Treasury Secretary Lew's Exit Memo: Eight Years of Progress at Treasury and a Look to the Future of American Financial Prosperity
WASHINGTON –U.S. Treasury Secretary Jacob J. Lew has authored a departure memorandum that recounts the progress and work of the U.S. Department of the Treasury over the last eight years. The memo then outlines Secretary Lew’s visions and goals for the future of the Treasury Department. The Secretary closes his departure memorandum with personal reflections on the importance of bipartisan cooperation, his optimism about America’s future, and his hope that future policymakers will take careful stock of the successes of this Administration as they consider the next steps forward. Please see the memo attached. Treasury Exit Memo.pdf The full text of the memo is below: Department of the Treasury Exit Memo Secretary Jacob J. Lew Cabinet Exit Memo │January 5, 2017 Introduction The Department of the Treasury (Treasury) is the executive agency responsible for promoting economic prosperity and ensuring the financial security of the United States. This role encompasses a broad range of activities, such as advising the President on economic and financial issues, encouraging sustainable economic growth, and fostering improved governance in financial institutions. Treasury’s mission was challenged like few times before in our nation’s history during the 2008 financial crisis. As few of us can forget, signs of trouble first emerged in the housing market, which set off a cascade of shocks in 2007 and 2008, including the collapse of Bear Stearns and Lehman Brothers, the freezing of credit markets, and the loss of trillions of dollars of wealth held by Americans in their homes, other assets, and businesses. By the time President Obama took office, the United States was in the midst of the worst recession since the Great Depression. The economy was shrinking at its fastest rate in 50 years and shedding more than 800,000 private-sector jobs per month. Unemployment peaked at 10 percent in 2009, a level not seen in over 25 years. The auto industry, an embodiment of American ingenuity and economic strength, was teetering on the edge of collapse; the deficit had hit a post-World War II high; and homes in neighborhoods across the United States faced foreclosure. Though the financial crisis was perhaps the most pressing challenge the country faced in 2008, it was far from the only one. Health care spending was on an unsustainable path, and millions of Americans lived in fear of facing a significant medical problem without insurance. Middle-class and working family incomes had stagnated for much of the previous three decades. Wealth disparities had grown to levels not seen since the 1920s. And after two major wars in the Middle East and strained relationships in many parts of the world, the standing of the United States around the world was in need of significant repair. We have come a long way as a country since 2008. In the following pages, I will recount the Administration’s record of progress, with a specific focus on the role Treasury has played. I will also articulate a vision for the future, and recommend steps to be taken in the coming years to make progress towards that vision. Finally, I will end with some personal reflections. Eight Years of Progress Economic Recovery Over the eight years since President Obama took office amidst the worst financial crisis of our lifetimes, we have seen a sustained economic recovery and a significant decline in the federal budget deficit. We have cut the unemployment rate in half. Our economy is more than 10 percent larger than its pre-recession peak. U.S. businesses have added a total of 15.6 million jobs since private-sector job growth turned positive in early 2010. Household incomes are rising, with 2015 seeing the fastest one-year growth since the Census Bureau began reporting on household income in 1967. And our financial system is more stable, safe, and resilient, providing the critical underpinnings for broad-based, inclusive, long-term growth. There are many factors that explain why the United States was able to bounce back so strongly from the recession. First and foremost, I credit the resilience of the American people. In addition, our policy response to the crisis was immediate and robust. Led by my predecessor, Treasury Secretary Tim Geithner, policymakers put in place a wide-ranging strategy to restore economic growth, unlock credit, and return private capital to the financial system, thereby providing broad and vital support to the economy. In February 2009, just 28 days after taking office, President Obama signed the American Recovery and Reinvestment Act, which provided powerful fiscal stimulus that resulted in a less severe recession and stronger recovery than we otherwise would have seen. Investments made through our Troubled Asset Relief Program (TARP) provided stability to our financial system, and the Automotive Industry Financing Program helped prevent the collapse of the U.S. auto industry. TARP also included housing initiatives that helped millions of struggling homeowners avoid foreclosure and lower their monthly payments. These efforts bolstered the housing market and strengthened consumer finances more broadly. And funds expended under TARP have been repaid in full, at a profit to taxpayers: in total, TARP invested $412 billion in financial institutions, large and small, during the financial crisis, and as of October 2016, these investments have returned $442 billion total cash back to taxpayers. Critically, we also acted quickly to reform our financial system, working with Congress to enact the most far-reaching and comprehensive set of financial reforms since the Great Depression: the Dodd-Frank Wall Street Reform and Consumer Protection Act. Wall Street Reform transformed the way the financial system operates, and Treasury and the financial regulators have continued to work together since its passage to implement important reforms such as the Volcker Rule, risk retention, and resolution planning for large, complex financial institutions. Because of these efforts, our system today is more stable, more transparent, and more consumer-focused. Wall Street Reform also created the Financial Stability Oversight Council, a body that looks across the entire financial system to identify future threats to financial stability, and the Consumer Financial Protection Bureau, a watchdog agency that is working hard to protect Americans from unfair, deceptive, or abusive financial practices. The progress we have made on implementing reform has resulted in a safer, stronger, and more stable American financial system—one better positioned to support growth rather than work against it, more likely for consumers to get fair treatment in their interactions with financial institutions, and less prone to major failures of financial firms that can harm Americans on Main Street. This progress must be sustained through continued follow-through, to avoid allowing a return to the recklessness and abuse that predated the worst global financial crisis of the last 80 years. A More Inclusive Economy Beyond working to bring our economy back from the brink and to spur growth, we also undertook efforts to ensure that more citizens have a fair shot at sharing in our nation’s prosperity. One of the Administration’s most significant achievements was the 2010 passage of the Affordable Care Act (ACA), which extended health insurance to millions of Americans who had not previously had it, allowed young adults to stay on the health plans of their parents, barred insurance companies from denying coverage to people with preexisting conditions, and strengthened Medicare’s solvency. Once the legislation was signed into law, Treasury implemented the law’s many new tax provisions. Beyond the ACA, the Administration made a number of other key changes to the tax code that has made our tax system significantly fairer and more equitable. Through programs like the Community Development Financial Institution Fund and myRA, and through extensive stakeholder engagement, Treasury has worked to promote access to the financial system for underserved and vulnerable populations. We also successfully worked with Congress to pass bipartisan legislation to enable Puerto Rico to undergo a financial restructuring. With continued commitment from policymakers in both the Commonwealth and the United States, this legislation will begin to put Puerto Rico on a fiscally sustainable path so that the 3.5 million Americans living there are not denied essential services and economic opportunity. Leading in the Global Economy As we put into place the financial regulatory framework to prevent future crises in the United States, we also led the international response to the crisis. We worked through the G-20 to help mobilize $5 trillion in fiscal stimulus, expand the resources of the international financial institutions by $1 trillion, and establish new institutions like the Financial Stability Board to prevent future crises. Our approach elevated the G-20 as the premier platform for international economic cooperation and put in place a demonstrated mechanism for international response. Following the financial crisis, many countries turned to policies of fiscal austerity, and Treasury vigorously advocated for a more balanced use of policy levers. Over the next several years, Treasury engaged closely with our partners and through the G-20 and other multilateral bodies to emphasize the need for short-term growth and longer-term structural reforms to put the global economy on stronger footing. Through our sustained engagement, we achieved a number of commitments from the G-20, including moving away from austerity-only fiscal policy and avoiding competitive currency devaluation. We have used the G-20 to advance a global growth agenda, and the U.S.-China Strategic & Economic Dialogue to foster increased bilateral economic coordination and engagement with China. Our sustained engagement with China has allowed us to exert positive pressure on Chinese exchange rate policy—whereas China once intervened in foreign exchange markets to drive down the value of its currency, in the past year, we have seen China intervene to prevent a rapid depreciation in the renminbi, which would have had negative consequences for the Chinese and global economies. Treasury also worked to solidify U.S. leadership by modernizing the international economic architecture to ensure that it would remain relevant in a changing world. In particular, securing the passage of International Monetary Fund (IMF) quota reform sustained U.S. leadership on the global stage. Our leadership in the IMF in turn enabled us to work through it to promote policies that supported U.S. economic and security objectives, such as economic stability in Ukraine and Greece. Promoting a Safer World Treasury has also continued to use its unique financial capabilities to address a variety of national security and foreign policy threats posed by terrorists, criminals and other bad actors. To address the changing threat posed by terrorism, including the threat posed by ISIL, we have worked with our international partners to deny terrorist financiers, fundraisers, and facilitators access to the international financial system with financial measures and targeted actions. Treasury’s sanctions against Iran played a critical role in forcing Iran to the table to negotiate a deal that cuts off the country’s pathways to a nuclear weapon. To hold Russia accountable for its aggression in eastern Ukraine and its occupation and attempted annexation of Crimea, we imposed sanctions that led to tighter financial conditions, weaker confidence, and lower investment in Russia. We also secured new domestic and multilateral sanctions measures against North Korea in the face of Pyongyang’s continued provocative behavior with regard to nuclear weapons and weapons of mass destruction. All the while, we have worked to craft a cohesive vision for the use of sanctions, in which sanctions are informed by financial intelligence, strategically designed, and implemented with our public and private partners to focus pressure on bad actors and create clear incentives to end malign behavior, while limiting collateral impact. In the face of emerging cyber threats, we have also made significant progress in coordinating cybersecurity efforts among financial regulators and the private sector, both domestically and internationally, to improve the financial sector’s resilience and to establish best practices for industry and government. A Vision for the Future Looking across the next five years, 10 years, and beyond, I see four major goals that mirror the progress above. Treasury should focus on: (i) continuing to promote more inclusive growth; (ii) moving from recovery to long-term fiscal health, (iii) remaining a leader in the global economy; and (iv) adjusting to the new threats in our world. Each of these goals brings with it major challenges that we must collectively overcome in order to reach them. Continuing to Promote Inclusive Growth Through the work of this Administration, the U.S. economy is growing again. But working families have not shared fully in the benefits of economic growth over the past decade, and there is evidence that our society has undergone structural changes that have fundamentally altered the basic social compact. It is crucial that the next Administration builds on the work already done to ensure that our prosperity is broadly shared. There are many aspects to inclusive growth, including: investing in infrastructure to create good middle-class jobs and lay the foundation for future growth, giving workers a stronger voice, enacting progressive tax policies, making quality education more available and affordable, and investing in retraining programs for those who have lost their jobs. One component most directly within Treasury’s purview is increasing access to the financial system; currently, many low-income and minority families are effectively locked out, operating without a credit card or banking history. Finding creative ways to increase access to the financial system—such as fostering new technologies—will help individuals and families transfer money and make payments safely and affordably. Financial inclusion allows people to manage life’s unexpected financial shocks, build long-term financial security, and take advantage of economic opportunities, like starting a business. Our inclusive growth agenda should not, however, be limited to domestic issues: more than 2.6 billion people live in poverty around the world, and more than two billion people rely solely on cash transactions. Moving underserved populations from a cash economy to formal banking not only increases their economic opportunity but also strengthens our ability to combat illicit and dangerous finance. Moving from Recovery to Long Term Fiscal Health The actions of this Administration, and the economic recovery those actions helped support, have sharply reduced deficits since 2009. However, both the Administration and the Congressional Budget Office project that, absent any changes in policy, the deficit will rise steadily over the next decade and beyond. Thus, while the actions of this Administration have put the country on a solid fiscal footing today, we must also focus on the long-term fiscal health of our nation. In recent years, the Administration has proposed a combination of smart investments and policy reforms that would keep the deficit under three percent of GDP for the next 10 years and nearly eliminate the fiscal gap over the next 25 years. Tax reform to curb inefficient tax breaks for the wealthy, close loopholes, and reform the taxation of capital income and financial institutions would make the tax system fairer and lower the deficit. Comprehensive immigration reform would boost labor force participation, productivity, and ultimately growth, directly addressing key fiscal challenges. Continued focus on health policy to further improve health care quality and control cost growth remains critical. This policy vision shows that investments in growth and opportunity are fully compatible with putting the nation’s finances on a strong and sustainable path. It also shows that responsible deficit reduction can be achieved without endangering vital support to poor Americans or undermining commitments to seniors and workers. Under President Obama’s leadership, there has been substantial economic and fiscal progress, showing what is possible when strategic investment to grow the economy is paired with smart reforms that address the true drivers of long-term fiscal challenges. While there is some scope for additional borrowing to finance smart investments in the next few years, ever-increasing borrowing is not sustainable as a long-run strategy, particularly when used to finance spending that does not generate higher growth or improvements for the middle class and in the case of deficit-increasing tax cuts, which deepen income and wealth disparities that are already a serious concern. Instead, the long-term fiscal health of the nation depends on smart investments in the middle class, tax reforms that close loopholes for the wealthy and ensure that everyone plays by the same set of rules, comprehensive immigration reform, and health reforms that build on our progress to date without sacrificing coverage or quality. Remaining a Leader in the Global Economy The United States must continue its long history of international economic leadership. Such leadership benefits American workers and families and enables the United States to project its values abroad to achieve its larger foreign policy objectives. Of course, the world has changed since the creation of our international financial architecture after World War II, and we must change with it. Perhaps somewhat counterintuitively, our influence internationally will increase if we share the benefits, as well as the responsibilities, of managing the global economic and financial system with emerging economies, such as China. Our influence, however, cannot be sustained if we either back away or insist on protecting the status quo. But we face a host of challenges. Our relationship with China is one of the most important in the world. While we have made much progress over the past eight years, the degree to which China is willing to takes the steps necessary to follow through on commitments to reorient its economy toward more sustainable growth, open up to foreign businesses, and be a partner in global governance, remains to be seen. As we saw from the example of Chinese exchange rate policy, engagement between the United States and China is an important means of maintaining pressure for China to implement policies that are necessary for China’s own medium and long-term economic health and to create a level playing field for the world economy. The UK’s decision to leave the European Union sent shockwaves through Europe and the world, and we must closely monitor the situation and continue to argue for the benefits of continued integration post-Brexit. Japan’s economy faces the ongoing challenges of an aging population and high public debt hampering the government’s ability to foster growth. We must also keep a watchful eye on emerging economies and the unique challenges they face. In particular, in recent years, we have made progress in our relations with Latin America, particularly with Mexico and Argentina, and we should build on that progress. Adjusting to the New Threats in Our World With the rise of state-sponsored and lone wolf terrorism, rogue nations, and international strongmen, we must address the reality that we live in a dangerous world. Making it safer means using every tool available—including the financial tools available to Treasury—to defeat and degrade terrorist organizations like ISIL. We must continue to leverage our ability to impose crippling sanctions on states and individuals to change behavior. We must seek to eliminate the proliferation of nuclear weapons. Cyber attacks on our financial system represent a real threat to our economic and national security, and maintaining vigilant and coordinated efforts to keep pace with and respond to these threats has been and will remain a crucial piece of Treasury’s work. And we must recognize global climate change for the economic and existential threat that it is and band together with the rest of the world to avert catastrophe. How to Make Our Vision a Reality How do we accomplish the goals laid out above? To be sure, there are a host of paths policymakers might take to do so, but I believe the following steps, which range from specific policy prescriptions to more general advice, are the most immediate. Infrastructure Spending Moving forward, we must redouble our efforts to make investments in our country’s transportation infrastructure, which help create middle-class jobs in the short term and drive broad-based economic growth in the long term. Indeed, by fixing our aging roads, bridges, and ports, we will help lay a foundation for widely shared economic expansion. The President’s business tax reform framework, discussed in more detail below, would generate substantial one-time revenues to fund new infrastructure investments. Paying for these investments by taxing overseas business profits would both be fiscally responsible and would help fix the perception that our tax system is not a level playing field. Continuing to come up with fresh, new ways to deploy capital will help the country achieve these goals. Effective partnerships between government and the private sector can play an important role in developing innovative solutions that efficiently leverage resources. And taking advantage of historically low interest rates to fund high-return public investments is simply smart fiscal policy. This Administration has long advocated for the creation of a national infrastructure bank, which would provide critical financing and technical support to foster public-private partnerships in U.S. infrastructure and establish a predictable source of long-term financing that would allow U.S. infrastructure to be consistently improved. Business Tax Reform Over the last eight years, Congress and the Administration have taken important steps to make the tax code fairer, support working families, and roll back unnecessary and unaffordable tax cuts for high-income families. In addition, using its administrative tools, the Administration has made substantial progress over the past eight years in combatting abusive tax practices. However, our business tax system remains in need of reform. As I have emphasized repeatedly throughout my time as Treasury Secretary, only Congress can enact business tax reform, which is necessary to remove incentives for businesses to relocate overseas, raise one-time revenues to promote infrastructure spending, and simplify tax compliance for smaller businesses. President Obama’s proposed plan for business tax reform sets out a framework for modernizing our business tax system. Among other elements, it would prevent companies from using excessive leverage in the United States to reduce their tax burden, impose a minimum tax abroad to help fight the global race to the bottom, impose a one-time tax on unrepatriated foreign profits, and reform the taxation of financial and insurance industry products. It also would close loopholes and special credits and deductions to lower rates without shifting the tax burden to individuals. Enacting such a plan would enhance our competitiveness and create an environment in which business rather than tax considerations drive decision-making. The President’s framework is also fiscally responsible, ensuring that business tax reform does not add to deficits over the long-term. I am hopeful that this framework will help to equip the new Congress to take responsible action on business tax reform. Housing Finance Reform Fixing our housing finance system remains the major unfinished work of post-financial crisis reform. Though the housing market has made significant strides thanks to efforts on the part of the Administration to help struggling homeowners, stabilize the housing finance system, and restore broader economic growth, many homeowners and neighborhoods continue to struggle. Fannie Mae and Freddie Mac remain in conservatorship and continue to rely on taxpayer support. Only legislation can comprehensively address the ongoing shortcomings of the housing finance system. A starting point for such legislation should be the principles President Obama laid out in 2013, which stressed a clearly-defined role for the government to promote broad access to consumer-friendly mortgages in good times and bad. While private capital should bear the majority of the risks in mortgage lending, reform also must provide more American households with greater and more sustainable access to affordable homes to rent or own. Global Economic Integration Global economic integration, including high-standards trade, leads to better economic outcomes than isolation and protectionism. High-standard trade agreements such as the Trans-Pacific Partnership can expand U.S. economic growth, open markets for American exports, and strengthen labor and environmental safeguards so that American workers can compete on a level playing field. But economic uncertainty, both domestically and abroad, threatens this framework. Whether driven by trade, technological advances, or the changing structure of the markets for labor and capital, these anxieties are real and deeply felt. In order to continue to enjoy the benefits of an integrated world, we need to focus on policies that address the real issues of inequality, such as slowing wage growth and increasing disparities in pay, to ensure that the benefits of trade are broadly felt. Strengthening the rules, alone, is not enough. To preserve this important engine of economic growth and international integration the United States and other advanced economies must also design and implement policies—including fiscal and tax policies—that advance the cause of inclusive, sustainable, and broad-based growth. Not all countries have the fiscal space sufficient to meet these needs, but after years of urging by the United States, policies of austerity are one-by-one giving way to policies designed to grow demand and improve incomes. The United States must continue to be an active voice in the global discussion of these issues. The United States must also maintain its leadership in the international financial architecture and ensure that the U.S.-led international financial system is adapting to best preserve U.S. interest in a changing world. This includes continued governance reforms of the IMF and multilateral development banks to reflect a changing world. Clear global rules create opportunities and incentives for innovation, invest, and work, which are critical to the United States and drive economic progress in other regions of the world. Continued Engagement with Challenging Partners Just as global economic integration has fueled economic growth, that integration—and our economic strength—provides us with additional tools to advance our priorities on the international stage. We should continue to use these tools judiciously to maintain pressure on those countries that take aggressive and destabilizing actions, such as Russia and North Korea, and provide sanctions relief when the targeted malign behavior changes, as with Iran and Burma. And, as we chart new courses with other countries, such as Cuba, we should be mindful of how we can use our economic tools to create the conditions for a changed relationship. We must always take care to avoid the overuse of sanctions, particularly our most unilateral tools like secondary sanctions that extend to non-U.S. persons. If we overuse these powerful tools, we risk lessening their impact when they are most needed and ultimately threaten our central role in the global financial system. Looking Forward with Optimism We have learned the hard way that deadlock does not produce good results—government shutdowns and near default on our debt cost the United States both economically and in standing around the world. It did not work in the 1990s, and it did not work over these past eight years. What has worked is finding opportunities in the sometimes quiet periods when bipartisan cooperation can lead to honorable compromise. In recent years, we have seen that targeted budget agreements could pave the way for more orderly and economically beneficial outcomes. We have seen that, on issues like creating a path forward for Puerto Rico and multi-year funding for our surface transportation programs, bipartisan compromise is still possible. But there is much more that requires this kind of progress. Treasury plays a critical role in finding areas where bipartisan solutions are possible. In a period when many thought little could be accomplished legislatively, we reached agreement on IMF Quota Reform, an approach to deal with Puerto Rico, and a permanent extension of expansions to the earned income tax credit and child tax credits that will reduce the extent or severity of poverty for millions of families with children. We have also used our existing authorities to limit corporate tax inversions, shed greater light on beneficial ownership to limit tax avoidance, realize tax parity for same-sex spouses, and opened relations with Cuba. And we have used our sanctions authorities to bring Iran to the negotiating table and limit the resources available to terrorist regimes and groups. I am proud of the record we have built over the past eight years. But during calmer economic times, policy makers are often tempted to roll back regulations, weaken reforms, and reduce oversight. I hope that future policymakers will take careful stock of the successes of this Administration as they consider the next steps forward. I remain an optimist about America’s future and wish the next team entrusted with responsibility for governing much success as it tackles the many challenges that remain and the new challenges that will present themselves over the coming years. Margaret Mulkerrin is the Press Assistant at the U.S. Department of Treasury. ###
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Fannie Mae reported that the Single-Family Serious Delinquency rate increased to 1.12% in November, up from 1.01% in October. The serious delinquency rate is down from 1.23% in November 2016.These are mortgage loans that are "three monthly payments or more past due or in foreclosure". The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.Click on graph for larger imageBy vintage, for loans made in 2004 or earlier (4% of portfolio), 3.05% are seriously delinquent. For loans made in 2005 through 2008 (7% of portfolio), 6.26% are seriously delinquent, For recent loans, originated in 2009 through 2017 (89% of portfolio), only 0.42% are seriously delinquent. So Fannie is still working through poor performing loans from the bubble years.This increase in the delinquency rate was due to the hurricanes - and we might see a further increase over the next month (These are serious delinquencies, so it takes three months late to be counted).After the hurricane bump, maybe the rate will decline another 0.5 percentage points or so to a cycle bottom, but this is pretty close to normal.Note: Freddie Mac reported earlier.
