiatives & Other and "Unallocated")  continue to lose US$2 Billion a quarter like clockwork.  Total Segment Income actually decreased by 20% over the comparable year to date period in 2017.  (2017 RMB 60,093 vs. 2018 RMB 48,139)  It appears as though "earnings", for the Alibaba Management team is more of a theoretical concept than an action item or goal.


So....What did Mr. Market think of all of this?

He absolutely loved it!  Up 7%!

Volume ended the day at twice the 30 Day average....36 million shares traded.....but it was actually on the low end of what you might expect.  There have been many 50 million share plus days, usually on the way down.  Now that the CCP has reestablished a pricing/value expectation, we can probably expect a pullback, but with BABA.....who the heck knows?





















The above is exactly why you can't short this beast.  My thesis has long been that the CCP funded "Caymans Crew" steps in and drives the price up just when you think the numbers are so silly that nobody would believe them.  This is the same methodology the CCP deploys to support the offshore RMB trade.  The RMB trades at 6.80:1 today but based on Mainland money supply expansion it should be the financial equivalent of a roll of Charmin tissue.  Thank goodness Chinese currency is at least "squeeze-ably soft" and will eventually be put to good use by those unfortunate enough to be stuck with it.

The SEC, by design, has no jurisdiction and no ability to see who's making these trades.  CCP trades are placed from off-shore accounts and the trail stops dead-cold with the impenetrable iron curtain of tax haven banking regulation.  As far as the Treasury and the SEC are concerned these trades and support levels might as well be designed and implemented by extra-terrestrials.  The source is beyond their jurisdiction.  Here's a video clip (below) of the latest joint SEC and House Banking Committee Task Force meeting where they are trying to figure out exactly what the hell is going on:



In Summary   

There is absolutely no doubt, at least in my mind, that this is the greatest, systemic and by far most entertaining financial fraud in history....the post WWI Wiemar Republic "paper mark" scam was good, but this Chinese money mess, as far as creativity, enormity and sheer chutzpah, absolutely leaves those cranky old German bankers in the dust.  Of course, all of this was  brought to you by our "heads in the sand", good old boy political and financial leadership......hey a guy's gotta make a buck!



Additional Reading:

For more gory details feel free to take a look at my last Alibaba 20-F discussion....
https://deep-throat-ipo.blogspot.com/2018/08/the-baba-20-ffinancial-comedy-gold.html

UPDATE 1/31/19
My Bad.....one of my readers pointed out that the Press Release did indeed contain analysis of the Interest and Investment Income (net) Here's the text below (Page 12 of the Press Release).  I can't believe I missed it.  Too much fishing....LOL

Interest and investment income, net in the quarter ended December 31, 2018 was RMB11,560 million (US$1,681 million), which mainly included a non-cash gain of RMB21,990 million (US$3,198 million) arising from the revaluation of our previously held equity interest in Koubei when we obtained control in December 2018. The gain was partly offset by impairment charges of RMB7,059 million (US$1,026 million) on certain investments, as well as net loss arising from the change in fair value of certain equity investments.  

So roughly 70% of Alibaba's Net Income for the Quarter was derived from a US$ 3.198 Billion write up of a money losing business.  Nice.....

Thursday, January 10, 2019

Our Rich Uncle Sam.....Today's T-Bond Auction...and the Stock Market Dumpster Fire....

Let's talk about today's 30 Year T-Bond Auction.....fascinating stuff....

I normally don't have time to post as often as I have lately, but there's so much happening, I feel compelled to comment on it.  Finance, when it works well, is relatively boring.  It's "making the donuts" day after day, no comment needed.  When finance doesn't function well, when there are so many odd, generationally unique, structurally cataclysmic events taking place, as is the case today, as an observer, hot topics abound.  We're in a "target rich environment" as they say.

The 30 Year T-Bond Auction - 1/10/19....Ouch!  

The 30 Year Treasury Auction was just completed a few hours ago...and it didn't go well.  As you know our incredibly wealthy Uncle Sam was looking for a small 30 year mortgage (He tried to sell  $16 Billion...30 Yr. bonds...a paltry sum in the grand scheme of things....chump change really) and as normal for really wealthy guys, he summoned the world's preeminent bankers and dealers over to his place (the "Treasury") and had them compete for the privilege of loaning him some money.  Well, the general consensus was that these astute financiers were perfectly OK with giving Uncle Sam some short term "Payday loans" at some hefty interest rates, as per the recent T-Bill auctions, but they were really uncomfortable with giving old Sam a 30 year mortgage, locking their money up on anything close to what good old Uncle Sam was hoping for.  Here are the results:

Offering Announcement: 
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/A_20190103_5.pdf

Auction Results:
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/R_20190110_3.pdf

We can note a couple of things.....

1.) BTC (Bid-To-Cover is the measure of interest in the auction.  BTC = $ bids/$ accepted bids) was abysmal at 2.19.  The average 30 YR BTC for 2018 was 2.4.  Recent T-Bill (safe money) Auctions have had BTC's running at 3+.  The BTC for Direct Bidders fell to 1.2.   This auction probably should have been canceled for lack of interest.

2.) As far as we can tell, Indirect Bidders (Foreign Central Bank buyers?) bought most of the bonds: $9.2 Billion (57% of the Bonds).  The grass is always greener I guess.  The Indirect Bidder ratio was 63% for 2018 Auctions.

3.) The yield moved up slightly to 3.035% on the 3-3/8% Coupon.

4.) Direct Bidders represented 15% of the Accepted bids.

Of course Uncle Sam was probably pretty bummed out by this.  His party was a flop and he most likely took it as a personal insult.  Did I mention that our Rich Uncle Sam has become a bit of a belligerent wind bag in his old age?  Lately, he's been going, well, a little berserk when he doesn't get his way.

Below is the transcript from the hypothetical (Dick Fuld Banker Speak Translator - BST) discussion that took place during the auction this afternoon:

Uncle Sam: "Come on guys.....buy these things....it's all guaranteed... risk free.....you'll get your money back....I promise!.....or if you don't buy 'em at least give me some competitive bids.  Come on....the show must go on....This is bullshit...."

Bankers/Dealers: "I don't know.....we have so many better places to put our money.....given everything that's going on we really don't want to get into a 30 Yr. /Coupon at 3-3/8% at par value.  Can't you just do more of those 2 month bills?  Anything under a year is fine....we'll buy it all day.  We can get 4% short term AAA debt in the Cayamans, Hong Kong, Luxembourg, Singapore, you name it, if you guys raise rates we're going to get killed on the 30 yr."

Uncle Sam:  "C'mon Man.....don't you clowns remember 2009?....I saved your collective asses....I gave you the FDIC & opened the window, I shit-canned the Volker Rule, Glass Steagall, Dodd-Frank and got rid of all kinds of regulation.... and I even looked the other way when you clowns started doing all that off-shore shit in the Caymans and Luxembourg.....I made you rich.....you f&%ing owe me!  I'll even loan you the money to buy this shit!........ Besides....I've got Powell in my back pocket...he'll buy it if you don't......what could possibly go wrong?"

Bankers/Dealers: " Geezzz....when this goes South are you going to bail us out?  How about our jobs?  Bonuses?  Those are still "no touchies" right?"

Uncle Sam: "Of course, of course, come on, have I ever let you guys down before?  If you can't trust me...who the hell can you trust?  Those schmucks in Hong Kong and the Chinese banks aren't going to bail you out...."

Bankers/Dealers: (short pause while thinking about Dick Fuld, Jimmy Cayne and Angelo Mozilla, etc. etc....)

Saudi Banker - Representative from JPM:  "I'm in for $1 Billion...."

Chinese Banker -  Representative from NYB/Mellon: "We will do what we can...."  (Thinking: is my jet ready?  I gotta get out of here......Caymans for the weekend...)     
 
Here's the problem......

Under normal circumstances, Investors understand the time value of money.  They expect to receive a lower interest rate (compensation) for the flexibility of a short term commitment (a few months) than they would receive for 10, 20 or 30 years.  Better said, they should expect a significant premium for a 30 year commitment.  They expect that the Federal Reserve would keep their social contract with the American Worker and Investor and manage interest rates and the money supply, keeping inflation in check, while also keeping the economy (and asset values) chugging along properly and in proportion.... and like Goldilocks, everything should be just right.

This makes perfect sense in a "guaranteed" Treasury environment where there's (theoretically) no risk of default.  The time value of money is a given.  It's understood.  The problem is that often, the math doesn't work.  Investors lose faith.  They lose faith in institutions, politicians, the FED, asset valuations and become conflicted by their own perceived inability to cope with the forever looming risk du jour.  Like an attractive, young, bright, single woman who can't decide on which lucky young man she should settle on, in times of uncertainty, investors want to keep their options open.  They shy away from any 10, 20 or 30 year commitments.

Generally, when there's a bit of uncertainty (or as I've described in this blog for the last few years, questionable asset valuations, global bubbles and misrepresentations, the likes of which have never been seen before in financial history)  Investors, once they start to figure it out, of course, begin to look for a safe place, usually, cash, money market, short term high grade & government debt, etc.. They move out of risk assets (stocks/funds/low-grade-long bonds, etc.).  They want to hide out until the mess blows over and things settle down.....but you all know that.

