May 5: Daily Contrarian Reads

“All Hell Is About To Break Loose” In China Says Kyle Bass

China’s credit system expanded “too recklessly and too quickly,” and “it’s beginning to unravel,” warns Hayman Capital’s Kyle Bass. Crucially, Bass notes that ballooning assets in Chinese wealth management products are another sign of a looming credit crisis in the nation. “Some of the longer-term assets aren’t doing very well,” Bass said on Bloomberg TV from the annual Milken Institute Global Conference in Beverly Hills, California. “As soon as liabilities have problems – meaning the depositors decide to not roll their holdings – all hell breaks loose.” The wealth management products, or WMPs, have swelled to $4 trillion in assets in the last few years, he said., on a $34 trillion banking system…

Recession Dead Ahead

One of the major components is the rate at which banks make new loans. As you know, we gave up real, gold-backed money in 1971. Since then, credit is what drives the economy. It is no longer an economy that produces and consumes wealth; instead, it produces and consumes credit, which leads to higher and higher levels of debt. Our friend Richard Duncan, who runs the advisory service Macro Watch, warns that when the rate of new credit creation drops below 2% a year, a recession follows. Well, guess what… The current rate of credit creation – loans made by banks and other credit institutions – is now dropping below 2%… and seems to be headed to zero.

How To Avoid A Korean War—Get Off The Peninsula!

So the conflict “would not … hit America.” Of course, that’s small comfort to South Koreans, who are supposed to be our allies. And even so, U.S. casualties likely would be very high, as American forces rushed in to stop a North Korean invasion backed by biological, chemical, and perhaps nuclear weapons. Overall casualty estimates start in the tens of thousands and race skyward. To trigger the war which the U.S. has spent 64 years attempting to prevent would be extraordinarily foolish……Especially since there is a very easy way to remove the North Korean target from American cities. Withdraw U.S. troops from the Republic of Korea.

Peak Exuberance, Unreal Expectations & Financial Gravity

There have been numerous articles out as of late emphatically stating this cannot be a bubble as valuations are not as elevated as they were in 1999 nor are investors as “giddy” about investments as they were then. While it is easy to point at the exceedingly high valuations of the late 90’s as a benchmark for a “bubble,” that just happened to be the case in history that “blew the curve.”  If we look at a 10-year median of monthly P/E ratios, we get a different picture of the price individuals are paying for stocks today.

It’s Starting—Puerto Rico Triggers The Largest Ever Muni Bankruptcy

Puerto Rico’s Governor Ricardo Rosselló took the momentous step on Wednesday to trigger the largest municipal bankruptcy-type process in the US, four times larger than the prior record, Detroit’s bankruptcy. Puerto Rico’s population has declined by about 10% since 2004 to 3.4 million. Its economy has declined by as much since 2005. Unemployment is at 14%. Public deficits have ballooned. Puerto Rico and over a dozen agencies, after years of reckless spending amid an aiding and abetting bond market, piled up about $73 billion in debt. That this was a mega problem became official two years ago; bonds crashed, and bond insurers got clobbered.

Volatility Illusions And The Risk of Falling Dominoes

The ability to see beyond the observable and the probable is the most important and under-appreciated characteristic of successful investors. For example, visualize a single domino standing upright. With this limited perspective, one can establish what the domino is doing in the present and form expectations around what might happen if the domino falls. However, by expanding one’s viewpoint, you may discover the domino is just one in a long line of dominoes standing equidistant from each other. The potential chain of events caused by the first domino falling now offers a vastly different outcome. Many investors myopically focus on the trends of the day and fail to notice the line of dominoes, or what is technically known as multiple-order effects.

The Fed’s Ritual Incantation About The Nothingness of “Transitory”

In a world where everything is transitory, nothing is. The FOMC in its latest statement referred to that word yet again. As always, the context is weakness. But if such is always unexpected yet occurring, even if temporary, “transitory” doesn’t apply. Yet we go through the ritual each time anyway.

The Coming Collapse In U.S. Auto Sales

Automobiles are not moving off the parking lot. That’s according to an industry report that showed a sharp decline in auto sales across all auto makers—see table. Meanwhile industry inventories have been climbing up from an average of 55 days back in April of 2015 to 70 days last month. Coming after months of sluggish sales and generous incentives, the big drop in April sales could be a sign of an impending collapse which could parallel that of 2008-9. There’s a compelling reason for that: pent down demand, which for years has been  “stealing” sales from the future. Now the future has arrived and pent down demand is bad for auto makers, their investors and the economy as a whole.

Canary In The C-Suites—-Corporate Insiders Are Unloading Their Stocks Like There’s No Tomorrow

And that’s exactly what’s going on with the stock market right now. The people who would stand to lose the most if the markets crashed; the corporate executives and insiders, are all jumping ship and selling their stocks. As the investing public has continued to devour stocks, sending all three major indexes to record highs in the last few months, corporate insiders have been offloading shares to an extent not seen in seven years. Selling totaled $10 billion in March, according to data compiled by Trim Tabs. It’s a troubling trend facing an equity market that’s already grappling with its loftiest valuations since the 2000 tech bubble. If the people with the deepest knowledge of a company are cashing out, why should investors keep buying at current prices?

Irony of the Money Printers: Central Banks’ Obsession with Price Stability Leads to Economic Instability

According to the stabilizers’ way of thinking, if the price level is not stable, then the visibility of relative price changes becomes blurred and consequently, businesses cannot ascertain the relative changes in the demand for goods and services and make correct production decisions. Thus, it is feared that unstable prices will lead to a misallocation of resources and to the weakening of economic fundamentals. Unstable changes in the price level obscure changes in the relative prices of goods and services. Consequently, businesses will find it difficult to recognize a change in relative prices when the price level is unstable. Based on this way of thinking it is not surprising that the mandate of the central bank is to pursue policies that will bring price stability, i.e., a stable price level.