Freddie Mac reported that the Single-Family serious delinquency rate in November was at 0.95%, up sharply from 0.86% in October. Freddie's rate is down from 1.03% in November 2016.Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are mortgage loans that are "three monthly payments or more past due or in foreclosure". Click on graph for larger imageThis increase in the delinquency rate was due to the hurricanes - and we might see a further increase over the next month (These are serious delinquencies, so it takes three months late to be counted).After the hurricane bump, maybe the rate will decline another 0.2 to 0.4 percentage points or so to a cycle bottom, but this is pretty close to normal.Note: Fannie Mae will report for November soon.
Authored by Dave Collum via PeakProsperity.com, A downloadable pdf of the full article is available here, for those who prefer to do their power-reading offline. Introduction “He is funnier than you are.” ~David Einhorn, Greenlight Capital, on Dave Barry’s Year in Review Every December, I write a survey trying to capture the year’s prevailing themes. I appear to have stiff competition - the likes of Dave Barry on one extreme and on the other, Pornhub’s marvelous annual climax that probes deeply personal preferences in the world’s favorite pastime. (I know when I’m licked.) My efforts began as a few paragraphs discussing the markets on Doug Noland’s bear chat board and monotonically expanded to a tome covering the orb we call Earth. It posts at Peak Prosperity, reposts at ZeroHedge, and then fans out from there. Bearishness and right-leaning libertarianism shine through as I spelunk the Internet for human folly to couch in snarky prose while trying to avoid the “expensive laugh” (too much setup). I rely on quotes to let others do the intellectual heavy lifting. “Consider adding more of your own thinking and judgment to the mix . . . most folks are familiar with general facts but are unable to process them into a coherent and actionable framework.” ~Tony Deden, founder of Edelweiss Holdings, on his second read through my 2016 Year in Review “Just the facts, ma’am.” ~Joe Friday By October, I have usually accrued 500 single-spaced pages of notes, quotes, and anecdotes. Fresh ideas occasionally emerge, but most of my distillation is an intellectual recycling program relying heavily on fair use laws.4 I often suffer from pareidolia—random images or sounds perceived as significant. Regarding the extent that self-serving men and women of wealth do sneaky crap, I am an out-of-the-closet conspiracy theorist. If you think conspiracies do not exist, then you are a card-carrying idiot. Currently, locating the increasingly fuzzy fact–fiction interfaces is nearly impossible thanks to the post-election bewitching of 50 percent of the populace. “The best ideas come as jokes. Make your thinking as funny as possible.” ~David Ogilvy, marketing expert You might be asking, “What’s with the title, Dave? My 401K is doing great, and I own a few Bitcoin!” Yes, indeed: your 401K fiddled its way to new highs day after day, but this too shall pass—it always does—and not without some turbulence. This year was indeed a tough one to survey. As many peer through beer goggles at intoxicatingly rising markets, I kept seeing dead people (Figure 1). “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping: I admit to not understanding it.” ~Richard Thaler, winner of the 2017 Nobel Prize in Economics Figure 1. An original by CNBC's Jeff Macke, chartist and artist extraordinaire. A poem for Dave's Year In Review The bubble in everything grew This nut from Cornell Say's we're heading for hell As I look at the data…#MeToo [email protected] Some will notice that in decidedly political sections, the term “progressives” is used pejoratively. Their behavior has become nearly incomprehensible to me. My almost complete neglect of the right wing loonies may reflect some bias, but politically, they have taken a knee. They have become irrelevant. Free speech is a recurring theme, introducing interesting paradoxes for employee–employer relationships. Some say I have no filter. They obviously have no clue what I want to say. In case my hints are too subtle, I offer the following: Sources I sit in front of a computer 16 hours a day, at least three of which are dedicated to non-chemistry pursuits. I’m a huge fan of Adam Taggart and Chris Martenson (Peak Prosperity), Tony Greer (TG Macro), Doug Noland (Credit Bubble Bulletin), Grant Williams (Real Vision and TTMYGH), Raoul Pal (Real Vision), Bill Fleckenstein (Fleckenstein Capital), James Grant (Grant’s Interest Rate Observer), and Campus Reform—but there are so many more. ZeroHedge is by far my preferred consolidator of news. Twitter is a window to the world if managed correctly. Good luck with that. And don’t forget it’s public! Everything needs an open mind, discerning eye, and a coarse-frit filter. “You are given a ticket to the freak show. When you’re born in America, you are given a front row seat, and some of us get to sit there with notebooks.” ~George Carlin, comedian Contents Footnotes appear as superscripts with hyperlinks in the “Links” section. The whole beast can be downloaded as a single PDF xxhere or viewed in parts—the sections are reasonably self-contained—via the linked contents as follows: Part 1 Introduction Sources Contents My Personal Year in Review Investing Economy Broken Markets Market Valuations Market Sentiment Volatility Stock Buybacks Indexing and Exchange-Traded Funds Miscellaneous Market Absurdities Long-Term Real Returns and Risk Premia Gold Bitcoin Housing and Real Estate Pensions Inflation versus Deflation Bonds Banks Corporate Scandals The Fed Europe Venezuela North Korea China Middle East Links in Part 1 Part 2 Natural Disasters Price Gouging The Biosphere and Price Gouging Sports Civil Liberties Antifa Harvey Weinstein and Hollywood Political Correctness–Adult Division Political Correctness–Youth Division Campus Politics Unionization: Collum versus the American Federation of Teachers Political Scandals Clintons Russiagate Media Trump Las Vegas Conclusion Books Acknowledgements Links in Part 2 My Personal Year in Review Who cares what an academic organic chemist thinks? I’m still groping for that narrative. In the meantime, let me offer a few personal milestones that serve as a résumé while feeding my inner narcissist. I remain linked into the podcast circuit, having had chats with Max Keiser and Stacy Herbert (Russia Today aka RT),5 Chris Martenson,6 Jim Kunstler (The KunstlerCast),7 Lior Gantz (Wealth Research Group),8 Anthony Crudele (Futures Radio Show),9 Susan Lustick (News-Talk 870 WHCU),10 Jason Burack (Wall St. for Main St.),11 Dale Pinkert (FXStreet),12 Lance Roberts (Lance Roberts Show),13 and Jason Hartman (Hartman Media Company).14 I also spoke at Lance Roberts’s Economic and Investment Summit discussing campus politics15 and the Stansberry Conference (Figure 2) arguing the merits of price gouging.16 I got into a big spat with the American Federation of Teachers and some local social justice warriors that made it to the national press (see “Unions”) and dropped 30 pounds unaided by disease. “And, before anyone should doubt what a chemistry professor would know about unions and what effect they would have, it should be noted that Collum has amassed a following for his annual 100-page papers on the state of business and politics. Turns out, he knows a thing or two about economics and politics as well.” ~Joe Cunningham, RedState Figure 2. The lovely Grant Williams, brainy Danielle DiMartino Booth, and one of the Paddock brothers in Las Vegas. On the professional side, I had a great year: I finished my stint as department chair; started a sabbatical leave; broke my single-year total publication record; and broke my single-year record for papers in the elite Journal of the American Chemical Society. I attempted to extend a contiguous string of 20 federal grants without a rejection by submitting two NIH grants and subsequently got totally blown out of the water. (OK. I’m still walking that one off. I think the panel finally noticed that I am deranged.) I was accepted into an organization called the Heterodoxy Academy, whose membership includes hundreds of tenured professors standing up for free speech on college campuses.17 “My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.” ~Jason Zweig, Wall Street Journal columnist Investing “I dig your indefatigable bearishness, my friend.” ~Paul Kedrosky, one of the earliest bloggers I’m sensing a tinge of Paul's sarcasm. My net worth from January 1, 2000, has compounded at a ballpark annualized rate of 7 percent. That’s not so bad, but the path has been rather screwy. From mid ’99 through early ’03, I carried cash, gold, silver, and a small short position. I kept buying gold through about 2005 (up to $700 an ounce), resumed in 2015, and bought several multiples of my annual salary’s worth in 2016. I’m done now. Gold is up 8 percent, and silver is down –2 percent in 2017 thanks to a minor end-of-year sell off. The spanking from ’11 to ’15 seems to have subsided. Precious metals, etc.: 29% Energy: 0% Cash equivalent (short term): 62% Standard equities: 9% “Most people invest and then sit around worrying what the next blowup will be. I do the opposite. I wait for the blowup, then invest.” ~Richard Rainwater I was totally blindsided by the downturn in gold starting in ’11 and energy in ’13. (Energy peaked in ’08 but was on the mend until ’13.) I bought energy steadily starting in ’01 with broadly based energy funds and a special emphasis on natural gas. The timing of entry was impeccable and all was going swimmingly—I was a genius!—until the Saudi oil minister attempted to talk oil down from $110 to $80 per barrel18 in '13. He thought he could blow the frackers out of the game fast, but it was a hold-my-beer moment for our credit system. The frackers kept fracking, the oil price overshot the Sheik's target by $50 per barrel, and I got whacked for 30–45% losses over four years starting in '14.19 It is impossible to know when you’re being a highly disciplined buy-and-hold investor—a Microsoft and Apple gazillionaire refusing to sell—or just an idiot. I sensed that the rotten debt had been purged and we were through the worst of the energy downturn. I worried that a recession could do a number on me, but it took years to get to my position through incremental buying. I’m holding on, goddammit! We seem to be running out of downside. Unbeknownst to me until October, however, my employer had liquidated my energy funds—every last one of them—and put me in a life-cycle fund in April. Sell ’em after they plummet? Thanks guys. A rational investor, if committed to hold them, would undo the general equity fund restrictions—I did—and buy the energy funds right back—I didn’t. Friends in high places all said to wait. About a week later, the Middle East erupted in what looked like a sand-to-glass phase transition (see “Middle East”), and energy started to move in sympathy. Peachy. Fidelity actually saved me a little money, but I am still white-knuckling the cash, growing a long wishlist, waiting for a generalized sell-off/recession to offer some serious sub-historical-mean bargains (see “Broken Markets”). The correction in ’09 at the very bottom brought us to the historical mean, but not through it. For this reason, I have largely skipped this equity cycle. The current expansion is long in the tooth and founded on poor fundamentals. I hope that the wait won’t be too long. Until then . . . “Remember, when Mr. Market shows up at your door, you don’t have to answer.” ~Meb Faber, co-founder and CIO of Cambria Investment Management Economy “A decade after the biggest crisis since the Depression, a broad synchronized recovery is under way.” ~The Economist, March 2016 Whoa! Fantastic! Goldilocks survived another bear. There is just one hitch: that was a total load of crap in 2016, and it’s a colossal load now. Let’s take a peek at a few gray rhinos—“large and visible problems in the economy that are ignored until they start moving fast.” GDP growth rates from 1930–39 and 2007–16 were as follows:20 GDP growth in the 1930’s 1930: –8.5% 1935: 8.9%1931: –6.4% 1936: 12.9%1932: –12.9% 1937: 5.1%1933: –1.3% 1938: –3.3%1934: 10.8% 1939: 8.0% GDP growth in the new millennium 2007: 1.8% 2012: 2.2%2008: –0.3% 2013: 1.7%2009: –2.8% 2014: 2.4%2010: 2.5% 2015: 2.6%2011: 1.6% 2016: 1.6% Whether you use the arithmetic or geometric mean, both gave us 1.3 percent annualized growth. Let’s spell this out: during the recent era in which markets soared, the economy tracked the Great Depression. It is instructive to look at the economy with a little more granularity than the writers at The Economist-Lite. According to John Mauldin, total domestic corporate profits have grown at an annualized rate of just 0.1 percent over the last five years.21,22 Goldman’s Abby Joseph Cohen says R&D spending is down to 2.5 percent of GDP from 4.5 percent and is a drag on the economy.23 Economic bellwether General Electric saw revenue drop 12 percent and earnings fall 50 percent year-over-year,24 and these numbers are aided by the company’s legendary creative accounting schemes.25 Meanwhile, corporate America witnessed a 71 percent rise in business debt since 2008. According to economist Lacy Hunt, “It’s the investment, the real investment, which grows the economy,” prompting the legendary market maven @RudyHavenstein to state dryly, “I like Hunt.” Where are they spending all that borrowed money? Hold that thought. Long-term demographic problems—“quantitative aging” (Figure 3)—exacerbated by dropping sperm counts26 suggests the economy will continue to shoot blanks. Figure 3. Demographics looking sketchy. Putative job gains affiliated with this low growth are fragile if not dubious as hell and are being boosted by the “Dusenberry effect”—consumers’ reluctance to stop spending even after their income drops—which will cause the next recession to be a real Dusey. (Sorry.) Eventually, common sense prevails as companies run out of credit and savings-deficient consumers reassume the fetal position. According to extensive work by Ned Davis Research, cash levels among households are near their lowest levels of all time; consumer resiliency is always temporary. “When it is all said and done, there are approximately 94 million full-time workers in private industry paying taxes to support 102 million non-workers and 21 million government workers. In what world does this represent a strong job market?” ~Jim Quinn, The Burning Platform blog The Bureau of Labor Statistics has turned to Common Core math. How can we have 100 million working-age adults—40 percent of the working-age population—not working, 4 percent unemployment, and employers claiming the labor market is tight? Are 90 percent of those without jobs professional couch potatoes? Let’s first look at employment in some detail and then address that whole “tight” part. Googles of pixels have been dedicated to the obligatory labor force participation rate (Figure 4), a critical component of any economic debunking. Of those employed, 26 million people are in low-wage, part-time jobs (Figure 5), 8 million hold multiple jobs, and 10 million are “self-employed.”27 Another 21 million work for the government, which means they are a tax on the free market. In 2016, 40 percent of new jobs were fabricated through the specious “birth and death model.”28 2017 will presumably post similar numbers. Occasional reports of large job growth are deceptive. July, for example, witnessed 393,000 benefit-free, part-time, low-skill jobs offset by a drop of 54,000 full-time workers. Payroll numbers keep coming in lower than expected, which economists invariably blame on some big, yet unseen effect they are paid to notice. Nine out of 10 millennials living on their parents’ couches a year ago are still clutching TV remotes.29 There are now 45–50 million Americans on food stamps, up from 14 million in December 2007,30 when the last recession was already underway. Figure 4. Labor force participation. I am going to let Jeff Snyder take a crack at explaining the tight labor market:31 “The economy is tight, not favourably tight as in no slack in the labour market, but more so tight in that there is little margin for addition. . . . The reality in the markets is this: executives are reluctant to pay wages at a market-clearing rate.” ~Jeff Snyder, Alhambra Investments Figure 5. Low-paying service jobs versus manufacturing jobs. Poor economic numbers are pervasive. Auto sales are canaries in the coal mine and getting crushed despite aggressive incentives.32 Ford is already suffering and predicting a multi-year slowdown.33 A car industry crunch analogous to that in ’09 may appear in ’18 as expiring leases leave consumers underwater owing to dropping used car prices, and decreasing profits in the auto industry may “then turn from secular to structural problems.”34 Morgan Stanley predicts a 50 percent drop in used car prices over the next 4–5 years,35 which will gut the new car business. The auto downturn has already begun. Wells Fargo is reporting large drops in auto loans after a long stretch during which subprime car loans flourished yet again.36 That should put a fork in the new car market. Yield-starved investors are chasing cash- and income-starved car buyers. Subprime auto-asset-backed securities will take yet another beating. Chrysler is teaming up with Santander Consumer USA to push out “unverified income” subprime auto loans using “automated decision making.” Santander seems to have nine lives, and they’ll need all of them. The hyperdeveloped loan market for used cars, however, is already faltering (Figure 6); delinquency rates are rising. Goldman expects “challenging consumer affordability” and has downgraded General Motors to “sell.”37 Those cars y’all bought on cheap credit yesterday will not be bought tomorrow. Claims that the hurricanes cleared out auto inventory38 are grotesquely underestimating the magnitude of the overhang and will be paid for by reduced consumption in other sectors. Any consumption pulled forward with debt has a deferred cost. Figure 6. Some key auto industry stats (a) loans and leases, (b) loan delinquencies. We’ll take a crack at the housing market in its own section and simply note here that the cost of renting or buying normalized to income has never been higher. Approximately half of tenants spend more than 30 percent of their income on rent, doubling from a decade ago.39 A survey of 20 cities showed that housing costs are growing at a 6 percent annualized pace. Our paychecks are not. Housing is a bubblette and likely to offer fire-sale bargains again. What many fail to grasp is that the reduced cost of borrowing owing to low rates is offset by higher prices. When interest rates were 15 percent, houses were cheap. Austrian business cycle theory says easy money policies generate overdevelopment and other malinvestment. The day of reckoning appears to be here. (I say that every year…channeling Gail Dudek.) Familiar brands like Toys “R” Us (my keyboard has no backwards R), JCPenny, Abercrombie & Fitch, Sears, Bon-Ton, and Nordstrom are gasping their last gasps before drowning in debt with no customers to save them. Total retail revenues and sales (including online) are up only 28 percent from the 2007 high.40 The management of Ascena Retail referred to an “unprecedented secular change.”41 More than 100,000 retail jobs have vaporized since October 2016.42 Credit Suisse estimates that more than 8,000 retail outlets closed this year.43 Consumer goods companies have held up better because consumers generally put off starving or freezing to death until all options are exhausted. Restaurants are extending the longest stretch of year-over-year declines for 16 consecutive months (last I looked).44 Business Insider blames millennials because they are “more attracted than their elders to cooking at home” (particularly when it’s their parents’ home.) Manhattan retail bankruptcies are called “horrifying.”45 Chapter 11s and company reorganizations in foreign courts increased sevenfold.46 Mall owners are using jingle mail—a term from the ’08–’09 crisis referring to leaving keys to creditors. Commercial retail will be coming into its own refinancing wave in 2018. Bears are sniffing around commercial-mortgage-backed securities as malls around the country begin to die.47 The next downturn will finish many of them off. Exchange-traded funds (ETFs) are positioning to short the brick-and-mortar retail. (Quick: somebody grab the ticker symbol “MAUL.”) Some suggest the Rout in Retail is merely a secular shift to