Wealthy foreign investors and Multi-National Businesses who can put their money anywhere, generally choose the most regulated, stable (and/or least taxed) financial systems, markets and vehicles, wherever located.  They look for places around the globe to park money when their respective economies "hiccup".  Historically, the US, the dollar and US government securities have been such a destination.  "In God (and Uncle Sam) We Trust".  Of course, when we see investors flock to T-Bills and short term government debt, they bid up the price (and push down the yield).  People and institutions are willing to pay dearly to park money in safe places.  When the world is in flames, I'd be happy to pay $1,001 for a one month $1,000 T-Bill (-1.2% Yield) if I absolutely know, with certainty, I'm going to get my $1,000 back in a month.  That's how we get to 0% (or negative) Interest rates.  People fight over access to "Will Rogers Money" ...they are more concerned about the "return of" rather than the "return on" their money.

Interestingly, this hasn't happened... yet.  Yields on T-Bills are at about 2.5% and the 30 Year Long Bond is, as of a few hours ago, just over 3%.....we've got a "flat" yield curve.

Yield Curves - Today vs. the Last Three Recessions....

All data, except the yield on today's Auction (inserted ad hoc), is derived from Treasury.gov.




Daily Treasury Yields - Treasury.gov
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019

I've charted the current yield curve (1/10/19 Solid RED Line) and compared it to the "Great Recession" 12/31/07 Pre-CrisisYield Curve (Dashed RED Line) and the 12/31/09 (Slightly Healthier looking, more normalized, Post Crisis Dashed GREEN line)



When we compare the current curve to the curves prior to and following the Great Recession we note a couple of things.

1.) The slope of the curve today more closely resembles the "Pre Recession" curve than the "Post Recession" curve.

2.) The 30 Year Bond Yield held relatively constant at about 4.5% through the 2008/2009 Recession.

3.) When we look at the "Post Recession" curve, we see that the yield on short term Treasuries collapsed as dealers bid up the price of the notes and bills.  Dealers/Investors at the time, apparently had no problem making low interest "Pay Day" loans to our Rich Uncle Sam in exchange for flexibility and his guarantee that nothing could possible go wrong.  They were concerned about the "return of" not the "return on" their money.

We also note that the pattern is similar for the two recessions prior to the "Great" one.

When we examine the curves from the Dot-Com (2000-2001) Recession (below), again, we have a flat "Pre-Recession" curve with rates running between 5% and 6% for the length of the curve.  The 2007 "Post Recession" curve exhibits similar characteristics as the 2008/2009 Post-Recession curve.  The (Safe Money) short term yields collapsed and the long end of the curve held relatively constant at Pre-Recession levels (5.5%), about 2.5% higher than today.



Now let's take a look at my favorite recession, the 1990/1991 "Post Reagan Recession".  At the time, I had been working my way up the corporate ladder and had just been given my first controller-ship.  I was promptly handed both the "Crash of 1987" and the 1990/1991 Post Reagan Recession to work my way through.  I had no idea what the hell was going on.  Good times!

We can see that the Pre-Recession and Post Recession Curve comparisons are consistent with both the above 2008/2009 Financial Crisis and the 2000/2001 "dot-com" implosion.



We also note that the "Post Reagan" Pre-Recession Curve was again flat, with all rates hovering at about 8%, a full 5% higher than the flat curve today.  Post recession, once again, we note that short term yields fell significantly lower (4% less...about half of the Pre-Recession yield) while the long term rates remained about the same as Pre-Recession levels (8%)

Again, thinking through what's happening today,  if the curve shape holds, we can anticipate that once the flight to safety hits, short term rates will most likely move to zero or marginally negative (that "Will Rogers rule" again), while longer term rates will remain at roughly 2.5% to 3%....or GAP UP!.  Unfortunately, because rates have been so low for so long, I'm not sure how much rate relief our friends at the FED will be able to give us.....or our rich Uncle Sam.

As Uncle Sam continues to go to the bond markets and starts to unload an increasing number of  those awesome 10,20 and 30 Year Bonds, trying to finance his drunken sailor deficit spending, my guess will be that, like today, these bond issues will stumble a bit and will eventually fall flat on their face.  Investors will demand that the "time value of money" must be restored.....so Uncle Sam is in the unenviable position where his Treasury holds the auction and private investors, dealers and banks are only willing to submit outrageous bids (by Uncle Sam's standards).  If the bonds are to be sold, the primary (and perhaps only) buyer could be the FED.....the Treasury will be printing fresh American "Troubled Assets" and the FED will be implementing auto-TARP the second the bonds hit the street.....Ouch!

My Little Cheat Sheet...

If you fully, really, truly, absolutely understand how bond math works, feel free to skip ahead to "What the 30 Year Auction Told Us Today...." Personally, I just find bond math fascinating to think about....

I've used this handy little chart (below) for years.  Remember, common stocks are Voodoo and magic....stock pricing requires guesses about the business, management, prospects, products, projections, business models, opportunity, CEO persona, etc.  It's lots of fun and really invigorating!

High Grade Bonds are just boring old math.....no Voodoo involved.

We know exactly how a Treasury bond/note is going to behave as interest rates change....unless that "risk free return" concept somehow goes awry.

The following comments refer to my "cheat sheet" below.....
(Note that these calculations are based on the Net Present Value - NPV of one coupon payment paid the end of each year.  There are more sophisticated products/calculations which take coupon timing and exact days outstanding into account and accurately calculates the precise yield of a specific issue.  You can make one quite easily on any spread sheet program.  My "full" Cheat Sheet starts at an interest rate of 0.5% and runs to 20.0%.  I've pasted the section from 2.0% to 5.0%.  (today's relevant range) to illustrate.  The "Cheat Sheet" is for illustration purposes only and should be "directionally" correct.....again, because of variables with each bond/note issue, it's more of a guideline than a rule...)




When you buy a bond, and hold it to maturity you are buying two things 1.) The present value (NPV) of the principal payment you'll receive down the road, and 2.) The present value (NPV) of the income stream (coupon payments) you'll receive on a periodic basis.

The "Cheat Sheet" below describes the NPV of the Principal Repayment and the NPV of the Coupon/Interest payments for a $1,000 principal invested at various terms from 1 yr. through 30 years. (I've omitted the "Bill" calcs for simplicity)  You can see that as the term of the bond increases the present value of the principal repayment decreases.  The greater the interest rate, and the longer the term, the more "discounted"and the less valuable the principal becomes.  Using the 2% rate, $1,000 paid back next year (NPV $980.39) is worth much more than $1,000 paid back 30 Years from now (NPV $602.41), or discounted at 5% 30 years from now (NPV $377.36)

Further, at higher interest rates, the present value of the coupon income increases.  At a 2% interest rate, the present value of the coupon stream on a 30 Year Bond is $447.93.  It's $768.52 at a 5% Interest rate.

As a bond owner, if interest rates and inflation remain constant at 2% you get $20/yr. for "renting" your money out to Uncle Sam.  After 30 Years, you've got a NPV of both the Principal Repayment and the Income Stream of $1,050.34.  You're $50.34! ahead! ....and you've incurred zero default risk!
 



We also note, sadly, that as interest rates go up, bond holders get...well....to be blunt....killed.  If I own a 30 Year Bond with a 3% coupon, and interest rates go to 5%, the NPV of my Bond Principal (To be paid back in 30 Years) decreases by $125.  ($502-$377=$125) and I'm stuck with the 3% Coupon ($30/yr.) which would also be discounted at the "new" 5% rate, when I should be getting my 5% Coupon ($50/yr.).  So a 2% increase in interest rates destroys $127 of my Coupon NPV ($588-$461 = $127).  By holding the bond to maturity I lose $252 ($125+$127) or about 23% of the NPV of my bond.  If I were to sell the bond I'd experience this $252 loss immediately, since my bond NPV is only worth $838 now....rather than the NPV of $1,090 I was expecting.

Note that on the way down the math actually works in reverse.....the NPV of the principal payment INCREASES and we get to KEEP the income stream from the higher coupon.  So the value of my bond INCREASES by (about) 23% as interest rates fall 2%!  If you bought a ton of 30 Year T-Bonds in 1991 and held on to them, you've done pretty well....your NPV on the Principal has increased substantially and your 8% Coupon is looking pretty good right now...and has been for quite sometime.  Talk about stimulus!

After all of the above calculations, given that UST's are "guaranteed undefaultable", even though their NPV can change dramatically as interest rates move, they remain the ultimate collateral.  Which, of course, also means that sharp traders and investors can design all sorts of awesome devices to lever up.  Futures, swaps, derivatives, ETF's, etc. etc. are all designed to hedge risk, or amplify speculative gains (and unfortunately... losses).  Then of course, we had to invent "Credit Default Swaps" which protect the holder of derivatives and related securities from default by the institution backing the derivative, which is tied to all of this guaranteed safe collateral.  Let's just hope everyone knows exactly what they are doing. 

To sum it up, that's why it drives me nuts when people say things like "what's the big deal...it's only 25 basis points"!....it's not the move in rate that causes the disruption....the problem is that the rate change impact is compounded over 10, 20 or 30 years and has an immediate, guaranteed impact on the NPV of the security as well as anything else tied or leveraged to it.

In other words Jay Powell has absolutely no idea what's going to happen when he announces an interest rate change.  Nobody does....and nobody could.

What the 30 Year Auction told us today......

