Confidence

The Wolf who cried “Boy”

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North Korea’s threat to fire a nuclear missile at Guam should the US try anything to jeopardize the hermit kingdom’s nuclear programme is more the domain of an hysteric media for now. He is the wolf crying boy – “I will eat your sheep when I wish, what are you going to do about it?” Of course, no sane government can dismiss his threats. The 33-year old leader has assassinated subjects and relatives who he feared might pose a challenge to him. He taunts his enemies in full knowledge the collateral damage the West may suffer would likely be factor fold higher than he stands to lose. North Korea’s GDP is estimated to be around $12 billion annually. Tokyo’s GDP is estimated to be around $1.5 trillion, 125x larger. Seoul’s GDP is around $780 billion (65x North Korea) but is located in shelling distance. From a purely militaristic standpoint, North Korea doesn’t stand a chance. The US has spy satellites parked permanently over North Korea surveilling troop movements, missile test sites and US submarines will have constant watch over Pyongyang’s naval activity. Mutually Assured Destruction (MAD) is not a bargaining chip in this case. While it does raise the ‘risk’ factor, it is not enough to exclude war on the peninsula.

The problem is that all the while no action is taken, PyongYang’s arsenal grows more sophisticated. Kim has no plans to halt his development. In 1994 then President Bill Clinton came closest to taking action against its nuclear capability but in the end chose diplomacy. We are 23 years on and the capabilities are such that this game has increasingly limited life span. Trump made his thoughts clear in a 1995 interview. Try to talk him out and if all else fails take the military option

The more advanced his arsenal becomes, the more weight his demands carry. Kim is in his 30s. Assuming the West does nothing, there is another three decades of threats and bellicose to consider. Over time its weapons programme will be sufficiently credible to hit Washington DC. Just like Russian missiles in Cuba, America will not allow a condition which could threaten it to exist.

North Korea has 3 main nuclear missile launch sites (Musudan-Ri,  Punggye-Ri and Tongchang-Ri) among the fourteen nuclear facilities ranging from R&D, power generation,  mining and refined fissile material production. A surgical strike would be difficult to achieve without North Korea getting away a few missiles itself.

Why Guam? Of course one can view his threat in several ways. One, Guam is the current realistic technical capability of his nuclear weapons, two; Kim hasn’t said he’ll strike Washington DC which should be interpreted as evidence that he is not completely deranged and bragging about capabilities he does not yet have, three; he could theoretically bomb the US military installations in Okinawa which is closer than Guam and more likely to score a relative hit but he has been careful not to drag Japan into this contest (yet) and finally; his nuclear programme is his only bargaining chip. Were Kim to cease his atomic aspirations, he would literally be a sitting duck. He knows – as did his father and grandfather before him – the regime survives on the will of the Rest of the World to appease it. If he has no trump card, the RoW can ignore it.

On April 10th this year, China’s special envoy on the North Korean nuclear programme, Wu Dawei, visited Seoul with the idea of pushing a harder UN resolution in case of another nuclear test. In the short term China is hoping a short term halt to coal imports will bring Kim Jong-Un to heel they have not ruled out removing him entirely. It is the least preferred option but Trump’s moves will only mean China is being forced to up the ante. However China has been lamenting that it can’t force Kim to come to heel. Once again this is partly China testing the will of Trump versus his predecessor. Do not think for one second that China hasn’t been channeling Sun Tzu as to how it can pull off a geopolitical masterstroke by bringing Kim to heel and the US to back down. This is becoming harder to achieve, even more so with an unpredictable president.

Let us not forget the strategic benefits of North Korea to China. It provides a buffer to the US friendly South Korea and keeps furthering China’s status as a dominant force (economically and militarily) in the region. One of the last things China wants is the equivalent population of Australia (24 million) as refugees on its northern border. Best it remains contained inside a regime presiding over a tiny economy. Even less desirable is a US invasion/strike which puts a US protectorate on China’s doorstep.

Global markets are not reacting too erratically to this crisis. They are collectively taking the path of most common scenario vis-a-vis history to date. Minor risk on. Even Korean CDS spreads, at 14 year highs (61) remain well down on GFC and the death of Kim Jong-Il. However a president who wants to reassert US foreign policy after 8 years of willful abuse under his predecessor may be more than willing to take decisive action and put an end to the North Korean problem. He won’t risk it unless his generals can give a very high level of assurance the collateral damage will be minimal

While some media want to believe that Trump is itching for a war in North Korea or Iran to resurrect his sliding poll numbers, that is an obtuse way of thinking. North Korea is a growing threat. Pure and simple. If North Korea gets a capability to potentially hit the US mainland then that is untenable. Any country that threatens to attack another puts itself on a geopolitical chess board of its own making. This is dragging China into a game it would rather not play but inevitably Beijing realizes that it has to take control before Trump takes it from them leaving them in the worst of all worlds.