online. Sounds logical except online sales represent only 8.5 percent of total retail sales.48 This argument might be masking a huge downturn in retail corresponding to the bursting of yet another Fed-sponsored bubble. As Amazon encroaches on every nook and cranny of retail sales, what began as a murmur has turned into a chorus: “This isn’t fair; somebody must do something!” Walmart knows this plotline. Market dominance does not connote “monopoly,” but Amazon has an image problem. Amazon gets a $1.46 subsidy (discount) per box from the USPS, well below its cost.49 Seems cheesy. Congress is showing concern out of self-interest. A monopoly is when a company uses its power to blow its competitors out of the water garishly. Who decides what is garish and when enough is enough? A judge under political pressure. A detailed summary of the breadth of Amazon’s market share and its anti-competitive pricing suggests that we are getting close.50 There’s nothing like a protracted anti-trust suit to mute the growth of a large conglomerate. Just ask the Microsoft high command. If our problems are not Amazon, what are they? Austrian business cycle theory says that our debt-driven, consumer-based economy endorsed by sell-side economists and analysts worldwide is unsustainable. Wealth is made, mined, grown, or coded, only then do you get to consume it. Wealth is extinguished by consumption, depreciation, and destruction. Central bankers seem to believe you can will wealth into existence by generating animal spirits. The next recession will start unnoticeably. Economists seem to miss every single one, often declaring telltale indicators irrelevant. Then you will hear phrases like “technical recession,” “growth recession,” or “earnings recession,” all eventually giving way to somebody opening the Lost Arc. If the next recession flushes the waste products (malinvestment) left behind by the central-bank-truncated ’08-’09 recession, it will reveal the central bankers to be charlatans. Even a typical recession witnesses near 40 percent losses in equity portfolios, which will leave already immunocompromised consumers vegetative. Banks will constrict lending to preserve capital, further slowing the economy. Weak businesses living off easy credit will become pink mist. An accelerating vicious cycle downward will take with it formerly viable businesses that could have survived a less arrogant monetary policy. This collateral damage was avoidable at least in its magnitude, but it can’t be avoided now. Are we on the cusp of the next recession? Citigroup “clients” say not even close (Figure 7). I think we are staring into the abyss. Figure 7. June 2017 Citigroup client survey of recession odds. Will this expansion continue because it has been pathetic or die because it is old? I cast my vote for the latter. The Fed and its central bank brethren, whether to retrieve residual credibility—they have precious little—or out of the deep-seated, albeit misguided belief that they are in charge of the economy, have decided it is time to “normalize rates” and undo quantitative easing. (We are now forced to accept the equally silly term “quantitative tightening.”) You can blame the ensuing problems on the tightening if you wish, but the huge mistakes were made long before this tightening cycle commenced. Every postwar recession until now was been preceded by a tightening cycle (although not all tightening cycles lead to recessions). Why not simply refuse to tighten? It won’t work, but the Fed governors are probably entertaining this possibility. “The central banks did their job. Unfortunately, almost nobody else has done theirs.” ~Martin Wolf, Financial Times “As has come to be commonplace, almost everything Mr. Wolf suggests is incorrect.” ~Tim F. Price, Cerberus Capital and author of Investing Through the Looking Glass (see “Books”) I’ll close this discussion with a brief mention of “creative destruction,” the process by which the new (and improved) ushers out the decrepit and out-of-date. It is a central tenet of capitalism—survival of the fittest—but has a disruptive dark side. McDonald’s (and every other service industry) is turning to kiosks to replace more costly human labor. Driverless cars will be awesome but also force car-based workers—potentially millions of them—to find new work. The financialization of the economy by central bankers has tipped the capital–labor balance profoundly toward capital. We will produce goods better and more efficiently, but the Darwinian adjustments will rock the system. Accelerated product cycles facilitated by excess capital can also be highly inefficient. The Erie Canal was completed in 1825 and faced its own black swan—railroads—that same year. Blockbuster was offed by Netflix as fast as it appeared. Can creative destruction happen too fast? Have product cycles become too short? Bulldoze your house every five years to build a better one and tell me how that works. Loose credit accelerates creative destruction, but not without a price. “A high initial saving rate has been associated with subsequently stronger economic growth, while a low saving rate produces a lower growth pattern.” ~Lacy Hunt, economist, noting soaring consumer debt Broken Markets “I think we have fake markets. . . . Everything is so tight, it is hard to pick a winner from a group that is fake.” ~Bill Gross, Janus "One word characterizes why the bull market can go on for years…'Goldilocks'" ~Sam Ro, Yahoo Finance “I’m not worried about the economy so much; what I’m concerned about is valuation.” ~David Swensen, Yale University’s longtime CIO "I think the bull market could continue forever." ~Jim Paulsen, Wells Fargo Regression to the mean is a force of nature. It is also a mathematical truism that markets reside below the mean for half of their price-weighted existence. The failure to go through the mean in ’09 is an anomaly caused by global central bankers that remains as an IOU on investors’ balance sheets and foreshadows trouble to come. Our system is constantly being overtly displaced from equilibrium by central bankers who view displacement as their mandate. Physical scientists know that any system displaced from equilibrium tends to return to equilibrium. The French physicist Carnot, often called the father of modern thermodynamics, showed that the round trip necessarily comes at a cost no matter how efficient the process: it’s a law of physics. Any chemist will tell you that a system massively displaced often returns with a considerable cost: you blow up your laboratory. Geologists? Volcanoes and earthquakes. Ski bums? Avalanches. How far are asset markets from equilibrium? The pros have some opinions: “Asset valuations historically aren’t way out of line, but elevated I would say, relative to historical averages.” ~Lael Brainard, Federal Reserve governor “Measured against interest rates, stocks actually are on the cheap side compared to historic valuations.” ~Warren Buffett, Berkshire Hathaway, channeling the Fed model “Compared to the Dutch Tulip Mania of 1637, stocks still look undervalued.” ~Rudy Havenstein (@RudyHavenstein), Funniest Tweeter of the Millennium Case closed. Let’s get a six-pack and watch football. The problem is that Brainard is a Fed governor, Havenstein is nuts, and Buffett is known for spewing some serious bullshit. Buffett’s favorite indicator—market cap to GDP—is double the historical mean (vide infra)—what market analyst John Hussman calls “historically offensive valuations.” Buffett also wrote an article in 1999 stating without qualification that returns are not about the economy at all.51 Secular bull markets are powered by falling interest rates and secular bear markets by rising rates. With interest rates at multi-century lows, it seems likely the old codger knows that his implicit reliance on the Fed’s valuation model is lunacy. As an aside, Berkshire has the largest cash hoard in its history—$100 billion—and it’s not being used to buy stocks that are “on the cheap side.” Others, only partially impeded by cognitive dissonance and the task of selling assets at any cost, seem to have neurons firing spasmotically (sense something): “We think the market still has the potential to move higher as investors capitulate into equities.” ~Merrill Lynch “Folks, I have been in this business for over 46 years, and observing markets with my father for 54 years, and I have never experienced anything like what is currently happening. . . . There are years left to run in this one.” ~Jeff Saut, Raymond James “It seems like uncertainty is the new norm, so you just learn to live with it.” ~Ethan Harris, global economist at Bank of America Merrill Lynch The fear of missing out (FOMO) is driving the markets way out over their skis. Markets could get much crazier, of course, but as any serious blackjack card counter will tell you, when the deck is stacked against you, size your bets accordingly. "If you pay well above the historical mean for assets, you will get returns well below the historical mean." ~Paraphrased John Hussman This Hussman quote is a recycle from last year but well worth repeating to make sure you understand it. He goes on to channel Ben Graham by noting that the devastating losses come from purchasing low-quality securities when times are good. The Hussman quote also pairs well with ideas about valuation I cobbled together from a well-known maxim about savings: “Overvaluation is appreciation pulled forward.” “Undervaluation is deferred appreciation.” ~David Collum This one passed the Google test for originality. I don’t know about you, but I want my appreciation in the future, or as James Grant (channeling Joe Robillard) likes to say, “I want everybody to agree with me . . . only later.” Valuations are meaningless as long as market participants are determined to buy stocks, but that mood will change at some point. Once markets are overvalued, however, you will give back those and any further gains during the next irrepressible regression to the mean, more so as you linger below the mean. I hasten to add that slight overvaluation is not a problem: the regression will be embedded within the noise. If, however, markets are way overvalued, an unknowable but inevitable combination of price drop and time—a retrenchment that could last decades—will usher invested boomers to the Gates of Hell. What do current valuations tell us about future returns assuming the laws of thermodynamics have not been repealed? Market Valuations “The median stock in the S&P has never been valued higher than it is today.” ~Jesse Felder, The Felder Report “There’s just no other way to say it: the market is insanely overvalued right now. It’s the longest recovery in history. It’s also the weakest. But you’d never know it from the stock market.” ~ David Stockman, former Reagan economic advisor and former Blackstone group partner “We are observing an episode that will make future investors wince. Just like the two closest analogs, the 1929 high and the tech bubble, I expect that future investors will shake their heads in wonder at the stark raving madness of it all, and ask what Wall Street could possibly have been thinking.” ~John Hussman, Hussman Funds “The gap between the S&P 500 and economic fundamentals can now be measured in light years.” ~Eric Pomboy, president of Meridian Macro Research "I believe fragilities today are much more systemic on a global basis than back in 2007. Where’s the Bubble? Virtually everywhere… The scope of today’s global Bubble goes so far beyond 2007." ~Doug Noland, McAlvaney Wealth Management It took a few years to blow up yet another equity bubble—referred to fondly by Jesse Felder and others as the “everything bubble”—but determined central bankers are not in short supply. A host of metrics point to a very mean regression cited below. As I rattle off a few stats, bear in mind the serious yet unknowable losses possible if regression rips through the mean. “Russell 2000 with a 75 p/e is just astronomical.” ~Jesse Felder Starting simple: McDonald’s saw zero revenue growth between 2008 and 2016 but had a 154 percent growth in debt. Its share price is up more than 200 percent. This is not an outlier. Additional examples assembled by Mike Lebowitz of 720Global are shown in Figure 8. I know it’s a table, but look at the contrasting revenue growth versus share price gains! Figure 8. Revenue growth versus price change. “And please don’t claim corporate profits are soaring, so the valuations are justified. . . . Corporate profits are unchanged since 2014—no growth at all.” ~Charles Hugh Smith, Of Two Minds blog The S&P 500 resides 70 percent above its ’07 high even though nominal GDP and total sales rose 10 percent during the same period. Price-to-revenue ratios are sharing the nosebleed seats with 1929 and 2000 (Figure 9).52 Buffett’s market cap–to-GDP indicator is no better, prompting Felder to guesstimate prospective 10-year returns—returns going to somebody else, apparently—at -2.6% annualized.53 In case you suck at math, you will be 10 years older, 33 percent poorer, and in need of a 50 percent gain to stumble your way back to even. Ever the optimist, John Hussman and his relatively complex valuation model, which shows high correlations when back-tested, predicts 60–70 percent losses over the next 10 years.54 To help the value-driven bottom-feeders, Hussman broke down the markets by valuation “deciles” and found that even the deep-value guys are looking at a >50 percent haircut—“haircut” sounds better than “castration” or “blood eagle”—at the end of the current market cycle.55 “Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. . . . What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? . . . After years of running into the wind, we are left with no sense stronger than, ‘it will turn when it turns.’ . . . Just because AMZN can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.” ~David Einhorn with tongue in cheek The legendary Howard Marks, using non-GAAP earnings (with a 25 percent fictional fudge factor)56 to calculate trailing P/E ratios, sees a 40 percent regression to the mean. The Case-Shiller weighted P/E ratio—far superior to the non-GAAP alternatives—is in the top 3 percent of historical readings,57 prompting Bob Shiller to dryly note that the markets are “at unusual highs.” (By the way, it was Shiller who slipped Greenspan the phrase “irrational exuberance.”) Dividend yields have flopped around over the centuries. A 56 percent equity decline is required to attain the 150-year historical average of 4.4 percent—assuming reduced cash flows owing to the price collapse don’t lead to dividend cuts.58 Tobin’s Q—essentially price-to-book value ratio and the favorite of Mark Spitznagle—is at all-time highs. The Economist sounds dismissive by suggesting that “a high Tobin’s Q signals that an industry is earning a lot from its assets,"59 which suggests that The Economist is underutilizing its intellectual assets. Figure 9. Valuation metrics from Grant Williams’s World of Pure Imagination.60 Consistency aside, how can these predictions possibly be correct? The reported P/Es are not that bad. The high-growth QQQ index, for instance, is sporting a P/E of only 22, and the Russell 2000—the small-cap engine of economic growth—is in the same neighborhood. Alas, Steve Bregman of Horizon Kinetics notes that the P/E of the QQQ is calculated by rounding all P/Es above 40 down to 40 and assigning a P/E of 40 to all negative P/Es—companies losing money, aka Money Pits.61 For some of the largest companies in the QQQ—think Amazon—with almost no GAAP earnings, these little fudge factors are not just rounding errors. In the scientific community, we call such adjustments “fraud.” Bregman pools the market caps and earnings to give a more honest analysis, which gently nudges the QQQ P/E to 87. In short, Wall Street is “making shit up.” Mark Hulbert, noting that more than 30 percent of the Russell 2000 companies are losing money, concurs with Bregman and suggests that the rascals at the parent company would get a P/E of 80 if they weren’t fibbing like teenagers.62 Market Sentiment Which FANG Stock Will Be The First To Break Out? ~Headline, Investor’s Business Daily (September) I couldn’t care less about market sentiment except to understand how we got to such lofty valuations and how investors have become drooling idiots babbling incoherently about their riches. Nothing scares these markets. Previous bubbles always had a great story, something that investors could legitimately hang their enthusiasm on. The 1929 and 2000 bubbles were floated by dreams of truly fabulous technological revolutions. The current bubble is based on a combination of religious faith in central bankers and, as always, investors’ deluded confidence in their own omnipotence as market timers. Oh gag me with a spoon, really? Unfortunately, some group of prospective toe-tagged investors with silver dollars on their eyes are going to own these investments to the bottom. For now, though, we have nothing to fear but fear itself. Veni vidi vici. “This is not an earnings-driven market; it is a momentum, liquidity, and multiple-driven market, pure and simple.” ~David “Rosie” Rosenberg, economist at Gluskin Sheff The FOMO model is not restricted to Joe and Jane Six-pack. Norway’s parliament ordered the $970 billion sovereign wealth fund to crank up its stock holdings from 60 percent to 70 percent.63 Queuing off an analysis I did last year, a collective (market-wide) allocation shift of such magnitude would cause a 55 percent gain in equities.64 The percentage of U.S. household wealth in equities is in its 94th percentile and above the 2007 numbers.65 A survey of wealthy folks shows they expect an annualized 8.5 percent return after inflation.66 Good luck with that if you wish to stay wealthy. At current bond yields, a 60:40 portfolio would need more than 12 percent each year on the equities. Venture capitalists think they can get 20 percent returns (despite data showing this to be nuts.)67 Maybe they can set up an ETF to track the 29-year-old high school dropout and avid video gamer who professed to love volatility and got himself a 295 percent gain in one year trading some crazy asset (probably Tesla or “vol”).68 He actually ordered a Tesla and proclaimed, “I will soon get my license!” Better get that Tesla ordered soon, young Jedi Knight, given the company’s annualized $2+ billion burn rate and stumbling production numbers. Meanwhile, the legendary Paul Tudor Jones' fund saw 50 percent redemptions.69 (Boomers: Insert Tudor Turtle joke here.) Prudence disappoints investors in the final stages of a market cycle. Unsurprisingly, the complacency index is at an all-time high.70 The oft-cited Fear and Greed Index (explained here71) is pegging the needle on extreme greed (Figure 10). A survey by the National Association of Active Investment Managers found investment managers to be more than 90 percent long the market.72 An American Association of Individual Investors survey showed that retail portfolios were at their lowest cash levels in almost two decades.71 High “delta,” which supposedly reflects investors’ willingness to use levered calls to catch this rally,72 suggests that investors perceive that risk has been eradicated in these central-bank-supervised markets. The few investors retaining a modicum of circumspection are “suffering extreme mental exhaustion” (PTSD) watching the consequences of the “deadweight of [the] US$400 trillion ‘cloud’ of financial instruments . . . supported by ongoing financialization” levitate anything with a price tag on it.73 Booyah Skidaddy. Let’s not forget, however, that traders make tops and investors make bottoms. In the next bloodletting, we may see bonds and stocks compete in synchronized diving. While traders run with the Pamplona bulls, investors sit in the shadows waiting for their day in the sun. Figure 10. Fear and Greed Index. Volatility Market pundits hurl around several definitions of volatility, and both have gotten huge press this year. A narrow dispersion of prices has arisen from the collusion of sentiment, $3 trillion of quantitative easing this year alone,74 trading algos, and programmed contributions to index investments that have created markets that seem very tame (not volatile). Headlines reported all sorts of records such as days without a 1 percent drop,75 consecutive S&P 500 closes within 0.5 percent of previous closing price,76 longest streak of green closes on the S&P, consecutive months without a loss,77 index advances accompanied by new 52-week lows,78 and days without a 3 percent draw down.79 Often the records were kept intact thanks to late-day panic-buying by the FOMO crowd. For the short