Last year in my discussions with my very knowledgeable, bond trader friend, Tim Bergin, we discussed why so many bond market transactions were "failing" as well as the possibility of a "gap up" in interest rates.  You can read (or reread) the discussion here.  Treasury Fails Revisited....

The "gap up" occurs when the price a buyer is willing to pay for a T-Bond drops significantly (and the yield pops) since the security has fallen out of favor and trust in the FED, the economy and the implied social contract, or all of the above, are broken.  Like Cinderella, today, the 30 Year T Bond wasn't invited to the Prince's ball.

There are dire consequences to this.  My guess is that we will be seeing this play out in future auctions on a regular basis.  Once note/bond owners/buyers/holders collectively decide "hey...we need a better return" they bid less for the bonds and push the yield up.  Possibly wayyy up.

At some point, the FED will no longer have control of interest rates.  No matter how dovish FED policy becomes, once long bond holders even sniff the hint that debt will be monetized, interest rates will go where the debt owners (lenders) choose to take them.  Either the time value of money will be restored to their satisfaction, or they won't buy the bonds (make the loans). 

Here are two Dallas FED charts I really like.  The first shows the total Federal Debt (Treasury Securities) outstanding over time.  The second shows the aggregate debt in relation to par value.




Total US Debt Markets (Public & Private) are somewhere around US$70 Trillion now (or about 3x Us Equity Markets).  "Risk-Free" Government Debt (UST's, etc.) are about $22 Trillion of the US$70 Trillion total.  By definition, the $48 Trillion of "non Treasury" debt has at least some level of default risk.  These notes and bonds may (or may not) have been underwritten properly and may (or may not) have a proper risk premium attached.  In any case.....it's not "chump change".

It's also interesting to note that for the first time since 1995 (Chart 3 Above) the Market Value of government debt has dipped below par value, which would be expected in periods of rising interest rates (see circa Volker days) even though the FED Funds target has only increased 2% in the last two years.  We're seeing more debt bought/sold at a discount to par than any time in recent history, again due to the impact higher interest rates have on the NPV of longer term debt.


So....Why is the Stock Market Selling Off? and why will the Sell Off continue?

I know you want answers, you deserve the truth....I just hope you can handle it...


As I've described above, people who really, truly understand what's happening, know that the Bond Markets (eventually) set long term interest rates, not the FED.  Our Rich Uncle Sam has been borrowing money from us (Investors) via the Debt Markets at an ever accelerating pace.  Like you, me or our businesses, when we are employed, sales are up, we're successful, we have paid down our debts and have some savings in the bank, lenders are clamoring to loan us long term money (mortgages, car loans, business loans, etc.) at favorable rates.  They trust us.  When times are tough, perhaps we're between jobs, we've not been wise with our money, had a bad break or two, or we've acted like drunken sailors on leave, lenders decline our loan requests and saddle us with higher interest rates, fees and usurious "Pay Day" style options.  They raise the rates and fees because there's an increasing probability they won't be paid back.  (i.e. we'll default)   

Now, remember those charts above?  The flat yield curve with the bottom dropping out of the short  end (Pay Day Loans) when times get tough?  We also see the long end (20 yr. & 30 yr.) "Gapping Up", as it did a teeny tiny bit today and when lenders (Debt Markets) require ...you know....a little something for the effort.....other than "total consciousness".



When we look at the balancing that's been done over the years we see that, to elaborate, our financial leadership (Greenspan, Bernanke, Yellen and now Powell) seems to have backed us into a bit of a corner.  The two Wharton Charts below (Wharton kids, for the most part, are pretty sharp cookies!) illustrate the problem pretty well.  In 2007, Marketable Government debt amounted to $4.52 Trillion, of which $1.94 Trillion (43%) had a maturity of 4 years or more.


Now, let's fast forward to 2017, described in the second Wharton chart below. Marketable Government Debt amounted to $14.38 Trillion, of which $7.2 Trillion (50%) had a maturity of 4 years or more.  So today we have about $5 Trillion more longer term debt out there ($10 Trillion total) than we did "Pre-Crisis".  Remember my "Cheat Sheet" above?  All of this debt will have to be discounted, and the present value of both the principal and the coupon flows will be beaten down as interest rates rise.  The longer the term of the debt, the more brutal the beating. Discounts on this debt will be exaggerated (and yields will spike) as they always do, until we reach some sort of equilibrium.  Even the rating agencies (who normally don't pull their heads out of the sand until well after the insolvency or bankruptcy filing(s)) are beginning to take notice.



























With perfect 20/20 hindsight, this problem would have been much easier to solve and unwind had our Rich Uncle Sam been less aggressive and issued short maturity debt rather than long maturity.  It would have been much less painful to bring interest rates back up to normalized levels.  Uncle Sam did exactly what any smart borrower would do.....he locked in favorable rates for as long as possible.  The problem is....that the lender is the American people....it's us.....our Rich Uncle Sam screwed us....we American voters are not getting paid enough for letting him piss away our money.....he really got the best of us on that deal.

Again, with the benefit of perfect 20/20 Hindsight, I'd imagine that if all of the American savers, workers and retirees were still getting 4% on their really simple, straight forward "golden passbooks" and Certificates of Deposit and had been adequately compensated for the time value of their money, they wouldn't have blindly redeployed all of their savings into hot, indecipherable funds and vehicles brimming with risk assets which had those assets anonymously shipped off shore... and the world would have never become one giant "risk on" bubble....but I digress.

Today, the FED can only cut the Funds target so much (2.5%) by my rudimentary math.  Of course, the debt markets can force the yield negative if the demand for safe money accelerates.  After today's  relatively pathetic showing on a paltry US$16 Billion Auction, the Markets are flashing the Treasury a pretty clear signal....They are saying....please stop.

Are we entering an era where we have a yield curve with 0% on the short end and 15% (October 1981) on the long end?.....since the market will soon be loathe to make a 30 year commitment?  Or will Uncle Sam take the less embarrassing road and simply stop issuing long dated debt (Like they did in Circa 2002 thru 2006).  Will our government financing be done on a Pay Day Loan basis forever?....will that be our only option?

In the past, the FED has cut rates going into the recession/panic (see VenabalePark.com chart below) in an effort to stabilize markets and/or save the financial system.  At a 2.5% T-Bill Yield I might question whether going back to zero would even be enough.  If you've read my past work in this blog, the Chinese have "created" out of thin air, an additional US$50.1 Trillion of brand spanking new Financial Assets that are just a hiccup or two away from going bad. 



@CoryLVenable

As I peruse the after-market-close postmortem commentary and Twitter feeds from the talking heads every day, I can only emphasize that what's happening to markets today (both debt and equity), no matter what you are being told, even though it's incredibly entertaining, what's happening today has nothing to do with the Trade War, White House Tweets, the Wall, the Shutdown, Democrats, RepublicansMexicansRussians or Bob Mueller.....it has everything to do with a decade of horrific, politically motivated, easy way out, global monetary policy.  And we are at risk of forfeiting the American Dream because of it. 

Advice....

Finally, for all of you moon-phase watching, double shoulder fanatic, contango observing, "Buy the Dip", "Stocks ALWAYS go up in the long run", "Oooppsss I hit a rogue wave" dudes and dudesses out there who have somehow convinced people that you know exactly what you are doing and fully understand what's happening......You don't!  This post was dedicated to you.  I'm trying to help you.

You are continually told about the "strong economy" and that everything is going along just fine and dandy.  You are repeatedly told about low unemployment (where everyone has three jobs just to get by, unless you work in healthcare of finance), low inflation (that's true, we may never have CPI inflation again, at least in my lifetime, since none of the monetary expansion has made it down to the "three jobs" people who would actually spend the money), average wages continue to rise (that's true as well, wage increases for six-figure finance and healthcare workers by far outpace the wage increases for the "three job" people).  You absolutely should not be listening to this "everything is just fine and dandy" folly.  We are already in the middle of a crisis, you just don't see it yet.  Please take steps to protect yourselves and your clients if you can.

To be clear, unless you are a global titan of finance, you have no idea what the next 24, 48 or 72 hours holds in store for you, much less the next six months.  (Hint: If you are running ads on Sunday morning local TV and/or holding "informational meetings" at Applebee's or Red Lobster trying to convince retirees and grandmothers to pony up their/your $10,000 minimum so you can "protect" their hard earned money....you are probably not a "titan of finance".)

I want you to really think about this and try your best to protect your and your client's money.  This is not a "buy the dip....don't worry be happy" event....this is the beginning of an Armageddon-like financial meltdown of Biblical proportions.

Here's the last chart of the day....


















Referring to the chart above.  To sum up what's been happening over the last few months in both the bond and equity markets, it's an unmistakable flight to safety.  Remember... "Smart" money, defined as that invested by "Titans of Finance" (higher volume RED BAR) "gets out" on the way down...."Dumb" money, defined as money invested by nice naive folks like you and me (lower volume GREEN BAR) continues to buy the dip....at least as long as they/we have money to buy it with.

Oh....and I almost forgot.....if you've been following my work you already know that because of China/CCP/PBOC monetary policy and the world's opaque off-shore banking system, the global financial system is also imploding....

Happy investing....and don't say I never warned you.....

Finally, I know exactly what you are about to ask......

