The reason this is more than an academic exercise is equally obvious; it’s not over with yet. Since 2007, the global economy has been captured not by a single depressionary instant dragged out in time. It has experienced instead repeating cycles of variable monetary dysfunction. Nothing ever goes in a straight line, though the stretching of time to its current ridiculous proportions can make it seem that way; the events of 2011, for example, have blurred in memory with those of 2013 or 2009.
Our assessment of the amount of debt outstanding in conjunction with what we are observing on new and used car lots, at department stores and restaurants offers some indication that we may be near a turning point in the credit cycle. This does not necessarily mean that a recession is imminent but if our concerns are valid, it certainly raises the probability of an economic downturn and quite possibly a catalyst to reverse the direction of asset prices. Given these dynamics and current market valuations, we continue to urge investors to proceed with caution.
The European Central Bank may not have as much flexibility left in its bond-buying program as Mario Draghi insists. As the Governing Council kicks off discussion about the future of its asset purchases, the question that will loom large is how much wiggle room policy makers have to extend their 2.3 trillion-euro program ($2.7 trillion). Not much, according to two economists. They believe the ECB’s decision to wind down bond buying next year will be a matter of necessity rather a choice.
The Ponzi Down Under: Unrealized Capital Gains Used to Collateralize Australian Investment Property Loans
THE Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a new report warns. The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.
The official policy goal of the Federal Reserve and other central banks is to generate 2% inflation annually. Put another way: the central banks want to lower the purchasing power of their currencies by 33% every decade. In other words, those with fixed incomes that don’t keep pace with inflation will have lost a third of their income after a decade of central bank-engineered inflation. There is a core structural problem with engineering 2% annual inflation. Those whose income doesn’t keep pace are gradually impoverished, while those who can notch gains above 3% gradually garner the lion’s share of the national income and wealth.
The rush into “robo-advisors,” stock trading apps and a surge in online trading accounts define point one. As Charles Schwab stated recently: “Clients opened more than 100,000 new brokerage accounts per month during the quarter, putting total new accounts at 362,000, the highest quarterly total in 17 years excluding acquisitions. New retail brokerage accounts grew 44% to 235,000 during the March-ended quarter for a total of 7.2 million accounts.”…..Hmmm…17-years ago was this statement from C.S. First Boston in 1999: “Trading volumes surged as much as 50 percent in January, after a 34 percent rise to a record 340,000 trades a day in the fourth quarter.”
Home sales in the Greater Toronto Area, the largest housing market in Canada, plunged 34.8% in August compared to a year ago, to 6,357 homes, with sales of detached homes and semi-detached homes getting eviscerated.
Except for the generals. Think of them as the last men standing. They did it. They took the high ground in Washington and held it with remarkable panache. Three of them: National Security Advisor Lieutenant General H.R. McMaster, Secretary of Defense and retired Marine General John Mattis, and former head of the Department of Homeland Security, now White House Chief of Staff, retired Marine General John Kelly stand alone, except for President Trump’s own family members, at the pinnacle of power in Washington.
With Hurricane Irma expected to make landfall in Florida sometime on Sunday according to the latest NHC forecast, investor attention is shifting to Catastrophe Bonds, which at least in some cases already, have lost as much as 50% of value in the past few days. For those unfamiliar, Catastrophe bonds (or CAT bonds) are a major category in the security class known as insurance-linked securities or ILS. Their purpose is to securitize, or crowd-source in the parlance of our times, reinsurance coverage, in order to reduce reinsurers’, insurers’, and self-insurers’ reserve requirements and reduce their cost of coverage. At the same time they are attractive to investors, because the risks they cover are virtually uncorrelated with other risks such as equity market risk, interest rate risk, and credit risk, and effectively offer a “prop bet” on catastrophic events taking place over a given time horizon, usually three years.
After the market low of 2009, margin debt again went on a tear until the contraction in late spring of 2010. The summer doldrums promptly ended when Chairman Bernanke hinted of more quantitative easing in his August 2010 Jackson Hole speech. The appetite for margin instantly returned, and the Fed periodically increased the easing. Even with QE now history, margin debt has reached another record high. The latest peak may not be a Fed-induced, easy-money bubble due to QE, but perhaps a response to the latest equity market rallies. It remains in high gear, as evidenced by the S&P 500 has logged over twenty record closes since the presidential election. For reference, last summer saw ten record closes and in November of 2014, there were twelve. As of this posting, the index is less than 1% below its latest record close.