sellers, it has been the Bataan Death March, particularly in February, when a leveraged fund was forced to liquidate billions of dollars of short positions.80 Even the treasury market shows an “implied volatility” at its lowest level in more than 30 years,81 which highlights historic investor complacency. Some say it is a new era; others see a calm before the storm. A second definition of volatility is explained in Investopedia:82 Volatility: A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option’s expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used. Glad to have cleared that up. It’s no surprise the market players found a way to turn an arcane market indicator into a trading device: you can buy and sell vol through various indices such as the “VIX,” XIV, and “SVXY.” What’s more, the buying and selling of vol influences the markets (10× leveraged according to Peter Tchir). As the vol indices go down, the markets go up, and if I have this right, there is causality in both directions. Vol has been plumbing record lows. Indeed, those shorting vol (driving it down) are making fortunes—a one-decision trade—at least until buying vol becomes the new-and-improved one-decision trade. Billions have flooded into vol short funds each week.83 It is estimated to be a $2 trillion market. Barron’s called shorting the VIX “the nearest thing to free money.”84 References to exceptionally high “risk-adjusted returns” leave me wondering: How do you adjust for risk on the vol trade? Maybe we should consult the logistics manager at a Target store who made a cool $12 million in five years by shorting the VIX.85 He reminds me of those Icelandic fishermen-turned-bankers. They did quite well for a while, but they returned to fishing the hard way. In an incisive analysis of the risks of the vol trade,86 Eric Peters notes that “to sell implied volatility at current levels, investors must imagine tomorrow will be virtually identical to today.” Seems like a reach given that such an assumption has no precedent in the recorded history of anything. The fact that 97 percent of VIX shares are sold short also seems a wee bit lopsided (Figure 11).87 The VIX even had a flash crash88: how ironic is that? JPM’s Marko Kolanovic—reputed to be one of the best technical traders in the known universe—says that a regression of the VIX to the historical norm could cause “catastrophic losses” because of all the shorts.89 Given that volatility begets volatility, forcing an epic short squeeze on $2 trillion of vol shorts at some point, one wonders what comes after “catastrophic”? Figure 11. Volatility (VIX) short positions. Stock Buybacks “Companies might have to start rotating out of the debt that they incurred to buy back their stock and start issuing stock.” ~Chris Whalen, The Institutional Risk Analyst In 2016, I referred to Whalen’s vision of stock buybacks as “buying high–selling low.”90 Peter Lynch’s original enthusiasm for buybacks was that clever management sneakily buys back undervalued shares, not overvalued shares. This buyback ploy began to turn into a scam in 1982, when buybacks were excluded from rules prohibiting price manipulation.91 Buybacks are so large now that they correlate with and quite likely cause large market moves (Figure 12). Since 2009, U.S. companies have bought back 18 percent of the market cap, often using debt—lots of debt.92 The 30 Dow companies have 12.7 billion fewer shares today than in ’08: “the biggest debt-funded buyback spree in history.” An estimated 70 percent of the per-share earnings—24 percent versus only a 7 percent earnings gain since 2012—is traced to a share count reduction from buybacks.93 Pumping the share prices at the cost of rotting the balance sheet (which gullible investors ignore) achieves two imperatives: it prolongs executive employment and optimizes executive compensation. Contrast this with paying dividends to enrich shareholders to the detriment of option holders. The rank-and-file employees might be comforted if companies plugged the yawning pension gaps instead (vide infra), but such contributions would have to be expensed, lowering earnings and, stay with me here, reducing executive compensation. Figure 12. (a) S&P real returns versus margin debt. (b) S&P nominal returns versus share buybacks, and (c) buybacks versus corporate debt. In one hilarious case, Restoration Hardware, a loser by any standard except maybe Wall Street’s, used all available cash and even accumulated debt to buy back 50 percent of its outstanding shares to trigger a greater than 40 percent squeezing of the short sellers who, mysteriously, think the company is poorly run.94 In the “eating the seed corn” meme, the 18 biggest pharmaceutical companies’ buybacks and dividends exceed their R&D budgets.95 Market narrowing—the scenario in which a decreasing number of stocks are lifting the indices—is acute and ominous to those paying attention.96 The so-called FAANGs + M (Facebook, Apple, Amazon, Netflix, Google, and Microsoft) have witnessed a 50 percent spike in their P/E ratios in less than 3 years.97 The FAANGs compose 42 percent of the Nasdaq and 13 percent of the S&P. An astonishing 0.2 percent of the companies in the Nasdaq have accounted for 45 percent of the gains.98 This is a wilding. The average stock, by contrast, is still more than 20 percent off its all-time high. What is going on? Indexing and Exchange-Traded Funds “When a measure becomes an outcome, it ceases to be a good measure.” ~Goodhart’s Law Charles Goodhart focused on measuring money supply,99 but his law loosely applies to any cute idea that becomes widely adopted (such as share buybacks). This is total blasphemy, but market indexing may be a colossal illustration of Goodhart’s Law. John Bogle was the first to articulate the merits of indexing in his undergraduate thesis at Princeton.100 Columbia University professor Burt Malkiel provided a theoretical framework for the notion that you cannot beat the market, which was translated into the best-selling book A Random Walk Down Wall Street. Even Warren Buffett endorses the merits of indexing, although once again, his words belie his actions. Bogle’s seminal S&P tracking fund now contains 10% of the market cap of the S&P 500 after quadrupling its share since ’08. (Behaviorist Peter Atwater attributes the recent enthusiasm to investors who are PO’d at active managers.)101 “When the world decides that there is no need for fundamental research and investors can just blindly purchase index funds and ETFs without any regard to valuation, we say the time to be fearful is now.” ~FPA Capital Then there are the massively popular ETFs that allow you to index while picking your favorite basket of stocks (have your cake and eat it too). Is there anybody who disagrees with the merits of indexing? Didn’t think so. Do ya see the problem here? Goodhart might. Maybe I was oblivious, but acute concerns about indexing seem to have emerged only in the last year or so. Let’s ponder some of them, but only after a brief digression. “There is no such thing as price discovery in index investing.” ~Eric Peters, CIO of One River Asset Management In his must-read book The Wisdom of Crowds, James Surowiecki posits that a large sample size of non-experts, when asked to wager a guess about something—the number of jelly beans in a jar, for example—will generate a distribution centered on the correct answer. Compared with experts, a crowd of clueless people offers more wisdom. I submit that this collective wisdom extends to democracies and markets alike. A critical requirement, however, is that the voting must be uncorrelated. Each player must vote or guess independently. As correlation appears, the wisdom is lost, and the outcome is ruled by a single-minded mob. Thus, when everybody is buying baskets of stocks using the same, wholly thoughtless protocol (indexing), the correlation is quite high. Investors are no longer even taking their own best guesses. The influence of correlation is amplified by a flow of money (votes) putting natural bids under any stock in an index, even such treasures as Restoration Hardware. What percentage of your life’s savings should you invest without a clue? Cluelessness has been paying handsome rewards. A big problem is that index funds and ETFs allocate resources weighted according to market cap and are float-adjusted, reflecting the market cap only of available shares not held by insiders. You certainly want more money in Intel and Apple than in Blue Apron, but indexing imposes a non-linearity that drives the most overpriced stocks to become even more overpriced. That is precisely why the lofty valuations on the FAANGs just keep getting loftier. The virtuous cycle is the antithesis of value investing. The float adjustment drives money away from shares with high insider ownership. Curiously, an emerging strategy that is not yet broadly based (recall Goodhart’s Law) is to find investments that are not represented in popular indices or ETFs on the notion that they have not been bid up by indexers. “With $160-odd trillion global equity market capitalization, we have much more opportunities for ETFs to grow, not just on equities, but in fixed income. And I believe this is just the beginning.” ~Larry Fink, CEO of Blackrock, the largest provider of ETFs The indexed subset of the investing world could be at the heart of the next liquidity crisis. In managed accounts, redemptions can be met with a stash of cash at least for the first portion of a sell-off. This is why air pockets (big drops) often don’t appear early in the downdraft. By contrast, ETFs trade shares robotically—quite literally by formulas and algos (the robots)—with zero cash buffer. The first hint of trouble causes cash inflows to dry up and buying to stop. Redemptions by nervous investors cause instantaneous selling. Passive buying will give way to active selling. The unwind should also be the mirror image of the ramp: FAANGs will lead the way down owing to their high market caps. Once again, selling begets selling, and the virtuous cycle quickly turns vicious. Investors will get ETF’d right up the...well, you get the idea. “You’re better off knowing which ETFs hold this stock than what this company even does. . . . That’s scary to me. . . . The market needs to have a major crash.” ~Danny Moses, co-worker of Steve Eisman “Throw them out the window.” ~Jeff Gundlach, CIO of DoubleLine Capital, on index funds I would be remiss if I failed to note that there are also some really wretched ETFs. What are the odds, eh? I’m not sure I even believe this, but it has been claimed that a 3×-levered long gold mining ETF lost –86 percent while a 3×-levered short gold mining ETF lost –98 percent, both over the same time frame that the GDX returned zero percent. You wouldn’t want to pair-trade those bad boys. It is also rumored that the SEC has approved 4×-levered equity ETFs. Investors are going to be seeing the inside of a wood chipper at some point. A 3×-levered Brazilian ETF (BRZU) lost 50 percent in a single day. Apparently none of these investors ever saw The Deer Hunter. We might as well set up ETFs in which investors choose the leverage multiple. One quick click, and it's gone. “ETFs are the new Investment Trusts (similar vehicles in 1920’s) that led to the Great Crash and will lead to the next crash.” ~Mark Yusko, CEO and CIO of Morgan Creek Capital Management “Passive investing is in danger of devouring capitalism. . . . What may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free market capitalism.” ~Paul Singer, founder and president of Elliott Management Corporation Miscellaneous Market Absurdities “Last time this mood took over, it ended very badly. Look at your investments with 2009 eyes. Did you tail hedge then? Should you risk up now?” ~Jeff Gundlach Recent initial public offerings (IPOs) get routinely flogged. SNAP’s 33 percent drop has become onomatopoetic. What would you expect for a company whose customer demographic is 12- to 18-year-olds with no income? GoPro (GPRO) has lost 95 percent in two years. A few more show precipitous drops from post-IPO highs: FIT, TWLO, FUEL, TWTR, ZNGA, and LC. Blue Apron (APRN) dropped 45 percent from its highs in the 36 days after its IPO. The company also cut 1,200 of a total of 5,000 jobs, prompting one veteran to ponder: “Seriously, how is that not illegal?” This is a new era, dude. The froth creeps into the screwiest places. The hard asset purchase of the year was the da Vinci painting of Salvatore Mundi that sold for $450 million. It was the only known da Vinci in private hands. A Modigliani nude sold for $170 million. A Basquiat painting purchased in 1984 for $19,000 moved across the auction block at a snot-bubble-blowing $111 million (23% compounded annualized return). The fabulously creative modern artwork, The Unmade Bed (Figure 13), sold for a cool $4 million.102 (I have one of those in my bedroom that I got for a lot less.) According to CBS News, a Harambe-shaped Cheeto sold for almost $100K on eBay.103 An obscure Danish penny stock company (Victoria Properties) surged nearly 1,000 percent in a few days, prompting management to remind investors that “there has been no change in Victoria Properties’ economic conditions. . . . The company’s equity is therefore still equal to about zero kroner.”104 Ford is valued at around $7,000 per car produced. Tesla is valued at $800,000 per car produced—they are literally making one model by hand on a Potemkin assembly line.105 A company called Switch has a “chief awesomeness officer.106 Ding! Ding! Ding! Figure 13. A $4 million masterpiece of modern art. Long-Term Real Returns and Risk Premia “Maybe it’s time to quietly exit. Take the cash, hide it in the mattress, and wait for the next/coming storm to pass.” ~Bill Blain, Mint Partners “People have just gotten so immune to any pain and anguish in any of these markets that when it happens it is going be very psychologically painful.” ~Marilyn Cohen, Envision Capital Management If the next correction is only 20–30 percent, I was simply wrong. Mete out a 50 percent or larger thwacking, and I am declaring victory (in a twisted sort of way). When the pain finally arrives, the precious few positioned to take advantage of the closeout sales will include idiots sitting in cash through the current equity binge buying (me). In theory, the short sellers would be in great shape too, but they all reside in shallow graves behind the Eccles Building. Some wise folks, like Paul Singer, have had the capacity and foresight to be raising billions of dollars for the day when monkey-chucking darts can find a target.107 "We think that there has never been a larger (and more undeserved) spirit of financial market complacency in our experience.” ~Paul Singer after raising $5 billion to buy distressed assets in the future There will be few victory laps, however, because boomers will be living on Kibbles ’n Bits. How painful will it be? Figure 14 from James Stack shows the fractions of the last 100 years’ bull markets that were given back.108 On only one occasion were investors lucky enough to hang onto three-fourths of their bull market gains. One-third of the bulls were given back entirely. Two-thirds of the bulls gave half back. The results are oddly quantized. How much will the next bear take back? It depends on how much the reasoning above is out of whack. Do ya feel lucky? Figure 14. Fraction of the bull taken by the bear.108 “The vanquished cry, but the victor doesn’t laugh.” ~Roman proverb Ethereal gains bring up an interesting point, more so than I first thought. In a brief exchange with Barry Ritholtz, I asserted that the “risk premia” on equities—the higher returns because of underlying risk—will be arbitraged away in the long run because occasionally risk turns into reality, and you get your ass kicked. I’m not talking inefficient high-frequency noise but rather the long term—call it a century if you will. With his characteristically delicate touch, Barry noted that I was full of hooey. Refusing to take any of his guff, I dug in. Certainly a free market would price equities much the way junk bonds are priced relative to treasuries to account for mishaps. Look back at Figure 14 in case it didn’t sink in. There is also the problem with interpreting index gains owing to survivor bias. Economist David Rosenberg claims that if the eight companies who left the Dow in April 2004 had remained, the Dow would still be below 13,000.109 Of course, presumably investors swapped them out as well if they were indexing (although somebody ate those losses). “I will get back to you next week with the answer to your singular investment question. Should you have further easy questions such as: is there a God and what gender he/she may be, that will necessarily be part of a separate email chain.” ~Brian Murdoch, former CEO of TD Asset Management on bonds versus stocks Start with the inflation-adjusted principle gains on the Dow (Figure 15), which returns less than 2 percent annualized. Think that’s too low? Take a look at my all-time favorite chart—the Dow in the first half of the 20th century, when inflation corrections weren’t needed (Figure 16). Now throw in some dividends (4 percent on average) and some wild-ass guesses on fees and taxes (including those on the inflated part of the gains). I get a real return on the Dow in the 20th century—a pretty credible century to boot—of only 4–5 percent annualized. Let’s adjust recent returns using the Big Mac inflation metric.110 Big Macs have appreciated sixfold since 1972 (4–5 percent compounded) with little change in quality. Over the same period, the capital gains on the Dow rose twentyfold. Adjusted for Big Mac–measured inflation, the Dow averaged less than 3 percent compounded (ex-dividends). An eightfold rise in the price of extra-large pizzas since 1970 (cited in my now-extinct blog for Elizabeth Warren) paints an even bleaker picture of inflation-adjusted S&P returns. Figure 15. Inflation-adjusted DOW. Figure 16. Non-inflation-adjusted Dow: 1900–1940. Those 4–5 percent inflation-adjusted equity gains do not account for the fourfold increase in the U.S. population, which should be included because the wealth of the nation was shared by four times as many carbon-based life-forms. The returns are also not in the same zip code as the 7–8 percent assumed by many pensioners. Back to the debate, the 4–5 percent inflation-adjusted equity gains contrast with 30-year treasuries returning about 4–5 percent nominally. Hmm...Seems like equities still won, and that Ritholtz appears to have been right. I consulted both digital and human sources (Brian Murdoch, Benn Steil, and Mark Gilbert), and everybody agreed: that punk Ritholtz was right. Even more disturbing, is it possible that Jeremy Siegel is not being a total meathead by asserting that you should buy equities at all times (BTFD)? The explanations for why markets fail to arbitrage the risk premia are said to be rather “mysterious.” According to Brian Murdoch, “academics have been remarkably unsuccessful in modeling it. . . . Despite three decades of attempts, the puzzle remains essentially intact.” Benn Steil concurred. Academic studies (warning!) claim that bonds do not keep up with stocks even over profoundly long periods, and no amount of fudging (fees, taxes, disasters, or survivor bias) accounts for the failure to arbitrage the marginal advantage of stocks to zero. Schlomo Benartzi and Richard Thaler suggest that short-term losses obscuring long-term gains—“myopic loss aversion”—is the culprit.111 (Ironically, I read this paper a week before the Nobel committee told me to read this paper.) Elroy Dimson et al. dismiss all the possible errors that could be root causes and put the sustainable risk premium on stocks at 3–5 percent.112 Let’s flip the argument: Why would you ever own a bond? There are rational answers. To the extent that you do not buy and hold equities for 100 years (unless you are Jack Bogle), you also pay a premium for the liquidity—the ability to liquidate without a huge loss because you were forced to sell into a swoon. You also forfeit the ability to sell into a rally, however, and certainly wouldn't want to sell into a bond bear market either. Of course, the role of financial repression—sovereign states’ ability to force bond yields well below prices set by free markets—could explain it all. Governments like cheap money and have the wherewithal to demand it. Maybe the message is to never lend to governments. I remain in an enlightened state of confusion. Gold “Gold is no more of an investment than Beanie Babies.” ~Gary Smith, economist “If you don’t have 5–10% of your assets in gold as a hedge, we’d suggest