You want to know how I can possibly write all of this analysis so soon after the results of the auction are published?  Literally just a few hours ago?   The answer is relatively straight forward.  I wrote most of this last weekend when I had a little free time.  I just filled in the details today, updated the charts and hit the publish button once today's Auction and Market Results came in.  It's relatively easy to analyze things, and life becomes much simpler, when you are pretty sure you know exactly what's going to happen. I just can't tell you exactly when it will happen.

But I'm sure you already knew that I was going to say that.....



Additional References
Daily Treasury Yields - Treasury.gov
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019

Market Value of US Government Debt
https://www.dallasfed.org/research/econdata/govdebt#tab2

Fitch UST Downgrade warning 1/9/19
https://www.reuters.com/article/usa-rating-fitch-idUSL8N1Z92B1


Tuesday, January 1, 2019

Keeping it Simple, Short and to the Point....and China has US$50.1 Trillion of new Financial Assets!

Over the holidays I've been asked by a number of my readers and friends to make an effort to simplify the issues I've been discussing over the last few years.  One of the suggestions, from a very astute money manager/friend of mine was "Nobody get's it!.....could you just put the most important stuff in one chart or table with citations?"

My response, not fully knowing exactly how I was going to approach this pile of financial spaghetti, was...."I guess I can try..."

So here goes.....

If you want a 30 Second Summary, just scan the graphics and read the text in RED.

After making my iron clad commitment to simplicity, almost on cue, the PBOC, on December 28th, published the long awaited (several months overdue), English version of their epic, annual, "no problem...nothing to see here" Financial Stability Report.


 

As usual, it's a laugh out loud gut-buster of a document filled with classic economic humor and side splitting financial one liners.  But, in keeping with the spirit and direction of my informal, reader focus group, I'm not going to attempt to dissect the entire 246 pages of the report.

I'll confess, I don't understand some of it.  I've tried.  Believe me, I've tried.  The problem is, to be kind, that it's a compendium of silly flotsam and odd financial jetsam, set adrift in a sea of irrelevant drivel.  There are probably nuggets of accuracy buried in it somewhere, but I've, as of yet, failed to identify them with certainty.

The purpose of the PBOC's Financial Stability Report, as far as I can tell, is to fully describe the financial condition of the Chinese economy and let the world know that "China" is on top its game and doing a great job ....at everything.  All's well.....nothing to see here.

As you also know if you've been a long time reader of this blog, I've been really concerned about China's meteoric "Questionable Financial Asset" growth and the impact that it might have on the global economy.

Keeping with the new "Simple,Short to the Point" theme, I'm going to try to boil this entire mess down to a couple of Simple, Short and to the Point Tables, complete with page number references......here they are:

The chart below has been compiled primarily from figures from the just released 2018 Financial Responsibility Report (page 62)





Highlights of the above:

1.) In four short years the Chinese Government has "created" 380 Trillion RMB or US$ 50.1 Trillion (US$ equivalent) in Financial Assets out of thin air.  The US$ (currency adjusted) value of these Financial Assets increased a whopping 22% in 2017 and forecast growth of 8% for 2018.

2.) The 2015 & 2016 figures include the "newly discovered" (Restated) Off-Balance Sheet  (OBS) Assets disclosed in the 2017 Report (For YE 2016).

3.) During this incredible run, Non-Preforming loan ratios actually improved.  Chinese bankers have always had a reputation as tough, relentless underwriters.  (For you Chinese bankers reading this....that was what we call "sarcasm" in America).   Here's the quote (pg. 60)  "Downward pressure on assets quality alleviated. By end-2017, the total outstanding NPLs of banking institutions recorded RMB 2.39 trillion, an increase of RMB 195.7 billion y-o-y. The NPL ratio dropped by 0.06 percentage point y-o-y to 1.85 percent."

4.) In the 2017 FSR (2016 YE Data) the PBOC appeared to be extremely concerned about the OBS Asset growth.  Here's the quote from page 48 of the report:  "In 2017, the foundation for a resilient economy and a sound financial market is still not firm, the downside pressure on real economy cannot be overlooked, and great attention should be attached to the challenges and risks confronted by the banking sector. The banking sector will remain committed to the mandate of contributing to the real economic growth, attach more importance to risk prevention, improve risk management and hold on to the bottom line of preventing systemic risks from happening."  Since the time of this prophetic writing the PBOC has continued to "pay great attention"..."improve risk management" and try their best to "prevent systemic risks from happening"......by supporting Financial Asset growth at an annual rate of 14%! ....uh oh...

5.) By extrapolation and applying the demonstrated 2017 Financial Asset growth rate (quantifying the PBOC's commitment to financial austerity and tight money) to 2018 we can calculate/forecast that Chinese Financial Assets (as of yesterday) now amount to roughly 634 Trillion RMB (US$ 92.2 Trillion) or probably about 1/4th of all financial assets on the planet at current exchange rates.

6.) During the same time period the RMB has weakened by only 13%. (6:05 v 6:88)

7.) No economy, in history, has ever created financial assets, in equivalent reserve currency at this pace or level.....EVER.

Given the above, relatively shocking Asset Growth (even though the PBOC says "All's well...nothing to see here"), let's compare the above PBOC Figures to those previously provided to the Financial Stability Board for the Global Shadow Banking Monitoring Report.   The FSB Figures (2014, 2015 & 2016) are taken from the 2017 Data Set.  2017 Data should be available in the March 2019 Report (2018 Data Set)






















When reviewing the figures we note a significant disparity between the PBOC Financial Stability Report and those provided to the Financial Stability Board (Since the numbers are all being reported by the PBOC, one would think they should be the same).  Here are the bullet points

1.) We note that the figures reported in 2014 were about the same (give or take a "Trillion" or two! US$ 40.0 Trillion vs. US$ 42.1 Trillion)  At that time Chinese Financial Assets were roughly 12% of Global Financial Assets as reported by the FSB.  Moving forward to 2016, the disparity grew to 20.6% vs. 14.4%.  (The "newly discovered" OBS Assets)

2.) When we fast forward to 2018, extrapolating the trend and accounting for an estimated decline in Total Global Asset Values over the last month we can forecast, based on 2017 growth rates that Chinese, Mainland RMB Assets are now roughly 27% of all Global Assets. (in dollar terms as of 12/31/18).

3.) In the 2017 FSR (2016 YE Data) the PBOC attempts to explain the US20.9 Trillion disparity between their own financial asset figures, and those reported to the Financial Stability Board, while half-heartedly acknowledging the risk associated with the meteoric growth of mainland Shadow Banking.  Here's the absurd quote found buried on page 151.  "Such business is of low transparency and is easy to evade regulatory requirements for loans. Moreover, part of the money is invested in prohibited areas and most of the money is not yet covered by statistics of the TSF (Total Social Financing)"  I believe that what the PBOC FSR is saying is that they don't include significant Shadow Bank Assets in their reporting to the to the FSB.  Like most things Chinese, if it makes them look bad....they leave it out...   

In other words, there's a good chance that, at the current exchange rate, Chinese Asset Values now exceed total US Financial Assets at the end of 2018 (Total US Financial Assets were US$90.2 Trillion as of 2016 per the FSB data Set).  How could this happen?.....because very little is written off or written down.  Bad Assets are rewritten, refinanced, rolled over and/or revalued.  US$ Trillions are locked into far from liquid, vacant, overvalued residential real-estate, mortgages and wealth management products tied to same  There's no such thing as a default or a non-performing loan or WMP in China.

Why Are the Numbers Different?

From my perspective, the numbers produced by the PBOC in their "Financial Stability Report" (an oxymoron  if there ever was one) should exactly match the numbers they provide to the Financial Stability Board.  Total Bank Assets and Off Balance Sheet Assets are specific terms with specific definitions, yet, the figures seem to "jump around" and differ by tens, or even hundreds of Trillions of RMB depending on the document/source.  There are a number of possible explanations for this....here they are:

1.) I'm (DeepThroatIPO) making a mistake in my reading of the reports and really don't understand what I'm looking at.  There could be some sort of definition issue or translation problem which causes the Trillions of dollars of differences in the figures and there's a simple answer for this anomaly.  Everyone who matters is already aware of it and I'm last to the party.  (I doubt it since the PBOC Report was just issued last Friday night).  If any economist or banker out there has a handle on what's really happening, or if you believe I'm dead wrong, I'd love to hear from you.

2.) The PBOC has a "second set of books"  that they provide to the Financial Stability Board. This also makes perfect sense, you know, just like the silly filings on the US$2.733 Trillion (Feb. 2018 valuation) of goofy Chinese IPOs on US Exchanges.  I'm told "Dual Bookkeeping" is nearing  epidemic levels in China.

3.) The PBOC simply has no idea what it's doing and just "makes shit up".  None of these numbers are actually calculable or accurate from the mish-mash, duct-taped-together financial systems they've conjured up and they just want to issue a rosy, feel good report for all the world to see.  "Assets" are a good thing....right?  The "trillions" could also be typos, slipped decimal points or mistakes, as been posed by a few of my troll-ish readers.  As a rebuttal, I'd suggest that typos and math errors are occasionally acceptable for bloggers, journalists and pundits, but they shouldn't be present in Central Bank documents. 

4.) The PBOC reports are politically motivated propaganda tools disbursed by the CCP.  The authors simply report big, gigantic, impressive numbers that they believe Xi wants to see, so they don't end up in one of those Xinjiang region re-education camps along with the Uighurs Avoiding re-education is most likely a primary career objective for most Chinese Bankers and Economists nowadays.

