May 12: Daily Contrarian Reads

The $22 Trillion Question: What Happens When Central Banks Stop Buying Bonds?

Central banks have been the world’s biggest buyers of government bonds, but may soon stop—a tidal shift for global markets. Yet investors can’t agree on what that shift will mean……When the unwinding begins money managers may not be positioned for it, and markets could move swiftly. In the summer of 2013, investors suddenly got spooked about the Federal Reserve withdrawing stimulus, leading to a swift bond sell off that sent yields on the 10-year Treasury up by more than 1 percentage point……When the unwinding begins money managers may not be positioned for it, and markets could move swiftly. In the summer of 2013, investors suddenly got spooked about the Federal Reserve withdrawing stimulus, leading to a swift bond sell off that sent yields on the 10-year Treasury up by more than 1 percentage point.

Watergate Redux or ‘Deep State’ Coup?

President Trump’s firing of FBI Director James Comey on Tuesday reflected a growing concern inside the White House that the long-rumored scheme by “deep state” operatives to overturn the results of the 2016 election may have been more than just rumors….. The fear grew that Comey and other senior officials in the U.S. intelligence community had concluded last year that neither Hillary Clinton nor Donald Trump was a suitable future president, albeit for different reasons. I’m told that Clinton was seen as dangerously hawkish and Trump as dangerously unqualified, opinions privately shared by then-President Barack Obama. So, according to this account, plans were made last summer to damage both Clinton and Trump, with the hope of putting a more stable and less risky person in the Oval Office – with key roles in this scheme played by Comey, CIA Director John Brennan and Director of National Intelligence James Clapper.

Red Ponzi Update—-The Latest “Reflation” Wasn’t All That

We can add China to the list of locations where the near euphoria about inflation rates is rapidly falling apart. This is an important blow, as the Chinese economy has been counted on to lead the world out of this slump if through nothing other than its own sheer recklessness. “Stimulus” was all the rage one year ago, and for a time it seemed to be producing all the right effects. This was “reflation”, after all. Producer prices in China had been still negative as late as last August. That country’s Producer Price Index (PPI) had contracted for 53 consecutive months before turning slightly positive in September 2016. Then, like in so many other places around the world, inflation seemed to appear in forceful fashion all at once. For China’s PPI, that meant a 7.8% annual increase for February 2017, the highest inflationary burst since the worst of the Global Financial Crisis.

The House GOP Health Care Bill—Obamacare Lite by Any Other Name

Last week, the U.S. House of Representatives crafted a partisan compromise bill that endorsed and reinforced the Affordable Care Act, or Obamacare. This was done notwithstanding claims to the contrary by President Donald Trump and the House Republican leadership, who want us to believe that this bill, if it becomes law, will effectively repeal and replace Obamacare.

Obama Takes Private Jet, 14-Car Convoy To His $3.2MM Save The Climate Speech

Just yesterday we noted that President Obama pocketed $3.2 million for a 1.5-hour speaking gig at a climate change conference in Milan…an exorbitant fee, by anyone’s measure, which Dilbert creator Scott Adams most accurately described as a “pre-bribe.” And while we’re certain that Obama’s motivation to appear in Milan had absolutely nothing to do with the money, but rather was born out of a pure concern for Mother Earth, we do find his travel arrangements, in light of that genuine environmental concern, somewhat ironic.  Apparently, according to the Independent Journal Review, it takes a private jet, 14-car motorcade, 300 police and multiple helicopters patrolling overhead just to get one man to a conference…quite the carbon footprint.

Mind The Miami Condo Cranes—-The Flippers Are Drowning In Another Glut

Miami, particularly near the waterfront, has experienced one of the hottest post-housing-bust construction booms in the country, creating a veritable mecca for “preconstruction” condo flippers – often institutional investors – that are trying to make a buck. That this might eventually create a supply problem is clear. Alas, “eventually” got here in a hurry.

Trump Wants a New Afghan Surge. That’s a Terrible Idea.

As the Pentagon requests more troops and drops more and bigger bombs, it’s important to assess the dangers of another surge. And to consider whether another U.S. escalation can turn around an unwinnable war. Will Surge 2.0 be consequential, relevant, sustainable? Or will it be another futile chapter in an unwinnable war?………….The Taliban-led insurgency has grown at double-digit rates annually since 2005. The Special Inspector General for Afghanistan Reconstruction (SIGAR) just reported to Congress that security incidents throughout 2016 and continuing into the first quarter of 2017 reached their highest level since 2007. The insurgents now control about half of the country. Taliban shadow governments operate in virtually every province, and control several of them, including Helmand. Insurgents are pressuring government centers across the country, including besieged Kabul, where a suicide bomber blew up a U.S. military convoy on the doorstep of the U.S. Embassy this week.

Elon Musk’s Other Crony Capitalist Rip-Off

There are two things in which Elon Musk is an undisputed champion: creating hype and buzz for massively cash-flow burning products and companies, and abusing every possible loophole in the US tax code to get explicit and implicit subsidies from the government. He demonstrated the latter on Wednesday, when Tesla began taking orders for its solar roof tiles, a cornerstone strategy of Elon Musk’s strategy to sell a “green”, fossil-fuel-free lifestyle under the brand name of its luxury electric vehicles. First the bad news: Tesla said the product, which generates solar energy without the need for traditional rooftop panels – assuming one lives in a traditionally sunny climate – will be substantially pricier than a conventional roof but don’t worry, it will “look better” and ultimately pay for itself through reduced electricity costs… it just may take 20 or more years for the payback period to occur (more on the math below).

A Cloud Hangs Over the Oil Sector

As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.

Sound Advice From Dead Economists

The late economist Friedrich Hayek, celebrated earlier this week on the anniversary of his birthday, left an enduring body of work and a place in history as the reluctant winner of a Nobel Prize he thought suited only to the physical sciences. But exactly how enduring his work and his legacy will remain is an important question, and not just for Hayek. The mood in the West is not friendly to intellectuals, much less dead intellectuals. We prefer social media and short videos to books and lectures. We want someone else to provide easily-digestible ideas, concepts, and news, rather than seeking original sources for ourselves. We don’t have time for context or nuance. With limited knowledge of history, we tend to fetishize new over old, modernity over tradition, and data over theory. In our hubris, we imagine ourselves in a new era where old knowledge and wisdom no longer apply.But we do so at our own peril….