Cooler heads to prevail? Maybe but something suggests that North Korea is brewing beyond what markets are currently pricing.

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When scientists expose the obvious

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Below is a resignation letter written by a scientist who pretty much proved what I’ve often thought of the climate alarmists. It is a money game. Look no further than the hypocrites like Al Gore warning of disaster yet using more 21x more electricity than the average home or Leo DiCaprio flying in private jets all around the globe. No doubt there will be replies to this post that seek to discredit Hal Lewis as often the case when climate alarmists want to shut down a debate. One of the best books I read on the climate change hoax was ‘The Delinquent Teenager’ written by Donna Laframboise which exposes just how shameful the climate game is, exposing that internal studies conducted by the UNIPCC proved how it is all about politics, not science. Yet here we have a scientist who had a conscience and made his feelings thought

From: Hal Lewis, University of California, Santa Barbara
To: Curtis G. Callan, Jr., Princeton University, President of the American Physical Society
6 October 2010

Dear Curt:

When I first joined the American Physical Society sixty-seven years ago it was much smaller, much gentler, and as yet uncorrupted by the money flood (a threat against which Dwight Eisenhower warned a half-century ago).

Indeed, the choice of physics as a profession was then a guarantor of a life of poverty and abstinence – it was World War II that changed all that. The prospect of worldly gain drove few physicists. As recently as thirty-five years ago, when I chaired the first APS study of a contentious social/scientific issue, The Reactor Safety Study, though there were zealots aplenty on the outside there was no hint of inordinate pressure on us as physicists. We were therefore able to produce what I believe was and is an honest appraisal of the situation at that time. We were further enabled by the presence of an oversight committee consisting of Pief Panofsky, Vicki Weisskopf, and Hans Bethe, all towering physicists beyond reproach. I was proud of what we did in a charged atmosphere. In the end the oversight committee, in its report to the APS President, noted the complete independence in which we did the job, and predicted that the report would be attacked from both sides. What greater tribute could there be?

How different it is now. The giants no longer walk the earth, and the money flood has become the raison d’être of much physics research, the vital sustenance of much more, and it provides the support for untold numbers of professional jobs. For reasons that will soon become clear my former pride at being an APS Fellow all these years has been turned into shame, and I am forced, with no pleasure at all, to offer you my resignation from the Society.

It is of course, the global warming scam, with the (literally) trillions of dollars driving it, that has corrupted so many scientists, and has carried APS before it like a rogue wave. It is the greatest and most successful pseudoscientific fraud I have seen in my long life as a physicist. Anyone who has the faintest doubt that this is so should force himself to read the ClimateGate documents, which lay it bare. (Montford’s book organizes the facts very well.) I don’t believe that any real physicist, nay scientist, can read that stuff without revulsion. I would almost make that revulsion a definition of the word scientist.

So what has the APS, as an organization, done in the face of this challenge? It has accepted the corruption as the norm, and gone along with it…

I do feel the need to add one note, and this is conjecture, since it is always risky to discuss other people’s motives. This scheming at APS HQ is so bizarre that there cannot be a simple explanation for it. Some have held that the physicists of today are not as smart as they used to be, but I don’t think that is an issue. I think it is the money, exactly what Eisenhower warned about a half-century ago. There are indeed trillions of dollars involved, to say nothing of the fame and glory (and frequent trips to exotic islands) that go with being a member of the club.

Is PM Abe’s at risk of a health relapse with yet more voter backlash?

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Yet more voter backlash for PM Shinzo Abe and the LDP. The scandals and shenanigans are causing some glaring results at the local and prefectural level. Last month’s Tokyo Municipal Assembly elections saw the LDP experience its worst ever outcome. The Sendai Gubernatorial elections this Sunday saw the LDP stench continue. Japan has been pushing the Abenomics revival theme but given the stress from a plummeting approval rating (26% heading into the Kake Gakuen hearings in parliament) will his health issues kick up forcing him to resign? The July 22-23 Mainichi newspaper poll showed that 56% did not back his government, +12 points from the previous survey in June.