The point I'm making is that the idea that these disjointed, nonsensical, inconsistent, figures could possibly be accurate, reliable or free from bias is laughable.

TO BE CRYSTAL CLEAR, SIMPLE, SHORT AND TO THE POINT.......IF THE PBOC FSR IS ACCURATE, THEN THE FINANCIAL STABILITY BOARD REPORT IS DEAD WRONG!  

THE FSB REPORT WOEFULLY UNDERSTATES THE LEVEL OF GLOBAL ASSETS, DUBIOUS SHADOW ASSETS AND THE INHERENT RISK OF DEFAULT ASSOCIATED WITH SAME.

THERE ARE ROUGHLY US$ 28.2 TRILLION ($92.2T-$64T) OF FINANCIAL ASSETS OUT THERE (AS OF YESTERDAY) THAT THE WORLD'S CENTRAL BANKERS DON'T KNOW ARE THERE, NOR DO THEY UNDERSTAND THE SIGNIFICANCE RE: MONETARY POLICY   


The Relationship of China's Financial Assets to "Fake" GDP

Here's a nice graphic I like, describing 2017 Global GDP by region/country.



Focusing on the period from 2014 thru 2017:


In 2014, China GDP was US$10.48 Trillion compared to Total Financial Assets of US$42.1 Trillion (i.e. Financial Assets were 4x GDP).  By 2017, China GDP increased to US$ 12.24 Trillion and Mainland Financial Assets increased to US$85.3 Trillion (i.e. a multiple of 7x GDP)

As a point of reference US Total Financial Assets have been relatively constant at roughly 5x GDP (FSB figures) over the same time period.     


The Simple Question is: How in the name of Paul Volker could any economy (China) create an additional US$43.2 Trillion (US$85.3T - US$42.1T) in Financial Assets in three (3) years, while increasing GDP by only about US$400 Billion a year.

In the three year period from 2014 thru 2017 the Chinese economy created US$25.00 of new Financial Assets for every dollar of GDP.  If we use PGDP (Productive GDP) in the ratio, it's probably about US$40.00 of Financial Assets per dollar of PGDP.  How could this possibly happen?

The Simple Answer is:  It can't!


There You Have It!   

Simple, Short and to the Point.....I invite you to read the PBOC report in its entirety.  It's a hoot!

Here are just a few of my favorite quotes from the Executive Summary :

The economic and financial development and reform and the defusing and tackling of major risks during the past one year have not only reduced financial risks, improved stability of the financial system, laid the foundation for the economic transformation and development in the next five years or an even longer period, but also contributed to growth and sustained recovery of the global economy. 

Well.... based on the numbers, that's not exactly what I might have concluded.  Apparently, they are looking for a "thank you" from the world?

The Chinese economy is going through the transformation of high-speed growth to high-quality growth and structural adjustment, thus some financial risks of a grey rhinoceros nature may still come up.

I'm glad they are concentrating on quality over quantity, otherwise they might have created US$100 Trillion of junk assets rather then just US$50.1 Trillion.  I also wish the PBOC wouldn't refer to the POTUS as a "grey rhinoceros".  So disrespectful.

However, the fundamentals of the Chinese economy featured by the large volume, huge market and strong resilience have remained unchanged. The basic policy orientation of reform and opening up has remained and will not change.

"Opening up?"  Really?  Do you have any Uighurs, Muslims or Tibetans working at the PBOC?  Have you talked to any US Tech Companies about how open you are?  Can your "regular" citizens transfer money offshore without a financial rectal exam?  Can your workers move to a new Chinese city or take another job without getting CCP approval?  Do you still bulldoze Chinese houses and throw the homeowners on the street when a crooked, connected party member developer wants to put up a high rise?  Why are all of those journalists and college professors deported or re-educated?  What exactly do you have against Canada?  How about unblocking this blog on the mainland?  Openness my ass.....Just sayin'......

That said, Chinese self reported Financial Asset growth doesn't make any sense.  It could be that the PBOC FSR is accurate, or the Financial Stability Board is accurate or "none of the above" is accurate.  In any case, managing intelligent, functioning monetary policy in this environment is not possible.

Right now, again if we were to guess, since China doesn't publish any real/believable numbers, debt service, at current mainland interest rates on US$92.2 Trillion of non-performing Financial Assets is rapidly approaching half of China's fake GDP.  The assets might actually exist in some form, but if they do they are poised for monetization, their economic values to be inflated away (currently underway) or default over time.  The only remaining question is, when will this devastation finally hit the exchange rate, properly reflecting the true value of the Chinese economy.

The Chinese Financial Cancer is now officially terminal and the malignancy has spread to every corner of the globe, thanks to the world's anonymous, offshore banking system and sophisticated Off-Balance-Sheet financial tools (Swaps, Repos, Cross Border Listings, FOREX Bonds/Notes/Loans, Cryptos, etc. and any other derivative tool our amazingly creative American, Japanese and EU Bankers can dream up.)

If you'd like to read more detail about how US Banks, Regulators and the off shore financial system have at best failed us, and at worst have been complicit in this debacle (for hefty fees), please feel free to peruse some of my prior posts.  Here are two of my relatively recent, better efforts that you might enjoy.

Twas the Night Before Christmas...

When Will Xi hit the Sell Button?....


One Final "What the Hell?"

This just popped into my inbox from a reader.....it appears that as the Chinese Equity Markets dry up, Chinese fraudsters.....I'm sorry....I meant to say  "Chinese entrepreneurs" have continued to scour the world for dopey "China Dream" investors courtesy of US Investment banks.  For the first time in history, at least that I'm aware of, a nation's "off shore" new listings & corresponding capital raises have actually surpassed that same nation's "on shore" raises.

In 2018, the capital raised by Chinese IPO listings in the US & HK (offshore) of US$40 Billion, was greater than capital raised on the mainland US$18 Billion.....again, these figures might all be suspect....but who the hell knows anymore.....

That's right, an economy the size of China's is raising more equity money via off-shore listings than on-shore.  Apparently, Chinese mainland investors have very little faith in their "entrepreneurs".  

Does that make any sense at all?

Anyway.....

HAPPY NEW YEAR!



Resources:

PBOC - All FS Reports -  2018 Report Published 12/28/18 (English Version)
http://www.pbc.gov.cn/english/130736/index.html

Financial Stability Board - Global Shadow Banking Monitoring Reports and Data Sets
http://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/

Actual Text - pg 62 of the 2018 PBOC FSR

















SCMP - China Construction Bank Chair Warns of housing bubble....
https://www.scmp.com/economy/china-economy/article/2179289/chinese-state-bank-chief-warns-against-buying-property-now

Wednesday, December 19, 2018

Twas the night before Christmas.....

....and all through the bank.....not a creature was stirring.....ne'er the ghost of "Old Hank"....

Our investments were placed by the chimney with care in hopes that FED accommodation, continuing and exacerbating years of horrific, politically motivated policy decisions, soon would be there.....Oooppss.....Not happenin' today!


I know, I know....my poetry doesn't exactly flow.....but it's accurate....

Yes, it's that time of year once again.  It's that special holiday time when we take a moment or two to reflect on the year's events, set backs and successes.  We think about all of the wonderful times, family and friendships we've been blessed with.  We rejoice and marvel in how fortunate we've been to somehow skip gleefully, unscathed through the mine field of life, oblivious to the myriad financial disasters lying in wait for us at every turn and round every corner.



Last week, a friend of mine stopped by my office to share some Christmas cheer and, as is the norm with our discussions, our banter eventually morphed from the insurance industry, local business gossip, Holiday events and parties, family, gifts and the Cleveland Browns, to, finally, of course, Chinese Monetary policy.....as nearly all office conversations do nowadays.  Typical Yuletide chit chat.

When we were discussing the relative dollar/RMB strength, my (very smart) friend brought up a reference and a few related thoughts that I hadn't considered since I was a wet-behind-the-ears finance student at the University of Wisconsin, many, many years ago.  Thus, the genesis of today's post.  The term that came up was.... the "Triffin Dilemma".

For those of you who don't recall, or never had the pleasure of meeting Bob, the Triffin Dilemma is a reference to the work and related 1959 Congressional testimony of Yale economist Robert Triffin, who argued, in a nutshell, that if the US Dollar is/was to remain as the preferred currency to settle the world's international trade, the Treasury would be required to supply "the world" with sufficient US Dollar currency to support global trade growth.  As global economic activity would grow, specifically, trade transactions where America wasn't a party (but dollars were....think today's Petro Dollar transactions) the United States would have to run increasingly larger Balance of Payments deficits to support these transactions.  (i.e. providing a stable reserve currency for the world's trade). 

Simply put, continued, increasing, Balance of Payment (Current Account) deficits would be required by the United States if the US Dollar were to be used as the world's reserve currency.

Triffin argued, well ahead of his contemporaries, that the system would eventually become unsustainable ( the "Dilemma") as the amount of currency (backed by gold) required would mandate unfundable, ever increasing Balance of Payments deficits and/or threaten the confidence/stability of the US Dollar's gold backing/guarantee.  The Treasury would be forced to starve the world of dollars.