you relook at this. . . . [I]f you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you [sic] sharing it with us. ~Ray Dalio, Bridgewater Associates Ray is rumored to have ramped Bridgewater’s gold position fivefold this fall. He cites geopolitical risk as a reason to own the barbecued relic. “If we actually see missiles in the air, gold could go higher.” ~CNBC trader on thermonuclear war Since the early 1970s, gold has had an annual return of 8 percent (nominal). Gold bears are quick to point out it doesn’t pay interest. Nor does my bank, and by the way, what part of 8 percent don’t they understand? By that standard, the 8 percent gain in 2017 was good but not statistically unusual. Coin sales are down,113 which suggests that either retail buyers are not in the game or the bug-out plans of hedge fund managers—I’m told they all have them—are complete. Sprott Asset Management made a hostile move on the Central Fund of Canada, a gold–silver holding company, in a move that might portend promising future returns.114 “Significant increases in inflation will ultimately increase the price of gold. . . . [I]nvestment in gold now is insurance. It’s not for short-term gain, but for long-term protection. . . . We would never have reached this position of extreme indebtedness were we on the gold standard. . . . It wasn’t the gold standard that failed; it was politics. . . . Today, going back on to the gold standard would be perceived as an act of desperation.” ~Alan Greenspan, 2017, still babbling On the global geopolitical front, Deutsche Bundesbank completed repatriation of 700 tons of gold earlier than originally planned.115 The urgency may be bullish, but a possible source of demand is now gone. Chinese gold companies have been actively searching for domestic deposits and international acquisitions as they push to quadruple their reserves to 14,000 tons by 2020.116 (The U.S. sovereign stash is less than 9,000 tons.) The gold acquisitions of China (Figure 17) show a curious abrupt and sustained increase in activity in 2011. When did gold begin its major correction? Right: 2011. Makes you wonder if geopolitics somehow preempted the supply–demand curve. Because gold can leave Shanghai but not China, it’s a one-way trip. The Shanghai Gold Exchange must get its bullion from other sources. Russia continues to push its reserves up too. Rumors swirl that China and Russia are colluding for something grand, possibly a new global reserve currency based on the petro-yuan and gold. This would change the global landscape way beyond generic goldbuggery. Figure 17. Abrupt changes in Chinese gold acquisitions through Hong Kong in 2011. “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We’d have a standard on which to base our money.” ~Donald Trump, 2016 The gold market continues to be dominated by gold futures rather than physical gold. The bugs think this will end. I can only hope. In this paper market, gaming is the norm. On a seemingly monthly basis, gold takes swan dives as somebody decides to sell several billion-dollar equivalents (20,000–30,000 futures contracts) when the market is least liquid (thinly traded). Stories of fat-fingered trades abound, but I suspect these are just traders molesting the market for fun and profit, unconcerned that a regulator would ever call them on it. The silver market looked even creepier for 17 days in a row (Figure 18). I never trust that kind of linearity. Figure 18. Silver acting odd over 5 minutes and 17 days. Price changes often appear proximate to geopolitical events, but everything is proximate to a geopolitical event somewhere. India’s success at destroying its cash economy—the only economy it had—via the fiat removal of high-denomination bills117 was akin to announcing that only electric cars are legal starting next week. Some suggested that the move was also an attempt to flush gold out of households and into the banking system.118 Gold inched toward currency status at a more local level as Idaho, Arizona, and Louisiana voted to remove state capital gains taxes on gold—baby steps toward an emergent gold standard.119 The Brits are going the other way by banning salary payments in gold.120 Finishing with some fun anecdotes, a massive gold coin worth millions was stolen from a German museum.121 Some guy restoring a World War II tank found $2.5 million in gold bullion tucked in a fake fuel tank.122 A piano repairman discovered 13 pounds of gold in an old piano.123 According to British law, the repairman gets half, and the folks who donated the piano get squat. Beyond that, the gold market has been quiet for almost five years (Figure 19). Some wonder whether Bitcoin is sucking oxygen away from gold. Which way is gold gonna break if Bitcoin or the dollar tanks? Inquiring minds want to know. Figure 19. Five years of gold price discovery. Bitcoin “Worse than tulip bulbs. It won't end. Someone is going to get killed. . . . [A]ny [JPM] trader trading Bitcoin will be fired for being stupid. . . . [T]he currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs." ~Jamie Dimon, CEO of JPM Unbeknownst to Dimon, his daughter was trading Bitcoin: “It went up and she thinks she is a genius.” More to the point, traders at JPM were already firing up crypto exchanges (while Goldman and the CFTC seemed to be positioning to enter the game). Dimon decided it was a prudent time to STFU (shut up) by declaring, “I'm not going to talk about Bitcoin anymore.” The joke was on us, however; nobody seemed to notice that Dimon slipped in an earnings warning the same day his Bitcoin quotes hit the media.124 Well played, Jamie. “Bitcoin owners should appeal to the IRS for tax-exempt status as a faith-based organization.” ~Andy Kessler, former hedge fund manager I wish I had a Bitcoin for every time somebody asked me about it. Cryptos and goldbugs share a common interest in escaping the gaze of the authorities. My ignorance of blockchain technology is profound, but I suspect that is true for many who talk the talk. I wonder if somehow blockchain might play a role in bypassing the SWIFT check-clearing system used by Western powers to shake down opposition (Russia).125 I also wonder, however, if the miracles of blockchain should not be confused with those of Bitcoin. Any mention of price or gains below should be followed with an implicit "last time I checked" or even “as of two minutes ago.” My failure to jump on Bitcoin leaves no remorse: (a) I never take a position that risks a you-knew-better moment, and (b) I would have been flushed out, and then I really would have kicked myself. Recall the legendary founding shares in Apple that were sold for $800 and are now estimated to be worth maybe $100 billion?126 There’s rumor of a guy who lost his Bitcoin “codes” that are now estimated at more than $100 million. That’s real pain. I offer my current view of cryptos from a position of total technical ignorance guided by an only slightly more refined understanding of history and markets. Please forgive me, crypto friends. I know you are tired of hearing the counter arguments and the cat calling. I am restrained by the words of a famous philosopher: “Only God is an expert. We’re just guys paid to give our opinion.” ~Charles Barkley, former NBA star What would have flushed me out of a Bitcoin long position? Let’s take it to the hoop: The price action. Exponential gains, even wildly bent on a semi-log plot, have few analogs in history, all of which led to legendary busts (Figure 20). The South Sea bubble, Tulipmania, Beanie Baby, and Mentos-in-a-Coke analogies are legion. They all had a story that convinced many. Figure 20. One-year price chart of Bitcoin (as of 2 minutes ago). The participants. I have a friend—a very smart former Wall Street guy—who swears by it and is up 100,000 percent. You do not need to size your position correctly with that kind of gain. But then there is the clutch of camp followers emblematic of all manias. We have grad students speculating in Bitcoin. A 12-year-old bought his first Bitcoin in May 2011 with a gift from his grandmother.126a At more than $17,000 per coin, his stash is more than $5 million. On MarketWatch, he declared he had a price target of $1 million. “I’m obviously very bullish, but I expect to make a couple million dollars off very little money. This is the opportunity of a lifetime. Finance is getting its Internet.” ~Bitcoin investor Competitors. A Bitcoin competitor issued by Stratis soared to more than 100,000 percent since its initial coin offering (ICO) this past summer. As of December 1, there were 1,326 cryptocurrencies with a total market cap of >$400 billion.127 Paris Hilton has a cryptocurrency.128 The market is saturated more than the dot-com market ever was. It is a certainty that more than 99 percent will die much like most of the 270 auto companies in the ’20s and dot-coms in the ’90s. A site called Deadcoins shows that some already have.129 The debate is whether 100 percent is the final number. Volatility. Massive corrections followed by ferocious rallies akin to a teenager on driving on black ice would have convinced me it was too crazy for my style. Corrections last seconds to hours, with wildly enthusiastic buyers poised to BTFD. Isaac Newton got into the South Sea bubble, was smart enough to get out, and then reentered in time to go bankrupt. I am decidedly dumber than Isaac. Figure 21. Bitcoin photo bomber (acquiring $15K of Bitcoin via crowdsourcing). For Bitcoin to become a currency in its current form, out of reach of sovereigns, seems to require a society-upheaving revolution, which is a rare event that usually gives way to new, equally ham-fisted regimes. The chances seem slim to none for several reasons. “No government will ever support a virtual currency that goes around borders and doesn’t have the same controls. It’s not going to happen.” ~Jamie Dimon (again) The competition. I am doubtless that central banks and sovereign states will never endorse Bitcoin in its current form. They have their own digital currencies and a monopoly on the power to create more, and they commandeer our assets through taxation. Existential risk will bring on the power of the State. When sovereigns decide to do battle, the cryptos will be brought to heel or forced underground. Instabilities. Digital currencies are showing digital instabilities that could just be growing pains or evidence of more systemic problems. How software buffs who know that software is duct tape and bailing wire could think that a software-dependent currency is invincible is beyond me. Ethereum dropped 20 percent in a heartbeat when a hacker theft was reported.130 It dropped 96 percent after the Status ICO clogged the network.131 One user put a stop-loss on Ethereum at $316 on GDAX, which executed at $0.10 during a flash crash.132 So-called “wallets” have been freezing up, although there is some debate as to whether the owners lost the Bitcoins.133 This stuff happens with all risk assets now but not with usable currencies. Volatility. Nobody will use a currency to pay for groceries if prices move 10 percent a day or even 5 percent as you move from the frozen food to the vegetable aisle. This, by the way, is the same explanation for why I don’t consider gold “money” or a “currency.” As long as there exists a Bitcoin–dollar conversion, a sovereign wishing to keep Bitcoin in the realm of a speculative plaything could use its unlimited liquidity to trigger price swings with a little day trading. Legality. If up against the wall, sovereigns will use arguments about fighting crime, stemming ransomware, or controlling monetary policy and declare a War on Cryptos akin to the potential War on Cash. China has already blown shots across the Bitcoin bow by shutting down exchanges as well as ICOs as they struggle with excessive sovereign debt and capital outflows.134 Britain has also done some sabre rattling.135 The IRS has declared gains taxable (akin to gold) and is paying companies to locate digital wallets.136 The fans of BTC declare invincibility—freedom! The average blokes may smoke pot and drive too fast, but they seem less likely to risk a spat with the State on this stuff. “Right now the trust is good—with Bitcoin people are buying and selling it, they think it’s a reasonable market—but there will come a day when government crackdowns come in and you begin to see the currency come down.” ~Mark Mobius, executive director at Franklin Templeton Investments Others have unshakeable faith even in the more obscure cryptocurrencies. I’m unsure what I’m hoping for on this bet (Figure 22): Figure 22. John McAfee, technology pioneer, chief of cybersecurity, visionary of MGT Capital Investments, going all in on cryptocurrencies. Housing and Real Estate “We bailed out the financial system so that financiers with access to cheap credit can buy up all of America’s real estate so that they can then rent it back to you later.” ~Mike Krieger, Liberty Blitzkrieg blog Greenspan claimed those who predicted the housing bubble were “statistical illusions” (as were those who saw Greenspan as a charlatan). There are, once again, housing bubbles littered across the globe at various stages of expansion and contraction owing to central banks providing in excess of $3 trillion dollars of QE this year. Credit is fungible, so the flood of capital can come from anywhere and migrate to anywhere it finds an inflating asset. Hong Kong’s spiking prices are rising by dozens of basis points per day. Attempts by authorities to cool the market only fanned the flames, resulting in “a sea of madness.”137 Australian authorities tried to cap the dreaded interest-only loans at 30% of the total pool, prompting one hedge fund to return money to investors and declare that “Mortgage fraud is endemic; it’s systemic; it’s just terrible what’s going on. When you’ve got 30-year-olds, who have never seen a property downturn before, borrowing up to 80% to buy three and four apartments, it’s a bubble.”138 Prices in London are now collapsing.139 Why would anything collapse with so much global credit? Simple: top-heavy structures tend to collapse from even small shocks. I will focus, however, on only two countries—the U.S. because it is my home turf and Canada because it is the most interesting of the markets. The U.S. appears to be in a bubblette, an overvalued market that does not approach the insanity of 2007 (detected by statistical illusions as early as 2002).140 Twenty percent down payments have become passé again. A survey of 20 cities reveals 5.9 percent annualized price rises.141 The median sale price of an existing home has set an all-time high and is up 40 percent since the start of 2014141 despite what seems to be muted demand (Figure 23). Thus, home ownership has dropped by 8 percent since ’09 because soaring prices have rendered them unaffordable. More than 40 percent of 25-34 year olds, a group historically en route to home ownership, have nothing set aside for a down payment.141 Those who scream about the need for affordable housing don’t notice that we have plenty of low-quality houses. We lack low-cost houses. And the Fed says inflation is good. Figure 23. Median new home sales price in the U.S. versus number sold and versus home ownership rate. In 1960, California had a median home price of $15,000—three times the salary of an elementary school teacher.142 The median home price in San Francisco is now $1.5 million,143 which is unlikely to be three times a teacher’s salary. A couple earning $138,000 will soon qualify for subsidized housing in San Francisco. California housing seems to be interminably overvalued, possibly owing to the draw of droughts, mudslides, crowds, and, fires. Despite modest 6 percent population growth since 2010, housing units have shown an only 2.9 percent increase. There could be a supply–demand problem, especially when the fires subside. Florida is rumored to have eager post-hurricane sellers—those with something left to sell, that is.144 Condo flippers drove prices skyward in Miami, but they are heading earthward with a glut of units scheduled to come online in 2018. It’s not just the sand states starting to see softness. In New York City, rising rates seem to be nudging commercial and residential real estate down and foreclosures up to levels not seen since the 2009 crisis (79 percent year-over-year in Q3).145 Sam Zell is, once again, a seller and claims "it is getting hard."146 Recall that Zell nailed the real estate top by selling $38 billion in real estate in ’07.147 “The condo market at the high-end [in Manhattan] . . . is a catastrophe and will get worse.” ~Barry Sternlicht, Starwood Property Trust Those who already own houses can once again “extract equity” from their homes using home equity lines of credit (HELOCs).148 They then wake up with more debt on the same house. Pundits claim consumers’ willingness to mortgage their future is “a healthy confidence in the economy.” Fannie Mae and Freddie Mac have also entered phase II of the catch-and-release program. Their regulators have authorized them to once again engage in unchecked, reckless lending, prompting some to begin estimating the cost of the next bailout.149 What happened to all that inventory from the colossal boom leading to the Great Recession? Some fell into the foundations, but a lot found its way into private equity firms. Mind you, single-family rentals are a low- or no-profit-margin business under normal circumstances. As long as rates stay low—Where have I heard that one before?—inherently thin profits can be amplified to a significant transitory revenue stream through leverage. A proposed merger of Invitation Homes (owned by Blackstone Group) and Starwood Waypoint Homes (owned by Starwood Capital) would spawn the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.150 Of course, rates will rise again, and these sliced-and-diced tranches of mortgage-backed securities must be offloaded to greater fools. Private equity guys are already frantically boxing and shipping.151 To avoid costly and time-consuming appraisals, market players are using “broker price opinions,” which can be had by simply driving by the house and taking a guess (or just taking a guess). In ’09, the legendary “Linda Green” signed off on thousands using dozens of different signatures.152 U.S. securities regulators are investigating whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments.153 Let me help you guys out: yes. “The main risk on the domestic side is a sharp correction in the housing market that impairs bank balance sheets, triggers negative feedback loops in the economy, and increases contingent claims on the government.” ~IMF, on the Canadian housing market Heading north, we find that Canada’s real estate market never collapsed in ’09 (Figure 24), an outcome often ascribed to the virtues of the country’s banking system. An estimated 7 percent of Canadians work in housing construction,154 and Canadians are using HELOCs like crazy.155 After Vancouver tried to burst a huge bubble in 2016 with a 15 percent buyers’ tax,156 Chinese buyers chased Toronto houses instead. Annualized gains of 33 percent with average prices of $1.5 million are pushing even the one-percentile crowd to remote ’burbs.157 Toronto authorities have now imposed the Vancouver-like 15 percent foreign buyers tax,158 causing a single-month 26 percent drop in sales and ultimately chasing the hot money to Montreal,159 Guelph, and even Barrie.160 “Make no mistake, the Toronto real estate market is in a bubble of historic proportions.” ~David Rosenberg Figure 24. Canadian versus U.S. median home prices and what they buy ($700,000 for that little gem). The most interesting plotline and a smoking gun in Canada’s bursting bubble was failing subprime lender Home Capital Group (HCG). Marc Cahodes, referred to as a “free-range short seller” and “the scourge of Wall Street,” spotted criminality and shorted HCG for a handsome profit.161 HCG was so bad it was vilified by its auditor, KPMG.162 Imagine that. HCG dropped 60 percent in one day when news hit of an emergency $2 billion credit line at 22.5 percent interest by the Healthcare of Ontario Pension Plan.163 (The CEO of the pension plan sits on Home Capital’s board and is also a shareholder.) Cahodes was printing money and ranting about jail sentences when, without warning, the legendary stockjobber Warren Buffett took a highly visible 20 percent stake in HCG at “mob rates” (38 percent discount).164 The short squeeze was vicious, and Cahodes was PO’d. As Paul Harvey would say, “now for the rest of the story.” HCG is, by all reckoning, the piece of crap Cahodes claims it is. Buffett couldn’t care less about HCG’s assets—Berkshire can swallow the losses