Independent candidate Kazuko Kori (right) promised education reform and a quick resolution to the problem of long child care waiting lists. Her LDP competition in the form of  Hironori Sugawara (left),ironically a president of a funeral services operator, was defeated.

PM Abe’s left his first term after just 12 months in 2006-2007 being diagnosed with an illness known as chronic ulcerative colitis — a type of inflammatory bowel disease which according to the Bungei Shunju monthly magazine in Feb 2008:

“He would rush to the toilet in pain…he felt the urge to evacuate every half hour or so.

While in the 2012 campaign Abe assured us he’d been cured, the question is whether the current crop of scandals (involving him and his wife Akie) will see a relapse of this condition, rendering him out of action. Markets are not yet forecasting Abe to resign but whatever one thinks about “Abenomics” it has brought some long overdue semblance of stability in Japanese politics. Should an event occur we could see some financial evacuations.

3 maps which explain a lot

IMG_0743The chart above shows the average % change in housing prices in the US by county today vs that in 2000 according to a Harvard study. The following maps show the results of the 2008 and 2016 election by county. Could this be yet another basic concept showing why the US voted the way they did last election?

2008 – a hope for change

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2016 – the last 8 years didn’t help – time to vote for wholesale change

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Feel free to draw your own conclusions. These three maps to me voice the disgruntled who remain destitute after all this time.

From Sesame to Elm Street

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ETF markets continue to surge in popularity. With low fees and basic packaging of the ETF product even Big Bird can understand what The Count is going on about. No wonder investors are snapping up these products faster than the Cookie Monster. However there is something chilling about the ETF market. In the lead up to and eventual crash of Lehmans et al CDOs, CDSs and other synthetic products were seen as the root of all evil. They were so complex that even Fields Medal winners in mathematics couldn’t make head nor tail of them. The ETF became the opposite – being too simplistic – and with that the product has brought huge complacency. To that end Sesame Street could well switch to Elm Street.

Today assets invested in ETF/Ps comprise over $3 trillion globally. Put simply the new funds flowing into ETFs vs. traditional mutual funds is at a 100:1 ratio and in terms of AUM is on par with total hedge fund assets which have been in existence for 3 times as long.

However ETFs, despite increasing levels of sophistication, have brought about higher levels of market volatility. Studies have shown that a one standard deviation move of S&P500 ETF ownership carries 21% excess intraday volatility. Regulators are also realising that limit up/down rules are exacerbating risk pricing and are seeking to revise as early as October 2015. In less liquid markets excess volatility has proved to be 54% higher with ETFs than the actual underlying indices. A full report can be seen here.

With the continuation of asset bubbles in a TINA (there is no alternative) world, ETFs in my view will lead to massive disappointments down the line. Their downfall could well invite the revival of the research driven fund manager model again as robots show they’re not as infallible as first thought in managing the volatility. Don’t forget humans designed the algorithms.

There is also the added risk of whether some ETFs actually hold the physical of the indices or commodities they mimic. A gold ETF is a wonderfully good way to store wealth without resorting to one’s own bank vault but how many ETF owners have inspected the subterranean cage that supposedly holds the physical the ETF is backed by? Has it been lent out? Does it own a fraction of stated holdings? It could be any other commodity too. Of course the ETF providers bang on about the safety of the products but how many times have we gasped when fraud reared it’s ugly head right in front of us. Bernie Maddoff ring any bells?

Given the implied volatility on the downside we need to bear in mind the actions of central banks. The Bank of Japan (BoJ) is the proud owner of 60% of the ¥20 trillion+ domestic ETF market. While the BoJ says it isn’t finished expanding its world’s largest central bank balance sheet (now 100% of GDP), the US Fed is looking to reduce its balance sheet by over 40% in order to normalize. While one can applaud some level of common sense pervading sadly the consequences of defusing the timer on the bomb they created at a period when the US economy is showing signs of recession will only be an overhang on asset markets. Should the US market be put through the grinder, global markets will follow.

It is one thing for the Fed to be prudent. It is another for it to be trying to cover its tracks through higher interest rates in a market that looks optically pretty but hides serious life threatening illnesses. The Fed isn’t ahead of the curve at all. It is so far behind the 8-ball that its actions are more likely to accelerate rather than alleviate a crisis. Point to low unemployment or household asset appreciation as reasons to talk of a robust economy but things couldn’t be further from the truth. Wage growth is not the stuff of dreams and the faltering signs in auto, consumer and residential markets should give reason for concern.