As is most often the case for truly revolutionary, yet painfully obvious economic thinking, Professor Triffin's work was largely ignored by politicians, bankers and business people until 1971 when everything he'd predicted became reality and what we now refer to as the "Nixon Shock", as Triffin expected, materialized.  The administration was forced to abandon the Bretton Woods Agreement, taking America off the gold standard, closing the "gold window", leaving the world with the US Dollar as a floating reserve currency.  The US Treasury would no longer exchange US Dollars for gold on demand.  The world would become a floating, market dependent fiat currency world.  The value of every currency would henceforth be determined by market forces (i.e. relative availability relating to supply and demand).  In theory, everything would, of course, be just fine.

So let's take a look at what's happened to the US Economy since we've dumped Bretton Woods, using one of my favorite charts.  (I can't take credit for it....citation below)




Beginning in 1947 (when my dad had just come back from his all-expense-paid French vacation on the beaches of Normandy courtesy of the US Army) up to 1971, we note that the bellwether indicators, Real Wages, inflation and GDP were in relative lockstep.  This is of course, before Al Gore invented the Internet, and high tech bankers came up with all sorts of sophisticated banking devices.  Once we entered a floating world, we observe that the indicators have diverged dramatically over time.  US GDP, both per capita and per FTE have skyrocketed.  We also note, to our chagrin, (using the collective "our" here presuming that most folks reading this will have some sort of a "job") that Real Weekly Earnings for full time workers are about the same as they were in 1971, even though Real GDP per capita/FTE has skyrocketed, as an apparent byproduct of productivity, as well as labor and capital seeking both its optimum use and lowest financial price-point/cost.  Economies around the world have been set free to export (and import) labor (jobs) capital and technology in competitive pursuit of lower costs and greater efficiencies and profits for the businesses who could navigate the new globalism.  The chart below describes the net impact of these monetary and regulatory policies on Western governments over time.

   
Ooopppsss......Oh Geezzz.....I'm sorry, by bad, that's actually a picture of last week's riots in Paris.....my mistake, I'm sure I'll locate that "productivity" graphic shortly, or at least by the time they put the fires out on the Champs-Élysées.

Anyway, as I was saying, here's the chart I was referring to.....



Oh crap.....I screwed this up again....this is actually last month in Venezuela, I guess a little government corruption and "a million percent" inflation, wiping out the life savings of main street folks (they probably didn't get their cash converted to Offshore USD/Euros in time) will rub those poor, pathetic huddled masses the wrong way from time to time.  We better get that wall up quickly, the US Southern border is just a few year's walk (maybe six months if they are in good physical shape) for these malnourished, unemployed, starving, "last resort" criminals.....I'll bet they are all members of MS13, or ISIS, or at least being actively recruited....if we could just come up with tear gas that doesn't hurt pregnant women, kids and old people....now that would be a technology worth an IPO!

Ok, now I've got it, here's the chart I was looking for (see below).  This chart, although not as graphic as the above photos, should absolutely scare the living-holiday-reindeer-snot out of any highly trained (or barely competent) economist reading it.   In economic terms, this chart depicts millions of people on the verge of starvation, going homeless or being shot and/or beaten to death in "real life".   Highly trained Economists, as we all know, have a completely different fear threshold than mere mortals.






The chart and table above were constructed based on data from the Financial Stability Board's 2017 Shadow Banking Monitoring report data set (2016 data) and the World Bank Development Indicators Data set (citations below).

The following is the most important statement in this post:

In broad, yet definitive terms, the chart above shows, with clarity, that the US Treasury and the FED have most likely lost control of the US, and by default, the global money/financial system.  (Please read that again....it's really important!....I'll wait....go ahead....read that one more time.....let it sink in.)

Ok....take a deep breath.....let's keep going...

A few days ago Janet Yellen discussed the idea that "The FED has no idea what they are doing" as a hypothetical topic (my words not Janet's), in general terms, blaming their "lack of tools", although not fully understanding or acknowledging that her continuation of "Bad Gauges" monetary policy was a major contributor to the gigantic mess we're in today.  Basing monetary policy on fudged, sampled, limited domestic metrics when the bulk of the systemic stress relates to foreign monetary policy (China), unregulated (off shore) funds flow, selective dedolarization and the Triffin-esque inability for the US Dollar to remain as the world's reserve currency, has become the undoing of the global financial system as we currently know it. 

“I am worried that we are in a deregulatory mode and I see a lot of pressures building in the system to go further to really weaken fundamental safeguards that were created in Dodd-Frank. We are a decade after the financial crisis so that would be worrisome and wrong to do,” Janet Yellen - speaking at the Women in Housing and Finance holiday event (12/12/18).

Hindsight being what it is, all of these "pressures" and off shore capital flight could have been mitigated, at least to some extent, had we begun to normalize interest rates sooner, put in China-style "selective" off shore capital restrictions, both in and out (Caymans, Luxembourg, et al), and taken steps to understand the true origin and exposure to the "brand-spanking-new" US$150+ Trillion in globalized "Fake Money" Financial Assets, destined for default, that US Bankers (read US Taxpayers) will be intimately involved in cleaning up.  As usual, the bankers made the mess, the regulators and legislators allowed it to happen....and the taxpayer will pay the bill.

Apparently, the FED has learned little from history, in October 2008, then New York Fed President Timothy Geithner observed that Europe “ran a banking system that was allowed to get very, very big relative to GDP, with huge currency mismatches and with no plans to meet the liquidity needs of their banks in dollars in the event that we face a storm like this.”  From the FOMC meeting transcript.

Here's some recent, behind the scenes video of the daily routine at the NY Fed's Open Market desk.  Note the sophisticated decision process, based on state of the art data and metrics.  The global economy, as we well know, depends on the meticulous execution of FED policy.


It's always been interesting to me that Amazon can track a US$4 parcel, time and date stamped,  from Shanghai, to Paramus, to my Cleveland office (knowing virtually everything necessary about the parties involved) and the FED/Treasury can't tell the origin, final destination or purpose  (without a court order in a complying jurisdiction) of a $50 Billion, US Dollar, layered wire transfer from Hong Kong to a Cayman Islands Bank.  Weird huh?

The FED's ability to manage the US money supply, while other entities are free to create trillions of Off Balance Sheet USD obligations is the equivalent of Amazon trying to do eCommerce without package tracking or inventory control.

Bear in mind that the most recent data (above) is the YE 2016 Data Set.  I would suspect that the data has been trending in a similar direction for the past two years.  i.e.) it looks much worse today.  Based on projected Asset Growth Rates we may have somewhere north of US$370 Trillion of Assets/Obligations on the world's books now, of which a significant chunk could be a tad over valued and poised to default.  Of course we won't get the 2018 numbers until the Spring of 2020, which is unfortunate.  As always, while the world's economists and politicians are relegated to looking in the rear view mirror, stocks, bonds, debt, derivatives and currencies are being priced in real time.

As you can see (above), I break the data/chart out into two sections, the first is what I call the "Old Money" and the other is what I lovingly refer to as "Fake Money".  Old Money is described as that held by established, seasoned, open economies with highly developed transparent, banking, taxation, and monetary systems.  Fake Money is best described as money held in jurisdictions where there is less transparency (perhaps a bit of chicanery) with financial asset location/creation and monetary policy, all having little to do with the underlying productivity of the  related domestic economies.  I've included China, the "usual suspect" Tax Havens (Caymans, Luxembourg, Switzerland, Hong Kong, et. al.) and "Other" (defined as everywhere else) as Fake Money.  Before I get bombarded with Greek, Italian, Middle Eastern, etc. emails resulting from my "Other" being defined as "Fake Money" located "everywhere else", keep in mind that as monetary policy goes, and I know you "Other" folks hate to hear this, but you are all along for the monetary ride.  Your sovereignty is a wonderful "feel good" convention, but it's largely irrelevant when compared to the Chinese/US/Tax Haven tsunami heading your/our way.   

The observations I'd make are as follows, regarding the change in composition from 2008 to 2016:

The "Old Money"

  1. Since the financial crisis the "World" has created additional financial assets (obligations) of US$81 Trillion (31% increase).  
  2. During the same period, Reported Global GDP has increased US$12.5 Trillion (19% Increase or about 2% at a compound rate)  This figure is several US$ Trillion less if you adjust for China's PGDP overstatement.
  3. Financial Assets housed in the UK, France and Germany have actually declined by 17%.  No wonder Paris is burning and Brexit is either happening or not based on the hourly headlines.  btw - Do you own any Deutsche Bank stock?
  4. Financial Assets housed in the Developed "Old Money" jurisdictions (US, UK, Germany, France & Japan) have increased a modest US$12.5 Trillion (7.4% increase or a 1% compound increase)
  5. The "Old Money" increase, offsetting the decline in the UK, German and France Financial Assets primarily took place in the United States ($22.4 Trillion or a 33% increase) presumably due to "Reserve Currency" obligations (i.e. the Triffin requirement)

The "Fake Money"