for eternity. Warren may have bought this loser as a legal entry to the Canadian banking system, which is loaded with hundreds of billions of “self-securitized” mortgages. The plot thickened as a story leaked that Buffett met with Justin Trudeau (on a tarmac).165 When the Canadian real estate bust begins in earnest, Buffett will have the machinery of HCG and the political capital to feed on the carcasses of the big-five Canadian banks. Pensions “This massive financial bubble is a ticking time bomb, and when it finally goes off, it is going to wipe out virtually every pension fund in the United States.” ~Michael Snyder, DollarCollapse.com blog The impending pension crisis is global and monumental with no obvious way out. The World Economic Forum estimates the pension gap—unfunded pension liabilities—at $70 trillion and headed for $250 trillion by 2050.166 Conservative but still conventional assumptions about prospective investment returns and spending patterns in old age suggest that retiring into the American dream in your mid 60s requires you bank 20–25 multiples of your annual salary (or a defined benefit plan that is the functional equivalent) to avoid the risk of running out of money. A friend—a corporate executive no less—retired with 10 multiples; he could be broke within a decade (much sooner if markets regress to historical means). Of course, you can defiantly declare you will work ’till you drop, but then there are those unexpected aneurysms, bypass surgeries, layoffs, and ailing spouses needing care. I’ve seen claims that more than 50 percent of retirees do not fully control their retirement age. “Companies are doing everything they can to get rid of pension plans, and they will succeed.” ~Ben Stein, political commentator The problem began as worker compensation became reliant on future promises—IOUs planted in pension plans—often assuming the future was far, far away. However, a small cadre of demographers in the ’70s smelled the risk of the boomer retirements and began swapping defined-benefit plans for defined-contribution plans.167 (A hybrid of the two traces back to 18th century Scottish clergy.168) The process was enabled by the corporate-friendly Tax Reform Act of ’86.169 Employees were unknowingly handed all the risk and became their own human resource specialists. Retirement risk depends on the source of your retirement funds. Federal employees are backstopped by the printing press, although defaults cannot be ruled out if you read the fine print.170 States and municipalities could get bailed out, but there are no guarantees. Defined-benefit corporate plans can be topped off by digging into cash flows provided that the cash flows and even the corporation exist. The depletion of corporate earnings to top off the deficits, however, will erode equity performance, which will wash back on all pension funds. The multitude of defined-contribution plans such as 401(k)s and IRAs managed by individuals are totally on their own and suffer from a profound lack of savings. Corporate and municipal defined-benefit plans assumed added risks by falling behind in pension contributions motivated by efforts to balance the books and, in the corporate world, create the illusion of profits. The moment organizations began reducing the requisite payments by applying flawed assumptions about prospective returns, pensions shifted to Ponzi finance. My uncanny ability to oversimplify anything is illustrated by the imitation semi-log plot in Figure 25. The red line reflects the assumed average compounded balance sheet from both contributions and market gains. The blue squiggle reflects the vicissitudes of the market wobbling above and below the projection. If the projections are too optimistic—the commonly reported 7–8 percent market returns certainly are—the slope is too high, and the plan will fall short. If the projected returns are reasonable but management stops contributing during good times—embezzling the returns above the norm to boost profits—the plan will fall below projection again. Of course, once the plan falls behind, nobody wants to dump precious capital into making up the difference when you can simply goose projected returns with new and improved assumptions. In a rational world, pensions would be overfunded during booms and underfunded during busts. Assuming we can agree that we are deep into both equity and bond bull markets and possibly near their ends, pensions should be bloated with excess reserves (near a maximum on the blue curve), and bean counters should keep their dirty little paws off those assets and keep contributing because we won’t stay there. Figure 25. Childish construct of pension assets. That’s a good segue to drill down into the contemporaneous details. Public pensions are more than 30 percent underfunded ($2 trillion).171 A buzzkiller at the Hoover Institution says that the government disclosures are wrong and puts the deficit at $3.8 trillion.172 Bloomberg says that “if honest math was being used . . . the real number would actually be closer to 6 trillion dollars.”173 What is honest math? Using prevailing treasury yields for starters. Bill Gross—the former Bond King—says that if we get only 4.0 percent total nominal return rather than the presumed 7.5 percent, pensions are $5 trillion underfunded.174 Assuming 100 million taxpayers, that’s $50,000 we all have to pony up. California’s CalPERS fund dropped its assumption to a 6.2 percent return—still seriously optimistic in my opinion—leaving a $170 billion shortfall.175 The Illinois retirement system is towing a liability of $208 billion with $78 billion in assets ($130 billion unfunded).176 Connecticut is heading for a “Greece-style debt crisis” with $6,500 in debt per capita (every man, woman, and child?).177 The capital, Hartford, is heading for bankruptcy.178 South Carolina’s government pension plan is $24 billion in the hole. Kentucky’s attempt to fill a gigantic hole in its pension fund (31 percent funded) was felled by politics.179 A detailed survey of municipal pension obligations shows funding ranging from 23 percent (Chicago) to 98 percent (Suffolk).180 My eyeball average says about 70 percent overall. Notice that despite being at the peak of an investment cycle, none are overfunded (Figure 26.) Large and quite unpopular 30 percent hikes in employee contributions are suggested. The alternative of taking on more municipal debt to top off pension funds is a common stop-gap measure of little merit long term; somebody still has to pay. Figure 26. State pension deficits. The 100 largest U.S. corporate defined-benefit plans have dropped to 85 percent funded from almost 110 percent in 2007. During the recent market cycle that burned bright on just fumes, the companies gained only 6 percent above the 80 percent funding at the end of 2008. Of the top 200 corporate pensions in the S&P, 186 are underfunded to the tune of $382 billion (Figure 27). General Electric, for example, is $31 billion in the hole while using $45 billion for share buybacks. Figure 27. Underfunding of 20 S&P pension funds. When are serious problems supposed to start, and what will they look like? Jim Bianco says “slowly and then suddenly.” Some would argue “now.” The Dallas Police and Firemen Pension Fund is experiencing a run on the bank.181 They are suing a real estate fund who slimed them out of more than $300 million182 and are said to be looking at $1 billion in “clawbacks” from those who got out early trying to avoid the pain.183 The Teamsters Central States and the United Mineworkers of America plans are failing.184 The New York Teamsters have spent their last penny of pension reserves.185 The Pension Benefit Guaranty Corporation has paid out nearly $6 billion in benefits to participants of failed pension plans (albeit at less than 50 cents on the dollar), increasing its deficit to $76 billion. CalPERS intends to cut payouts owing to low returns and inadequate contributions (during a boom, I remind you). “The middle 40% [of 50- to 64-year olds] earn $97,000 and have saved $121,000, while the top 10% make $251,000 and have $450,000 socked away.” ~Wall Street Journal Looks like those self-directed IRAs aren’t working out so well either. Two-thirds of Americans don’t contribute anything to retirement. Only 4 percent of those earning below $50,000 a year maxes out their 401(k)s at the current limits.186 They are so screwed, but I get it: they are struggling to pay their bills. However, only 32 percent of the $100,000+ crowd maxes out the contribution. When the top 10 percent of the younger boomers have two multiples of their annual salary stashed away, you’ve got a problem.186 If they retired today, how long would their money last? That’s not a trick question: two years according to my math. Half the boomers have no money set aside for retirement. A survey shows that a significant majority of boomers are finding their adult children to be a financial hardship.187 Indeed, the young punks aren’t doing well in all financial categories; retirement planning is no exception. Almost half of Gen Xers agreed with this statement: “I prefer not to think about or concern myself with retirement investing until I get closer to my retirement date.” Moody’s actuarial math concluded that a modest draw down would cause pension fund liabilities to soar owing to a depletion of reserves.188 There is a bill going through Congress to allow public pensions to borrow from the treasury; they are bracing for something.189 This is a tacit bailout being structured. The Fed cowers at the thought of a recession with good reason: Can the system endure 50% equity and bond corrections—regressions to the historical mean valuation? What happens when monumental claims to wealth—$200 trillion in unfunded liabilities—far exceed our wealth? Laurence Kotlikoff warned us; we are about to find out.190 Beware of any thinly veiled claim that the redivision of an existing pie will create more pie. My sense is that we are on the cusp of a phase change. Stresses are too large to ignore and are beginning to cause failures and welched promises. Runs on pension funds akin to runs on banks would be deadly: people would quit working to get their pensions. At this late stage in the cycle, you simply cannot make it up with higher returns. Enormous appreciation has been pulled forward; somebody is going to get hosed. It’s only fourth grade math. Bankruptcy laws exist to bring order to the division of limited assets. We got into this mess one flawed assumption at a time. On a final note, there is a move afoot to massively reduce contributions to sheltered retirement accounts. This seems precisely wrong. (I have routinely sheltered 25–30 percent of my gross income as a point of reference.) Congress is also pondering new contributions be forced into Roth-like accounts rather than regular IRAs. I have put a bat to the Roth IRA both in print191 and in a half-hour talk.192 Here is the bumper sticker version: Roth IRAs pull revenue forward, leaving future generations to fend for themselves; Fourth grade math shows that Roth and regular IRAs, if compounded at the same rate and taxed at the same rate, provide the same cash for retirement. Roth IRAs are taxed at the highest tax bracket—the marginal rate—whereas regular IRAs are taxed integrated over all brackets—the effective tax rate. If you read a comparison of Roth versus regular IRAs without reference to the “effective” versus “marginal” rate, the author is either ignorant or trying to scam you. Phrases like “it depends on your personal circumstances” are double-talk. This synopsis of a Harvard study has two fundamental errors: Can you find them? “If a worker saves $5,000 a year in a 401(k) for 40 years and earns 5% return a year, the final balance will be more than $600,000. If the 401(k) is a Roth, the full balance is available for retirement spending. If the 401(k) is a traditional one, taxes are due on the balance. Let’s say the person’s tax rate is 20% in retirement. That makes for a difference of $120,000 in spending power, which a life annuity will translate into about $700 a month in extra spending.” ~John Beshears, lead author of a Harvard study Inflation versus Deflation “Deflation does not destroy these resources physically. It merely diminishes their monetary value, which is why their present owners go bankrupt. Thus, deflation by and large boils down to a redistribution of productive assets from old owners to new owners. The net impact on production is likely to be zero.” ~Guido Hülsmann. Mises Institute “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.” ~Lael Brainard “Inflation is a tax and those least able to afford it generally suffer the most.” ~Esther George, president and CEO of the Federal Reserve Bank of Kansas City “Barring major swings in value of the dollar, inflation is likely to move up to 2 percent over the next couple of years.” ~Janet Yellen, Federal Open Market Committee chair Barring major swings in the value of the dollar? What kind of circular reasoning is that? The Fed tells us inflation is too low relative to their arbitrary 2 percent target. I say they are lying—through their teeth—and I have company. John Williams of ShadowStats has been ringing the alarm for decades, currently putting inflation at 6 percent compared with official numbers of less than 2 percent (Figure 28).193 A study by the Devonshire Group concurs with Williams.194 The most notable support for the official consumer price index (CPI) inflation numbers comes from MIT’s Billion Prices Project (BPP).
Federal National Mortgage Association (OTC: FNMA ) and Federal Home Loan Mortgage Corp (OTC: FMCC ) investors got some good news this week when the Treasury Department and the Federal Housing Finance Agency ...
Since the US government nationalized the two GSEs in 2008 in a $187 billion bailout of the mortgage giants, there have been consistent calls for them to be wound down and for the private sector to fill the void. As we discussed, this view is, or was, shared by new Fed Chairman, Jay Powell. Mr. Powell has called on Congress to overhaul the housing finance system, saying he’d like to see the country’s two large mortgage-finance firms, Fannie Mae and Freddie Mac, move out from under government conservatorship. More private capital in those firms would reduce the risk of a taxpayer-funded bailout in the event of a downturn, he said in a speech in July. Although the Fed isn’t responsible for housing finance, it supervises some of the country’s largest lenders who frequently sell their loan to the two agencies. “No single housing finance institution should be too big to fail,” he said. In August this year, Fannie and Freddie’s regulator, the Federal Housing Finance Agency (FHFA), published the results of its latest annual stress tests on the two GSE’s. The FHFA outlined a “severely adverse” scenario in which US real GDP decline 6.5%, the unemployment rate rises to 10.0%, equity prices decline almost 50%, home prices decline 25% and commercial real estate prices by 35%. Under these conditions, it estimates Fannie and Freddie would need a bailout of up to $100 billion in the form of a draw on the Treasury (depending on how they treat assets to offset tax). Mortgages guaranteed by Fannie and Freddie amount to about $4 trillion and account for about 40% of the total US market. Note: 2017 data through June. Sources: Inside Mortgage Finance, Urban Institute Sadly, after almost a decade of federal ownership, the hope that Fannie and Freddie could be wound down has evaporated. Senators on both sides of the political divide have concluded that they are too big and too risky to replace. Proposed legislation in 2018 will see them retained at the centre of the US mortgage industry, rather than replacing them as a previous senate proposal tried and failed four years ago. According to the Wall Street Journal. Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down, people familiar with the matter said. Bipartisan Senate legislation set to be introduced in early 2018 marks the clearest sign of this reversal and shows how the companies, entering their 10th year under federal control, have proven too risky to attempt replacing. The housing market has seen strong demand in recent years, driven in part by steady access for many Americans to 4% or lower 30-year fixed-rate mortgages, thanks in part to a government backstop of the companies. Advancing legislation to refashion the nation’s $10 trillion mortgage market is a heavy political lift and may yet sputter during the coming midterm-election year, as a prior Senate effort did four years ago. One big difference this time around: a more incremental approach largely reliant on the existing housing-finance framework. The new plan, proposed by Senators. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) could be introduced as early as next month. Instead of a new mortgage-finance system, Fannie and Freddie will be retained under government control and permitted to issue mortgage securities guaranteed by the Treasury until private sector competitors emerge. The GSE’s investment portfolios, which have fallen to less than $250 billion each from over $900 billion each at their peak, could be liquidated under the Senate plan. “We’re looking for a more simplified approach that protects the taxpayer, preserves the 30-year fixed mortgage and includes stronger access and affordability provisions,” Mr. Warner said in a statement Friday. However, Bloomberg’s sources acknowledge that a private sector alternative to Fannie and Freddie will not only take years to emerge, but it’s not clear which companies will enter the market. Besides having the advantage of bi-partisanship, the proposals have the advantage that politicians who wish to reform mortgage finance are reaching retirement age as Bloomberg notes. Another factor bolstering chances for a deal is the retirement of Washington officials interested in reducing government control of housing, including Mr. Corker. The Tennessee senator has been working with Mr. Warner and Senate Banking Committee Chairman Mike Crapo (R., Idaho) all year on the issue, according to people familiar with the deliberations, and Mr. Crapo has made the overhaul a top goal for his panel. Even House Financial Services Committee Chairman Jeb Hensarling (R., Texas) signaled this month in a speech to Realtors that he would like to see a Fannie and Freddie deal in what is to be his final year in Congress. Mr. Hensarling said he is still committed to replacing the companies, but has backed off a position that any future setup provide no federal backstop. Reforming mortgage finance has not been a focus for the Trump administration and nor has it endorsed any proposed legislation thus far. However, Treasury officials are reported to have been in close contact with the Senate officials as the plan has emerged. Furthermore, Treasury Secretary Steven Mnuchin, who also headed up Goldman’s mortgage securities department in the late 1990s, disagreed with calls for abolishing Fannie and Freddie last month. “No, I wouldn’t,” he said in an interview at November’s Wall Street Journal CEO Council meeting. “We have got to make sure that the housing system is built to last.” Bloomberg reports that supporters of Corker and Warner’s proposal see a “narrow window” in early 2018 when the legislation could be added on to another bill to reduce post-crisis regulations in the financial sector. The question about what to do with Fannie and Freddie has now come full circle since the financial crisis. In its aftermath, the consensus view became so negative that even long-time supporters, like Democrat Barney Frank, capitulated, saying they should be abolished. In 2013, Obama called on Congress to wind them down and “end Fannie and Freddie as we know them”. However, the tide started to turn shortly after due to the lack of confidence in mortgage bonds that didn’t have a government guarantee. The latest Senate proposal is the first having bipartisan backing which keeps Fannie and Freddie instead of replacing them. So, a bit like the “Too Big To Fail” banks, the encroachment of government into parts of the financial system which it should never have entered, makes winding back that intervention difficult, if not impossible. We could have seen it coming as Bloomberg laments. Washington’s about-face will come as little surprise to market participants who for years predicted that efforts to replace Fannie and Freddie, which together back around half of all outstanding mortgages, would prove too difficult. But the shift on Capitol Hill nevertheless illustrates one way in which policy ideologues appear to have lost ground to market realities.