Since GFC we have witnessed the worst global economic revival in history. The weakest growth despite record pump priming and balance sheet expansion. Money velocity is continually falling and the day Greenspan dispensed with M3 reporting one knew that things were bad and “nothing to see here” was the order of the day.

Record levels of debt (just shy of $220 trillion or 300% of GDP when adding private, corporate and government), slow growth, paltry interest rates and coordinated asset buying have not done anything other than blown more air into a bubble that should have been burst. GFC didn’t hit the reset button. Central banks just hit print to avoid the pain. We’ve doubled up on stupidity, forgot the idea of prudent and sensible growth through savings and just partied on. Ask any of your friends in finance what they “really” think and I can assure you that after a few drinks they’ll tell you they’re waiting for the exit trade. They know Armageddon is coming but just don’t know when

Whether we like it or not, the reset button will be hit. I often argue people should not worry about the return ON their money but the return OF it. Global markets can’t be bailed out again with massive cash infusion. That has been a recipe for disaster, only widening the gap between haves and have nots. Debt must be allowed to go bad, banks must be allowed to go bust and free markets must be freed from the shackles of state sponsored manipulation to set prices. It will be ugly but more of the same can kicking won’t work.

ETFs are a sign of the times. They represent the slapdash approach to life these days. Time saving apps if you will. However nothing beats hard nosed analysis to understand what awaits us. Poor old Big Bird will be the canary in the coal mine and Sesame Street will be renamed Elm Street as the Kruger’s move in to give us nightmares Janet Yellen assures us aren’t possible.

Perhaps that is the ultimate question. As you go to work each day do you honestly feel that things are peachy as the management town hall meetings would have you believe? Are your friends or colleagues all bulled up about the future? Perhaps that is easier to answer than an ETF.

Yellen’s Fedtime stories

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US Fed Chair Janet Yellen uttered perhaps some of the most bizarre words to come out of a central banker. So much so that Alan Greenspan’s “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.” seems almost comprehensible by comparison. Yellen told an audience that she believes we won’t see another severe financial crisis in our lifetimes. Either Ms Yellen is not long for the world or denial is running deep within her veins. One of her own FOMC board members (James Bullard) wrote a piece on why the Fed needs to trim its balance sheet from $4.47tn to around $2.5 trillion) so they can prepare for the next horror that awaits.  Even Minnesota Fed Reserve Bank President Neel Kashkari said the likelihood of another financial crisis is 2/3rds. We have a world with debt up to its eyeballs and global interest rate policies that have only led to the slowest post slowdown growth in history. The signs of a global slowdown are becoming ever more obvious even in the US. Slowing auto sales and rising delinquencies are but one signal. The imminent collapse of so many public pension funds another.

Had she not seen the European Commission’s decision to let Italy spend up to 17 billion euros to clean up the mess left by two failed banks? The news is not only another whack for Italian taxpayers but a setback for the euro zone’s banking union, and a backflip for the EU’s stance on non-standard bailouts. The Italian government wound down Banca Popolare di Vicenza and Veneto Banca, two regional lenders struggling under the weight of non-performing loans which averages 20% across the nation and up to 50% in the south. Intesa Sanpaolo bought the banks’ good assets for one euro, and was promised another 4.8 billion euros in state aid to deal with restructuring costs and bolster its capital ratio. Italy’s taxpayers get to keep the bad loans, which could end up costing them another 12 billion euros. Even the Single Resolution Board — whose purpose is to take the politically difficult decision of whether to close a bank out of the hands of governments — chose not to intervene.

Last year four Italian banks were rescued and it seems that since Lehman collapsed in 2008 non performing loans (NPLs) have soared from 6% to almost 20%. Monte Dei Paschi De Siena, a bank steeped in 540 years of history has 31% NPLs and its shares are 99.9% below the peak in 2007. Even Portugal and Spain have lower levels of NPLs. The IMF suggested that in southern parts of Italy NPLs for corporates is closer to 50%!

Italy is the 3rd largest economy in Europe and 30% of corporate debt is held by SMEs who can’t even make enough money to repay the interest. The banks have been slow to write off loans on the basis it will eat up the banks’ dwindling capital. It feels so zombie lending a la Japan in the early 1990s but on an even worse scale.

