August 31: Daily Contrarian Reads

The Two Parts of Stock Bubbles

…..These opinions during an asset bubble become rationalizations, which is the first part required for one. The second part is what investors are rationalizing, that the underlying fundamental conditions have nowhere to go but up. It becomes hard coded in trading regimens that whatever it is today can only be an order of magnitude better tomorrow; thus, buy today before you miss the can’t miss. The dot-com bubble was exactly that. According to several measures of profitability, including those provided by the Bureau of Economic Statistics as part of their GDP (really GDI) data set, it was a true bubble in that sense. The BEA estimates the corporate profits hit their maximum in late 1997. Prices rose, often insanely, while underneath there was no confirmation for them.

Three Financial Lessons Learned From “Harvey”

Insurance, whether life, disability, healthcare or long-term care related, must be utilized to mitigate risks that a household and family cannot financially absorb. It’s not about probability of occurrence, it’s about whether or not the risk is survivable if it does occur. Remember, the risk only needs to come to fruition once to wreak havoc.

Shadow Lending In The Red Rust Belt

Regional banks in China’s rust-belt provinces are driving the rapid expansion of shadow banking in the country, fueling a web of informal lending that poses wider risks to the financial system, according to a study by UBS Group AG. Smaller rust-belt banks like Bank of Tangshan Co. and Baoshang Bank have been using products such as trust beneficiary rights and directional asset-management plans to hide the true state of their bad loans and circumvent lending restrictions, the study by analyst Jason Bedford said. Others have been using the shadow loan instruments to diversify away from lending in their struggling home provinces, exposing themselves to a much wider spectrum of Chinese corporate risk in the event of a default, according to the report.

The Terror Next Time: The Daesh Story Is Not Ending

Iraq’s second largest city, Mosul, has been reduced to rubble. It has been finally conquered, snatched back from the notorious group, Daesh, after months of merciless bombardment by the US-led war coalition, and a massive ground war. But ‘victory’ can hardly be the term assigned to this moment. Mosul, once Iraq’s cultural jewel and model of coexistence, is now a ‘city of corpses’, as described by a foreign journalist who walked through the ruins, while shielding his nose from a foul smell. “You’ve probably heard of thousands killed, the civilian suffering,” Murad Gazdiev said. “What you likely haven’t heard of is the smell. It’s nauseating, repulsive, and it’s everywhere – the smell of rotting bodies.”

How Much Stimulus Is (Way) Too Much?

The amount of monetary stimulus increasingly imposed on the financial system creates false signals about the economy’s true growth rate, causing a vast misallocation of capital, impaired productivity and weakened economic activity. To help quantify the amount of stimulus, please consider the graph below.

Another Macro-Warning: Hotel Building Boom Stalls As Oversupply Threatens

Hotel developers are slowing down new U.S. construction projects after years of rapid growth, a result of tighter lending conditions and a ballooning supply of rooms in large markets. Though consumer demand remains healthy, hotel construction spending was down 2% to $27.5 billion in June at a seasonally adjusted annual rate from December, according to Census Bureau data, after more than tripling since bottoming in 2011. A combination of increased travel spending, growing consumer confidence and cheap credit prompted developers to pour money into hotel-construction projects in the aftermath of the 2007-09 recession. Now, growth in new hotel rooms is outpacing the number of consumers able to stay in them in cities like New York, Houston and Miami, prompting banks and developers to take a breather.

How Washington Helped Make The Houston Flood Disaster Worse

Houston’s problem was runaway development in flood-prone areas, accelerated by heavily subsidized federal flood insurance. Now that Hurricane Harvey has turned Conrad’s warnings into reality, it’s worth noting that Houston’s problem was in part a Washington problem, a slow-motion disaster that was easy to predict but politically impossible to prevent. Congress often discusses fixing flood insurance to stop encouraging Americans to build in harm’s way, but the National Flood Insurance Program is still almost as dysfunctional as it was 19 years ago. It is now nearly $25 billion in the red, piling debt onto the national credit card. Meanwhile, cities like Houston—as well as New Orleans, which Higher Ground identified as the national leader in repetitive losses eight years before Hurricane Katrina—continue to sprawl into their vulnerable floodplains, aided by the availability of inexpensive federally supported insurance.

The Same Ol’ Afghan War Fallacies

Added to these features is a further notion that Trump shares with many others, including observers who in other respects are critical of his policy. This is the idea that there is a direct connection between extremists having a physical presence in a distant land and the United States facing a terrorist threat at home. Trump used the term safe haven four times in his speech. He declared that the basic purpose of the military expedition in Afghanistan was, “We must stop the resurgence of safe havens that enable terrorists to threaten America.” One hears this same idea over and over. The current U.S. military commander in Afghanistan, General John W. Nicholson, Jr., says, “The requirement to keep pressure on these terror groups to prevent another attack on our homeland .?.?. fundamentally, that is why we are here.” Such statements — and not only about Afghanistan — are minor rephrasing of the old notion of “fight them over there or else we’ll have to fight them at home.”

Not All Swaps Are Created Equal; Part 1 (Eurodollar University)

I’ve never understood the myth of central bank dollar swaps. They are automatically placed in the category of QE or IOER, perhaps because very few seem to understand what was really happening with them (as well as outside of them). The Fed expands its balance sheet which everyone assumes is the same as expanding either base money or something like it. It’s a false equivalency, and one that is demonstrably so.They make their first crisis appearance in December 2007; seven, not eight. On December 6 that year, the FOMC gathered telephonically for one of those emergency policy calls that were becoming more frequent, the level of discussion more urgent.

How Mayor DeBlasio Is Spending NY Into Big Fiscal Trouble

But New York also keeps eclipsing another record: spending. When Mayor de Blasio took office in January 2014, New York was halfway through a fiscal year in which it would spend $76.2 billion; in the current fiscal year, which started July 1, 2017, the city will spend about $87.3 billion — an $11.1 billion increase. Thus, de Blasio’s inaugural term has seen a 14.6 percent rise in annual spending. (All numbers are in today’s dollars.)