По данным Федерального агентства по финансированию жилья (FHFA) индекс цен на дома в США, покупка которых осуществлялась с участием контролируемых государством ипотечных агентств Fannie Mae и Freddie Mac, в октябре повысился в месячном исчислении на 0.5% при ожидавшихся 0.4%. Повышение индекса в сентябре пересмотрено с 0.3% до 0.5%.
По данным Федерального агентства по финансированию жилья (FHFA) индекс цен на дома в США, покупка которых осуществлялась с участием контролируемых государством ипотечных агентств Fannie Mae и Freddie Mac, в октябре повысился в месячном исчислении на 0.5% при ожидавшихся 0.4%. Повышение индекса в сентябре пересмотрено с 0.3% до 0.5%.
After years of political stalemate over the future of Fannie Mae and Freddie Mac, things are beginning to move in Washington. The big news for investors is the ultimate endgame is starting to take shape in Congress.
Основные индексы Уолл-стрит выросли в четверг, так как инвесторы ожидают снижения ставок корпоративного налога, что побудит компании тратить свой дополнительный капитал на дивиденды, новые проекты и повышение заработной платы. Кроме того, как стало сегодня известно, цены на жилье в США выросли в октябре на 0,5% по сравнению с предыдущем месяцем, согласно индексу цен на жилье (HPI) от Федерального агентства по жилищному финансированию (FHFA) с поправкой на сезонность. Ранее сообщаемый прирост в сентябре на 0,3% был пересмотрен с повышением до 0,5%. Месячный HPI от FHFA рассчитывается с использованием информации о ценах по продаже жилья от проданных или заложенных ипотечных кредитов или гарантированных Fannie Mae и Freddie Mac. С октября 2016 года по октябрь 2017 года цены на жилье выросли на 6,6%. Вместе с тем, в ноябре индекс ведущих индикаторов (LEI) от Conference Board вырос на 0,4% до 130,9 (2010 = 100), после увеличения на 1,2 процента в октябре и роста на 0,1 процента в сентябре. Цены на нефть незначительно выросли в четверг, чему способствовал продолжающийся простой нефтепровода Forties в Северном море. Кроме того, определенную поддержку ценам оказывали вчерашние данные от Минэнерго США, которые отразили значительное падение запасов нефти. Большинство компонентов индекса DOW в плюсе (20 из 30). Лидер роста - Chevron Corporation (CVX, +2.96%). Аутсайдер - Intel Corporation (INTC, -1.39%). Большинство секторов S&P в плюсе. Больше всего вырос сектор сырьевых материалов (+1.4%). Наибольшее снижение показывает сектор коммунальных услуг (-0.7%). На текущий момент фьючерсы демонстрируют следующую динамику: Dow 24827.00 +88.00 +0.36% S&P 500 2691.25 +9.75 +0.36% Nasdaq 100 6506.75 +17.75 +0.27% Oil 58.26 +0.17 +0.29% Gold 1270.40 +0.80 +0.06% U.S. 10yr 2.49 -0.01 Информационно-аналитический отдел TeleTradeИсточник: FxTeam
Federal National Mortgage Association (OTC: FNMA ) and Federal Home Loan Mortgage Corp (OTC: FMCC ) shares are rocking Thursday after the Treasury Department and the Federal Housing Finance Agency announced ...
The U.S. regulator overseeing Fannie Mae (FNMA.PK) and Freddie Mac (FMCC.PK) has reinstated a $3 billion capital cushion for each of the mortgage guarantors, citing the imminent tax overhaul. The $3 billion cushion, which comes after Fannie and Freddie were expected to eliminate their capital reserves next year, would cover "ordinary income fluctuations," the Federal Housing Finance Agency said on Thursday. The two enterprises remain in government conservatorship after the subprime mortgage crisis and are still expected to pay out quarterly dividends to the Treasury, according to the terms of their government support.
Цены на жилье в США выросли в октябре на 0,5 процента по сравнению с предыдущем месяцем, согласно индексу цен на жилье (HPI) от Федерального агентства по жилищному финансированию (FHFA) с поправкой на сезонность. Ранее сообщаемый прирост в сентябре на 0,3 процента был пересмотрен с повышением до 0,5 процента. Месячный HPI от FHFA рассчитывается с использованием информации о ценах по продаже жилья от проданных или заложенных ипотечных кредитов или гарантированных Fannie Mae и Freddie Mac. С октября 2016 года по октябрь 2017 года цены на жилье выросли на 6,6 процента. Для девяти отделов переписи скорректированные с учетом сезонных колебаний изменения цен с сентября 2017 года по октябрь 2017 года колебались от -0,4 процента в Западном Северо-Центральном дивизионе до +2,8 процента в Юго-Восточном Центральном дивизионе. 12-месячные изменения были положительными, начиная от +4,8 процента в Западном Северно-Центральном дивизионе до +8,7 процента в Тихоокеанском подразделении. Информационно-аналитический отдел TeleTradeИсточник: FxTeam
Фонд Билла Миллера MVP 1 к настоящему моменту наполовину инвестирован в Bitcoin, что стало крупнейшей концентрацией активов инвестиционного фонда, заявил Миллер WealthTrack. Миллер запустил Miller Value Partners в 2016 году после 35 лет работы в Legg Mason. Он управлял фондом, который превосходил S&P 500 в течение 15 лет вплоть по 2005 год. У Миллера репутация инвестора с концентрированными вставками, тем не менее, он никогда не инвестировал половину своего фонда в один актив. Миллер инвестировал 20% в AOL за один раз, почти столько же в Dell и 10% в Fannie Mae. Фонд Миллера инвестировал около трети средств в Bitcoin в конце октября, сообщили Wall Street Journal, таким образом, это около $154 млн. Bitcoin на тот момент торговался около $6,000 за монету. С того момента Bitcoin более чем утроился в цене, превысив отметку в $19,000 по мере роста спроса со стороны инвесторов. Компания Миллера управляет $2.2 млрд., включая отдельные счета для инвестиционных фондов и крупных розничных инвесторов. В данный момент он рассматривает варианты смягчения рисков для фонда. Он заявил, что Bitcoin не будет длительное время составляет половину его портфеля, тем не менее, это не означает, что он планирует продавать его прямо сейчас. Фонд Миллера до настоящего момента не покупал другие криптовалюты, так как глава фонда планирует сохранить основной упор на биткоине. Миллер заявил, что большинство других криптовалют, если судить по истории денег, не будут ничего стоить. Сын Миллера, управляющий портфелем в компании, убеждает отца также рассмотреть варианты с инвестированием в альткоины. Миллер покупал Bitcoin в 2014 и 2015 годах по средней цене в $350. Часть закупок была ниже $200, однако другие были выше $500. Bitcoin Billionaire Investor Invests Half of His MVP 1 Fund in Bitcoin, CCN, Dec 19 Источник: FxTeam
What prompted this question was seeing this release from Senator Portman (as well as this tweet) extolling the Tax Cuts and Jobs Act, appealing to the opinion of “137 economist”. Here’s the list: James C. Miller III, Former OMB Director, 1985-88 Douglas Holtz-Eakin, American Action Forum Alexander Katkov, Johnson & Wales University Ali M. Reza, […]
The Senate is reportedly working on a draft of a house financing reform bill that could have huge implications for Fannie Mae and Freddie Mac. Since 2012, all of Fannie and Freddie's profits have been turned over to the government under the terms of their bailouts during the financial crisis. The good news for Fannie and Freddie started in May when Federal Housing Finance Agency director Mel Watt said it would be irresponsible to keep the two government-sponsored entities under government conservatorship without recapitalizing them to provide a cushion in the event of another housing market downturn.
They are once again turning a profit, and looking to the company's future in the digital age.
Submitted by Wolf Richter of Wolf Street The Fed’s balance sheet for the week ending December 6, completes the second month of the QE-unwind. Total assets initially zigzagged within a tight range to end October where it started, at $4,456 billion. But in November, holdings drifted lower, and by December 6 were at $4,437 billion, the lowest since September 17, 2014: “Balance sheet normalization?” Well, in baby steps. But the devil is in the details. The Fed’s announced plan is to shrink the balance sheet by $10 billion a month in October, November, and December, then accelerate the pace every three months. By October 2018, the Fed would reduce its holdings by up to $50 billion a month (= $600 billion a year) and continue at that rate until it deems the level of its holdings “normal” – the new normal, whatever that may turn out to be. Still, the decline so far, given the gargantuan size of the balance sheet, barely shows up: The Fed is unloading its Treasuries alright. As part of the $10-billion-a-month unwind from October through December, the Fed is supposed to unload $6 billion in Treasury securities a month plus $4 billion in mortgage-backed securities (MBS) a month. The Fed doesn’t actually sell Treasury securities outright. Instead, it allows some of them, when they mature, to “roll off” the balance sheet without replacement. When the securities mature, the Treasury Department pays the holder the face value. But the Fed, instead of reinvesting the money in new Treasuries, destroys the money – the opposite process of QE, when the Fed created the money to buy securities. This happens only on dates when Treasuries that the Fed holds mature, usually once or twice a month. In October, the big day was October 31, when $8.5 billion of Treasuries on the Fed’s books matured. The Fed reinvested $2.5 billion and let $6 billion “roll off.” Hence, the amount of Treasuries fell by about $6 billion from an all-time record $2,465.7 billion on October 25 to $2,459.8 billion on November 1. In November, there were two big maturity dates: November 15, about $11 billion in Treasuries matured. The Fed allowed $3.4 billion to “roll off” without replacement. November 30, about $7.9 billion matured. The Fed allowed $2.5 billion to roll off without replacement. For all of November, the balance of Treasuries fell by $5.3 billion to $2,454.5 billion, in line with the plan, and the lowest level since October 8, 2014: Mortgage-backed securities are a different animal. As part of QE, the Fed acquired residential MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Now, as part of its $10-billion-a-month QE-unwind, the Fed is supposed to shed up to $4 billion a month in these MBS. And? At the beginning of October, the Fed held $1,768.2 billion in MBS. The balances then jumped up and down on a weekly basis and ended October at $1,770.6 billion, or $2.4 billion higher than at the beginning of the QE-unwind. Same scenario in November, though they have started to edge down overall just a tiny bit to $1,767 billion, the lowest by a smidgen since March 8, 2017: Residential MBS differ from bonds. Fannie Mae et al. regularly pass through principal payments to MBS holders as underlying mortgages get paid down or get paid off. Thus, the principal shrinks until the remainder is redeemed at maturity. To keep the MBS balance steady, the Fed, via the New York Fed’s Open Market Operations (OMO), buys MBS in the “to-be-announced market,” or “TBA market.” This is a trade where the actual MBS is not designated at the time of the trade but will be announced 48 hours before the established settlement date, which can be two to three months later. But the Fed books its MBS holdings on a settlement-date basis. So there is a mismatch between the date the Fed receives principal payments and the date reinvestment trades settle. Hence the jagged line in the chart above. So when will the $4-billion-a-month in MBS reductions show up on the Fed’s balance sheet? The first MBS reinvestment trades under the QE-unwind plan were conducted in October. Given the lag to settlement date of two to three months, the first visible impact on the balance sheet would start no earlier than December. This is where we are now, on the verge of seeing it. The line in the MBS chart will always bounce up and down due to the mismatch between the date the Fed receives principal payments and the date reinvestment trades settle. But the line should start trending down, with noticeably lower lows and lower highs. For the first three months, the QE unwind only removes about $10 billion a month, a negligible amount, given the vast markets and excess liquidity. But it picks up steam every three months. By October 2018, if the plan is still on, the QE unwind will remove $50 billion a month from the markets. This process will do the opposite of what QE had done: it will gradually destroy some of the $3.6 trillion that the Fed had created during QE. And by that time the broader effects of QE – asset price inflation – should also start to reverse.
Democratic Representative Ruben Kihuen of Nevada became the latest member of Congress forced out by allegations of harassment. Here's a running list of all the lawmakers calling it quits.