Not to worry, the Italian Treasury tells us the ECB will buy this toxic stuff! But wait, the ECB is not allowed to buy ‘at risk’ stuff. So it will bundle all this near as makes no difference defaulted garbage (think CDO) in a bag and stamp it with a bogus credit rating such that the ECB can buy it. In full knowledge that most of the debt will never be repaid, the ECB still violates its own rules which state clearly that any debt they buy ‘cannot be in dispute’.

The Bank of Japan has no plans to cut back on the world’s largest central bank balance sheet. It continues to Hoover up 60% of new ETF issues at such an alarming pace it is the largest shareholder of over 100 corporates. Then there is the suggestion of buying all $10 trillion of outstanding JGBs and convert them into zero-rate (+miniscule annual service fee) perpetuals.

Australia’s banks are now the most loaded with mortgage debt globally at 60% of the total loan book.  Second is daylight and third Norway at 40%. Private sector debt to GDP is 185%. We have a government who can’t tighten its belt basing its budget on rosy scenarios that will be improbable. Aussie banks have been slapped with a new tax and with the backdrop of a rising US rate environment, the 40% wholesale funded Aussie banks will be forced to accept higher cost of funds. That will be passed straight onto consumers that are already being crushed under the weight of mortgages. One bank survey by ME Bank in Australia said that 1/3rd would struggle to pay a month’s mortgage if they lost their jobs.

Had Ms Yellen forgot to read the St Louis Fed’s survey which revealed that 45% of Americans can’t raise $400 in an emergency without selling something? USA Today reported that 7 out of 10 Americans have less than $1,000 in savings to their name.

“Last year, GoBankingRates surveyed more than 5,000 Americans only to uncover that 62% of them had less than $1,000 in savings. Last month GoBankingRates again posed the question to Americans of how much they had in their savings account, only this time it asked 7,052 people. The result? Nearly seven in 10 Americans (69%) had less than $1,000 in their savings account…Breaking the survey data down a bit further, we find that 34% of Americans don’t have a dime in their savings account, while another 35% have less than $1,000. Of the remaining survey-takers, 11% have between $1,000 and $4,999, 4% have between $5,000 and $9,999, and 15% have more than $10,000.”

So Chair Yellen, we are not sure what dreamland you are living but to suggest that we won’t see another financial crisis in our lifetime almost guarantees it will happen. The Titanic was thought unsinkable until history proved otherwise. Money velocity is not rising and every dollar printed is having less and less impact. I thought it nigh on impossible to surpass the stupidity of Greenspan but alas you have managed it.

Her Majesty knows best Mayor Khan

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Isn’t it funny how the Mayor of London Sadiq Khan has been gazumped by the Queen. Her Majesty has served her country for over 65 years and ruled over 14 Prime Ministers. Let’s just say her understanding of politics, geopolitics, terrorism and the importance of long term relationships has never got in the way of short term pettiness. The Queen values the American relationship knowing it was their partnership that helped Great Britain defeat the Axis powers in WW2. She never forgets the important times when the relationship has truly mattered. Her extension of an invite to President Trump to Buckingham Palace is all about preserving shared values. Khan wants to cancel Trump’s visit because he is offended by his tweets with regards to his softness on terrorism in his city. Is Trump wrong?

Instead of the Mayor facing Trump tete-a-tete and justifying his stance he seeks to do what many leaders in the West do – sulk and seek to alienate the relationship because of their weakness. What Trump has said about Khan has validity. The President isn’t conventional and he doesn’t necessarily deliver in the most courteous manner but where is the counter argument? Piers Morgan was spot on. Instead of Khan blaming Theresa May for Met Police funding cuts, he humiliated the Mayor querying isn’t his biggest responsibility to ensure the safety of Londoners by monitoring the 400 suspects living in his constituency?

Let’s be clear, if the UK was at war for whatever reason you can be guaranteed the majority of the British want America on their side. The Queen knows this and I’m sure Her Majesty can bring Trump to mutually beneficial discussions rather than exchange pleasantries over tea. All this nonsense about banning Trump and distancing the UK from the US shows the typical “conditional” attitudes our society seems increasingly willing to tolerate. Khan is in that camp.

Let’s be clear. Trump’s America first isn’t all about pure isolationism. A large part is about making sure other nations don’t ride their overwhelming generosity on things like NATO, UN or the Paris Climate Accord. Many presidents to date have happily allowed the country to be gouged on the international stage but now the budget and deficits don’t support endless freebies for other nation states.

Perhaps Mayor Khan should learn from the current monarch about true values rather than  grizzle about his hurt pride. She maybe in her 90s but she is still sharp as a tack.