  1. If you've been reading this blog, or any other economic journals, papers or publications for that matter, you won't be shocked to hear that there's a sizable group of us who believe that the Chinese Communist Party has been cooking their books on reported GDP, Debt Levels, Currency, financial statements, transactions, NPL's, Asset Values, SEC filings, etc. etc. and virtually every economic statistic they've published over the last few decades.  Shocking....I know...but It's truly bordering on the absurd now.  (Luckily this blog is blocked on the Mainland and the CCP probably isn't reading this, so there's little/no chance that I'll be included in the Wanzhou Meng prisoner exchange package....I hope...) Anyway.....
  2. The "Off Shore" money is comprised of financial assets housed in the Cayman Islands, Luxembourg, the Netherlands, Ireland, Hong Kong, Singapore and Switzerland. (US$51.7 Trillion)  In 2016 "Off Shore" assets were approximately the equivalent of all financial assets housed in the UK, France and Germany combined.  There is little/no "GDP" directly associated with these Assets.  They are "Somebody else's money".  But whose?
  3. The same holds true for "Other".  i.e.) Every economy outside of the "Off Shore" Money, the US, China, Japan, the UK, France & Germany...the "rest of the World",  houses the equivalent financial assets (US$57 Trillion).  Again, this "Other" figure is about the same, in big round numbers, as that of the UK, France and Germany.
  4. Chinese domiciled financial assets increased from US$13.2 Trillion in 2008 to US$49.1 Trillion in 2016.  A 257% increase, or at about a 20% compound rate.  (again...not a typo)
  5. Even though the USD is currently the world's reserve currency, the currency of choice in most trade and global financial transactions, NEARLY ALL of the US$81 Trillion increase in Financial Assets took place in Fake Money jurisdictions.
During the same period (2008 to 2016) Global GDP grew at a compound growth rate of just over 2%.  An eyeballing of the figures would suggest that the world didn't require an additional US$81 Trillion of financial assets to create this meager growth.  More likely, this relatively large increase in Financial Assets (Generally $6 of assets per year for every $1 of GDP) was a byproduct of capital misallocation, kicking the can down the road, as Central Bankers attempted to stem the inevitable tide of defaults.

In the chart below we examine selected M3 from December 2008 thru August of 2018.  We also note that M3 generally tracks the asset growth in the Old Money/Fake Money chart above, with a few notable divergences....I would emphasize, that in the history of economics, we've never seen Money Supply growth/management like this in mature, industrialized economies.  Never.  We, for emphasis, now have to look at the world's monetary policy through Banana Republic spectacles.  That's where we're at. 

From the figures, we immediately note that the Eurozone M3 (Including the UK) has increased a whopping 54% (a 5.5% compound rate) while the Financial Assets of Germany, France and the UK have actually been on the decline (see above).  The ECB has been funding/carrying under-performing EU economies to the detriment of fiscally responsible economies for a decade.  Unfortunately,  Mario's amusement park is about to close.

Chinese M3 growth has been, well, I don't know that there's a word for it, a historic outlier perhaps?  The Chinese money supply has been growing at a compound rate of 20% (again, that's not a typo either).  Also note that China's M3 has declined slightly since the spring of 2018 when it surpassed US$28 Trillion.  As we all are well aware, China's fake GDP target has long been 7%-ish.  Productive GDP (PGDP) is probably about 4% +/-.  A 20% compound increase in M3 and related Financial Asset Values (loans/debt) should be frightening to any economist when compared to a PGDP that low.  What could possibly go wrong?   

Moving ahead, the world's dollar denominated obligations/assets today are truly unknown.  In the "good old days", financial assets in a specific jurisdiction were largely denominated in the domestic currency.  Foreign currency was electronically sent "back to where it came from" since domestic markets had little use for it.  Italian Citizens didn't own US Treasuries.  Russian Oligarchs didn't buy NYC penthouses through shell companies in the Caymans.  Chinese "entrepreneurs" didn't put "the world's biggest IPO" on the NYSE.  Now they do.  Today, there are roughly 200 currencies on the planet and about half of them (my guess) are pegged in some way to the US dollar.  Foreign Banks and businesses routinely take (and hold) USDs for domestic transactions, perhaps hedging the currency risk with creative domestic financial products or perhaps not.  Per the BIS, there is roughly US$110 Trillion in debt out there now (about a third of all financial assets), about double from 2005.  International Debt Securities comprise about US$23 Trillion of that.  Of course, most international debt is issued in or pegged to USDs.   





















We also know that Dollar Loans (i.e. debt that must be serviced and repaid in USD) made to Non-US, Non-Bank Borrowers is about US$10 Trillion now.  Note the growth of same....




Today, particularly in the Tax Haven Jurisdictions, we have no way of knowing (at least that I'm aware of) the composition, by currency, of the financial assets (and hence, obligations) held.  (Tim Geithner's concerns from the above FED FOMC minutes coming home to roost.)  We know that 90%+/- of the FOREX transactions around the globe have the US Dollar on one side of the trade.  There must be a reason for that, don't you think?

Anyway, the point of all of this is that all sorts of organizations, businesses and governments, outside the jurisdiction of the FED and the US Treasury, are issuing obligations in US Dollars.  Everyone seems to be making promises in US Dollars that, by definition (since access to US Dollars is at least theoretically, at the discretion of the US Financial System, FED/Treasury) they may not be able to keep.

Speaking of "promises" here's a Bridgewater chart from the The Long View @HayekAndKeynes I particularly liked:


The chart is yet another example of the burgeoning obligations being forced, or some would say, self-inflicted, on the US financial system.  Some/many of these promises, either foreign or domestic, won't be kept.  The only remaining question is which ones and when?

The Changing World.....

The point of all of the above is that the world and the way we finance it has changed significantly since 2008.....the waters are complex and muddied....let's sum it up:

"Money" is leaving the "Old Money" Domiciles and showing up in Off Shore Tax Havens at an unprecedented rate.  The impact here is two fold: First, the fleeing money largely escapes taxation in the originating, home domicile (or anywhere), causing domestic tax revenue shortfalls and increasing budget deficits.  Infrastructure and government services become underfunded/unfundable as a result of the capital flight and declining tax base.  Second, when this money moves offshore it's rarely used to fund "main street" economic growth anywhere.  It's not used to build businesses, bridges, roads or pay wages.  It's not spent, it's saved.  The money stays in financial products seeking/chasing a higher yield.  It creates bubbles and the cycle continues.

We can observe the same thing about Chinese Money, but to a much greater degree.  I've written ad nauseam about China's pegged Exchange Rate.  Chinese newly printed fake money and related influence is splattered all over the planet now, from Luxembourg to the OBOR participants, to the US$2.733 Trillion (Feb 2018) silly/fake IPO's on US exchanges, to a good chunk of luxury real estate in NYC, Vancouver, Silicon Valley and the Bay Area, etc. etc.  With the Chinese Money Supply  growing at a 20% compounded clip since 2008, it should not be remotely possible for the exchange rate to remain constant (within a range) when compared to every other major currency, as described in the FRED Chart below (RED Line is the RMB), yet the condition continues to exist.  The Chinese Communist Party has managed to "print" trillions of dollars and buy up Western Assets at a huge discount.  I've said this often....this was brilliant!






















Per the Triffin effect, the FED is left with two options, the first is to provide sufficient (ever increasing) dollar funding as globalization increases, putting tremendous pressure on the dollar and effectively monetizing US financial obligations (this might actually happen "by accident").  Under the current model, as global trade grows, more, cheaper dollars would be required by "the world".  Alternatively, the US could tighten (as is happening ever so slightly now), taking dollars out of the system, forcing the world to get by with fewer dollars and/or force a deglobalization/dedollarization, where everyone takes their political & monetary balls and bats and goes home.  We're actually starting to see this now e.g. Bop! Zonk! Splat!....it's "Tariff Man!".

(The Long View  @HayekAndKeynes)


The graphic below is from the December 17th, 2018 Yardini Research briefing.  Total Central Bank Assets  (FED, ECB, BOJ, PBOC) declining (tightening) by roughly US$1 Trillion since earlier this year to US$19.4 Trillion at the end of November.  I discussed these concepts and consequences in a 2016 post entitled: The Theory of Financial Relativity....  The conclusion at the time was "this can go on....until it can't". After reviewing recent central bank activity, it looks like the clock is about to strike "can't".




Central Banks are beginning to shut off the printing presses, shrink balance sheets and tighten. It's the equivalent of "taking away the punch bowl", however, not when the party just gets started, but after a two week bender in Vegas.  Remember all of those dollar bonds?  Global interest rates are finally (hopefully ever-so slowly and carefully) going up.  Remember my 9% rule?  For every 1% increase in interest rates, the value of a long bond drops by 9%?  That math is going to become painfully relevant again.

If the rest of the world is going to keep "trading", and globalization is going to continue, the "world" will need to come up with a substitute reserve currency, payment system or hybrid.  We need some sort of Utopian "floating" world with no cross border exchange restrictions for the dollar to be supplanted.  Since, we've come too far down the fiat currency path to go back (cryptos, pork bellies, bologna futures, oil, Glenn Beck's "doomsday" gold coins, or just about any surrogate "hard" assets, are all insufficient in both quantity and infrastructure to support the US$370 Trillion in current financial assets) the most probable course would be, believe it or not, that we continue down the same foolish, special interest supported, meandering path that we've been on, causing all sorts of senseless disruption.

I'd also suggest that today's political environment makes it impossible to solve this problem in a painless fashion.  "Cooperation" is a dirty word.  Cheating is in vogue.  Interestingly, history shows that horrific economic decisions are self correcting over time, although the results can be a bit unpredictable.  A heavily armed insurrection or two somewhere wouldn't be out of the question if this spins horribly out of control.  History also shows that the Dictators, Kings, Emperors, Imperial Grand Poobahs, El Presidentes' and their regimes rarely thrive when the commoners successfully storm the castle, so we can also expect some relatively radical changes in the way the world works coming to a Twitter feed near you.  Civilizations rise and fall based on monetary and economic policy....so let's hope and pray in the spirit of the holidays that this all somehow works out.