Мы совсем как то эту тему забросили, а зря. Все же на этот рынок много завязано. О каких суммах идет речь? Объем ипотечных кредитов (для жилой недвижимости, коммерческой, сельскохозяйственной) составляет 13.1 трлн долл на конец 2012 года. Из этих 13.1 трлн более 9.4 трлн записано на домохозяйства. Под эти кредиты выпускали тоннами всякого MBS’осного шлака, процесс полностью остановился в 2008 году. Сейчас совокупный объем MBS составляет 7.54 трлн, т.е. почти 58% всех ипотечных кредитов было секьюритизировано. На пике зверства было под 70%. Из 7.54 трлн около 80% эмитировано Government-sponsored enterprises (GSE) всякие там fannie mae и freddie mac, остальное остальное на частные структуры. Причем стоит обратить внимание на то, что в 2009 году более 4.4 трлн дефолтных бумаг (!) было изъято из частных структур в пользу государственных. Не будь этого, то все рухнуло. Программа TARP, кредитование ФРС и QE здесь не учитываются.Как это было...Чтобы оценить тенденции и масштабы, то лучше всего на графике.Как видно, процесс сокращения ипотечных кредитов продолжается. Низкие процентные ставки не помогают, кредиты не берут. А выкуп MBS не помогает тем более, т.к. сам процесс выкупа не имеет ни малейшего отношения к способностям и желаниям заемщиков получать кредит. Все, к чему имеет отношение ФРС - это стимуляция дальнейшей активности бангстеров по секьюритизации ипотечных кредитов, но если нет роста кредитов, то и чисто теоретически не может быть никакого роста активности в MBS. Поэтому проблема не в предложении кредитов, т.е не в банках, а в спросе (заемщиках). Нет спроса на кредиты, а банки бы рады опять шарманку запустить.Максимум, что может получиться из этой безумной затеи ФРС - так это провоцирование отрыва башни у бангстеров . С тем, чтобы условия получения займов были столь простыми, что получить займ мог бы любой, кто имеет в активах хотя бы один чупа чупс и половину недопитой банки коки. Возврат к тому, от чего пришли. Ничего этих людей не исправит.Кто держит весь этот мусор?Разумеется больше всех у ФРС – 1 трлн на конец 2012 и 1.15 трлн в настоящий момент. Ни одна структура единолично столько не держит. Это 15% рынка на 2012, к концу 2013 будет держать все 20% рынка. Тем самым это означает, что ценообразование на этом рынке под полным контролем ФРС и дилеров. Проще говоря, вторичного рынка больше не существует.Почти 4.5 трлн у финансовых структур (1.6 трлн коммерческие банки, 350 млрд ипотечные трасты, 347 млрд страховые фонды, 223 млрд пенсионные фонды, 170 млрд у брокеров и так далее).Частный сектор (домохозяйства и корпорации) сократили вложения почти в ноль. Причем домохозяйства по каким то загадочным причинам начали скупать MBS тогда, когда они наиболее активно падали в цене. На тот момент (2007-2008) они были самым крупным покупателем на рынке, нарастив всего за 1.5 года объем MBS на 500 млрд до 1.02 трлн, а потом в период с 2009 по 2010 все продали, когда ФРС запустил QE1Я раньше вам говорил, но повторю. Эта операция была похожа на хорошо спланированный инсайд. Группа лиц инсайдеров и аффилированных лиц с ФРС примерно в конце 2007-середине 2008 знала, что будет неизбежный выкуп MBS со стороны ФРС для поддержания рынка и примерно тогда готовился план по банкротству Лемана. Учитывая, что бумаги продавались с дисконтом, то предположительно через частные счета и некоммерческие организации был проведен выкуп на 300-400 млрд бумаг, которые по рыночной цене не стоили и половину от номинала. А потом продавали по номиналу ФРС, заработав сотни процентов чистой прибыли. Также поступали и дилеры, но в отличие от юридических лиц, физиков и НКО никто проверять не будет, т.к. об этом никто даже не догадывается. Т.е. более, чем вероятно, что на инсайде смогли отмыть через мошеннические схемы более 150 млрд чистой прибыли.Основные выводы1. Роста кредитования нет.2. Эмиссии MBS нет, т.к. нет роста кредитования.3. Рынок MBS под полным контролем ФРС и дилеров. Еще никогда в истории одна структура не держала такую долю рынка. 15% на 2012 и 20% на конец 2013. Вторичного рынка больше не существует в свободном формате. Цены регулируются ФРС.4. ФРС частная лавочка бангстеров и инсайдеров, которая действует прежде всего в интересах бангстеров и инсайдеров.5. По множеству косвенных и прямых признаков, инсайд о вероятном запуске QE1 был еще в начале 2008 года. Много подозрительных теневых операций по переброски средств в НКО. Откуда у НКО пол триллиона баксов, которые выкупали это говно в момент острой паники и краха. По моим оценка отмыли не менее 150 млрд чистой прибыли.6. Когда MBS в объеме не увеличиваются, а ФРС выкупает под 40 млрд в месяц + когда ФРС монетизирует гос.долг США, то избыточная ликвидность абсорбируется на рынке акций. Реципиентом являются дилеры – те, кто работает с ФРС и получает ликвидность от ФРС. НЕ нужно питать иллюзий, что рост фондового рынка чем то фундаментально обоснован. Очередная гнусная операция по перекачки ликвидности и поддержанию рентабельности фин.сектора в условиях, когда активность клиентов спала на рекордно низкий уровень. Не будет QE = не будет роста рынка.7. Единственной хорошей новостью является то, что этот бардак выходит на финишную прямую. Когда они сосредоточили в руках почти всю возможную власть и активы, то прорыв этого чуда-юда неизбежен. Учитывая то, насколько все ухудшилось за последний год, то ждать осталось не так и долго. Еще никогда контроль над активыми не был столь тотальным и всеобъемлющим.Более детальная таблица держателей MBS
Небольшая предыстория, чтобы понять, откуда растут ноги у монетарного безумия. Это важно понимать в условиях, когда система на полном ходу несется под откос. Все началось задолго до того, как общественностью принято считать началом острой фазы кризиса. Первые серьезные проблемы появились в еще 2007 году, а не осенью 2008.Но сначала, что такое MBS? Объясню предельно кратко. Это структурированная облигация с определенным номиналом и процентными платежами, покупаемая инвесторами по образу и подобию обычных облигаций с небольшими отличиями. Кто является эмитентом? Либо квазигосударственные структуры (Ginnie Mae, Fannie Mae, Freddie Mac), либо инвестиционные фонды. На какой основе происходит эмиссия?Ипотечные кредиты населения объединяются в пул residential mortgage-backed security (RMBS)Коммерческие ипотечные кредиты объединяются в пул commercial mortgage-backed security (CMBS).Нарисовал схематично в общих чертах принцип работыДалее происходит секьюритизация кредитов и градация по качеству кредитов с присвоением соответствующего рейтинга. Самый высокий рейтинг соответствует якобы самым надежным кредитам и по ним наименьшие ставки. Соответственно наоборот с наименее надежными –сабпрайм кредитами.После этого происходит эмиссия MBS и продажа инвесторам. Не буду заостряться на ценообразовании, т.к. это весьма обширная тема, а скажу суть. Процентные ставки по MBS всегда ниже, чем процентные ставки по кредитам, образующих MBS. Так, например, если пул кредитов на 1 млрд долларов со средневзвешенной ставкой в 6%, то облигация будет точно ниже 6% годовых. Если инвесторы не готовы покупать по 6%, а просят 7%, то эмиссия облигации теряет всякий смысл.Отсюда вытекает две фундаментальные уязвимости.Первое. В отличие от стандартных облигаций, MBS крайне серьезно завязаны на денежном потоке, который образуется процентными платежами по кредитам, поэтому процентные ставки по MBS не могут быть выше процентных ставок по кредитам.Второе. В действительности, инвесторы не могут претендовать ни на какие залоги, поэтому формально облигация не имеет реального обеспечения, т.к. если происходит дефолт заемщиков и реализация их недвижимости на рынке, то это в самом лучшем случае может компенсировать лишь часть пула. Допустим, в пуле кредитов 10% оказались дефолтными и лишь 7% удалось реализовать, да еще с дисконтом в 20% из-за падение цен на недвижимость. Эмитент облигации в таких условиях не может в полной мере выполнить своих обязательств и инвесторы несут убытки, либо при исполнении обязательств эмитент понесет убытки пропорционально количеству дефолтных заемщиков.Но это в лучшем случае.В реальности процедура взыскания усложнена, т.к. из-за иерархической секьюритизации сложно доказать, кто фактически является собственников кредита. Вспомните, Foreclosure-gate в 2010 году, когда банки не могли доказать принадлежность кредита, что усложняло процедуру взыскания.Это потоки денег между контрагентами.Т.е. схема такая. Заемщик идет в банк за кредитом, получает деньги и покупает недвижимость. Коммерческий банк продает пул кредитов инвестфондам, как правило, с небольшим дисконтом, и инвестбанк получает пул кредитов и процентные платежи по нему от коммерческого банка. Далее инвестбанк структурирует кредиты, производит градацию по качеству и выпускает MBS. Инвесторы платят инвестбанку деньги за MBS, а от банка-эмитента получают процентные платежи и деньги при полном или частичном погашении облигации.Собственно, мотивация инвестбанков в покупке пула ипотечных кредитов заключается в том, чтобы заработать деньги на разнице между процентной ставкой по эмитированной облигации и процентными ставками по ипотечным кредитам.Коммерческие банки заинтересованы в перераспределении ответственности и снятию рисков невозврата.Инвесторы заинтересованы в получении доходов от MBS. Раньше деньги по MBS исправно платились,Все были заинтересованы в расширении этого рынка, но …Коллапс ипотечного пузыря с 2007 года вызвал обесценение mortgage-backed security и инвесторы стали просить премию за ипотечные пулы. Иными словами, эмиссия этого чуда-юда проходила по существенно более высоким ставкам.Все крупнейшие банки были достаточно сильно представлены в MBS, как со стороны инвесторов, так и со стороны эмитентов.Теперь рассмотрим этот процесс внимательно со стороны эмитента MBS. В активах у них ипотечные пулы, в пассивах обязательства по MBS.Начинается дефолт заемщиков (сужается денежный поток по выплате кредитов), падает цена не недвижимость, которая является залогом в пуле кредитов. Целые кластеры обесцениваются, но инвестбанк вынужден выполнять свои обязательства перед инвесторами.Допустим, к погашению подходит 10 млрд MBS. Раньше на каждые 10 млрд погашений, банки могли размещать по 30-50 млрд нового выпуска, тем самым происходил, как процесс рефинансирования, так и процесс расширения. А что случилось в 2007-2008?Эмиссия упала в ноль. Погашать надо, а рефинансировать не получается. Все, конец. Без ФРС теперь никуда.Во-первых: инвесторы начали просить премию и более высокие процентные ставки, тем самым многие выпуски теряли смысл при отсутствии рентабельности.Во-вторых: инвесторы значительно сократили свои вложения в этот рынок из-за опасения дефолтов после коллапса ипотечного пузыря и смены настроений. Т.е. раньше рефинансировали легко 10 млрд, а теперь максимум готовы купить 2-3 млрд.Так вот, банку нужно погасить 10 млрд, а купить в новой эмиссии готовы лишь на 2 млрд. Образуется дефицит ликвидности на 8 млрд. Что делать? Фондироваться на межбанке, просить деньги у ФРС, либо реализовывать свои активы на рынке.Фондироваться на межбанке не получалось, т.к. в начале был дефицит ликвидности, когда у других банков были теже самые проблемы и им тоже нужны были деньги. А потом возник кризис доверия, когда банки не могли открывать кредитные линии по причине, что не были уверены в платежеспособности контрагента.Реализовывать активы на рынке приходилось с дисконтном в десятки процентов, т.к. одновременно на продажу ринулись все, тем самым активы посыпались. В 4 квартале 2007 году произошли первые многомиллиардные списание у крупных банков. Собственно тогда стало окончательно понятно, что система пошла в разнос.Оставалось звонить ФРС.Звонки в ФРС стали происходит в аварийном режиме на постоянной основе с матерными выкриками : «Бен, что за ебанистика творится на рынке? Мы не может остановить падение MBS, у нас нет денег на поддержание штанов, мы банкроты»Разработка экстренных программ началась в 4 квартале 2007 года, запуск первых состоялся в декабре. Одна из первых программ – это Term Auction Facility (TAF) – временные аукционы для поддержания ликвидности в финансовой системе. Эта программа предоставляет банкам кредиты на 28 или 84 дня на тот случай, если кредитование через дисконтное окно ФРС по каким либо причинам не доступно, либо не востребовано банками.И понеслась.Март 2008. ЗапускTerm Securities Lending Facility (TSLF) программа, призванная увеличить показатели ликвидности непосредственно для первичных дилеров. Кредиты сроком на 1 месяц, обеспеченные залогами. Старт был в марте 2008, окончание действия 1 февраля 2010. Процентная ставка определяется по рыночной стоимости казначейских одномесячных векселей.Primary Dealer Credit Facility (PDCF) Это овернайт кредиты исключительно для первичных дилеров с целью стабилизации рынка РЕПО и устранения кассовых разрывов при отсутствии возможности фондироваться на необходимую сумму из других источников. Теоретически овернайт кредиты могут пролонгироваться бесконечно в формате действий данной программы. Ставка фиксированная и определяется ФРБ Нью Йорка. Лимиты программы формально безграничны, но фактически определяются уровнем залогов у первичных дилеров.Но ничего из того не помогло, исправить ситуацию не получилось. Обесценение MBS происходило дальше.Банки убивало то, что эмиссия MBS сжалось почти в ноль, а погашать MBS надо был в огромных количествах. Следовательно, дефицит ликвидности стал просто запредельным. Плюс сжатия денежного потока + падение цен на недвижимость и самого залога.В середине 2008 стало окончательно понятно, что должен быть крупный покупатель на рынке MBS, чтобы стабилизировать обесценение. Вариантов не оставалось – это только ФРС.Сейчас в 2013 это кажется странным, но тогда монетарное блядство и разврат были далеко не так запущены, как сейчас. Опыта QE не было. Было просто дикостью, что ФРС будет скупать активы на открытом рынке, ни одному в голову такое прийти не могло. В середине 2008 они придумали гениальный план, суть которого заключалась в следующем, что раз просто так начать QE не получится, то необходимо устроить панику и условия тотального страха, чтобы законодательно оправдать помощь. Повторюсь, в 2008 году банкиры были очень запуганными, это сейчас они обнаглели в конец и делают, что хотят. Тогда еще были рамки приличия. Как устроить панику? Обанкротить банк? Какой банк? Достаточно крупный, чтобы вызвать глобальную панику, но недостаточно крупный, чтобы привести к параличу банковской системы.Выбор был невелик: Goldman Sachs, Morgan Stanley, Merrill Lynch и … Lehman Brothers. Не будем заостряться, почему это был Lehman Brothers, но так получилось, что козлом отпущения должен был стать именно он.Существует миф, что якобы виной кризиса стал Lehman Brothers. Это не так. В оправдание этого банка скажу, что вся банковская система была на тот момент банкротом, т.к. экспозиция по структурированным продуктам была запредельная, и этот рынок был парализован. Сказать, что финансовый кризис спровоцировал LB – это расписаться под собственной профнепригодностью.Lehman Brothers – это не более, чем предлог для начала экстренных спасительны мер, это был инструмент для спасения всей банковской системы, т.к. необходимо было начать программы TARP и выкуп MBS. Банкротство Lehman Brothers шло в полном соответствии с планом Казначейства и ФРС по спасению банковской системы. Банкротство Lehman Brothers было спланированным и подготавливалось с весны 2008, когда стало понятно, что без выкупа не обойтись. Если бы не начали выкуп, то через несколько дней навернулся бы другие инвестбанки, там были дичайшие кассовые разрывы.Ниже задолженность банков перед ФРС по кредитам. Отмечу, что Citi и Bank of America в тот момент были в более плачевном положении, чем Lehman Brothers.На графике черной линией консодированная задолженность Леман перед ФРС по кредитным линиям.Видно, что она на уровне других банков, а пиковая задолженность в пару раз меньше, чем у конкурентов, что как бы намекает на то, что дела у других банков мягко говоря шли еще хуже.Потом Генри Полсон говорил, что они обанкротили Леман по причине, что не хотели тратить деньги налогоплательщиков? Брехня и вранье.Через пару дней они начали заливать в систему триллионы, что видно нижеЗдесь я провел клиринг всех операций кредитования и посчитал кумулятивную экспозицию по всем программам.Расшифровка программ. Про три программы расcказал выше. Остальные:Commercial Paper Funding Facility (CPFF) – программа обеспечивает поддержку ликвидности для американских эмитентов корпоративных облигаций через прямой выкуп трехмесячных облигаций (обеспеченных и необеспеченных активами) по специально созданным лимитам. Операции проводились до полного погашения обязательств. Ставки кредитования для необеспеченных бумаг OIS + 300 базисных пункта, а для обеспеченных OIS + 100 базисных пунктаTerm Securities Lending Facility (TSLF) – программа, призванная увеличить показатели ликвидности непосредственно для первичных дилеров. Кредиты сроком на 1 месяц, обеспеченные залогами.Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) – это программа экстренного кредитования фондов денежного рынка под залог коммерческих бумаг, обеспеченных активами. Процентная ставка фиксированная и устанавливается ФРБ Нью Йорка на день выдачи (Primary Credit rate). Лимит кредитования устанавливается в зависимости от предоставленных залогов. Срок кредитования от нескольких дней до нескольких месяцев.На графике не отражены своп линии и Maiden Lane for Bear Stearns, American International Group – целый ряд программ поддержки для Bear Stearns и AIG. В совокупности на пике без учета своп линии впрыск ликвидности доходил до 1.25 трлн долларов.В принципе, надо понимать, что для ФРС не было никакой проблемой спасти Леман. Речь шла о разрыве в 15 млрд баксов. Они не дали 15, чтобы потом влить 1.5 трлн. Чувствуйте разницу? Дело в том, что он вполне мог спасти по образу и подобию Bear Stearns, когда дал гарантии по части обязательств банка. Но на Леман закрыли лимиты тогда, как банки, так и ФРС. Программы кредитования проходили достаточно мутно. т.к. в залог формально давали активы, а по факту мусор, т.к. оценить стоимость было сложно и тупо оценивали все по номиналу.Так вот, откуда объем в 1.25 трлн у QE1? Почему не 600 млрд или 1 трлн? 1.25 трлн = пику кредитования. Т.е. QE1 замещал кредит на чистый впрыск ликвидности. Те. Банки погашали кредиты и одновременно получали деньги через QE1.Почему выкуп MBS, а не трежерис? Понятно из статьи.QE2? Что это? Экспериментальная программа, чтобы проверить обратную реакцию системы. Чистый вандализм и произвол. Они хотели проверить, приведет ли программа к негативным последствиям на валютном и долговом рынке? Не привела, все осталось в порядке и запустили QE3 в уже безлимитном форматеПрограмма QE3. Основная цель – монетизация гос.долга и обеспечение рентабельности бангстеров в условиях, когда реальный сектор высушен, когда невозможно генерировать прибыль. К заявленному спасению экономики программа не имеет никакого отношения. Это очередное прикрытие банкиров.Посмотрите, насколько херовые результаты по доходам инвестбанков.Конъюнктура такая, что делать деньги стало практически невозможно. Разумеется, опять приходит на помощь ФРС уже с QE3 ))Вероятно, QE3 - это последнее, что сделает ФРС. Система в критическом состоянии находится. Обратные связи полностью деградировали. Сейчас производят интервенции на рынке акций в аварийном режиме, но не знаю, поможет ли? Думаю, что нет. По совокупности факторов, мировая экономика находится в более худшем состоянии, чем в 2009 году. Основная беда, что все идет в холостую, в пустоту. Рентабельность приращенного гос.долга близка к нулю
Федеральная резервная система может увеличить объемы и расширить список активов, выкупаемых в рамках проведения третей программы количественного смягчения. Об этом заявил президент Федерального резервного банка Сан-Франциско Джон Уильямс.Такие действия возможны в ответ на слабую реакцию экономики США на текущий формат стимулирования экономики."В отличие от наших прошлых программ по выкупу активов у этой нет заранее определенной даты завершения. Вместо этого она напрямую привязана к тому, что происходит с экономикой. Мы можем даже расширить наши покупки, с тем чтобы включить в них другие активы", - заявил Уильямс.Уильямс также отметил, что хоть и согласно мандату ФРС список бумаг, который может быть на балансе регулятора, ограничен, однако все еще есть возможность выкупа казначейских облигаций всех сроков обращения, долговых обязательств ипотечных агентств Freddie Mac и Fannie Mae.Помимо этого, Уильямс также ожидает продления сроков программы "Твист". "Я ожидаю, что мы продолжим эту программу в 2013 году, и я также думаю, что существуют сильные предпосылки для увеличения объемов или продолжения выкупа других активов в 2013 году, включая Treasuries с более длительными сроками обращения", - отметил Уильямс.По прогнозам представителя регулятора, ФРС удастся добиться снижения безработицы до 7,25% уже в 2014 г., поэтому программа выкупа активов будет завершена до конца 2014 г.