We're starting to see fragmented evidence of this "accidental accelerated deglobalization" already.
  1. Global asset values are beginning to correct.  Asset prices, real estate, equities, etc. will seek their economically supportable values over time, as they always do.  The DJIA swinging down 900 points today (24,057 down to 23,162 in response to a 1/4 point FED rate increase and some guidance) would be one small indicator that this process is underway.
  2. Current agreements, alliances and "promises" will be broken, NAFTA, TPP, the EU, the WTO, IMF, ACA, NATO, WTF, etc. etc. 
  3. There will be a rush to alliances between global trade partners and financiers based on perceived equitable relationships.  The operative word is "perceived" the less astute will be taken advantage of.  e.g..) The Chinese will "own" sub Saharan Africa, Venezuela, Pakistan, etc. etc. and all of the issues that go with these nations.  We're already beginning to see this with  bilateral currency/swap agreements, OBOR, investment commitments, etc. (Recent update)
  4. There will be a fitful, fragmented, fruitless movement toward a standard global, universal currency, perhaps based on an IMF/SDR concept as is resurrected by the CCP, as you'd expect, from time to time.  The PBOC has to do something to prevent the RMB from seeking its true value as they run out of options.  Per the IMF and SWIFT today the RMB is used in roughly 2% of global payments.  The RMB comprises only about 2% of Global Central Bank reserves. To be blunt, the idea that a propped currency which Chinese citizens feel compelled to stuff in their underwear as they board a plane, just so they can convert it to anything but RMB, might somehow become a "reserve currency" is delusional.   My guess is that, again based on the current political environment, all of this effort would be unworkable and the current IMF/SDR framework will simply erode or become non-functional over time.  Again, we'll see more trading partners leaving the sandbox as others get burned.  The Chinese will blame America and the Americans will blame the Chinese.  So it goes.      
  5. Enthusiasm for cross border listings is, of course, on the decline.  The SEC actually came out with a recent statement, inexplicably complaining about insufficient audits on Chinese companies that they, oddly enough, are responsible for regulating and chose to approve to list on US Exchanges.  Saying in their statement: "224 companies listed on U.S. exchanges, with a combined market capitalization of more than $1.8 trillion, have auditors located in countries that prohibit PCAOB inspections, most of them member firms of the Big 4 global audit networks. Almost all of the audit firms are in China or Hong Kong."  To reiterate, the figure I calculated was US$2.733 Trillion in February of 2018 so based on current price declines, US Investors are already down US$900 Billion this year because of these shams.  Only US$1.8 Trillion to go..... Nice work Jay!

The "Deep Throat Conundrum" or "Theft by Valuation"

Of course, the rarely discussed corollary to the Triffin Dilemma is what I'll refer to as the "Deep Throat Conundrum". 

The Deep Throat Conundrum. simply put, states that, in a floating currency world, an economy which continually runs large Balance of Payments (Current Account) Surpluses, using sufficient currency/capital controls can manage their exchange rate to a pegged value.  The "Impossible Trinity" can, for a frightening period of time, become possible.

If said economy (China) so chooses, that economy/country is able to print money and "buy" foreign assets at a whopping discount.  (i.e. Today, the PBOC by virtue of accumulated US Dollar reserves, rather than market forces determines the value of the RMB).  This "theft by valuation" (e.g. I print money in my basement and you sell me the Waldorf Astoria!....such a deal!) will most likely reset global asset values and topple the global financial system as currently constructed.

The "Conundrum" is only possible because the financial system we've (collectively "the world") developed and accepted is one built on the rationalization of amoral transactions and devices, justified by and in exchange for, significant compensation to the promulgators of same.  Carefully crafted legal work, perspective and related legislation directed by special interests, in the name of protecting privacy and promoting free markets has made just about any movement of money both impossible to regulate and "technically" not illegal per se.

Quite a Conundrum indeed.

Our Leadership

Since it looks like we're up against a good old fashioned market meltdown followed by QE money printing the likes of which we've not seen since the Wiemar Republic, enormous debt monitization, an eventual dollar devaluation/crash and an economic contraction of biblical proportions, it's indeed fortunate that we are guided by highly compensated financial professionals, relentless regulators and statesmen whose only concern is the well being of the American people.

Over the last few weeks, as the equity markets have begun to "take a dump" (technical bankers term), Yellen, Clayton, Geithner, Chanos, FED Officials, investors and the talking heads alike have all weighed in, in some form or another, describing in various degrees and terminology that something is a bit "wrong" with the markets.   Ray Dalio, a relatively busy guy, actually just took the time to produce a 450 page tome entitled "A Template for Understanding Big Debt Crises".  I'm forging through it over the holidays....as you might suspect, it's wonderfully written, but a really a tough read.  Lots to absorb and think about.  I'd also suspect that, since Ray has always been a big picture, time is of the essence kind of guy, I doubt that while he was writing this, he was thinking that:

"Hey.....everything is fine and dandy right now....perhaps I'll chronicle my concerns about something that could crop up around 2040....I've got nothing better to do.....no time like the present!"

That said, if you recall, back in 2008 "stay the course", "steady as she goes", "no need to panic" and "buy the dip" were all drinking games.  Here's just one of the many, many examples of the fantastic, well thought out guidance the US Retail Investor has available at their beck and call on the Internet:


If that's not inspirational enough for you, the video below is an outstanding  example of the integrity, truthfulness and transparency that US CEO's have become known for, standing by their decisions, relentlessly, fairly representing the unvarnished truth to their investors regardless of consequences or the impact on their stock price.



Finally, during the Holidays, in this festive time of jubilation, as we share tidings of great joy with our fellow men/women, we must be totally grateful for our political leadership.  We are truly blessed to be led by dedicated, compassionate, grounded intellectuals who use their giant "brains" to analyze complex problems, carefully calculating all of the possible permutations, consequences and ramifications of their meticulously crafted bipartisan policy, with their sole concern being the well being of the American people.  I, for one, am confident our future is in the best of hands.  If  anyone can get us through the soon to commence financial crisis, our current leadership can!  This administration, working in lockstep with Congress, as our founding fathers had intended, will deftly guide us toward the re-illumination of our shining city on the hill....       




Oh Geeezzz.....we are so screwed.....

Oh.....I almost forgot......MERRY CHRISTMAS!


Additional Reading

World Bank Development Indicators
https://datacatalog.worldbank.org/dataset/world-development-indicators

Gross GDP for China
https://fred.stlouisfed.org/series/MKTGDPCNA646NWDB

GDP World
https://fred.stlouisfed.org/series/NYGDPMKTPCDWLD
 
FSB Shadow Bank Monitoring Report - Excel Dataset
http://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/

Venezuela is in trouble....
https://www.cnbc.com/2016/11/02/venezuelas-problems-get-worse-as-protests-and-riots-become-more-violent.html


China - call for new reserve currency
https://www.ft.com/content/7851925a-17a2-11de-8c9d-0000779fd2ac

The World's Reserve Currency - USD
https://www.thebalance.com/world-currency-3305931

Carnagie Endowment - US Foreign Policy Impact on Middle Class America
https://twitter.com/i/broadcasts/1yoKMjmkLPzGQ

Michael Pettis - Thoughts on China & de-Globalization
https://twitter.com/i/status/1073253716030095360

Jim Chanos - Something wrong.....
https://www.cnbc.com/2018/12/13/jim-chanos-says-theres-something-wrong-with-the-stock-market-when-rates-this-low-cause-panic.html?__source=twitter%7Cmain

US Budget Deficit Widens in November
https://www.bloomberg.com/news/articles/2018-12-13/u-s-budget-deficit-hits-widest-on-record-for-month-of-november

Janet Yellen Comments - Inability of FED Policy to react to the next financial crisis - Market Watch
https://www.marketwatch.com/story/janet-yellen-is-worried-about-the-next-financial-crisis-2018-12-13?mod=mw_share_twitter

BIS - International Credit Markets
https://www.bis.org/ifc/events/ifc_armenia_2018/Tissot.pdf

Really Smart "Brains" are Required
https://www.mediaite.com/online/trump-claims-in-wild-interview-my-gut-tells-me-more-sometimes-than-anybody-elses-brain-can/

McKinsey - A helping hand to authoritarian government
https://www.nytimes.com/2018/12/15/world/asia/mckinsey-china-russia.html

Yardini - Central Bank Balance Sheets
https://www.yardeni.com/pub/peacockfedecbassets.pdf

China's Crumbling Reeducation System - The Onion
(For my Chinese readers out there, this is what's referred to as "Weisenheiming Sarcasm")
https://www.theonion.com/chinese-officials-vow-to-fix-nation-s-crumbling-reeduca-1819577410

The OBOR "dollar problem" - Financial Times
https://ftalphaville.ft.com/2018/12/18/1545130791000/The-Belt-and-Road-s-dollar-problem/

The RMB won't replace the dollar - Financial Times
https://ftalphaville.ft.com/2018/09/19/1537329600000/China-s-currency-will-not-replace-the-US-dollar/